Lecture 4: Books of Prime Entry, Control a/c, Correction of Errors & Computerised Acc.

Control accounts: -E.g.

'total' accounts contained in the general ledger. E.g. -Sales Ledger Control a/c (SLCA) = Trade receivables a/c -Purchases Ledger Control a/c = Trade payables a/c

Correction of errors: (2)

(depending on the effects of the errors): 1. Errors: 'debit = credit' (i.e. trial balance remains balanced): Apply corrective journal entries (without using suspense account). 2. Errors: 'debit ≠ credit' (i.e. trial balance is not balanced): Create a suspense account to 'plug' the gap in the trial balance; Apply corrective journal entries that involve the suspense account. The suspense account balance should become nil after correction.

Contra in ledgers:

*Contra settlement go on BOTH ledgers*

This recording system summarises all the daily/weekly/monthly recurring transactions in the.....before posting the total to the.....

1. BoPE. 2. Nominal ledger.

Therefore, we require? (2)

1. Books of prime entry. 2. Memorandum ledgers (i.e. personal accounts).

Accounts Payable Control Accounts: (DR/CR) Posting: 1. Beginning balance 2. Purchases (credit sales from purchases day book) 3. Cash payments (cash paid to suppliers from cash book) 4. Purchase returns (total from PRB) 5. Discount received (from cash book) 6. Ending balance

1. CR 2. CR 3. DR 4. DR 5. DR 6. CR

Errors can be detected using several methods: (3)

1. Control accounts reconciliation. 2. Bank reconciliation. 3. Trial balance.

Accounts Receivable Control Accounts: (DR/CR) Posting: 1. Beginning balance 2. Sales (credit sales from sales day book) 3. Cash receipts (cash received from customers from cash book) 4. Sales returns (total from SRB) 5. Bad debts 6. Discounts allowed (from cash book) 7. Ending balance

1. DR 2. DR 3. CR 4. CR 5. CR 6. CR 7. DR

Five broad types of errors in accounting: (5)

1. Errors of omission 2. Transposition errors 3. Errors of principle 4. Errors of commission 5. Compensating errors

Why do accountants use control accounts? (5)

1. Help check the accuracy of entries made in the SL and PL. The balance on the CA should = the total list of balances of the individual Pas: this proves the ledger is arithmetically correct. 2. Help identify posting errors promptly. 3. Provide an internal check where there is separation of bookkeeping duties. -Make sure no money has been taken from the business: hire different people to manage different accounts. -They are likely to deter fraud and the misappropriation of funds since it is usually prepared by the accountant. 4. Provide total receivables and payables balances more quickly. -They therefore facilitate the preparation of (monthly or quarterly) final financial statements. 5. Keep the number of accounts in NL and TB to a manageable size.

Entries in the Sales Ledger Control a/c: Other than sales and receipts from receivables, what may also be entered into this ledger? (3)

1. Irrecoverable debt = when a debt owed by a customer will never be paid (i.e. bad debt). Dr. Irrecoverable debt expenses (E ↑) Cr. Sales ledger control account (A ↓) 2. Contra = when a person/business is both a customer and a supplier, amount owed by and owed to the person may be 'netted off' by means of a contra. Dr. PLCA (and personal account in the PL) (L ↓) Cr. SLCA (and personal account in the SL) (A ↓) 3. Dishonoured cheque = when a customer's cheque 'bounced' when paid into the bank account. The debt is written back. Dr. SLCA (and personal account in the SL) (A ↑) Cr. Bank (A ↓)

Instead of relying on only the Nominal/General Ledger [NL], most businesses maintain additional ledgers to:(2)

1. Keep a detailed record of every receivable account [Sales Ledger (SL) or Receivable Ledger]. 2. Keep a detailed record of every payable account [Purchases Ledger (PL) or Payable Ledger].

