Chara Charalambous CDA COLLEGE

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ACC102: FINANCIAL ACCOUNTING

Week 9: Lecture 9

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Learning Goals

• What are the Books of prime entry?

• What are the Control Accounts?

• What are the ‘contra’ entries?

• Apply the control accounts reconciliation.

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Books of Prime Entry

– If ledgers were updated each time a transaction occurred, the ledger accounts would quickly become mixed-up and errors might be made.

– To avoid this, all transactions are initially recorded in a book of prime entry.

– Several books of prime entry exist, each recording a different type of transaction.

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Book of Prime Entry Transaction type

Sales Day Book Credit Sales

Purchases Day Book Credit Purchases

Sales Returns day Book Returns of goods sold on credit

Purchases returns day book Returns of goods bought on credit

Cash Book All bank transactions

Petty Cash Book All small cash transactions

The journal All transactions not recorded elsewhere

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• Entry of a transaction to a book of prime entry does not record the double entry required for that transaction.

• The book of prime entry is, however, the source for double entries to the ledger accounts.

• The double entry arising from the book of prime entry will be recorded periodically (daily, weekly, monthly) depending on the volume of transactions.

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Sales Day Book formatDate Invoice Customer Amount €4.1.12 1 Jake 45004.1.12 2 Bella 30004.1.12 3 Fizz 22004.1.12 4 Milo 100004.1.12 5 Max 500Total for 4.1.12 20200

The format of the remaining day books is similar to that of the sales day book.

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Ledger Accounts and the division of the Ledger

In a manual system, ledgers can be thought of a books containing the individual accounts:– The general ledger contains all accounts or a summary of all

accounts necessary to produce the trial balance and financial statements.

– The accounts in ‘Debtors ledger’ contains an account for each credit customer to show how much each one owes.

An account to summarize and gather all information is normally contained within the general ledger and is named ‘Debtors control account’.

– The accounts in ‘Creditors ledger’ contains an account for each credit supplier to show how much they are owed.

An account to summarize and gather all information is normally contained within the general ledger and is named ‘Creditors control account’.

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Debtors Control Account

Step 3: General Ledger

Step 2: Secondary Ledger-Debtors Ledger

Customer A

Customer DCustomer C

Customer B2,500

1,500 500

1,000

Bal. 5,500

Steps of Recording Credit Sales Transactions

Step1: Books of Prime entry: Sales Day Book & Cash Book & Sales Returns Day Book

Sales account

Debtors Control 5500

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• If a business keeps individual accounts in the Debtors or Creditors ledger and also keeps a control account in the general ledger ONLY ONE can be part of the double entry system : either individual accounts or control accounts! The other exist for memorandum purposes. Normally in this case of business the control accounts are part of double entry and individuals accounts are kept for information reasons.

Control Accounts

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Control AccountsThe usefulness of control accounts is that they

reduce the time it takes to find out the total amount owed by receivables and owed to payables. Also the risk of making errors when totaling several individual accounts is also reduced.

Even when control accounts are kept, a business must still keep a record of how much each customer owes them and how much they owe each supplier, therefore the creditors accounts ledger and debtors accounts ledger are always part of the accounting system.

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Individual Accounts part of accounting system:

Debtor Jake Dr 4500

Debtor Bella Dr 3000

Debtor Fizz Dr 2200

Debtor Milo Dr 10000

Debtor Max Dr 500

TOTAL 20200

The total receivable should then be posted to the control account

Debtors Control Account part of double entry:

Dr Debtors Control a/c 20200

Cr Sales a/c 20200

Control Accounts

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Contra Entries• The situation may arise where a customer is also a

supplier. Instead of both owing each other money it may be agreed that the balances are contra’d, i.e. cancelled.

• The double entry for contra transactions is: Dr Creditors Control account x Cr Debtors control account x

The individual Debtor and Creditor accounts must also be updated to reflect this.

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Debtors Control AccountB/ce B/d x B/ce b/d x

Credit Sales x Sales Returns x

Bank dishonored

Cheques x Bad Debts x

Interest Charged x Contra x

B/ce c/d x B/ce c/d x

xx xx

Control Accounts:Entries may include

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Creditors Control AccountB/ce B/d x B/ce b/d x

Purchases Returns x Credit Purchases x

Bank x

Discounts Received x x

Contra x

B/ce c/d x B/ce c/d x

xx xx

Control Accounts:Entries may include

Note that entries in the control accounts must also be reflected in the individual accounts.

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Credit Balances in Debtors' Accounts and Debit Balances in Creditors' Accounts.

• Generally, debtors' accounts contain debit balances and creditors' accounts contain credit balances.  But at times, some debtors may have small credit balances and creditors  may have small debit balances. 

• Reason: After settling their accounts, some debtors may return goods which have been charged or they may have been overcharged for goods bought.  When these items are credited to their account at balancing time, there are no debit balances to offset them.  As a result, these debtors will have credit balances for the time being. The same situation may be valid with creditors.

