Post on 08-Apr-2018
8/6/2019 Unit 1DFA 1200
1/20
Financial Accounting DFA 1200
Unit 1 1
UNIT 1 CONTROL ACCOUNTS AND CORRECTION OF
ERRORS
Unit Structure
1.0 Overview
1.1 Learning Objectives
1.2 The Analytical Cash Book
1.3 Definition of Control Accounts
1.3.1 Definition
1.3.2 Principle
1.4 Types of Control Accounts and Their Purpose
1.3.1 Typical Sales Ledger Control Account
1.3.2 Typical Purchases Ledger Control Account
1.3.3 Purpose of Control Accounts
1.5 Do Control Accounts from Part of the Double Entry System?
1.4.1 Control Accounts form Part of the Double Entry System
1.4.2 Control Accounts do NOT Form Part of the Double Entry System
1.6 Types of Errors in the Accounts
1.6.1 Errors which do not Affect the Trial Balance
1.6.2 Errors which Affect the Trial Balance and the Suspense Account
1.7 Procedure for Tackling Identified Errors
1.8 Illustrative Example
1.9 Summary
1.10 Practice Question
1.0 OVERVIEW
This Unit focuses on the principles and procedures in identifying and correcting
accounting errors. Control accounts are in-built accounting techniques which help in
identifying accounting errors. The general procedure for correcting any error involves
8/6/2019 Unit 1DFA 1200
2/20
Financial Accounting DFA 1200
Unit 1 2
three steps: First, the error needs to be identified; second, what accounting entries have
been done; third, what accounting entries should have been done.
1.1 LEARNING OBJECTIVES
By the end of this Unit, you should be able to do the following:
1. Apply techniques for identifying errors.
2. Discuss the differences which exist in the correction of errors if control accounts
are part of the double entry system as opposed to if they are merely memorandum
accounts.
3. Draw up sales ledger and purchase ledger control accounts.
4. Understand the sources of information for control accounts.
5. Explain the three-step procedure for correcting errors.
1.2 THE ANALYTICAL CASHBOOK
The name cash book may be something of a misnomer because the book is used to
summarise an organisations bank transactions. A companys transaction in cash (i.e.
notes and coins) are usually dealt with through the petty cash book.
Many organisations have two distinct cashbooks a cash payments book and a cash
receipts book but for the examinations it is convenient to think of the cash book as a
single book.
8/6/2019 Unit 1DFA 1200
3/20
Financial Accounting DFA 1200
Unit 1 3
A typical receipts cash book would be analysed as follows:
Date Details Ledger
reference
Bank Discount
allowed
Sales
ledger
Cash
sales
Sundry
income
2 Feb Cash
sales
100 100
5 Feb S.Black B7 75 5 75
10 Feb J Clark C8 200 200
28 Feb Interest
received 125 125
Total 500 5 275 100 125
Explanatory note:
The above analytical receipts side of the cash book shows how the different bank receipts
(column 4) have been analysed. For instance, the business has received Rs75 from S.
Black, a debtor, and has granted him a discount allowed of Rs5. Note that the analytical
cash book gives details of individual entries in chronological order but also gives total
figures: for instance, we have total cash paid by debtors (6th
Column) Rs275 and total
cash discount allowed (5th Column) Rs5.
8/6/2019 Unit 1DFA 1200
4/20
Financial Accounting DFA 1200
Unit 1 4
A typical payment cash book would be analysed as follows:
Date Details Ledger
reference
Bank Discount
received
Purchases
ledger
Cash
purchases
Sundry
expense
2 Mar Cash
purchases
200 200
5 Mar Tom T7 150 50 150
10 Mar Jerry J8 200 50 200
31 Mar Interest
paid 150 150
Total 700 100 350 200 150
The above analytical payments side of the cash book shows how the different bank
payments (column 4) have been analysed. For instance, the business has paid Rs150 to
Tom, a creditor, and has been granted a discount received of Rs50. Note that the
analytical payment side of the cash book gives details of individual entries in
chronological order but also gives total figures: for instance, we have total cash paid to
creditors (6th
Column) Rs350 and total cash discount received (5th
Column) Rs100.
1.3 DEFINITION OF CONTROL ACCOUNTS
1.3.1 Definition
A control account is an account which records the total value of individual entries which
have increased and decreased the account or a group of like accounts.