The challenges of maintaining a SL and PL in addition to NL:

1. Keeping the sum of individual receivables in SL = to total receivables in NL is difficult. 2. Keeping the sum of individual payables in PL = to total Payables in NL is difficult. 3. Hence: need to perform control accounts reconciliations and correction of errors (if posting mistakes made).

How to work out what to do with accounting errors: (3)

1. Know your double-entry principles! 2. Establish the following: A. What has happened? (i.e. what entries has the accountant made?) B. What should have happened? (i.e. what the correct entries should have been?) 3. Apply corrective journal entries that will take you from A to B. Remember: only errors that debit ≠ credit will require the use of suspense accounts.

In practice, an entity's transactions are likely to be too.....to be recorded directly in the......

1. Numerous. 2. Nominal Ledger.

The benefits of maintaining a SL and PL in addition to NL: (2)

1. Provides entity with individual records of its receivables and payables. 2. It prevents clogging up of the Nominal/General Ledger.

Books of prime entry [BoPE] consist of: (8)

1. Sales day book. 2. Sales returns day book. 3. Purchases day book. 4. Purchases returns day book. 5. Cash book. 6. Petty cash book. 7. The journal. 8. The payroll. They are the records in which the business first records transactions.

There are 2 types of discount: (2)

1. Trade discounts 2. Cash/settlement discounts

Errors of commission:

ANY OTHER ERRORS. This is where the correct amount is entered but in the wrong person's account: e.g. where a sale of £11 to C. Green is entered in the account of P.Green. -It will be noted that the correct class of account was used, both the account concerned being personal accounts. Errors of commission: A mistake is made in recording transactions in the ledger accounts for reasons other than those above. E.g. Putting a debit/a credit entry in the wrong account - telephone expenses of £400 are debited to the electricity expenses account, and Casting (adding-up errors) in the SDB.

Computerised accounting systems: Advantages (6) and Disadvantages (5):

Advantages: -Cost savings. -Timely information. -Simultaneous access to data. -Improved accuracy of data/ reducing errors. -Improved detailed. -Improved reporting. Disadvantages: -Set-up costs. -Maintenance and support. -Security risk. -'Garbage in, garbage out'. -Standardisation vs bespoke needs.

Imprest system:

Always brought back to the same amount/topped up.

Cash book: -What is it? -How does it work?

CB = The BoPE for receipts and payments in the business's bank a/c. It records not just physical money exchanges (e.g. coin and notes) but also cheques, card, bank transfer, standing order, direct debit, and online transfer. -It works like a normal T-account with debit/credit (on the left/right). -A memo column (on each side) is usually kept to track discounts allowed/received. -It is also common to have additional columns on each side [not shown] to analyse the nature of receipts and payments.

Discounts allowed used to be?

Classed as an expense. Not called expense anymore: treated as discount allowed.

Transposition error: -How can this be detected?

DIGITS THE WRONG WAY ROUND. Transposition errors: When two digits in an amount are accidentally recorded the wrong way round. E.g. A sale is credited in the sales account as £6,843 but has been wrongly debited in the SLCA as £6,483. So credit > debit by £6,843 - £6,483 = £360. Can detect a transposition error by checking whether the difference between debits and credits can be divided exactly by 9 (£360 ÷ 9 = £40).

Payroll Ledger:

DR Wages Expenses CR Cash at bank CR HMRC (PAYE + ee's NI + er's NI)# CR Pension trustee (ee's pension + er's pension)# # Classified as 'Other Payables': they will be cleared when the Ltd hands over the deductions to the appropriate parties

Errors of principle:

ENTERING INTO WRONG ACCOUNTS (DON'T KNOW ACCOUNTING RULES). Errors of principle: Making a double entry in the belief that the transaction is being entered in the correct accounts, but subsequently finding out that the accounting entry breaks the 'rules' of an accounting principle or concept. E.g. Treating revenue expenditure incorrectly as capital expenditure.

