Topic 6: Control Accounts Flashcards
What is a Control account?
a control account is a summary account or total account that is used to check upon the accuracy of the entries in the individual accounts in a particular ledger, like the receivable and payable ledger
When does a minority balance occur in a trade receivables control account?
- when a trade receivable pays us more than what he owes us by mistake
- when a trade receivable pays us the whole debt and then they return goods to us
When does a minority balance occur in a trade payables control account?
- when we pay a trade payable more than what we owe him by mistake
- when we pay a trade payable the whole debt and then we return goods to him
What are the advantages of preparing a trial balance?
- CHECK ACCURACY: The Trial Balance checks the arithmetical accuracy of a business’s bookkeeping.
- IDENTIFY IMPORTANT ACCOUNTING INFORMATION: The Trial Balance identifies totals for key accounting data e.g. bank, sales revenue, ordinary goods purchased, trade receivables, trade payables.
- PREPARE FINANCIAL STATEMENTS: The Trial Balance is the link between the bookkeeping process and the Financial Statements i.e. it is used to produce the Income Statement and the Statement of Financial Position.
What are the limitations of a trial balance?
LIMITATIONS
Does not reveal all errors that may exist
Does not help locate the exact place of the error (localize the error)
What are the advantages of preparing a control account?
CHECKING DEVICE: We can easily check a particular ledger for the arithmetical accuracy of the double entry. The balance of the control account is checked against the sum of the individual balances in a particular ledger and if they do not agree we have evidence of errors/fraud. So, errors/discrepancies can be easily identified. (reveals casting errors, transposition errors, and entries missing from either the day books or the ledger).
LOCALISE ERRORS: A control account helps localize an error in a particular ledger and saves time looking for errors in areas where errors do not exist. PREVENT FRAUD: Independent check on the work of clerks who maintain the receivables and payables ledgers. This helps detect and fight fraud/errors because the control a/c is prepared by a responsible official (senior accountant) other than the bookkeeper/clerk who maintains the particular ledger. One employee checks the work of another.
INFORMATION FOR MANAGEMENT Calculating trade receivables and trade payables totals for management use is much easier, faster, and more accurate when using a control account rather than adding up the individual balances of all trade receivables or trade payables.
COMPILING FINANCIAL STATEMENTS: Control accounts provide the total figures for trade receivables/trade payables that can be used to help compile Financial Statements when a business has Incomplete Records
What are the limitations of control accounts?
IMITATIONS
* Considerable additional work (+cost!) is required to pinpoint errors/fraud in individual accounts
- Errors not revealed by the Trial Balance (e.g., error of commission and error of omission) will not be revealed by the control account. These errors may only come to light if a customer complains that his statement of account is incorrect. Also compensating errors and errors of original entry in the business documents will be carried through.