8/6/2019 Unit 1DFA 1200
5/20
Financial Accounting DFA 1200
Unit 1 5
1.3.2 Principle
The principle on which the control account is based is simple. Taking the example of
account, if the opening balance is known together with information of the sum total of the
individual additions and deductions entered into the account, the closing balance can be
calculated.
Rs
Opening balance X
Add TOTAL of individual entries which have increased the balance X
Less TOTAL of individual entries which have decreased the balance (X)
Closing balance X
1.4 TYPES OF CONTROL ACCOUNTS AND THEIR PURPOSE
1.4.1 Typical Sales Ledger Control Account or Debtors Total Account
A sales ledger control account or Debtors total account controls the sales ledger in the
sense that the totals appearing on the debit and credit side of the debtors total account
should tally with the sum total of individual entries which over time have increased or
decreased individual debtor accounts in the sales ledger. This means that the balance on
the debtors total account should tally with the sum of individual balances on the sales
ledger (Recall that the sales ledger records the chronological entries in each individual
debtor account).
8/6/2019 Unit 1DFA 1200
6/20
Financial Accounting DFA 1200
Unit 1 6
Debtors total account
Rs Rs
Balance B/F (should tally with
sum of sales ledger debit
balances at end of previous
period X
Balance B/f (total of
sales ledger credit
balances b/f from
previous period) X
Credit sales (total in sales day
book) X
Return inwards (total of
Return inwards book) X
Dishonored cheques (Bank
statement and cash book) X
Bad debts (journal) X
Cash received from
debtors (sales ledger
column in the analytical
cash book)
X
Cash discounts allowed
(total of discount
column of cash book) X
Balance c/d (should tally
with sum of debit
balance on the individual
debtor accounts in the
sales ledger) X
X X
8/6/2019 Unit 1DFA 1200
7/20
Financial Accounting DFA 1200
Unit 1 7
Explanatory note
The sources of information for control accounts are total figures from sales day book,
return inwards day book, relevant totals (e,g. total cash received from debtors, total
discounts allowed from cash book) from the analytical cash book and relevant figures
from the journal. Recall that the journal keeps a record of any event which is not recorded
by the cash book, sales day book and returns inwards day book.
Since the debtors total account sources its information from total figures, it acts as a
control over the sum of individual debtor balances in the sales ledger, the entries to which
are posted in chronological order to each individual debtor account.
1.4.2 Typical Purchase Ledger Control Account or Creditors Total
Account
A purchase ledger control account or creditors total account controls the purchase ledger
in the sense that the totals appearing on the debit and credit side of the purchase total
account should tally with the sum total of individual entries which over time have
increased or decreased individual creditor accounts in the purchases ledger. This means
that the balance on the creditors total account should tally with the sum of individual
balances on the purchases ledger (Recall that the purchases ledger records the
chronological entries in each individual creditor account).
8/6/2019 Unit 1DFA 1200
8/20
Financial Accounting DFA 1200
Unit 1 8
Creditors total account
Rs Rs
Balance B/F (should tally with
sum of purchases ledger debit
balances at end of previous
period) X
Balance B/f (if any)
(total of purchases ledger
credit balances b/f from
previous period) X
Cash paid to creditors
(Purchase ledger column in
cash book) X
Credit purchases (total
in purchases day book) X
Return outwards (total of
Return outwards book) X
Cash discounts received (total
of discount column of cash
book) X
Balance c/d (should tally with
sum of credit balances on the
individual creditor accounts in
the purchases ledger) X
X X
8/6/2019 Unit 1DFA 1200
9/20
Financial Accounting DFA 1200
Unit 1 9
Explanatory note
The sources of information for the creditors total account are total figures from
purchases day book, return outwards day book and relevant totals (e,g. total cash paid to
trade creditors, total of the discounts received column in the cash book) from the
analytical cash book.
1.4.3 Purposes of Control Accounts
To act as independent checks on the arithmetical accuracy of the aggregates of the
balances in the sales and purchases ledgers.
To provide total of debtors and creditors quickly when a trial balance is prepared.
To identify the ledger or ledgers in which errors have been made when there is a
discrepancy between the total account and the sum of the individual ledger
balances.
To act as an independent internal check on the work of the sales and purchasesledger clerks, to detect errors and deter fraud. There should be segregation of
duties of sales ledger clerks, purchase ledger clerks and those who maintain
control accounts.
