CONTROL APPLICATIONS

Control application
 Demonstrate the importance of control applications in organisations
 Examine the differences between control accounts and personal ledger accounts
 Prepare control accounts
 Identify the causes for the differences between the cash book and bank balances
 Draw up the bank reconciliation statements
 Correct errors in the cash book and on the bank statements

A control account is a general ledger account containing only summary amounts. The details for
each control account will be found in a related (but separate) subsidiary ledger .

The control account keeps the general ledger free of details, but still has the correct balance for
preparing the company's financial statements.

These are accounts which record all creditors and debtors accounts, in other words it is a
summary of all these transactions.

Purposes of control accounts

 to locate errors
 to deter fraud
 fraud or errors are easier to check
 checking is made easier as sectional ledgers are created
 to provide totals for creditors and debtors quickly

Reasons why a debtor’s account might have a credit balance

 payment in advance
 credit note issued
 overpayment

Limitations of control accounts

 control accounts do not guarantee the accuracy of individual accounts, which may
contain compensating errors, for example items posted to wrong accounts.
 control accounts may themselves contain errors.

Preparation of control accounts

The information required for the preparation of the sales ledger can be found as follows:
Sales Ledger Control Account – for trade receivables

Sales Ledger Control Account Source of Information

(Items included)
Opening balances Total of balances in debtors accounts under sales
ledger
Credit sales Total of sales day book
Return Inwards Total of sales return day book
Bad Debts / Bad Debt Recovered General Journal
Bank and Cash received from debtors Cash Book (Receipt side)
Discount Allowed Cash Book (Receipt Side)
Interest Received on overdue payments from General Journal
debtors
Set off / Contra General Journal
Closing Balance Total of balances in debtors accounts under sales
ledger

Purchases Ledger Control Account – for trade payables

Purchases Ledger Control Account Source of Information

(Items included)
Opening balances Total of balances in creditors accounts under
purchases ledger
Credit Purchases Total of purchases day book
Return Outwards or Purchase Return Total of purchases return day book
Bank and Cash paid to creditors Cash Book (Payment side)
Discount Received Cash Book (Payment Side)
Interest charged by creditors General Journal
Closing Balance Total of balances in creditors accounts under
purchases ledger
 Sales Ledger Control Account

Date Details folio $ Date Details folio $

Balance b/d xxx Balance b/d xxx

Credit Sales xxx Sales Return xxx
Dishonoured Cheque xxx Bad Debts w/o xxx
Interest received xxx Discount Allowed xxx
Balance c/d xxx Bank and Cash xxx
Set off: contra xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx Balance c/d xxx

Purchase Ledger Control Account

Date Details folio $ Date Details folio $

Balance b/d xxx Balance b/d xxx

Purchases Returns xxx Credit Purchases xxx
Set off: contra xxx Interest due xxx
Discount Received xxx Balance c/d xxx
Bank and Cash xxx
Balance c/d xxx
xxx xxx
Balance b/d xxx Balance c/d xxx

Benefits of Control Account

 Control accounts provide a check on the internal accuracy of the ledger accounts
 They identify the ledger or ledgers in which errors have been made when there is
difference on trial balance

 Provide the final balances of debtors or creditors

 Limit the frauds or deception with respect to sales and purchases or cash / cheque
payments or receipts

 Any missing figure such as credit sales or credit purchases can be identified
Limitations of Control Account

 If control account itself is based on some errors such as posting or entering of data
from day books or ledgers, it might not restrict the errors.

 If the system of maintaining day books, ledgers and control accounts are prepared by
the same group or individuals, the frauds might not be restricted.

 Control accounts are only limited to debtors and creditors, they do not focus on other
items such as stocks, or accruals.
RECONCILING CONTROL ACCOUNTS WITH LEDGERS

At times after the preparation of control accounts, that is the Sales ledger control account and
Purchases ledger control account some items may be omitted, overstated, understated or wrong
figures were taken. Hence there is need to prepare amended/ adjusted control accounts taking
into account these shortfalls. In addition a reconciliation statement will need to be prepared to
reconcile the control account and the ledgers.

