Use Of Control Accounts To Ensure Ledger Accuracy - self assessment 123 Flashcards
Explain the purpose of a control account.
A control account is one that checks the arithmetical accuracy of the purchase and sales ledgers by comparing the control account balance to the sum of all the individual ledger balances. The balances in both should be the same and, if not, there is an arithmetical error.
The control account will only reveal arithmetical errors but it will not identify others, such as the misposting of an amount to the wrong account (error of commission).
Explain the advantages of preparing control accounts.
The advantages of preparing a control account include:
1) It ensures that any arithmetic differences or errors in the sales and purchase ledgers are detected early and can be corrected.
2) It saves time when a trial balance is being drawn up.
3) Control accounts are supervised by more senior staff and this reduces the risk of fraud.
4) It enables management to see at a glance what amount is owed to the firm by customers, and what it owes its suppliers. Expected cash receipts from customers and payments to suppliers can then be estimated.
5) Provides verified figures for receivables and payables in the statement of financial position (balance sheet).
All of the above are important but it is vital in a question of this type that you include in your answer a reference to the verification of the figures.
Cash transactions do no appear in the sales ledger control account.
Why is this?
When a cash transaction takes place with immediate payment,
neither a trade receivable, nor a trade payable is created.
The control accounts contain information that affects
what the firm is owed by its customers and
what it owes to its suppliers.
Cash transactions are irrelevant for the reason given.
Do not confuse cash transactions, with receipts in cash (or any other payment type) from trade receivables.
After the preparation of a sales ledger control account,
how would the accuracy of the cloaking (end-of-month) balance be checked?
The accuracy of the balance figure would be verified by totalling the individual balances in the sales ledger. The control account is made up of the totals of the various types of transactions plus opening balance already verified. It follows, therefore, that the closing balances from each account should total to the same amount as the balance on the control account.
