Virtual Kollage: Control accounts and their reconciliation with receivables and payable ledger acoount

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Control accounts and their reconciliation with receivables and payable ledger acoount



CONTROL ACCOUNTS AND THEIR RECONCILIATION WITH RECEIVABLE AND PAYABLE LEDGER ACCOUNTS
Control accounts are accounts that summarize the transactions recorded in a particular ledger. They are normally prepared for accounts receivable and payable ledgers. Control accounts may also be prepared for inventory, etc. 

Control accounts normally form part of the double entry system whereas the individual debtors and creditors accounts are considered memorandum accounts only.

Purpose of Receivable and Payable Ledger Control Accounts
1.      To correct errors.
2.      To ensure accuracy in the double entry system.
3.      To ensure that debtors and creditors balances can be ascertained more readily.
4.      To act as internal check on staff.
5.      To save time.

Receivables Ledger Control Accounts
It is an account that is prepared to summarize the individual transactions in the accounts receivable ledger.
The format may be as follows:
Receivables Ledger Control Account
Balance b/f
Xxx
Balance b/f (if any)
xxx
Credit sales
xxx
Discount allowed
xxx
Refund to debtors
xxx
Return inwards
xxx
Interest on overdue debt
xxx
Bad debt
xxx
Correction of errors
xxx
Bank
xxx
Balance c/d (if any)
xxx
Correction of errors
xxx


Contra set-off
xxx


Balance c/d
xxx

xxx

xxx

Payable Ledger Control Account
It is an account that is prepared to summarize the individual transaction in the accounts payable ledger.
The format may be as follows:
Payables Ledger Control Account
Balance b/f (if any)
xxx
Balance b/f
xxx
Discount received
xxx
Credit purchases
xxx
Return outwards
xxx
Refund from creditors
xxx
Bank
xxx
Correction of errors
xxx
Correction of errors
xxx
Balance c/d (if any)
xxx
Set -off
xxx


Balance c/d
xxx



xxx

xxx


EXERCISE 1
a.       State whether a control account is personal or impersonal account and indicate the ledger in which the payable or receivables ledger control account can be found.

b.      Record the following transactions in the receivable and payables ledger control accounts and balance them off.
Jan 1: Receivables:      balance b/f       $ 5,000 (DR)               -           20 (CR)
          Payables:           balance b/f       $ 2,000 (CR)               -           15 (DR)

Transactions during the month:
                                                                                                    $
Credit sales                                                               100,000
Cash sales                                                                    40,000
Credit purchases                                                         65,000      
Cash purchases                                                            30,000
Return inwards                                                             4,000
Return outwards                                                           2,500
Bad debts written off                                                      120
Cash discount allowed to credit customers                     600
Cash discount received from credit suppliers               1,200
Interest on overdue debts of customers                        1,200
Receivable ledger account balance set off against
    payable ledger account balance                                   750
Overstatement of return inwards                                     820
Cash from credit customers                                        30,000
Cash paid to suppliers for goods bought on credit     20,000
Cash refund to credit customers                                   1,500
Cash refund from credit suppliers                                2,000
Jan 31. Credit balance in the receivables ledger (prepayment)   500
            Debit balance in the payables ledger (prepayment)      1,100


EXERCISE 2
Take a look at an inexperienced bookkeeper who has drawn up the receivables ledger control account below
Receivables Ledger Control Account

           $

        $
Opening balance
180,000
Credit sales
190,000
Cash from credit customers
228,000
Bad debts written off
1,500
Sales returns
8,000
Contras against payables
2,400
Cash refunds to credit customers
3,300
Closing balance (Balancing figure)
229,600
Discount allowed
4,200


423,500

423,500
You are required to determine the correct closing balance after correcting the errors made in preparing the accounts.


EXERCISE 3
A careful study of the receivables ledger control account below reveals many inaccurate entries
Receivables Ledger Control Account

        $

            $
Opening balance
138,400
Credit sales
80,660
Cash received from credit customers
78,400

Contras against credit balances in   
     payable ledger

1,000


Discount allowed to credit
      customers

1,950


Bad debts written off
3,000


Dishonoured cheques from credit 
       customers

850

Closing balance
129,360

216,820

216,820
What should the closing balance be when all the errors have been corrected?



Reconciliation of Control Account Balance with Personal Ledger Balances
The control account balance may not agree with the sum of the personal ledger balances as a result of any of the following:
Error of omission (in day book or personal ledger)
Error of transposition (in day book or personal ledger)
Error of casting (in day book or personal ledger)
Error of reversal of entry
Error of original entry
Error of duplication

Generally, the personal ledgers are not part of the double entry system but are kept as memorandum accounts only. Where this is the case the following may be followed for the reconciliation:
        i.            Pass all relevant entries in the control account to correct any errors that have affected the control account.
      ii.            Prepare a reconciliation statement to explain the difference between the control account balance and the sum of the personal ledger balances, using the errors affecting the personal ledgers only.

Note that it is easier to start the reconciliation with the total of the individual accounts balances rather than the control account balance. But all two approaches must be learnt.


EXERCISE 4
Flaws Ltd maintains receivables and payables control accounts. In addition, individual accounts are kept for debtors and creditors as memorandum accounts only.

The Receivable ledger control account showed a balance of $50,000 which is different from the total of the balances of the individual accounts in the Receivables ledger. Further investigations showed the following:
        i.   Cash from credit customers of $500 was omitted from the control account.
      ii.   Returns by a customer of $250 had been recorded twice in the control account.
    iii.   Bad debts in respect of Mr Sun, a customer, had not been recorded in his account $20.
    iv.   A contra set off between the Receivable and Payable ledger control accounts of $52 had been recorded as $25 in the control accounts.
      v.   A debit balance of one customer was omitted when casting the individual account balances $30.
    vi.   Refund of $4,000 to a customer was totally omitted in the cash book.
Required:
Prepare a reconciliation statement to determine what the total of the individual account balances would be after the above errors have been corrected.

EXERCISE 5
You are assisting in the preparation of the year end accounts of Rogers and Co. The balance on the trade payables control account in the general ledger is $45,505. The total value of the list of balances on the suppliers’ personal accounts is $46,886.

You have noted the following:
        i.   An invoice from a supplier for $739 has been entirely omitted from the accounting records;
      ii.   A credit note received from a supplier for $266 was entered in the daybook as an invoice;
    iii.   No entries have been made in respect of an agreement to offset a credit balance of $864 in the payables ledger against a debit balance in the receivables ledger;
    iv.   Payments to a supplier totaling $1,800 have been recorded in the general ledger, but no entries have been made in the supplier’s personal account;
      v.   A payment of $17,500 was made to settle a balance of $17, 585. The balance on the supplier’s personal account was fully written off, but only the payment of $17,500 was entered in the general ledger;
    vi.   A payment of $340 to a supplier was recorded in the cheques issued daybook as $430;
  vii.   A credit balance of $167 on a supplier’s account was listed as a debit balance.

Required: 
a)      Prepare the payables control account including the necessary adjusting entries and the corrected balance.
b)      Prepare a reconciliation of the list of balances to the corrected balance on the payables control account.
c)      State the corrected payables balance for inclusion in the final accounts and where it should be reported.
 
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