TOPIC 2

CONTROL ACCOUNTS.

Control a/c is an account opened to check the accuracy of arithmetical entries in the general ledger.

It is maintained by large companies where there are many transactions.

ADVANTAGES OF CONTROL ACCOUNTS

• To check the accuracy of arithmetical entries
• To avoid fraud. i.e. entries are passed after analysis by the person.
• Speed up the flow of information
• Used to calculate the missing figure.

There are two main types of control a/c

(ii)  Purchases ledger control a/c (total creditors a/c)

SALES LEDGER CONTROL ACCOUNT

• This is an account prepared to determine the total debtors of the company.
• Sales ledger has a debit balance.

FORMAT FOR SALES LEDGER CONTROL A/C

     DR                   CR

The following information was extracted from the books of Hashim wholesalers

         Shs. 000

Jan. 2012 Debit balance in sales ledger a/c           38,500

      Credit balance in sales ledger a/c              1,800

During Jan. 2012

Credit sales       41,700

Return inwards        6,200

Receipts from debtors      39,100

Discount allowed        1,900

Debtors cheque returned unpaid      2,500

Bad debt written of           800

Interest charged on overdue a/c         500

Sales ledger control a/c debit balance transferred to sales ledger 5,000

Hashim Sales ledger control a/c

                DR     Sales ledger control account                                      CR

 PURCHASES LEDGER CONTROL ACCOUNT

This is the account prepared to determine the total creditors of the company. Purchases ledger always has credit balance.

                        DR                                   Purchases ledger control a/c                                  CR

Example:

The following information is available from the books of Charles store L.t.d. 2013

1Jan. Debit balance in purchases ledger control a/c 420

 Credit balance in purchases ledger control a/c 13,870

During January;

Credit purchases     12,540

Return outwards       1,360

Payments to creditors     10,970

Discount received          210

Bills of exchange accepted         1,500

Transfer to sales ledger        1,260  

                         DR          Charles store Ltd. Purchases ledger control a/c                  CR

ACCOUNTING FOR INCOMPLETE RECORDS. (SINGLE ENTRY)

Incomplete record or single entry is a system of boo keeping where double entry is not followed i.e. only personals accounts are maintained.

Therefore, some information is provided while the missing information is to be found. The missing information is obtained by applying the basic principles of double entry.

• Single entry is common to:-
• Shopkeepers.
• Market stall owners
• Retailers.

This may be because of:-

• Poor knowledge of double entry record
• Failure to record every transaction
• In small business maintain only a cash book.     

DISADVANTAGES OF SINGLE ENTRY ACCOUNTING AS INCOMPLETE RECORDS.

(i)     The whole exercise of trial balance will yield incorrect figures

(ii)  It is difficult to ascertain the true value of assets.        

Calculating of Profit from Single Entry system.

Profit can be obtained by finding the difference between capital at the end and capital at start.    

Example:

John started a business with capital 100,000 at the end of year capital was 150,000/=

Therefore, profit = End capita – start capital

   = 150,000 – 100,000

   = 50,000/=

Capital can be calculated by using statement of affairs or balance sheet.

From AC. Eq.  Assets = Capital + Liabilities

Capital = Assets – Liabilities.

Balance sheet

FORMAT FOR PRESENTING PROFIT OR LOSS UNDER SINGLE ENTRY SYSTEM.

Capital at close   xx

Add: Drawing (if any)    xx

Total capital at close   xx

Capital at start    xx

Add: additional capital (if any) xx

Total capital at start   (xx)

Net profit or loss               xx

Logic of adding drawing or addition capital assumes that we have capital control account as follows.

                                                                                               DR    Capital control a/c                                CR

FORMS OF INCOMPLETE RECORDS

(i)     Absence of any record whatever.

(ii)  Partial records being maintained

(iii) Falsification, distraction or misplacement of records either intentionally.

(iv) Single entry accounting where merely a long sheet or diary is kept.

Example:
H. Chitayi provides information as to his assets and liabilities certain date.

                                    A 31 Dec. 1995

Assets:  Motor van   shs. 10,000

  Fixture   shs. 7,000

  Stock    shs. 8,500

  Bank   shs. 11,000

  Cash    shs. 1,000

  Debtors   shs.  9,500

Liabilities: Creditors   shs. 2,000

  Loan from J. Nerende shs. 6,000

At 31 Dec. 1996 after depreciation.

 Motor van    8,000

 Fixtures    6,300

 Stock    9,900

 Debtors   12400

 Bank    17000

 Cash    2,000

Creditors:    3,000

  Loan from Nerende 4,000

  Drawing  9,000

 Required to:-

(i)     Calculate capital on 31 Dec. 1995

(ii)  Profit at 31Dec. 1996

Solution:

                                   Balance sheet as at 31 Dec. 1995

                              Balance sheet on Dec 1996.

Technique which assists include:-

a)      Past record / trend. – This will help to establish certain relationship and the general direction of business.

b)     Ratio analysis – This give the relationship between one items to another.     100 =

c)      Balance sheet equation i.e. Asset = owners equity + liabilities. From this equation any missing figure can be calculated.

d)     Trading account format:- Gross profit = Sales – Cost of goods sold.

e)      Use of control a/c

It help to get the value of purchases, sales, cash paid to supplier cash received from customers.

These are used when one figure is missing in those two a/c.

 i.e Sales ledger control a/c

    Purchases ledger control a/c

               Floating capital.

Example:

 J. Banda own a store, his records are incomplete and you have been called in to prepare his accounts.

You ascertain the following.

Drawings during the year were shs.1200/= per week and legacy of sh. 4,000/= received on March 2001 had been paid into Bank.

Required:-

a)      Draw up statement of Affairs showing

• Capital at January 1^st 2001
• Capital at December 31^st 2001.

b)     Compute a statement showing the profit and loss for the year ended December 31^st 2001.

Example:

The following information relate to Mr. Kazimoto, a trader as at 30^th July, 2004

Sale     340,000

Cost of sale    75% of sales

Opening stock    90,000

Net profit    20% of sales

Closing stock    20% of cost of goods sold

 Required to calculate:-

a)      Purchase

b)     Cost of goods sold

c)      Closing stock

d)     Net profit

e)      Expenses

f)       Gross profit

Solution:

Cost of sales   340,000 = 255,000

Cost of goods sold = Opening + Purchase – Closing 

   255,000 = 90,000 + Purchases -     255,000

    255,000 = 90,000 + P + 51,000

    255,000 = 90,000 – 51,000 = P

Purchases = 114

Closing stock =    255,000 = 51,000

Net profit =     340,000 = 68,000

Gross profit = Sales – Cost of goods sold

 340,000 – 255,000 = 85,000

Net profit = Gross profit – Expenses

Net profit = 85,000 – Expenses

68,00 – 85,000 =

Expenses = 17,000