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Carrying out a Reconciliation The steps in a reconciliation of a sales ledger control account balance to the balances on the debtors

account in the sales ledger are as follows. (The same steps should be applied to reconcile the purchase ledger control account with the balances on the supplier accounts In the purchase ledger) Compare the balance on the sales ledger control account with the sum of the balances on the individual customer accounts. If there is a difference one or more errors or omissions has occurred. Identify the errors or omissions and decide whether the error has occurred in the control account or in the individual customers subsidiary account. Once the error has been identified, the appropriate correction should be made.

Purposes of Control Accounts 1. It helps to detect fraud . It helps to identify errors !. It provides the total figures of debtors and creditors "uic#ly for the preparation of the final account. Preparation of Control Accounts Control $ccounts is prepared from periodic totals of each type of transactions which are obtained from the boo#s of prime entry. The control account is also #nown as Total $ccount Example: Transactions for %anuary &&! ' %an (old goods ) 1,&&& on credit to $misha 1& %an (old goods ) 1,*&& on credit to +atel ' %an (old goods ) ,&&& on credit to ,inta * %an $misha returns goods ) 1&& * %an +atel returns goods ) &&. - %an ,inta returns goods ) !&& . %an /eceived ) -&& cash from $misha after allowing her ) -& discount 0 %an /eceived ) .&& cash from +atel after allowing her ) .& discount !& %an /eceived ) 1,!&& cash from ,inta after allowing her ) 1!& discount 1ote2 $ (ales 3edger (individual $ccount) is used to prepare a debtors4 list. The total of the debtors4 list should be e"ual to the balance of the Control $ccount. Example:

Transactions for %anuary &&! ' %an 5ought goods ) 1,&&& on credit from %ac# 1& %an 5ought goods ) 1,*&& on credit from /am * %an 6e returned goods ) 1&& to %ac# * %an 6e returned goods ) && to /am. . %an +aid ) -&& cash to %ac# after receiving ) -& discount 0 %an +aid ) .&& cash to /am after receiving ) .& discount

Sales Ledger Control Account 7 The (ales 3edger control $ccount is also #nown as 8ebtors Control $ccount or Total 8ebtors $ccount 7 The (ales 3edger Control $ccount has the main balance in the debit side and a minority balance on the credit side (5alance b9d). 7 $ minority balance is created due to the following. : $n overpayment of account by a customer : /eturn made by debtors not yet refunded : 8eposit made by customers 7 Cash (ales are not recorded in the (ales 3edger Control $ccount. 7 +rovisions for 8oubtful debts do not feature in the (ales 3edger Control $ccount because the provision accounts are #ept in the general ledger, not in the (ales 3edger. Purchases Ledger Control Account 7 The +urchase 3edger Control $ccount is also #nown as Creditors Control $ccount or Total Creditors $ccount. 7 The +urchases 3edger Control $ccount has the main balance in the credit side and the minority balance on the debit balance 7 $ minority balance is created due to the following. : $n overpayment of account to a supplier : /eturn made to creditors not yet refunded : 8eposit made to suppliers Contra Settlement $ contra settlement is made whenever an individual is both a debtor and a creditor at the same time. (et off ad;ustment is made with the lowest balance of the two accounts. Contra settlement decreases both the debtors and the creditors at the same time. Accounting entries: 8ebit Creditors Control $ccount Credit 8ebtors Control $ccount Sources of information Sales Ledger Control Account The boo#s of original entry from which entries are made in the (ales 3edger Control $ccount

7 Opening balance (main)7 Total of (ales 3edger debit balance b9f from previous period. 7 Opening balance (minority) 7 <inority balance brought forward from previous period. 7Total Credit (ales 7 (ales 8ay 5oo#. 7 Cash refund to customers 7 Cash 5oo# 7 Cash 9 5an# 7 Cash 5oo# 7 8iscount $llowed 7 Cash 5oo# 7 8ishonoured che"ues 7 Cash 5oo# 7 (ales /eturns 7 (ales /eturns boo# 7 Interest charged on debtors 7 =eneral %ournal 7 5ad 8ebts written off 7 =eneral %ournal 7 Contra entry 7 =eneral %ournal 7 Closing 5alance (main) 7 Total of (ales 3edger debit balance 7 Closing 5alance (minority) 7 <inority balance at the end Sources of information Purchases Ledger Control Account 7 Opening balance (main) 7 Total of +urchases 3edger credit b9f forward from previous period. 7 Opening balance (minority) 7 <inority balance brought forward from previous period. 7 Total Credit +urchases 7 +urchases 8ay 5oo#. 7 Cash 9 5an# 7 Cash 5oo# 7 8iscount /eceived 7 Cash 5oo# 7 +urchases /eturns 7 +urchases /eturns boo# 7 Contra entry 7 =eneral %ournal 7 Closing 5alance (main) 7 Total of +urchases 3edger credit balance 7 Closing 5alance (minority) 7 <inority balance at the end CORRECTIO O! ERRORS A " CO TROL ACCO# TS Control $ccounts are prepared to find if the balance on the control account is e"ual to the total of the balances in the section of the ledger it is controlling. If they are not e"ual, this implies that there are errors either in preparing the control account or in the ledger. These errors need to be traced and corrected Errors and their corrections Error $: $ transaction omitted from the boo# of prime entry. Therefore, the entry is omitted from both the ledger and the control account Correction: Correct both personal account balance and the control account balance Error %: $ transaction entered incorrectly in the boo# of prime entry Therefore, the entry is entered incorrectly in both the ledger and the control account Correction: Correct both personal account balance and the control account balance Error &: $n error in the addition of the boo# of prime entry The error affects only the control account Correction: Correct only the control account balance Error ': >rror in the personal account only