Errors of omission:

FORGET TO RECORD SOMETHING. Errors of omission: Failing to record a transaction at all, or making a debit or credit entry, but not the corresponding double entry. E.g. A £250 invoice from a supplier is completely omitted from the books. or the PLCA is credited with £250 but no debit entry is made to the purchases account.

Dishonoured cheque Side in SLCA?

Is a cheque that the bank refuses to cash because there is not enough money in the account It is debited to SLCA: You received a cheque, Debtor credited, Bank debited. However, since the cheque is dishonoured, it goes back to debtor, hence debtor debited and bank credited. Think about it like that.

The journal:

It is used to record a variety of things, most of which consist of accounting adjustments, such as the correction of errors. Also includes purchase and sale of non-current assets on credit.

The purchases returns day book:

It is used to record the credit notes received from suppliers relating to goods returned or where there has been an overcharge on the invoice. The total of he purchases returns day book is credited to the purchases returns ledger account in the general ledger.

The sales returns day book:

It is used to record the credit notes sent to customers relating to the goods they have returned or been overcharged on an invoice. The total of the sales returns day book is debited to the sales returns ledger account in the general ledger.

The purchases day book:

It is used to record the purchase on credit of goods bought for resale. It is made up from the invoices and debit notes received from suppliers. The total of the purchases day book is debited to the purchases account in the general ledger. -The total of the balances on this ledger becomes the trade payables amount.

The sales day book:

It is used to record the sale on credit of goods bought for resale. It is written from copies of sale invoices and debit notes (amount entered is after deducting trade discount). The total of the sales day book is credited to the sales account in the general ledger. -The total of the balances on this ledger becomes the trade receivables amount.

Sales ledger and Purchases ledger are examples of what? -They get their input from?

Memorandum ledgers. -The individual entries of the BoPE.

Petty Cash Book:

Petty CB = The BoPE for small payments and receipts of cash (n.b. very similar to CB).e.g. newspapers, taxi fares, stationary. Most PCBs operate under an imprest system; i.e. the amount of petty cash is kept at an agreed sum or 'float' (say £250) at every period end.

Returns outwards?

Purchases returns: goods going back.

The journal:

Records transactions not recorded in any other BoPE, e.g. purchases of non-current assets, etc. Records unusual movements between ledger accounts, e.g. correction of errors, etc. The journal entry (debit + credit) is then posted to the Nominal Ledger.

Returns inwards?

Sales returns: goods coming back.

Payroll:

The payroll = the book of original entry for recording staff costs. In the UK, the cost of employing a staff consists of: Gross pay to employee Pay-as-you-earn (PAYE) income tax Employee's National Insurance (NI) contributions Employee's pension contributions Net pay (cash paid to employee) Additional cost for the employer Employer's NI contributions Employer's pension contribution Note: Gross pay is not the actual amount paid to the employee. -The employer needs to make deductions from gross pay (i.e. PAYE, NI and pension) before paying net pay to the employee.

Compensating errors:

WHEN TWO OR MORE EVENTS CANCEL EACHOTHER OUT (COINCIDENCE). Compensating errors: Errors which are, coincidentally, equal and opposite to one another. E.g. Admin. expenses of £2,822 are entered as £2,282 in the admin expenses account. At the same time, income of £8,931 is shown in the sales account as £8,391. Both debits and credits are £540 too low, but the mistake would not be apparent when the trial balance is cast.

Cash/settlement discounts:

a reduction in the amount payable in return for immediate payment in cash, or for payment within an agreed period. (e.g. pay within 1 week instead of 1 day). There are two separate ledger accounts for settlement discounts: 1. Discount allowed = discount given to credit customers. 2. Discount received = discount received from credit suppliers. The original transactions will be recorded at gross and cash discounts separately accounted for when taken.

Trade discounts:

a reduction in the cost of goods, owing to the nature of the trading transaction (e.g. bulk or goodwill discount). It is usually deducted from the list price of goods sold, to arrive at a net sales figure. Only final figures net of trade discounts are accounted for.