Notes on reconciling control accounts with ledgers.

1. If a transaction is omitted from a book of prime entry, it will be omitted from the personal
account in the sales or purchases ledger and from the control account. Complete omission of
a transaction affects control accounts and sales / purchase ledgers and is therefore rectified
through amended control accounts and debtors / creditors reconciliation statement.
Examples include:
 Sales invoice was completely omitted from the books.
 Purchases invoice was completely omitted from the books.

2. Overcasting/ Undercasting of errors in books of original entry affects only control account
and is therefore rectified through control accounts. Examples may include any of the
following:
 Sales / purchases journal overcast or under cast.
 Returns Journal overcast or under cast.
 Discounts column in cash book overcast or under cast.

3. Errors in the personal accounts affect only the debtors / creditors and are therefore rectified
through debtors / creditors reconciliation statements. Examples may include any of the
following:
 Incorrect value of purchase/ sale posted to trade payables/ trade receivables
personal accounts.
 Correct amount entered on the wrong side of personal account.

4. Incorrect amount entered on the invoice will affect control accounts and sales / purchase
and is therefore rectified through adjusted control and trade payables/ trade receivables
reconciliation statements. Examples may include any of the following:
 An invoice of $1 505 was incorrectly totalled as $1 550.
 An invoice of $532 was incorrectly recorded in the journal as $523
EXAMPLE

The following information has been taken from the books of Nissi Yasha for the financial year
ended 31 December 2014.
$
Sales ledger balances at 1 January 2014 31 270
Payments to trade payables 496 324
Cash received from debtors 106 195
Discount allowed 1 735
Sales returns 2 410
Purchases returns 4 820
Cash sales 49 165
Bad debts written off 980
Credit sales for the year 124 745
Debit balances transferred to purchase ledger accounts 1 705

The total of Nissi Yasha’s sales ledger balances amounts to $40 040 which does not agree with
the closing balance in the sales ledger control account. The following errors have been
discovered.

i. The sales ledger account was understated by $465.

ii. Sales returns were under cast by $435.
iii. Shumirai had returned goods worth $270 but this sum was recorded as $225 in his
account.
iv. Discount allowed $135 had been posted to the wrong side of trade receivables account.
v. Interest of $40 charged to trade receivable was overlooked by the Clerk.
vi. Sales day book had been over cast by $680.
vii. Bad debts of $95 were entered in the control account but not posted to the customer’s
account.
viii. Discount allowed of $175 was entered in the cash book but were not entered in the
customer’s account.
ix. Sales returns of $220 from M. Power had not been recorded in the books.
x. M. Maka was both a customer and a supplier. He had a balance of $135 in the purchase
ledger and $95 in the sales ledger. The contra entry was made in M. Maka’s account but
no entry was made in the control account.
xi. A sales invoice of $745 was not entered in the books.
xii. A credit sale of $930 to M. Ano was entered on the credit side of his account.

REQUIRED
a. From the original list of balances, draw up the sales ledger control account for the year
ended 31 December 2014.
b. Show the amendments to be made to the control account.
c. Draw up a statement amending the total of the sales ledger balance to agree with the new
control account balance.
 SOLUTION

a. Sales Ledger Control Account

Date Details fol Amount $ Date Details fol Amount $

2014 Balance b/d 31 270 201 Sales returns 2 410
December Sales 124 745 December Bank 106 195
D. allowed 1 735
Bad debts w/o 980
Contra 1 705
March 31 Balance c/d 42 990
156 015 156 015
January 1 Balance b/d 42 990

b. i. Amended Sales Ledger Control Account

Date Details fol Amount $ Date Details Fol Amount $

2014 Balance b/d 42 990 2014 Sales returns 435
December Sales omitted 745 December Sales o/stated 680
Sales returns 220
Contra 95