1.5 DO CONTROL ACCOUNTS FORM PART OF THE DOUBLE
ENTRY SYSTEM?
1.5.1 Control Accounts are Part of The Double Entry System
Usually, control accounts i.e. the debtors total account and the creditors total account are
an integral part of the double entry system. If this is so, then the sales ledger and the
8/6/2019 Unit 1DFA 1200
10/20
Financial Accounting DFA 1200
Unit 1 10
purchases ledger will only be memorandum accounts i.e. accounts which are not part of
the double entry system and which are kept only for reference and control purposes.
Example:
Suppose the following information is given from page 1 the sales day book:
Date Customer Amount (Rs)
10 Jan Ally 100
15 Jan Bernie 200
25 Jan Constance 300
Total (page 1 sales book) SD1 600
The double entry would be:
DR Total debtors account (SD1) Rs600
CR Sales account Rs600
The sales ledger would keep for memorandum only an account for each individual
debtor to which will be debited Rs100, Rs200 and Rs300 to the respective accounts ofAlly, Bernie and Constance.
8/6/2019 Unit 1DFA 1200
11/20
Financial Accounting DFA 1200
Unit 1 11
1.5.2 Control Accounts are NOT Part of the Double Entry System
In the rare cases where control accounts are memorandum only, the sales ledger and the
purchases ledger would then be part of the double entry system. Using the same example
as above, the double entries would be:
Date Amount (Rs)
10 Jan Dr Debtor (Ally) 100
Cr Sales account 100
15 Jan Dr Debtor (Bernie) 200
Cr Sales account 200
25 Jan Dr Debtor (Constance) 300
Cr Sales account 300
The debtors total account would be kept for memorandumonly to which will be debited
a total figure of Rs600 from page 1 of the sales book.
1.6 TYPES OF ERRORS IN THE ACCOUNTS
1.6.1 Errors Which do not Affect the Trial Balance
The following are errors which are not disclosed by the trial balance:
(i) Errors of omission
Transaction which have been completely omitted from the books. For instance, if
an invoice of Rs4,000 for the purchase of goods is omitted from the purchase day
8/6/2019 Unit 1DFA 1200
12/20
Financial Accounting DFA 1200
Unit 1 12
book then neither the purchase accounts will be debited not the creditors account
credited by Rs4,000. The trial balance will be unaffected by the error.
(ii) Errors of commission
These occur when a posting is made to the right type of account but to the wrong
account name. For instance, a sale of goods on credit to Kamal (a debtor) is
posted to in error to another debtor account say K. Amal.
(iii) Errors of principle
These arise when the posting is made to an account which is not only the wrong
account but also one which is not of the correct type. For instance a sales of goods
on credit to Kamal (correct entry would have been Dr Debtors Cr Sales) is posted
in error say to the cash book (Dr Cash, Cr sales).
(iv) Compensating error
These arise when errors cancer each other out. For instance the debit side of the
cash book is overcast by Rs1,000 and the credit side of say a creditors account is
overcast by Rs1,000.
(v) Errors of original entry
This occurs when a transaction is initially recorded in the books with an incorrect
amount. For instance a sale of goods on credit to ABA Ltd is recorded for
Rs2,100 is recorded in the sales day book as Rs1,200. Thus, the debtors account
will be debited by Rs1200 (instead of Rs2,100) and the sales account will credited
with Rs1,200 (instead of Rs2,100).
(vi) Complete reversal of entries
If a cheque for Rs300 is drawn by the business to pay a creditor (say ABC plc)
but the cheque is posted in error to the debit side of the cash book (instead of the
credit side) and to the credit side of ABC plc (instead of to the debit side), the
8/6/2019 Unit 1DFA 1200
13/20
Financial Accounting DFA 1200
Unit 1 13
bank account will be overstated by Rs600 and the creditor account (ABC plc) will
be overstated by Rs600.
1.6.2 Errors which Affect the Trial Balance and the Suspense Account
These are of course errors, the cumulative effect of which are apparent on the trial
balance since the total of debits will not equate with the total of credits. When this
situation arises, a suspense account is temporarily created to make up the discrepancy. If
debits exceed credits by say Rs1,000, then a suspense account with a credit balance of
Rs1,000 will be inserted in the trial balance. If credits exceed debits by Rs500, then a
suspense account with a debit balance of Rs500 will be inserted in the trial balance. Of
course, when the errors are identified and corrected, the suspense account will be
automatically eliminated.
