Chapter 14 - Control Accounts

Question 1

What are control accounts?

Answer 1

Control accounts contain the totals of all postings made to the accounts in a particular ledger.

Question 2

What are the credits and the debits of a purchases ledger control account?

Answer 2

Credits 
Balance brought forward 
Credit purchases
Refunds from suppliers 
interest charged by suppliers

Debits 
Debit balances if any 
Purchases returns
Discount received 
payments made to suppliers 
Contra entries against the sales ledger

Question 3

What are the credits and debits of a sales ledger control account?

Answer 3

Debits
Balance brought forward 
Credit sales
Refunds to credit customers
Dishonored cheques 
Bad debt recovered
Interest charged on overdue accounts 

Credits
Sales returns
Discounts allowed
cash received from customers
Bad debts are written off
Contra entries against the purchases ledger

note - we never enter provisions for doubtful debts

Question 4

What are the reasons for a credit balance to occur in the Sales ledger control account?

Answer 4

• The customer may have paid in advance
• The customer may have overpaid
• the customer may have paid the invoice in full but returned some goods.

Question 5

What are the uses of control accounts?

Answer 5

• It is easy to detect errors in the ledgers, when the totals do not agree with the balances on the control accounts.
• They may identify the ledgers in which erros have been made, if there is a difference in the trial balance.
• They provide totals quickly
• The risk of individuals acting dishonestly is reduced due to internal check ; the division of duties between those who maintain ledgers and control accounts.

Question 6

What are the limitations of control accounts?

Answer 6

• Control accounts may themselves contain errors
• control accounts do not guarantee the accuracy of individual accounts
• It may add to the business costs, as someone with specialised knowledge may be needed.

Question 7

What are the reasons for reconciliation?

Answer 7

• If the transaction is omitted from the books of prime entry, it will be omitted from the personal accounts and the control accounts. Both records will be wrong and the control account will NOT reveal the error.
• If the transaction is entered incorrectly in the book of prime entry, the ledgers and the control accounts will also be incorrect. The control account will not reveal the error.
• If a transaction is incorrectly copied to the sales/purchases ledger, the control account will NOT be affected, and it will reveal that an error has been made in the ledger.
• If a total in a prime entry book is incorrect, the control account will be affected but the ledgers will NOT be affected. The control account will reveal the error that has been made.