Jan 31 Balance c/d 42 305

43 735 43 735
January 1 Balance b/d 42 305

ii. Statement of agreeing balances

$ $ $
+ -
Sales ledger total 40 040
Sales ledger understated 465
Sales ledger understated 35
Interest 40
Sales omitted 745
Credit sale error 1 860 3 145
43 185
Bad debts 95
Discount allowed 175
Sales returns omitted 220 490
42 695
PRACTICE QUESTION 1
The following information has been extracted from the accounts of Kundai Jakwaz for the
year ended 31 March 2010.
$
Sales ledger balance at 1 April 2009 58 080
Credit sales 999 784
Cash sales 29 268
Credit sales returns 19 756
Receipts from debtors, banked 925 360
Discount allowed on credit sales 42 808
Bad debts written off 19 020
Debtors’ cheques dishonoured 1 324
Contra entries 2 306

REQUIRED
a. Prepare Kundai Jakwaz’s sales ledger control account for the year ended 31 March 2010.
[10]
The total of Kundai Jakwaz’s sales ledger balances at 31 March 2010 was $53 690, which
did not agree with the closing balance of his sales ledger control account. On checking his
accounts he discovered the following errors.

1. A credit note for $840 which had been sent to a debtor had been entered in the sales
journal (day book) and posted as a sale to both accounts.
2. A debit entry in the sales ledger for $1 396 had been set off as a contra entry in the
purchases ledger, but no entry had been made in the control accounts.
3. The discount allowed account had been overstated by $620.
4. A sales invoice for $1 996 had been completely omitted from the accounts.
5. A debit balance of $4 204 had been omitted from the list of debtors.
6. A debtor who owed $1 792 had been declared bankrupt during March 2010. The debt
had been written off in the control account, but no entry had been made in the debtor’s
account.
7. A receipt for $1 260 had been debited to the bank account but omitted from the debtor’s
account.
8. An entry for $1 632 in the sales journal (day book) had not been posted to the debtor’s
account.
9. A sales ledger account had been understated by $400.
10. A page of the sales journal (day book) with entries totalling $7 712 had been omitted
from total sales. The amounts had, however, been posted to the debtors’ accounts.
REQUIRED
b. (i) Beginning with the closing balance which you have calculated in (a), prepare a
statement showing the amended balance on the control account. [6]

(ii) Beginning with Kundai Jakwaz’s sales ledger balance of $53 690, prepare a
statement amending the total of the sales ledger balance to agree with the new
control account balance. [8]
c. State three advantages of keeping control accounts. [6]
PRACTICE QUESTION 2

The following information has been taken from the books of Ellen Musendo for the financial
year ended 31 December 2018.
$
Sales ledger balances at 1 January 2018 165 208
Credit sales for the year 595 234
Cash sales 196 484
Bad debts written off 7 642
Return inwards 15 652
Cash received from debtors 504 638
Discount allowed 13 362
Interest charged to customers 2 890
Debit balances transferred to purchase ledger accounts 5 944

The total of Ellen Musendo’s sales ledger balances amounts to $208 894 which does not agree
with the closing balance in the sales ledger control account. The following errors have been
discovered.

i. Shumi returned goods worth $1 420 but this sum was recorded as $340 in his account.
ii. Sales Day Book had been under cast by $1 760.
iii. A credit sale of $5 440 was entered on the credit side of Ellen Musendo’s account.
iv. Return inwards $2 480 from M. Agness had not been recorded in the books.
v. A debtor balance of $3 060 was omitted from the list of debtors.
vi. Return inwards Journal was under cast by $1 160.
vii. Discount allowed $720 had been posted to the wrong side of debtor’s account.
viii. Interest of $340 charged to trade receivables were not recorded.
ix. Bad debts of $440 were entered in the control account but not posted to the customer’s
account.
x. Adbel was both a customer and a supplier. He had a balance of $1 840 in the purchase
ledger and $2 240 in the sales ledger. The contra entry was made in the control account
but no entry was made to Adbel’s account.
xi. A sales invoice of $3 540 was completely omitted in the books.
xii. Discount allowed of $1 520 was entered in the cash book but were entered in the
customer’s account.