1.7 PROCEDURE FOR TACKLING ERRORS IN ACCOUNTS
There is a 3-step procedure for correcting identified errors:
Step 1: Identify what entries, if any, have been made in the accounts.
Step 2: Identify what entries SHOULD have been made.
Step 3: Identify what entries are required to correct the error.
Simple example:
A cheque received from a debtor, Rs1,000, has been posted to the debit side of the cash
book and to the debit side of the debtor account in the sales ledger. However, the totaldebtors account has been correctly credited with Rs1,000. Prepare corrective entries
assuming (i) the control accounts are memorandum accounts (ii) the control accounts are
part of the double entry system.
8/6/2019 Unit 1DFA 1200
14/20
Financial Accounting DFA 1200
Unit 1 14
Solution assuming (i) control accounts are memorandum
Step 1: Entries which have been made:
Dr cash book by Rs1,000 (correct entry).
Dr Debtor account in sales ledger by Rs1,000 (incorrect entry).
Therefore, the trial balance would have Debits exceeding Credits by Rs2,000.
Hence a suspense account account with a credit balance of Rs2,000 would be
created.
Step 2: What entries should have been made?
Dr cash book by Rs1,000 (entry already done).
Cr Debtor account in sales ledger by Rs1,000 (entry not yet done).
Step 3: Entries required to correct the error
Dr Suspense account by Rs2,000
Cr Debtor account by Rs2,000
Tutorial note:
By crediting the debtor account by Rs2,000, we are firstly, canceling the incorrect debit
of Rs1,000 made to the debtor account and, secondly, incorporating the correct credit of
Rs1,000 to the debtor account.
Solution assuming (ii) control accounts are part of the double entry system
In this case NO corrective entries are required since no error has been made in any
account which forms part of the double entry system.
8/6/2019 Unit 1DFA 1200
15/20
Financial Accounting DFA 1200
Unit 1 15
Therefore, only memorandum corrective entries to the sales ledger would be effected,
i.e., Credit the Debtor account by Rs2,000. (Tutorial Note: No debit entry is required
since the sales ledger is NOT part of the double entry system!)
Word of caution: It is important to read the question carefully to identify whether it is
the ledger or control accounts which form part of the double entry system.
1.8 ILLUSTRATIVE EXAMPLE
Buyrites individual ledger account balances are listed and totaled on a monthly basis and
reconciled to the control account balance. The firms creditors total account is an integral
part of the double entry system. Information for the month of March is as follows:
1) Individual ledger account balances at 31 March have been listed out and totaled as
follows:
Total of debit balances: Rs1,012
Total of credit balances: Rs20,778
2) The purchases ledger control account at 31 March is Rs21,832 (net)
3) The total of the discount received for the month, amounting to Rs1,715, has been
posted neither to the control account nor to the discount received account.
4) On listing out the individual purchase ledger balances, an individual credit
balance of Rs205 was incorrectly treated as a debit.
5) A petty cash payment to a supplier amounting to Rs63 has been correctly treated
in the control account but no entry has been made in the individual suppliers
individual ledger account.
6) The purchases daybook total for March has been understated by Rs2,000.
7) Contras (set-offs) in the sales ledger, amounting to Rs2,004, have been correctly
treated in the individual ledger accounts but no entry has been made in the control
account.
8/6/2019 Unit 1DFA 1200
16/20
Financial Accounting DFA 1200
Unit 1 16
Required:
(a) Prepare journal entries to correct the above errors.
(b) Prepare the corrected creditors total account and a revised total of the
purchase ledger balances (net).
Solution:
Item 3
Dr Total Creditors account Rs1,715
Cr Discount received Rs1,715
No adjustment required to the memorandum purchases ledger.
Item 4
No error has occurred in the control accounts. So, no double entry is required.
No error has occurred in the purchases ledger. It is only when the balances were listed
out, that a credit balance was inadvertently treated as a debit balance. Thus, the sum of
the credit balance in purchase ledger should be increased by Rs205 and the sum of debit
balances decreased by Rs205.
Item 5
No error has occurred in the control accounts. So, no double entry is required.
