Chapter 6: Internal control:

Debtors, creditors and cash

(Lecture 1)
• Theory
• Debtors reconciliation
• Additional Question 1
Consultation hours of lecturers for Chapter 6
Dr Corlia Joynt (Blue Group): EMS 2-67

Tuesday 09:30 – 10:20

Wednesday 08:30 – 09:20
Wednesday 14:30 – 15:20
Thursday 12:30 – 13:20

Mrs Lanise van der Burgh (Green Group): EMS 2-64

Monday 08:30 – 09:20

Tuesday 12:30 – 13:20
Wednesday 08:30 – 10:20
Homework
 Pre-test for Chapter 6:

Opens: Thursday 6 April at 06:00

Closes: Tuesday 18 April at 12:00 (midday)

 Complete and mark Question 6.3 (in free e-reader)

Learning outcomes – Chapter 6
After studying this chapter, you should be able to:

• Describe the purpose and nature of internal controls.

• Discuss internal control measures necessary to safeguard the assets against loss
and damage and to validate liabilities.
• Reconcile the balance of control accounts (debtors and creditor) in general
ledger with the total of the balances in the subsidiary ledgers (debtors and
creditors).
• Reconcile internal records with information from external sources (creditors and
bank).
Assumed knowledge
Before starting with Chapter 6, you should have a thorough understanding the accounting cycle:

Mo
General ledger: nth
Post to ly
• Debtors control account
• Creditors control account

Subsidiary ledgers:
• Debtors ledger (with list) Da
ily
• Creditors ledger (with list)
Introduction
• An entity must have internal control measures in place to protect its assets and to
validate liabilities.

• Internal controls are mechanisms implemented to ensure the integrity of

information, promote accountability, and to prevent fraud.

• Internal controls can be preventative (stop before it occurs) or detective

(uncover if it occurs).

Separating duties Inventory count

Introduction
The objectives/purpose of internal controls can be divided into two categories:

OPERATIONAL COMPLIANCE AND FINANCIAL REPORTING

 Effective and efficient management of  Assist in achieving management’s

the entity (for example, inventory objectives.
management).

 Protect assets against losses, theft or  Compliance with laws and government
damage (for example, ensure that legislation.
cash is not stolen).

 Detect and correct errors in the  Financial information is recorded timely,

accounting process (for example accurately and completely.
incorrect posting).
Internal control techniques
General:
• Use standardised source documents.
• Segregation of duties.
• Appoint staff with integrity.
• Job rotation.
Safeguarding of inventory:
• Regular inventory count.
• Access controls to storage areas.
• Segregation of duties.
Safeguarding of cash:
• Segregation of duties.
• Authorisation of payments.
• Reconciliation of bank account with bank
statement.
Safeguarding of debtors:
• Properly designed and numbered source
documents.
• Segregation of duties.
• Check creditworthiness of customers.
• Regular communication with customers.
• Authorisation for adjustments to accounts.
• Reconciliation between control account
and individual accounts.
Validity of creditors:
• Reconciliation of control account,
individual accounts, and external
documents.
• Segregation of duties.
Reconciliation
Internal control technique where:

• one system is compared to another system,

• to identify differences between the systems, and
• to account for any differences,
• so that the two systems contain the same transactions (and same balances).
Reconciliation
Ensures the accuracy and validity of financial information.

Assists in identifying fraudulent activities.

Prevents errors in the financial statements.

Examples of reconciliations
Compare balance of inventory account in
Inventory reconciliation general ledger with balance according to
inventory count.

Compare balance of debtors control account in

Debtors reconciliation general ledger with balances of individual
accounts in subsidiary ledger
Chapter 6
Types
Compare balance of creditors control account in
general ledger with balances of individual
Creditors reconciliation accounts in subsidiary ledger. Also compare this
Chapter 6 to statement of account from creditor.

Compare balance of bank account in general

Bank reconciliation ledger with bank statement received from bank.
Chapter 6
Reconciliations in Chapter 6

Compare balance of debtors control account in

Debtors reconciliation general ledger with balances of individual
accounts in subsidiary ledger

Compare balance of creditors control account in

Creditors general ledger with balances of individual
Types reconciliation accounts in subsidiary ledger. Also compare this
to statement of account from creditor.