REQUIRED
a. From the original list of balances, draw up the sales ledger control account for the year
ended 31 December 2018.

b. Amended sales ledger the control account.

c. Draw up a statement amending the total of the sales ledger balance to agree with the new
 control account balance.
PRACTICE QUESTION 3

The following information was extracted from the books of Ball Point for the year ended 30 June
2011.
$
Purchases ledger balances at 1 July 2010 21 560
Sales ledger balance 1 July 2010 24 560
Credit purchases for the year 412 070
Dishoured cheques 12 070
Credit purchases returns 6 200
Cheques paid to creditors 372 990
Bad debts written off 1 000
Discount allowed 9 510
Cash purchases 4 470
Discount received on credit purchases 15 700
Credit balance transferred to sales ledger accounts 2 605

The total of the balances in Ball Point’s purchases ledger amounts to $33 830, which does
not agree with the closing balance in the Control account.

The following errors were then discovered.

i. Discount received had been overstated by $500.

ii. A credit purchases invoice for $1 020 had been completely omitted from the books.
iii. A purchases ledger account had been undercasted by $50.
iv. A credit balance of $425 in the purchases ledger had been sett off against a contra
entry in the sales ledger, but no entry had been made in either control account.
v. A payment of $725 had been debited to the creditor’s account but was omitted from
the bank account.
vi. A credit balance of $1 605 had been omitted from the list of creditors.

REQUIRED

a. From the original list of balances, draw up the purchases ledger control account for the
year ended 30 June 2011.

b. Extract the necessary information from the above list and draw up an amended purchases
ledger control account for the year ended 30 June 2011

c. Draw up a statement amending the total of the purchases ledger balance to agree with the
new control account balance.
BANK RECONCILIATION STATEMENT

It is a statement prepared to reconcile the bank statement and the cash book.

Businesses maintain cash book to record both the cash as well as bank transactions. A Cashbook
has a cash column which shows cash available with the business and a bank column which
shows cash at bank.

Bank also keeps an account for every customer in their books. All the deposits are recorded on
credit side of customer’s account and withdrawals are on the debit side of their account. An
account statement is sent regularly to the customers by the bank.

Sometimes the bank balances as per cash book and bank statement doesn’t match. In case
balance available in the passbook doesn’t match the bank column of the cash book, the business
should identify the reasons for the same. It is important to reconcile the differences.

For reconciling the balances as shown in the Cash Book and Bank Statement a reconciliation
statement is prepared known as Bank Reconciliation Statement. In other words, a bank
reconciliation statement is a statement which is prepared for reconciling the difference between
balances as per cash book’s bank column and bank statemant on a given date.

Reasons for using bank reconciliation statements are as follows:

 A bank reconciliation statement provides verification of a company’s records with items

not yet processed by the bank such as unpresented cheques and uncredited items.

 Also, a bank reconciliation statement provides an update of the company’s records with
items made by the bank but not yet accounted for by the company such as interest
received, credit transfers, standing orders and bank charges.

 Accounting staff can locate the errors in either the company’s cash book or the bank
statement by preparing the bank reconciliation statement.

 Bank reconciliation statement provides a check on the timing difference between the date
recording the receipts (or payment) and the date of banking in these receipts (or
withdrawing these payments from bank).
Reasons for differences in bank statement and cash book
The causes of difference will be fall into one of the following classes:
1. Items (not consisting of errors) which appear in the bank statement but which are not in
the cash book, e.g., dishonoured cheques or bills, interest and bank charges, standing
order (an order made to the bank to make a regular payment), dividends or interest
income credited direct to the bank and payments by customers which are paid direct to
the bank.

