CH – 14 - Control accounts

What are control accounts?

A control account keeps a total record of a number of individual items. It is an impersonal account which is part of the
double entry system.

A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar but
individual items. Control accounts are used chiefly for trade receivables and payables. Although control accounts are used mainly
in accounting for receivables and payables, they can also be kept for other items, such as inventories, wages and salaries, and
cash.

The two most important control accounts are those for receivables and payables. They are part of the double entry system.
(a) A receivables control account is an account in which records are kept of transactions involving all receivables in total.
(b) A payables control account is an account in which records are kept of transactions involving all payables in total.

The balance on the receivables and payables control account at any time will be the total amount due to the business at that time
from its receivables and payables respectively.

The purpose of control accounts

Cash books and day books are totalled periodically and the totals posted to the control accounts. At suitable intervals, the
balances on the personal accounts are extracted and totalled. These balance totals should agree to the balance on the control
account. In this way, errors can be located and corrected.

Discounts
Discounts can be defined as follows.
 A trade discount is a reduction in the list price of an article, given by a wholesaler or manufacturer to a retailer. It is often
given in return for bulk purchase orders.

 A cash (or settlement) discount is a reduction in the amount payable in return for payment in cash, or within an agreed
period.

IMPORTANT .

Cash (or settlement) discounts received are included as other income in the statement of profit or loss.
Cash (or settlement) discounts allowed are included as expenses in the statement of profit or loss.

Trade discounts received are deducted from the cost of purchases.

Trade discounts allowed are deducted from sales and cash discounts allowed are shown as expenses of the period.

Remember that only cash (settlement) discounts are separately recorded in the books;
Sales and purchases are recorded net of trade discounts.
 CH – 15 - Bank reconciliations

The bank reconciliation

A bank reconciliation is needed to identify and account for the differences between the cash book and the bank statement. The
corrected cash book balance is the balance that is shown in the statement of financial position.

Differences between the cash book and the bank statement arise for three reasons.
Errors – usually in the cash book
Omissions – such as bank charges not posted in the cash book
Timing differences – such as unpresented cheques

When the differences between the bank statement and the cash book are identified, the cash book must be corrected for any
errors or omissions. Any remaining difference can then be shown to be due to timing differences.

* Note that, on the bank statement, a debit is a payment out of the account.

Proforming a bank reconciliation

Step1 Correct the cash book

— Corrected cash book balance is the cash balance that is shown in the SOFP.

Step 2 Reconcile to the bank statement

Proforma bank reconciliation $

Balance per bank statement X
Less: outstanding cheques (X)
Plus: outstanding lodgements X
Plus/less: bank errors X/(X)
Balance per corrected cash book X
 CH – 16 - Correction of errors

Types of error in accounting

Once an error has been detected, it needs to be put right.
(a) If the correction involves a double entry in the ledger accounts, then it is done by using a journal entry.
(b) When the error breaks the rule of double entry, then it is corrected by the use of a suspense account as well as a journal
entry.
There are five main types of error. Some can be corrected by journal entry; some require the use of a suspense account.

Errors of transposition
Errors of omission
Errors of principle
Errors of commission
Compensating errors

Errors of transposition
An error of transposition is when two digits in a figure are accidentally recorded the wrong way round. (48 – 84)

Errors of omission
An error of omission means failing to record a transaction at all, or making a debit or credit entry, but not the corresponding
double entry. (Ya heç bir qeydiyyatın yazılmaması ya da debet ya da kreditdən birinin yazılması ilə yaranan səhv)

Errors of commission
Errors of commission are where the bookkeeper makes a mistake in carrying out their task of recording transactions in the
accounts.

Errors of principle
An error of principle involves making a double entry in the belief that the transaction is being entered in the correct accounts, but
subsequently finding out that the accounting entry breaks the 'rules' of an accounting principle or concept.

Compensating errors
Compensating errors are errors which are, coincidentally, equal and opposite to one another.
Here are two common types of errors of commission.
1. Putting a debit entry or a credit entry in the wrong account. amount.
2. Errors of casting (adding up).

Summary:
Errors that can be detected by a trial balance.
Errors of transposition
Errors of omission (if the omission is one-sided)
Errors of commission (if one-sided, or two debit entries are made, for example)

Other errors will not be detected by extracting a trial balance, but may be spotted by other controls (such as bank and control
account reconciliations).
 The correction of errors
Errors which leave total debits and credits in the ledger accounts in balance can be corrected by using journal entries. Otherwise
a suspense account has to be opened first, and later cleared by a journal entry.

Journal entries
The journal requires a debit and an equal credit entry for each 'transaction', ie for each correction. This means that if total debits
equal total credits before a journal entry is made then they will still be equal after the journal entry is made. Similarly, if total debits
and total credits are unequal before a journal entry is made, then they will still be unequal (by the same amount) after it is made.

Suspense accounts
Suspense accounts, as well as being used to correct some errors, are also opened when it is not known immediately where to
post an amount. When the mystery is solved, the suspense account is closed and the amount correctly posted using a journal
entry.
A suspense account is an account showing a balance equal to the difference in a trial balance.
A suspense account is a temporary account which can be opened for a number of reasons.

The most common reasons are as follows.

(a) A trial balance is drawn up which does not balance (ie total debits do not equal total credits).
(b) The bookkeeper of a business knows where to post the credit side of a transaction, but does not know where to post the debit
(or vice versa).

Suspense accounts are temporary

It must be stressed that a suspense account can only be temporary. Postings to a suspense account are only made when the
bookkeeper doesn't yet know what to do, or when an error has occurred. Mysteries must be solved, and errors must be corrected.
Under no circumstances should there still be a suspense account when it comes to preparing the statement of financial
position of a business. The suspense account must be cleared and all the correcting entries made before the final
accounts are drawn up.

CHAPTER ROUNDUP .
 There are five main types of error. Some can be corrected by journal entry; some require the use of a suspense account.
 Errors which leave total debits and credits in the ledger accounts in balance can be corrected by using journal entries.
Otherwise a suspense account has to be opened first, and later cleared by a journal entry.
 Suspense accounts, as well as being used to correct some errors, are also opened when it is not known immediately
where to post an amount. When the mystery is solved, the suspense account is closed and the amount correctly posted
using a journal entry.
 Suspense accounts are only temporary. None should exist when it comes to drawing up the financial statements at
the end of the accounting period.

Question

What is a journal most commonly used for?

A Correct errors
B Correct errors and post unusual transactions
C Correct errors and clear suspense account
D Make adjustments to the double entry

D Although A, B and C are correct as far as they go, they don't cover everything. D is the most comprehensive answer.