Compare balance of bank account in general

Bank reconciliation
ledger with bank statement received from bank.
Debtors reconciliation
It is very important to understand the flow of a transaction through the
accounting cycle…

General
ledger
Debtors control
Source General
Transaction
document journal

Subsidiary
ledger
Debtors ledger

List of
individual
account
balances
Debtors reconciliation
If a transaction is recorded correctly in the control account in the GENERAL
LEDGER and in the individual accounts in the SUBSIDIARY ledger, these two
systems must balance.

General
ledger
Debtors control

Source General
Transaction
document journal
Subsidiary
ledger
Debtors ledger

List of
individual
account
balances
Examples of items that can result in differences
General
ledger
Debtors control

Source General
Transaction
document journal

Subsidiary
ledger
Source document Debtors ledger
not completed
correctly (for
example amount).
List of
individual
account
balances
How should differences be treated?
Source document not completed correctly and recorded as such:

• Correct in general journal.

• Correction will affect debtors control account in general ledger and individual account in
debtors ledger (list of debtors).
Examples of items that can result in differences
General
ledger
Debtors control

Source General
Transaction
document journal

Subsidiary
ledger
Transaction not
recorded in general Debtors ledger

journal
OR
Transaction
List of
recorded incorrectly
individual
in general journal.
account
balances
How should differences be treated?
Transaction not recorded or incorrectly recorded in general journal:

• Record/correct in general journal.

• Correction will affect debtors control account in general ledger and individual account in
debtors ledger (list of debtors).
Examples of items that can result in differences
General
ledger
Debtors control

Source General
Transaction
document journal

Subsidiary
ledger
Total of column for
Overcast = Too high control account in Debtors ledger
(make lower) general journal not
added up correctly
Undercast = Too low (overcast or
(make higher) undercast).
List of
individual
account
balances
How should differences be treated?
Total of columns for control accounts in general journal not added up correctly:

• Correct in general journal.

• Correction will affect only the debtors control account in general ledger.
Examples of items that can result in differences
General Transaction not
ledger posted to control
Debtors control account in
general ledger
Source General OR
Transaction
document journal
Transaction
posted
Subsidiary incorrectly to
ledger control account
Debtors ledger in general ledger.

List of
individual
account
balances
How should differences be treated?
Transaction not posted or incorrectly posted to control account in general ledger:

• Correct in general ledger.

• Correction will affect only the debtors control account in general ledger.
Examples of items that can result in differences
General Control
ledger account in
Debtors control
general ledger
incorrectly
Transaction
Source General balanced.
document journal

Subsidiary
ledger
Debtors ledger

List of
individual
account
balances
How should differences be treated?
Control account in general ledger incorrectly balanced:

• Correct in general ledger.

• Correction will affect only debtors control account in general ledger.

Examples of items that can result in differences
General
ledger
Debtors control

Source General
Transaction
document journal
Transaction not
posted to
Subsidiary
individual account
ledger
in subsidiary
Debtors ledger
ledger
OR
Transaction
posted incorrectly
List of
to individual
individual
account account in
balances subsidiary ledger.
How should differences be treated?
Transaction not posted or incorrectly posted to individual accounts in subsidiary ledger:

• Correct in debtors ledger.

• Correction will only affect individual account in debtors ledger (list of debtors).
Examples of items that can result in differences
General
ledger
Debtors control

Source General
Transaction
document journal

Subsidiary
ledger
Debtors ledger
Balance of
individual
account
incorrectly
List of
calculated.
individual
account
balances
How should differences be treated?
Balance of individual account in subsidiary ledger incorrectly calculated:

• Correct in debtors ledger.

• Correction will only affect individual account in debtors ledger (list of debtors).
Let’s do Additional Question 1 together
[clickUP  Chapter 6  Subject Content  Additional Questions]
After this lecture, you should be able to:
• Describe the purpose and nature of internal controls.
• Discuss internal control measures necessary to safeguard the assets against loss
and damage and to validate liabilities.
• Reconcile the balance of debtors control account in general ledger with the total
of the balances in the subsidiary ledger.
THE END