CONTROL ACCOUNTS AND ERROR

CORRECTION

Unit 8

Correction of errors

Learning objectives

Introduction to the journal

Types of errors
Suspense account
Corrected Income statement
Corrected Statement of financial position

Books of prime entry

Recap

Sales day book

Purchases day book
Return inwards day book
Return outwards day book
Cash Book/ Petty cash Book
The journal

The journal

A book of prime entry which records

transactions which are not routine and
not recorded in any other books of prime
entry

Typical uses of the journal

Year end adjustments
Acquisitions and disposal of non-current
assets
Opening entries-Entries to open a new
set of books
Correction of errors

Presentation of the journal

The journal shows:

The date
The name of the account(s) to be debited
The name of the account(s) to be credited
A description of the transaction the
narrative

Errors
Errors
Errors where trial balance
balances

Errors where trial balance

does not balance
Suspense account

Correction journals

Impact of correction
journals on profit
7

Errors where the trial balance still

balances
Error of omission
Error pf commission
Error of principle
Compensating error*
Error of original entry
Reversal of entries

Errors where the trial balance does

not balance
Addition errors figures are incorrectly
added in a ledger account
Posting error
a an entry made in one record is not posted at
all
b 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

Suspense account
A suspense account is an account in
which the debits and credits are held
temporarily until sufficient information is
available for them to be posted to the
correct accounts
Dealt with the normal rules of doubleentry bookkeeping

10

Suspense account (Cont)

There are two main reasons why suspense

accounts may be created: On the extraction of a trial balance the debits
are not equal to the credits and the difference
is put to a suspense account.
When a bookkeeper performing double entry is
not sure where to post one side of an entry he
may debit or credit a suspense account and
leave the entry there until its ultimate
destination is clarified.
11

Control accounts

12

CONTROL ACCOUNTS

13

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

14

Reasons/Advantages Of Having Total

/Control Accounts:

The Control accounts serve as an independent

check/internal check on the accuracy of the Ledgers.
Control Accounts can assist Management to safeguard
against fraudulent entries if there is a proper
segregation of duties by making sure the person taking
charge of the Ledgers do not prepare the Control
Accounts.
To prepare the Trial Balance, it is quicker to extract
the total/control accounts of the trade debtors and
trade creditors account instead of extracting the details
of the individual balances of the individual trade debtors
and trade creditors accounts.

15

Reasons/Advantages Of Having Total

/Control Accounts:

Control Accounts facilitate the location of

errors. For example, at any time the closing
balance of the Trade Debtors Control Account
must equal to the sum of the individual trade
debtors accounts balances. Hence, if the two
totals do not agree, we can quickly know that
there must errors in either the Sales Ledger or
the Control Account.

16

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.

17

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

18

Sales ledger control account

(Debtors control account)
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

19

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)

Credit sales (total in sales day

book)

Return inwards (total of

Return inwards book)

Dishonored cheques (Bank

statement and cash book)

Bad debts (journal)

Cash received from debtors

(Cash column on received
side)

Cash discounts allowed

(total of discount column of
cash book)

Balance c/d (should tally

X
with sum of debit balance on
the individual debtor
accounts in the sales ledger)
20

Example 11-Sales ledger control account

1 Sept

Money owed by customers

Rs 5,700

1 Sept

Money owed to customers

Rs 350

30 Sept Sales
30 Sept Return inwards

Rs
35,680
Rs 1,350

30 Sept Cheque payment by credit

customers

Rs
32,360

30 Sept Cash payments by credit

customers
30 Sept Money owed by customers

Rs 4,300

30 Sept Money owed to customers

Rs 170

Rs 3,190

21

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

22

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

23

Purchases ledger control account

Balance B/F (should tally with sum of
purchases ledger debit balances at end of
previous period)

Balance B/f (if any) (total of

purchases ledger credit balances b/f
from previous period) Credit
purchases (total in purchases day
book)

Cash paid to creditors (Payment column

in cash book)

Balance B/f (if any) (total of

purchases ledger credit balances b/f
from previous period) Credit
purchases (total in purchases day
book)

Return outwards (total of Return outwards

book) Cash discounts received (total of
discount column of cash book)

Return outwards (total of Return outwards

book) Cash discounts received (total of
discount column of cash book)

Balance c/d (should tally with sum of

credit balances on the individual creditor
accounts in the purchases ledger)

xx

xx
24

Example 22- 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

25

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

26

Accounts of Simpson
01/06 Credit sales

Sales ledger
Simpson

Rs 500

Purchases ledger
Simpson
10/06 Credit purchases Rs350

27

Treatment of a contra entry

01/06 Credit sales

Sales ledger
Simpson

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

28

Activity 1

Sales ledger control account and

purchases ledger control account

29