chapter 5 control accountsskhlkyss.edu.hk/~whf/works/chapter_5_control _accounts.pdf · entry (such...

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Chapter 5 Control Accounts

Notestoteachers

1 StartwithChapters3and4ofFrank Wood’s Introduction to Accountingandbrieflyexplaintostudentsthebasicprinciplesofrecordinginthebooksandledgerstransactionswithtradedebtorsandcreditors.

2 Remindstudentsthatcashsalesandpurchasesarenotrecordedintheaccountsreceivableandaccountspayableledgers.

3 Moststudentshavedifficultyrelatingthejournalstotheledgers.TeachersshouldgooverwithstudentsthebookkeepingproceduresshowninExhibit5.1.

4 Thepreparationofacontrolaccountfortheaccountsreceivableoraccountspayableledgerisnotadifficulttaskformoststudents.Butitisnotthateasytoworkoutthereconciliationofbalancesofacontrolaccountwithitscorrespondingledger.Teachersshouldspendsufficienttimeexplainingtheerrorsandtheircorrections,asshowninSections5.8–5.10.

5 Remindstudentsthatminoritybalancesshouldnotbenettedoffwiththenormalbalances.Thiserroralwaysoccursinpublicexamquestions.

6 Thistopicisusuallycombinedwithothertopics,mostlikelythecorrectionoferrors,inpublicexaminations.

7 Someteacherspreferteachingthecorrectionoferrorsfirstbeforeteachingthecontrolaccounts.Thereisnoobjectiontosucharrangement.Thereasonforplacingthetopicofcontrolaccountsbeforethecorrectionoferrorsisthatthistopicinvolvesfewertypesoftransactions(onlytransactionswithtradedebtorsandtradecreditors),makingitaneasiertopictodealwith.

Q1 Tradedebtors’accounts

Q2 Debtorsareindividualsororganisationswhichowethefirmmoney.Tradedebtorsaredebtorswhoarisefromgoodsorservicessoldoncredit.Non-tradedebtorsaredebtorswhoariseforotherreasons.

Onlythetransactionswithtradedebtorsshouldbeshownintheaccountsreceivableledgercontrolaccount.

Q3 Ifthebaddebtwaswrittenoffinapreviousperiodbutwasrecoveredinthecurrentperiod,therequireddoubleentrieswouldbe:

1 Restatingthedebt(fortheamountpaidback)inthedebtor’saccount:

Dr Debtor’saccount Cr Baddebtsrecoveredaccount

Chapter 5

Notestoteachers

M01_FWFA_TB_HKG_9645_C05.indd 60 2009/11/4 4:01:19 PM

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2 Recordingthereceiptofpayment:

Dr Cash/Bankaccount Cr Debtor’saccount

3 Transferringthetotalofbaddebtsrecoveredtotheprofitandlossaccountattheendofanaccountingperiod:

Dr Baddebtsrecoveredaccount Cr Profitandlossaccount

Ifthebaddebtwaswrittenoffandrecoveredinthesameperiod,therequireddoubleentrieswouldbe:

1 Restatingthedebt(fortheamountpaidback)inthedebtor’saccount:

Dr Debtor’saccount Cr Baddebtsaccount

2 Recordingthereceiptofpayment:

Dr Cash/Bankaccount Cr Debtor’saccount

Inthiscase,thereisnoneedtoopenaseparateaccountforbaddebtsrecovered.Whatisneededistoreversethebaddebtfromthebaddebtsaccount.

Q4 1 Put(a)themonthlytotalsoftransactionsthatarerelatedtotradedebtorsfromthebooksoforiginalentry(suchasthesalesjournal,thereturnsinwardsjournalandthecashbook)and(b)thetradedebtors’balancesfromtheaccountsreceivableledgerintoacontrolaccount.

2 Checkwhetherthedebitandcredittotalsofthecontrolaccountagree.

Ifthedebitandcredittotalsofthecontrolaccountdonotagree,errorsmusthavebeenmadesomewhereinthebooksorledgers.