The error affects only personal account balance Correction: Correct only personal account balance Error ): >rror in the control account balance only The error affects only the control account Correction: Correct only the control account balance ote: 6hen correcting these errors, an amended Control $ccount and a statement reconciling the Control $ccount 5alance and the 3edger 5alance need to be prepared. Example The balance as per the list of debtors as at !1st 8ecember &&! was ) 1,&!& and The 5alance as per the 8ebtors Control $ccount as at !1st 8ecember &&! was) ,'.& $fter investigation the following errors were discovered Error $:$n invoice of ) 1,&&& representing a sale to ?isham has been completely omitted from the boo#s Error %: Credit (ales of ) && to /a;a has been incorrectly posted in the (ales 8ay 5oo# as ) &. Error &: The discount column in the Cash 5oo# has been overcast by ) && Error ': =oods returned to 1unda ) '&&, has been correctly entered in the (ales /eturn 5oo#, but credited to her account as ) '&. Error ): Credit (ales totaling ) 1 ,&&& was correctly added in the (ales 8ay 5oo# but posted in the (ales 3edger Control $ccount as ) 1',&&& Statement reconciling Sales ledger *alance +ith sales ledger control account ( *alance,List of de*tors1,&!& 5alance as per the list of debtors > 1 Credit (ales omitted from (ales 8ay 5oo# 1,&&& > (ales incorrectly posted in (ales 8ay 5oo# 10& > ' /eturn inwards wrongly posted (!-&) 1,0*& 5alance as per $mended Control $ccount

STR#CT#RE" .#ESTIO S @1. The following information was eAtracted from the boo#s of +et (hop 5oys for the month of $pril && . && ) $pril 8ebit 5alance (ales 3edger Control $ccount 1 ,'.& 1 Credit 5alance (ales 3edger Control $ccount 1-& 8ebit 5alance +urchases 3edger Control $ccount 11&

Credit 5alance +urchases 3edger Control $ccount

B, 0&

$pril +urchases for $pril (including ) ., 0& for cash 0,00& !& purchases) (ales for to $pril (including ) 1 ,-&& for cash sales) !.,B-& +ayment creditors. &,-&& /eceipts including ) '-& bad debts recovered -,!'& Customer4s che"ues returned by ban# !*& 8iscount received *&& 8iscount allowed -& (ales /eturn .!& 5ad debt written off *!& 8ecrease in provision for doubtful debts 1-& Transfer of debit balance from sales ledger to -&& purchases ledger Credit balance as per sales ledger '.& 8ebit balances as per purchases ledger *-& Cou are re"uired to prepare2 a) (ales 3edger Control $ccount, and D.mar#sE b) +urchases 3edger Control $ccount as they would appear in the =eneral ledger. D.mar#sE c) (tate what does the figure in the debit balance of the (ales 3edger $ccount represents. D1 mar#E @ . The following information has been eAtracted from the boo#s of =. >lm, trader, for the month of October 1BB'. (ales 3edger 5alances at 1 October 8/ +urchases 3edger 5alances at 1 October 8/ (ales F Cash +urchases F Cash (ales F Credit +urchases F Credit (ales /eturns (Credit Customers) +urchases /eturns (Credit Customers) 5alance on 5ad 8ebts +rovision at 1 October 5ad 8ebts 6ritten off Che"ue 8ishonoured 8iscounts $llowed 8iscount /eceived Interest Charged on 8ebtors Overdue $ccounts /eceipts from 8ebtors +ayment to Creditors (ales 3edger Credit 5alance at !1 October +urchase 3edger 8ebit 5alance at !1 October . B*& 0!* C/ 1 &.* C/ -' '1& **& - & 1 . & B& !!& B.& 1 *& * & 0&* 1 '& 1 .B& 1 !*& 1& 1&' *&& 01 B-& 1 11& ''&

Cou should note that2 1. the provision for bad debts is to be ad;usted to ) B&&G . on the !1 October the balances on + /eid4s account were2 F +urchase 3edger )1 '*& F (ales 3edger ) B1& The balance in the (ales 3edger is to be offset against the +urchase 3edger balance. RE.#IRE": (a) +repare (ales 3edger and purchase 3edger Control $ccounts for October 1BB'. (b) 3ist briefly the uses and advantages of Control $ccounts. (c) >Aplain briefly how a contra entry might arise. /%0 m1s2

@!. D!E

(a)

Outline

three

reasons

for

#eeping

control

accounts.

(b) The following information was eAtracted from the boo#s of 6illiam 1oel for the year ended !& $pril &&1. ) +urchase ledger 5alance at 1 <ay &&& '!1 & Credit purchases for the year 0 '1'& Credit purchases returns 1 '&& Che"ues paid to creditors .'*B0& Cash purchases 0B'& 8iscount received on credit purchases !1'&& Credit balances transferred to sales ledger accounts * 1& 8raw up the purchases ledger control account for the year ended !& $pril D*E The total of the balances in 1oel4s purchases ledger amounts to )-.--& which does not agree with the closing balance in the control account. The following errors were then discovered. 1 8iscount received had been overstated by )1&&&. $ credit purchases invoice for ) &'& had been completely omitted from the &&1.

boo#s. ! $ purchases ledger account had been understated by )1&&. ' $ credit balance of )0*& in the purchases ledger had been set off against a contra entry no the sales ledger, but no entry had been made in the control accounts. * $ payment of )1'*& had been debited to the creditor4s account but was omitted from the ban# account.

$ credit balance of )! 1& had been omitted from the list of creditors.

(c) (i) >Atract the necessary information from the above list and draw up an amended +urchases 3edger Control $ccount for the year ended !& $pril &&1. (ii) 5eginning with the given total of )-.--&, draw up a table showing the changes to be made in the +urchases 3edger to reconcile it with the new control account balance.