The memorandum purchases ledger requires an adjustment: the individual creditor
account need to be debited by Rs63. Thus, the total of credit balances in the purchases
ledger will be decreased by Rs63.
8/6/2019 Unit 1DFA 1200
17/20
Financial Accounting DFA 1200
Unit 1 17
Item 6
This is an error of original entry since the total sum of the purchase day book was
understated by Rs2,000. Thus, both the purchases account and the total creditors account
have been understated by Rs2,000.
Corrective entries: Dr Purchases account by Rs2,000 and Cr Total creditors account by
Rs2,000.
The memorandum purchases ledger requires NO adjustment since the March credit
purchases have been correctly posted to the various individual creditor accounts.
Item 7
Again, this is an error of original entry. Therefore, debit total creditors account and credit
total debtors account byRs2,004.
Purchase ledger Control account (or Total creditors account)
Rs Rs
Discount received (item 3) 1,715 Balance B/f (Net) 21,832
Total debtors account 2,004 Purchases a/c (Item 6) 2,000
Balance c/d (revised) (Net) 20,113
23,832 23,832
Balance b/d (net) 20,113
8/6/2019 Unit 1DFA 1200
18/20
Financial Accounting DFA 1200
Unit 1 18
Revised Total purchase ledger balances
Debit Credit Net Credit
Balances (1,012) 20,778 19,766
Item 4 205 205 410
Item 5 (63) (63)
(807) 20,920 20,113
1.9 SUMMARY
a) Control accounts are in-built accounting techniques which help in identifying
accounting errors. There are two types of control account, a Total debtors control
account and a total Creditors control account.
b) The balance on the control account should tally with the sum of individual
balances on the sales/purchases ledger. A control account sources its totals from
totals in the purchases/sales day books, analytical cash book and journal.
c) If control accounts are part of the double entry system, then the sales or purchases
ledger will be memorandum account. If the sales/purchases ledger form part of
the double entry system, then the control accounts will be memorandum accounts.
d) The procedure for correcting errors identified in the accounts involves three steps:
first, identify what entries, if any have been made in the accounts; second, identify
what entries should have been made; third, identify what entries are required to
correct the error.
8/6/2019 Unit 1DFA 1200
19/20
Financial Accounting DFA 1200
Unit 1 19
1.10 PRACTICE QUESTION
Practice questions on correction of errors
The trial balance of Happy Bookeeper Ltd as provided by its junior accountant includes
the following items:
Sales ledger control account Rs110,172
Purchase ledger control account Rs78,266
Suspense account (debit balance) Rs2,315
You have been given the following information:
(i) The sales ledger debit balances total Rs111,111 and the credit balances total
Rs1,234.
(ii) The purchase ledger credit balances total Rs77,777 and the debit balances total
Rs1,234.
(iii) The sales ledger includes a debit balance of Rs700 for business X, and the
purchase ledger includes a credit balance of Rs800 relating to the same business
X. Only the net amount will eventually be paid.
(iv) Included in the credit balance on the sales ledger is a balance of Rs600 in the
name of H. Smith. This arose because a sales invoice for Rs600 had earlier been
posted in error from the sales day book to the debit of the account of M. Smith in
the purchase ledger.
(v) An allowance of Rs300 against some damaged goods had been omitted from the
appropriate account in the sales ledger. This allowance had been included in the
control account.
8/6/2019 Unit 1DFA 1200
20/20
Financial Accounting DFA 1200
(vi) An invoice for Rs456 had been entered in the purchase day book as Rs654.
(vii) A cash receipt from a credit customer for Rs345 had been entered in the cash
book as Rs245.
(viii) The purchase day book had been overcast by Rs1,000.
(ix) The bank balance of Rs1,200 had been included in the trial balance, in error, as an
overdraft.
(x) The junior had been instructed to write off RS500 from customer's Y account as a
bad debt, and to reduce the provision for doubtful debts by Rs700. By mistake,
however, he had written off Rs700 from customer Y's account and increased the
provision for doubtful debts by Rs500.
(xi) The debit balance on the insurance account in the nominal ledger of Rs3,456 had
been included in the trial balance as Rs3,546.
Required:
(a) Draft journal entries to correct the above error.
(b) Establish the NET CORRECTED balances on:
(i) The sales ledger
(ii) The purchases ledger
(iii) The sales ledger control account
(iv) The purchase ledger control account