Q5 Tradecreditors’accounts

Q6 Creditorsareindividualsororganisationstowhomthefirmowesmoney.Tradecreditorsarecreditorswhoarisefromgoodsorservicespurchasedoncredit.Non-tradecreditorsarecreditorswhoariseforotherreasons.

Onlythetransactionswithtradecreditorsshouldbeshownintheaccountspayableledgercontrolaccount.

Q7 Minoritybalancesrefertocreditbalancesintheaccountsreceivableledgerordebitbalancesintheaccountspayableledger.Suchbalancesonlyexisttemporarily.

Q8 Withaself-balancingcontrolaccount,theopeningorclosingbalanceinthecontrolaccountisnotextractedfromthecorrespondingledger.Instead,itisthedifferencebetweenthetotalsofthetwosidesofthecontrolaccountitself.

Q9 Theadvantagesforkeepingcontrolaccountsinclude:

• Controlaccountshelptestthearithmeticalaccuracyofentriesinledgers.

• Theyhelpsafeguardagainstfraud.

• Theyfacilitatethepreparationoffinancialstatements.


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A1 Thegeneraljournal(orthejournal)

A2 (a)and(b):Theywillbothdecrease.

A3 Possiblereasons:

1 Thefirmreturnedgoodstoacreditoraftermakingfullpayment.

2 Thefirmhadover-paidacreditor.

Thetotalofminoritybalancesintheaccountspayableledgershouldbeshownseparatelyinthecontrolaccount.Theyshouldnotbenettedoffwiththecreditbalancesintheaccountspayableledger.

A4 (a) $600

(b) Thecreditbalanceswouldbecome$55,000(i.e.,reducedby$600)andminoritybalanceswouldnotbeseparatelyshown.

A5 AlltheerrorsmentionedinSection5.7wouldnotoccurifpostingwasdoneautomaticallybycomputer.

A6 Thetotalofbalancesintheaccountsreceivableledgerwouldbecome$9,000,whilethebalanceoftheaccountsreceivableledgercontrolaccountwouldbeunaffected(i.e.,$8,000).Sothesetwobalanceswouldnotagree.

A7 TheerrorshowninExhibit5.16wouldnotoccurifpostingwasdoneautomaticallybycomputer.

A8 Thedebitbalancesintheaccountsreceivableledgerwouldhavebeenoverstatedby$428.Thedebittotalshouldbereducedby$428andthecreditbalanceof$428shouldbeseparatelyshown.

A9 Theallowancefordoubtfuldebtsismadeattheendofanaccountingperiodandrecordedinthe‘allowancefordoubtfuldebts’accountandtheprofitandlossaccount.Bothoftheaccountsarekeptinthegeneralledger.Noentriesaretobemadeintheaccountsreceivableledger.Therefore,theerrorinrespectoftheallowancefordoubtfuldebtswouldnotaffecttheaccountsreceivableledgeroritscontrolaccount.

A10 No.Thisisbecausetherearecertaintypesoferrorsthatdonotaffecttheagreementofacontrolaccountanditscorrespondingledger.RefertoSection5.8forexamples.

A11 Evenwhenthebalanceofacontrolaccountagreeswiththetotalofbalancesinitscorrespondingledger,itdoesnotnecessarilymeanalltheentriesinthecorrespondingbooksandledgersarecorrect.Thisisbecausetherearecertaintypesoferrorsthatdonotaffecttheagreementofacontrolaccountanditscorrespondingledger.Therefore,controlaccountscannothelptodetectallaccountingerrors.


