Unit 8
Control accounts and error
correction
1
What is a control account (Total
accounts)


Is an account in the nominal ledger which
summarizes the transactions in a number of other
accounts
Examples of control accounts could include: The sales ledger control account, which
summarizes the individual customer accounts
 The purchases ledger control account, which
summarizes the individual supplier accounts
2
Purposes of control accounts

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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 purchases ledger 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.
3
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
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.
4
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.
The debtors total account and the purchases total
accounts would be kept for memorandum purposes
only
5
Sales ledger control account
(Debtors control account)

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Is used to control the ledger
The entries in the sales ledger control account
comes from the books of prime entry, not from
the individual accounts in the sales ledger
This provides a checking facility because, if
information in the books of prime entry is posted
directly to the individual accounts and also in the
control account, a cross check can be made
The balance on the control account should be the
same as the total balances on the individual sales
account.
If they are not, then an error has occurred
6
Sales ledger control account
Balance b/d(should tally with
X
sum of sales ledger debit balances
at end of previous period
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
(Cash column on received
side)
X
Cash discounts allowed
(total of discount column of
cash book)
X
Balance c/d (should tally
X
with sum of debit balance on
the individual debtor
accounts in the sales ledger)
7
Example 1-Sales ledger control account
1 Sept
Money owed by customers
Rs 5,700
1 Sept
Money owed to customers
Rs 350
30 Sept Sales
Rs
35,680
30 Sept Return inwards
Rs 1,350
30 Sept Cheque payment by credit
customers
30 Sept Cash payments by credit
customers
Rs
32,360
Rs 4,300
30 Sept Money owed by customers
Rs 3,190
30 Sept Money owed to customers
Rs 170
8
Credit balances on the sales
ledger control account


Such balances arise when
 The customer has overpaid
 Credit notes have been issued for fully
paid for goods
 Payment is received in advance of raising
invoices
The Purchases ledger control account may
show a debit balance for similar reasons
9
Purchase ledger control account
or creditors total account



Sometimes known as creditors control
account
Is used to control the purchases ledger
which contains the accounts of individual
suppliers who supply goods on credit
Information needed to prepare the
purchases ledger control account comes
from books of prime entry
10
Purchases ledger control account
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) Credit
purchases (total in purchases day
book)
x
Cash paid to creditors (Payment column
in cash book)
x
Balance B/f (if any) (total of
purchases ledger credit balances b/f
from previous period) Credit
purchases (total in purchases day
book)
x
Return outwards (total of Return outwards
book) Cash discounts received (total of
discount column of cash book)
x
x
Return outwards (total of Return outwards
book) Cash discounts received (total of
discount column of cash book)
x
x
Balance c/d (should tally with sum of
credit balances on the individual creditor
accounts in the purchases ledger)
x
x
xx
xx
11
Example 2- Purchases ledger
control account
1 July
Money owed to suppliers
Rs 37,450
31 July
Credit purchases
Rs 231,600
31 July
Return outwards
Rs 12,900
31 July
Total payments
Rs 222,000
31 July
Discount received
Rs 6,770
31 July
Money owed by suppliers
Rs 560
31 July
Money owed to suppliers
Rs 27,940
12
Contra entries


Contra entries or set off entries arise if a
business sells goods to, and also buys
goods from, the same trader
Example On
01 June Nigel sells Rs 500 of wood to
Simpson
 On 10 June Nigel buys 1chair from Simpson for
Rs 350
 In this case, Simpson will have an account in
both the sales ledger and purchases ledger of
Nigel
13
Accounts of Simpson
Sales ledger
Simpson
01/06 Credit sales
Rs 500
Purchases ledger
Simpson
10/06 Credit purchases Rs350
14
Treatment of a contra entry
Sales ledger
Simpson
01/06 Credit sales
Rs 500 30/06 Contra Purchases Ledger Rs 350
30/06 Bank
Rs 150
Purchases ledger
Simpson
30/06 Contra Sales ledgerRs
350
10/06 Credit purchases
Rs 350
15
Activity 1

Sales ledger control account and
purchases ledger control account
16
What errors can be detected by
control accounts



Casting errors are errors of addition.Example
when total sales for the period in the sales day
book are added incorrectly
A transposition error is an error in which two
digits are transposed. Example Rs 1,375 may be
written as Rs 1,735
An error can arise if a transaction is recorded in
the control account and not in the other account,
or vice versa
17
How are errors corrected in control
accounts


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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.
18
Example 3

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At the end of December, the sales ledger control
account of John was balanced and the amount
carried down was Rs 24,700
The total debtors according to the list of debtors in
the sales ledger was Rs 21,300.
The following errors were detected after
investigation
A bad debt of Rs 500 was written off in the sales
ledger but not recorded in the control account
A debit balance of Rs 2,700 from a customer
account was not included in the total of debtors list
Discounts allowed to the value of Rs 200 were
recorded in individual accounts but not the control
accounts
An invoice of the sales of Rs 2,600 to Raj was
19
completely omitted from the records
20
Activity 2

Amended sales ledger control account
and revised debtor balance
21
Suspense account
and error
correction
22
What is a suspense account


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A suspense account is an account in the general
ledger in which amounts are temporarily recorded.
There are two reasons why a suspense account
could be opened:
a bookkeeper is unsure where to post an item and
enters it to a suspense account pending
instructions
there is a difference in a trial balance and a
suspense account is opened with the amount of
the difference so that the trial balance agrees
(pending the discovery and correction of the errors
causing the difference).
This is the only time an entry is made in the
records without a corresponding entry elsewhere
We are going to concentrate on the second reason
for opening a suspense account
23
Summary of errors that do not affect trial
balance and do not involve suspense account
 Error of Omission – a transaction is not
recorded at all
 Error of commission – an item is entered to
the correct side of the wrong account (there
is a debit and a credit here, so the records
balance)
 Error of principle – an item is posted to the
correct side of the wrong type of account, as
when cash paid for plant repairs (expense)
is debited to plant account (asset)
24
Summary of errors that do not affect trial
balance and do not involve suspense account
(Cont…)

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Error of original entry – an incorrect figure is
entered in the records and then posted to the
correct account
Example: Cash £1,000 for plant repairs is entered
as £100; plant repairs account is debited with
£100
Reversal of entries – the amount is correct, the
accounts used are correct, but the account that
should have been debited is credited and vice
Compensating errors – do not affect trial balance
but involves suspense account
25
Errors that require correction
through suspense account


Addition errors – figures are incorrectly added in a
ledger account
Posting error



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an entry made in one record is not posted at all
an entry in one record is incorrectly posted to another
Trial balance errors – a balance is omitted, or
incorrectly extracted, in preparing the trial balance
Compensating errors – two equal and opposite
errors leave the trial balance balancing
26
Effect of errors on profit
Some of the errors will have meant
that the original profits calculated will
be wrong.
 Other errors will have no effect on
profit
 For instance if errors affect items only
in the balance sheet, then the original
calculated profit will not need altering.

27
Errors which do affect profit
calculations
If the error is in one of the figures
forming part of the trading and profit
and loss account, then the original
profit will need altering.
 Once the error has been corrected in
the journal, a statement of corrected
net profit for the year should be
drafted.

28
Example 4

Correction of errors
29
Activity 3

Correction of errors (HW)
30