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Example: Jones prepares monthly Debtors and Creditors control a/cs. At 1st Nov 2005 the following balances existed in the company’s records.

Dr Cr• Debtors control account 54000 1000• Creditors control account 200 43000

The following information is extracted in Nov 2005 from the

company’s records:

€

Credit Sales 251000

Cash Sales 34000

Credit Purchases 77000

Cash Purchases 29000

Credit Sales Returns 11000

Credit Purchases returns 3000

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Amounts received from credit customers 242000

Dishonored cheques 500

Amounts paid to credit suppliers 74000

Discounts allowed 3000

Discounts received 2000

Bad Debts 1000

Increase in Provision for Bad Debts 1200

Interest charged to customers 1400

Contra settlements 800

At 30 Nov 2005 the balances in Debtors and Creditors

Ledger as extracted totaled: Dr Cr

Debtors b/ce to be calculated 2000

Creditors b/ce 200 to be calculated

Prepare the two control accounts.

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Solution:

Debtors control accountB/ce b/d 54000 B/ce c/d 1000

Credit Sales 251000 Credit sales returns 11000

Interest charged 1400 Receipts from debtors 242000

Dishonored cheques 500 Bad Debts 1000

B/ce c/d 2000 Contras 800

Discounts allowed 3000

B/ce c/d 50100

308900 308900

B/ce b/d 50100 B/ce c/d 2000

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Creditors control accountB/ce b/d 200 B/ce c/d 43000

Credit Purch returns 3000 Credit purchases 77000

Payments 74000

Contras 800

Discounts received 2000

B/ce c/d 40200 B/ce c/d 200

120200 120200

B/ce b/d 200 B/ce c/d 40200

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Control Account Reconciliations

• Control Accounts– Control accounts are a means of proving the

correctness of the Debtors and Creditors ledger accounts.

– If wanted to check the correctness of the accounts receivables ledger, one way we can do this is by getting the information from different sources:• The sales can be taken from the sales day book.• The cash received and discounts allowed are recorded in the

cash book.• The opening balances can be taken from the prior month’s

closing balances.

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Control Accounts Reconciliations

• An alternative way to check the correctness of the Debtors accounts ledger is to compare the sum total of the individual Debtors accounts with the balance on the receivables ledger control account.

• Remember that the control account is normally part of the double entry system, whereas the ledger contains information accounts which are not part of the double entry system. Nevertheless, both are updated using the same sources and therefore should agree.

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Supplier Statements• These statements are issued to a business by

suppliers to summarise the transactions that have taken place during a given period, and also to show the balance outstanding at the end of the period.– Their purpose is to ensure that the amount outstanding is

accurate and agrees with original documentation.– The Creditors ledger control account and individual list of

creditors balances should agree with the total of the supplier statements.

– These are a further way to prove the correctness of accounting records and also to make sure that we will pay the correct amount to the creditor.

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Control Account Reconciliation

• The reconciliation is a working to ensure that the entries in the ledger accounts agree with the entries in the control account. The two should have the same closing balance as ideally they have had exactly the same entries in both accounts.– A Debtors ledger reconciliation compares the total

of the accounts in the Debtors ledger with the balance on the Debtors control account.

– A Creditor ledger reconciliation compares the total of the accounts in the Creditors ledger with the balance of the Creditors control account.

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Control Account Reconciliation

• If there are differences between the control account and the ledger accounts, they must be identified and reconciled. Differences may arise due to:– Errors in the Debtors or Creditors ledger.

– Errors in the Debtors or Creditors ledger control accounts.

– Errors in both the control account and ledger account.

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Example: Alston’s Creditors Control Account is part of the double entry system. Individual ledger account balances are listed and totaled on a monthly basis and reconciled to the control account balance. Information for the month march is as follows:

Individual account balances are listed and totaled to €19766 The Creditors control account balance is €21832

On further examination the following errors are discovered:

(1) The total of discount received for the month amounting to €1715 has not been entered in the control account only entered in the individual accounts.

(2) A credit balance of € 205 has been incorrectly treated as a debit in the individual account.

(3) A cash payment to a supplier €63 has been correctly entered in the control account but no entry has been made in the supplier’s individual account.

(4) Credit purchases € 2000 have not been recorded in the control account.

(5) Contras with the debtors accounts €2004 have been recorded in the individuals accounts but not in the control account.

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Solution:

Creditors Control Account

Discount received 1715 B/ce b/d 21832

Contras 2004 Credit purchases 2000

B/ce c/d 20113

23832 23832

Individual Debtors list reconciliation with control account balance:

Total Balance of Debtors as taken from the individual accounts 19766

Add Credit balance incorrectly treaded (2*205) 410

Less payment (63)

TOTAL 20113