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ASSESSMENT

Short QuestionsShort Questions

1 AccountsReceivableLedgerControl

2009 $ 2009 $Mar 1 Balanceb/d 12,490 Mar 31 Returnsinwards 1,120" 31 Sales 24,610 " 31 Cashandbank 16,380 " 31 Balancec/d 19,600 37,100 37,100

2X AccountsPayableLedgerControl

2009 $ 2009 $May 31 Returnsoutwards 1,220 May 1 Balanceb/d 19,320" 31 Bank 22,390 " 31 Purchases 31,745" 31 Balancec/d 27,455 51,065 51,065


2009 $ 2009 $Mar 1 Balanceb/d 6,708 Mar 31 Discountsallowed 300" 31 Sales 11,500 " 31 Cashandbank 8,970 " 31 Baddebts 115 " 31 Returnsinwards 210 " 31 Balancec/d(balancingfigure) 8,613 18,208 18,208

4X AccountsPayableLedgerControl

2009 $ 2009 $Nov 30 Discountsreceived 240 Nov 1 Balanceb/d 7,560" 30 Returnsoutwards 355 " 30 Purchases 11,100" 30 Cashandbank 9,850" 30 Balancec/d(balancingfigure) 8,215 18,660 18,660


2009 $ 2009 $May 1 Balanceb/d 6,420 May 31 Cashandbank 10,370" 31 Sales 12,800 " 31 Discountsallowed 395" 31 Balancec/d 50 " 31 Set-offs—Accountspayableledger 145 " 31 Balancec/d(balancingfigure) 8,360 19,270 19,270


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Application Problems

6X (a) AccountsPayableLedgerControl

2009 $ 2008 $Mar 31 Discountsreceived 1,125 Apr 1 Balanceb/f 15,000" 31 Paymentstocreditors 156,250 2009" 31 Set-off—Accountsreceivableledger 2,500 Mar 31 Purchases 151,000" 31 Balancec/f 6,125 166,000 166,000

(b) AccountsReceivableLedgerControl

2008 $ 2009 $Apr 1 Balanceb/f 30,000 Mar 31 Receiptsfromdebtors 212,8752009 " 31 Set-off—Accountspayableledger 2,500Mar 31 Sales 236,250 " 31 Balancec/f 51,100" 31 Interestchargedtodebtors 225 266,475 266,475

7X (a) Theadvantagesforkeepingcontrolaccountsinclude:

• Itkeepsacheckonthearithmeticalaccuracyofentriesintheaccountsreceivableandaccountspayableledgers.See(c)below.

• Itenablesaquickcheck,formanagementcontrol,onthetotalsoftradedebtorsandtradecreditorswithoutwaitingforalltheaccountstobebalancedoff.

(b) Hecansetoffthebalancesbetweentheparticulartradedebtor’saccountintheaccountsreceivableledgerandthetradecreditor’saccountofthatpersonintheaccountspayableledger.Onlythenetindebtednesswillhavetobepaidorreceived.

(c) No,hecan’t.Errorsmaystilloccurwhenthereare:

(i) Completeomissionsofsales,purchases,returnsinwardsoroutwardsfromthebooks.

(ii) Completeomissionsfromthebooksofcash/chequesreceivedorcash/chequespaidout.

(iii)Errorsofcommission,e.g.,salestoKWongdebitedtoKWoo.

(iv)Compensatingerrors.

(v) Errorsoforiginalentry,e.g.,salesof$95enteredasbothdebitandcredititemsas$59.

(vi)Otheritems,suchasdebtswrittenoffasbaddebtsinerror.

(Note:ThesetypesoferrorswillbecoveredinChapter6.)

8 (a) AccountsPayableLedgerControl

2010 $ 2010 $Mar 31 Purchases(iii) 120 Mar 31 Balanceb/f 5,850" 31 Balancec/f 5,960 " 31 Purchases(i) 230 6,080 6,080


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(b) StatementofAccountsPayableLedgerBalancesasat31March2010(beforecorrections)

$ $Originalbalances(balancingfigure) 4,950Add Purchaseswronglydebitedtocreditor’saccount($870×2) (ii) 1,740 6,690Less Purchasesoverstated (iii) 120 Totalofbalancesovercast (iv) 610 (730)Correctedbalancesaspercontrolaccount 5,960

Note:Item(v)didnotaffecttheaccountspayableledgeranditscontrolaccount.

