chapter 14 Flashcards
control account
a memorandum account containing the totals of all transactions relating to trade receivables and trade payables; it checks the accuracy of the individual trade receivables in the sales ledger, and trade payables accounts in the purchases ledger. can be used in any parts of an accounting system, but most common are for the sales and purchases ledgers. it is prepared at the end of an accounting year and uses the totals from the books of prime entry. prepared using double entry bookkeeping principles
memorandum account
ledger accounts that are not regarded as part of the main double-entry system even though they are produced using double-entry principles. They are produced to check the accuracy of parts accounting system.
sales ledger
an account relating to one item for example, each credit customer will have its own sales ledger
the balance of a control account
it should be equal to the balances in the ledger it controls
two functions of a control account
as an arithmetical check on the accuracy of the bookkeeping
as a summary of the part of the accounting system, enabling one total balance to be entered into the trial balance rather than lots of balances
why is a sales ledger maintained for each customer
it helps keep an accurate and up to date record of how much is owed and is a big concern for business that sell goods on credit. the accounts show the value of the asset represented by the amount that each customer owes
what does balance brought down on the debit side mean
the amount that the customer owes
sales ledger control account
summarizes the transactions involving sales on credit. since it is an asset account, the balance b/d figures should always be on the debit side. anything that increases what the customer owes will be a debit entry, while anything that reduces what the customer owes will be a credit entry. this account is about customers owing the business money and so only credit sales should be entered into the individual ledgers and the control account. only irrecoverable debts that are written off should be included in the individual sales ledgers and the control account
how is a cheque payment recorded
debit: bank
credit: individual customer’s account
and the appropriate credit entry would be made in the relevant individual sales ledger
how is a dishonored cheque recorded
the entries for a cheque payment have to be reversed
debit: individual customer’s account
credit: bank
reasons for credit balances
overpaid their sales invoice
paid in advance or have paid a deposit before the delivery of the goods and the creation of the invoice
paid the invoice in full but a problem discovered later has resulted in a credit note being issued.
contra (set-off)
an accounting entry used to record a transaction where balances on two accounts are being cancelled out against each other
when are contra (set-off) used
it is possible that two business might supply goods or services to each other on credit so they owe each other money
purchases ledger control account
summarizes the transactions involving purchases on credit. the balances on this account can then be compared (and reconciled) with the total of the balances on the individual ledger
why is it important for businesses to keep a purchases ledger account
when a business buys goods on credit, it needs to know when the purchases were made and how much is owed to each supplier so that the right amounts can be paid at the right time. the business would like to total up individual balances so that one figure can be included. the bookkeeping has to be accurate and that this total figure for its trade payables is reliable
errors and purchases ledge control account
it can be safely assumed that if the balance on the purchases ledger control account does not agree with the sum of the individual purchase ledgers, then there are errors that need to be investigated and corrected. it is also possible that errors have been made that do not cause any discrepancy, for example- a payment might be debited to the wrong suppliers account, which would result in two incorrect balances even if the total payables balance was still correct
why does the purchases ledger and purchases ledger control account represent liabilities
the balances show how much money is owed by the business. items that increase what is owed will appear as credit entries and those that reduce the size of the liability are show as debits
why can a ledger have a debit balance
the business has overpaid a purchase invoice
the business has paid in advance or paid a deposit before the delivery of the goods and the creation of the invoice
the business has paid the invoice in full but a problem discovered later has resulted in a credit note being received.
why are control accounts regarded as memorandum accounts
they are there to check the accuracy of the individual trade receivables in the sales ledger and he individual trade payables on the purchase ledger
why are individual sales and purchase ledgers needed to provide an accurate and up to date record of transactions
the right amounts of money can be collected from each customer and late payers can be chased for the correct amounts
the right amounts of money can be paid to the right supplier at the right time
benefits of control accounts
indicating that errors have been made if the totals of the balances in the individual ledgers do not agree with the balances on the control accounts
indicating which part of the accounting system contains errors if there is a difference on a trial balance
if a business has a large number of credit customers and suppliers, then the trial balance will contain a few large control account balances rather than a huge number of small ones
improving internal control
The business accounts may not be maintained using a full double-entry system
limitations of control accounts
they may contain errors
they do not guarantee the accuracy of individual ledger accounts, which may contain compensating errors
they may add to business costs as someone with specialist accounting knowledge is required to verify their accuracy
error of omission
an error where the financial transaction has not been recorded
error of original entry
an error where the amount entered from the book of prime entry is incorrect
what needs to be done when there is a difference between the balance on a control account and the total balances in the ledger it controls
the cause must be found and the necessary corrections made. only when this has been done can the control accounts and the individual ledgers be said to have been reconciled
why does error of omission not cause a discrepancy
this will not appear in either the individual ledger or the control account. both records will be wrong but out reconciliation will still agree
why does error of original entry not cause a discrepancy
this will be repeated in both the individual ledger and the control account. both records will be wrong but out reconciliation will still agree
errors that can cause discrepancy
if an item is copied incorrectly from a book of prime entry to an individual ledger or purchases ledger, the control account will not be affected, and an unsuccessful attempt to reconcile the total of the individual ledger balances with the control account balance will reveal that an error has been made
If a total in a book of prime entry is incorrect, the control account will be incorrect but the individual sales or purchases ledgers will not be affected. The unsuccessful attempt to reconcile the total of the individual ledger balances with the control account balance will reveal that an error has been made.
how to reconcile control accounts with purchases ledgers
The purchases ledgers and the purchases ledger control account are recording liabilities. So all balances will be on the credit side.
There will be no irrecoverable debts or allowance for irrecoverable debts to deal with.
The trade payables figure in the statement of financial position will be the balance in the purchases ledger control account.
auditor
a person authorized to examine, review and verify financial records to ensure that they are accurate and that the information provided by a business represents a ‘true and fair view’ of its performance and financial state.
way of verification of balance: reconciliations with statements of account
it is quite likely that statements of account will be received from most, if not all, suppliers. The business can tick off items in the individual purchases ledgers against the statement of account to see if there are any obvious errors. Note that it is possible there will be some timing differences,
ways of verification of balance: formal requests from suppliers and customers
auditors send out letters to credit suppliers and customers requesting information about the outstanding balance at a particular date. If there is a difference between that reported by the client and the balance according to the customer/supplier, then a reconciliation can be produced to ensure that the differences are due to timing differences rather than genuine errors.