2. Items (not consisting of errors) which appear in the cash book but which do not appear in
the bank statement. These are confined to outstanding cheques and outstanding deposits.

3. Errors made in the compilation of the cash book or the bank statement.

How to prepare a Bank Reconciliation Statement

 The first step is to compare opening balances of both the bank column of the cash book
as well as bank statement; these could be different due to un-credited or un-presented
cheques from a previous period.

 Next, compare credit side of the bank statement with debit side of the bank column of
cash book and debit side of the bank statement with the credit side of the bank column of
the cash book. Place a tick against all the items appearing in both the records or in other
words tick all similar items.

 Analyze the entries both in the bank column of the cash book as well as bank statement
and look for entries which have been missed to be posted in the bank column of the cash
book. Make a list of such entries and make the necessary adjustments in the cash book.

 Correct if any mistakes or errors appear in cash book.

 Calculate the corrected and revised balance of cash book’s bank column.

 Start bank reconciliation statement with updated cash book balance.

 Add the un-presented cheques (cheques which are issued by the business firm to its
creditors or suppliers but not presented for payment – Expense) and deduct un-credited
cheques (Cheques paid into the bank but not yet collected – Income).

 Make all the necessary adjustments for the bank errors. In case the bank reconciliation
statement begins with the debit balance as per bank column of the cash book, add all the
amounts erroneously credited by the bank and deduct all the amounts erroneously
credited by the bank. Do vice-versa in case its start with the credit balance.
  The resultant figure must be equal to the balance as per the bank statement.

Benefits of preparing a Bank Reconciliation Statement

Detecting errors
A bank reconciliation helps you in spotting accounting errors which are common to every
business. These mistakes include errors such as addition and subtraction, missed payments and
double payments.

Detecting Fraud
You may not be able to prevent employees from stealing your money once, however, you could
prevent it in future. Bank reconciliations statement helps you in detecting and spotting fraudulent
transactions. It is advisable to employ an independent person to perform the reconciliations for
preventing the accounting employee from falsifying your books and reconciliations.

Tracking Receivables
Bank Reconciliation Statement allows you to confirm all your receipts, assisting you to avoid
awkward situations and also identifying entries for receipts which you didn’t deposit.
PRACTICE QUESTIONS

QUESTION 1

The cash book of A. Ball showed a balance at the bank of $1 140 in hand on 31 January 2019. At
the same date, the bank statement balance of A. Ball’ account was overdrawn by $892. The
difference was accounted for as follows:

1) Cheques for $3 110 sent to creditors on 30 January were not paid by the bank until 9
February.
2) Cheques amounting to $5 040 paid into the bank on 31 January were not credited by
the bank until 1 February.
3) A standing order for a charitable subscription of $120 had been paid by the bank on 22
January but no entry had been made in the cash book.
4) A cheque paid by A. Ball for rent on 15 January for $690 had been entered in his cash
book as $708.

Required

A bank reconciliation Statement as at 3I January 2019.

.

QUESTION 2

Nissi has received her bank statement for the year to 30 September 2013. At the date, her balance
at the bank amounted to $28 260 whereas her own cash book showed a balance of $40 000. Her
accountant investigated the matter, and discovered the following discrepancies:

(a) Nissi had brought down her opening cash book balance of $13 170 as a debit balance
instead of as a credit balance.
(b) Nissi had entered a payment of $1 120 in her cash book as $1 300.
(c) Cheques drawn by Nissi in July 2013 had not been presented to the bank.
(d) One of Nissi’s customers had agreed to settle their debts $900 by direct debit though
nothing was entered in the cash books yet. Unfortunately, the bank had credited the
direct debit to another customer’s account.

Required:

i. Make any necessary entries in the cash book as at 30 September 2013.

ii. Prepare a bank reconciliation statement as at 30 September 2013.