9X (a) AccountsReceivableLedgerControl

2010 $ 2010 $Dec 31 Balanceb/f 4,560 Dec 31 Salesovercast(i) 640" 31 Salesundercast(ii) 50 " 31 Balancec/f 3,970 4,610 4,610

(b) StatementofCorrectedAccountsReceivableLedgerBalancesasat31December2010

$ $Originalbalances 3,770Add Salesundercast (ii) 50 Balanceomitted (iv) 330 380 4,150Less Returnsinwardsunderstated($200–$20) (iii) (180)Correctedtotalofbalances 3,970

Note:Item(v)affectedneithertheaccountsreceivableledgernortheaccountsreceivableledgercontrolaccount.

10 AccountsPayableLedgerControl

$ $Returnsoutwards 2,648 Balanceb/f 11,874Bank 146,100 Purchases 154,562Pettycash 78Discountsreceived 2,134Set-offs—Accountsreceivableledger 1,036Balancec/f 14,530 166,526* 166,436*

*Error:Differencebetweentwosides—$90onthecreditside($166,526–$166,436)

AccountsReceivableLedgerControl

$ $Balanceb/f 19,744 Returnsinwards 4,556Sales 199,662 Cashandbank 185,960 Discountsallowed 5,830 Set-offs—Accountspayableledger 1,036 Balancec/f 22,024 219,406 219,406


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11 (A) Theadvantagesofmaintainingcontrolaccountsinclude:

• Withacontrolaccountforeachledger,itiseasiertolocateerrors.

• Withcontrolaccountsfortheaccountsreceivableledgerandtheaccountspayableledger,itisfastertoderivethetotalsofdebtors’balancesandcreditors’balances.

• Withledgersandcontrolaccountsbeingseparatelypreparedbydifferentpersons,itismoredifficulttocommitfraudinthebooks.

(Anytwooftheaboveorotheracceptableanswers)

(B)(a) StatementofRevisedTotalofAccountsReceivableLedgerBalancesasat31December2009

$ $Originaltotalofbalances 38,253Add Debittotalofadebtor’saccountundercast (iv) 200 Debitbalanceincludedasacreditbalance($466×2) (vii) 932 1,132 39,385Less Salesunderstatedandenteredtwice[($628×2)–$682)] (i) 574 Chequereceivedwronglydebitedtodebtor’saccount($3,697+$3,679) (ii) 7,376 (7,950)Revisedtotalofbalances 31,435

(b) AccountsReceivableLedgerControl

2009 $ 2009 $Dec 31 Balanceb/f(balancingfigure) 30,902* Dec 31 Returnsinwards(iii) 121" 31 Sales(i) 54 " 31 Balancec/f(from(B)(a)) 31,435" 31 Discountsallowed(v) 600 31,556 31,556

*Thebalancesbeforeadjustmentsintheaccountsreceivableledgercontrolaccountamountedto$30,902.

Note: Item(vi)shouldbecorrectedasfollows:

Dr Bankaccount$1,280 Cr Baddebtsrecoveredaccount(orprofitandlossaccount)$1,280

Therefore,thisitemwouldnotaffecttheaccountsreceivableledgerortheaccountsreceivableledgercontrolaccount.

12X (a) AccountsReceivableLedgerControl

$ $Balanceb/f 46,540 Balanceb/f 470Sales($7,650–$7,560)(ii) 90 Sales(iii) 1,800Balancec/f 470 Baddebts(v) 680 Set-off—Accountspayableledger(vi) 3,600 Balancec/f 40,550 47,100 47,100

AccountsPayableLedgerControl

$ $Balanceb/f 230 Balanceb/f 38,220Purchasesovercast(i) 290 Purchases(iii) 1,800Set-off—Accountsreceivableledger(vi) 3,600 Balancec/f 230Balanceovercast(vii) 90Balancec/f 36,040 40,250 40,250


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(b) StatementofAccountsReceivableLedgerBalancesasat31March2009(beforecorrections)

$ $Adjustedtotalofdebitbalances 40,550Add Purchaseswronglyrecordedassales (iii) 1,800 Set-offwithaccountspayableledger (vi) 3,600 Creditbalancewronglylistedasadebitbalance (viii) 470 5,870 46,420Less Salesunderstated (ii) (90)Totalofdebitbalancesbeforecorrections 46,330

Totalofcreditbalancesbeforecorrections 0

StatementofAccountsPayableLedgerBalancesasat31March2009(beforecorrections)

$ $Adjustedtotalofcreditbalances 36,040Add Set-offwithaccountsreceivableledger (vi) 3,600 39,640Less Purchaseswronglyrecordedassales (iii) 1,800 Purchaseswronglydebited($850×2) (iv) 1,700 (3,500)Totalofcreditbalancesbeforecorrections 36,140

Totalofdebitbalancesbeforecorrections 230

(c) Theseareknownasminoritybalances.Thecreditbalancesintheaccountsreceivableledgercontrolaccountrepresenttheamountsowedtocustomers,whilethedebitbalancesintheaccountspayableledgercontrolaccountrepresenttheamountsowedbysuppliers.Thesebalancesarisebecausegoodshavebeenreturnedafterfullsettlementoftheamountsowedand/oroverpaymentshavebeenmade.

Past Exam QuestionsPast Exam Questions

13 (a) CalculationoftheRevisedTotaloftheSalesLedgerBalances

$ $Totalofsalesledgerbalancesbeforeadjustments 457,265Add Dishonouredcheque (iv) 6,760 464,025Less Baddebtswrittenoff (vii) 8,600 Debitbalanceincludedtwice (viii) 2,050 (10,650)Revisedtotalofthesalesledgerbalances 453,375

CalculationoftheRevisedTotalofthePurchasesLedgerBalances

$ $Totalofpurchasesledgerbalancesbeforeadjustments 120,356Add Purchaseinvoicenotposted (vi) 3,040 Creditbalanceomitted (ix) 3,770 6,810Revisedtotalofthepurchasesledgerbalances 127,166

(b) SalesLedgerControl

$ $Balancebeforeadjustments 467,525 Salesdaybookovercast(i) 5,550 Baddebtswrittenoff(vii) 8,600 Balanceafteradjustments 453,375 467,525 467,525


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PurchasesLedgerControl

$ $Purchasesdaybookovercast(ii) 6,820 Balancebeforeadjustments 132,546Discountreceivedomitted(iii) 1,450 Returnsoutwardsovercast(v) 2,890Balanceafteradjustments 127,166 135,436 135,436

14X (a)(i) PurchasesLedgerControlAccount

2005 $ 2005 $Jun 1 Balanceb/d 320 Jun 1 Balanceb/d 7,645" 30 Cash 37,659 " 30 Creditpurchases 41,847" 30 Discountsreceived 785 " 30 Balancec/d 246" 30 Returnsoutwards 972" 30 Salesledger:Set-off 648" 30 Balancec/d 9,354 49,738 49,738

(ii) SalesLedgerControlAccount

2005 $ 2005 $Jun 1 Balanceb/d 14,160 Jun 1 Balanceb/d 282" 30 Creditsales 65,264 " 30 Cash 61,457" 30 Legalexpenseschargedto " 30 Discountsallowed 1,625 customers’accounts 250 " 30 Baddebtsexpense 600" 30 Dishonouredcheques 1,000 " 30 Returnsinwards 1,236" 30 Balancec/d 135 " 30 Purchasesledger:Set-off 648 " 30 Balancec/d 14,961 80,809 80,809

(b) BalanceSheet(extract)asat30June2005

$Current assetsTradedebtors($246+$14,961) 15,207Less Provisionforbaddebts (338)

Current liabilitiesTradecreditors($9,354+$135) 9,489

(c) (i) Tosummarisethetransactionsofsubsidiaryledgeraccountsandtoprovideadebtors’balanceandcreditors’balancefortheproductionofatrialbalanceandbalancesheet.

(ii) Toprovideaninternalcheckontheaccuracyofentriesbycomparingthetotalbalancesinthecontrolaccountswiththetotalofindividualaccountbalancesinthesubsidiaryledgers.Thiswillhelptolocateerrorsmorequickly.

(iii)Whenthereisaseparationofbookkeepingduties,thecontrolaccountsprovideanindependentcheck.

(Anytwopoints)


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