Financial Data Analysis

Welcome to Section Two of Financial Accounting. In this section, we will explore both practical applications and theoretical concepts related to key areas in financial data analysis. To start, we will focus on identifying and correcting accounting errors, examining their impact on trial balances and financial statements and learning how to make accurate entries in the journal and ledger. Next, we will dive into bank reconciliation statements, exploring why discrepancies occur between the cashbook and bank statements and then proceed to create our own reconciliation statements to resolve these differences. Additionally, we will learn about control accounts—their purpose and how to make entries in the receivables and payables control accounts. By the end of this section, you will be able to identify, correct, and interpret accounting errors, as well as prepare accurate reconciliation and control accounts, which are essential for precise financial reporting.

KEY IDEAS

• Accounting errors are mistakes in financial accounting that result from the misapplication of accounting principles and methods.

• Bank reconciliation statement is a statement, or a report prepared by a business at the end of the month or period to show any differences arising between the bank statement balance and the cashbook (bank column) balance at that date

• Bank statement shows the list of debit and credit transactions that have happened in a particular bank account.

• Control accounts are a summary account in the general ledger that consolidates (combines) the total balances of several related detailed accounts

• Payable control account is an account in which records are kept of all transactions relating to all creditors in total.

• Receivable control account is an account in which records are kept of all transactions relating to all debtors in total.

Meaning of Errors

Errors are mistakes in financial accounts which are accidental and may be due to the incorrect application of accounting principles [rules] and methods.

Types of Errors

There are two types of errors.

1. Errors that do not affect the agreement of the trial balance

2. Errors that affect the agreement of the trial balance We will look at each of these in more detail.

Errors that do not affect the agreement of the trial balance These types of errors occur when two or more mistakes in the accounting records cancel each other out, resulting in a trial balance that still agrees.

For example, if an error in one account mistakenly increases a debit and a similar error in another account mistakenly increases a credit by the same amount, the trial balance will still show that debits equal credits.

This situation can be misleading because it creates the impression that the accounts are accurate even though there are underlying mistakes. As a result, these errors can be difficult to detect since they do not affect the overall balance of the accounting ledger, though they can still impact the accuracy of financial statements.

Examples of this type of error are discussed below.

1. Error of omission An error of omission in accounting happens when a transaction is entirely missed and not recorded in the accounting books. This means that the transaction is left out completely. Such an error can occur due to oversight, carelessness, or not realising that the transaction should be noted.

Errors of omission can have a big impact on financial statements because they make the records incomplete or incorrect.

For instance, if a company forgets to record a payment received or an expense paid, this can lead to an inaccurate picture of the financial health of a business. This could affect decisions made by users of accounting information who rely on the financial statements to understand the true situation of a business.

Example 2.1

A business pays GH¢3,000 for utility expenses but forgets to record the payment in its accounting records.

2. Error of commission In accounting, this type of error occurs when a transaction is recorded in the wrong account of the same type or class.

In this case, the right amount is sent to the wrong personal account in the same class.

What this means is that the transaction is recorded in a different account than where it should be recorded.

Example 2.2

A payment of GH¢2,000 received from Appiah is mistakenly recorded in Ampiah’s account.

3. Error of principle An error of principle in accounting happens when a transaction is recorded in the wrong type of account.

This means that while the correct amount is posted, it is placed in an account that belongs to the wrong class or category of account.

For instance, recording the sale of an asset as revenue would be an error of principle.

An error of principle changes the nature of the financial data, which can mislead decision-makers about the financial health and performance of the business.

Example 2.3

The sale of an old equipment worth GH¢50,000 has mistakenly been recorded in the sales account.

4. Error of original entry An error of original entry happens when a mistake is made when a transaction is recorded in the books of account at the initial stage.

This type of error usually involves entering the wrong amount in the books of original entry, which is then carried over to both the debit and credit sides of the ledger.

Since the mistake affects both sides equally, the trial balance may still match, making the error harder to spot.

Example 2.4

Purchase of office equipment worth GH¢8,000 has been recorded as GH¢800 in the books of account

5. Error of complete reversal of entry This type of error happens when the correct accounts are used, but the entries are recorded on the wrong side of each account.

In other words, the double-entry for a transaction is reversed, whereby accounts that should be credited are debited and accounts that should be debited are credited.

For instance, if a company receives cash from a customer, the correct entry would be to debit the cash account and credit the customer’s account. However, an error of complete reversal of entry would occur if the cash account is credited and the customer’s account is debited. Although the trial balance might still balance because the amounts are the same on both sides, the financial records would be incorrect.

Example 2.5

Rent of GH¢5,000 paid by cheque was debited to the bank account and credited to the rent expense account.

6. Error of duplication This type of error occurs when a transaction is recorded more than once in the accounting records.

In other words, both the debit and credit entries for the same transaction are made twice (or more), causing the total amounts in the accounts to be overstated by the same value.

Let’s say an expense item is recorded twice. In such a situation, the debit and credit columns of the trial balance will still match; however, the duplicate entries will lead to the wrong account balances being determined. This will eventually affect financial reporting by making it seem as though the business has spent more, though that is not the case.

Example 2.6

A payment of GH¢3,000 cash is received from a customer. The cash account is debited twice, and the customer’s account is credited twice with GH¢3,000.

7. Compensating error This type of error happens when one or more mistakes on one side of an account are balanced out by errors of the same amount on the opposite side of the same account or a different account.

Essentially, these errors cancel out each other, thereby making the trial balance appear correct even though there are inaccuracies.

Example 2.7

The rent expense account is overstated by GH¢700 on the debit side, and the sales account is also overstated by GH¢700 on the credit side. Clearly, an error on the debit side of one account has been compensated by an error of equal amount on the credit side of another account, so the trial balance will still appear correct.

Activity 2.1 Meaning of Errors

1. In groups, discuss the following

a. The meaning of “error” in financial accounting.

b. The types of errors that could be made by accountants which do not affect the agreement of the trial balance.

2. Summarise your discussions and make a poster presentation to the larger class.

Activity 2.2 Identification of Errors

1. In groups, brainstorm and write down 10 business transaction scenarios that result in errors that do not affect the agreement of the trial balance.

2. For each transaction, identify the type of error that has occurred in the scenario you have given.

3. Exchange your work with that of another group for feedback.

You can use Table 2.1 to support your response. An example has been provided for you.

Table 2.1: Identification of Errors

A sale of office furniture for GH¢3,000 was wrongly entered in the sales account. Error of principle 1 2 3 4 5 6 7 8 9 10 Errors that affect the agreement of the trial balance Errors that affect the agreement of the trial balance are mistakes that cause the total amount on the debit and credit columns of the trial balance not to match. These errors disrupt the balance between the two sides of the trial balance, making it obvious that there is an issue that needs correction.

Common types of such errors are discussed below.

1. Single Entry (partial omission) This error occurs when only one part of a double-entry transaction is recorded, either as a debit or a credit, without the corresponding entry on the other side.

In other words, this error happens when one entry of a transaction is recorded and the other is left out.

For instance, if a purchase is recorded as a debit in the purchases account but no corresponding credit entry is made in the cash or bank account, the trial balance will not agree.

Example 2.8

Purchase of goods from Sakora Ventures for GH¢3,000 was recorded correctly in the purchases account but was not posted to the supplier’s account in the purchase ledger.

2. Error of Transposition

This error occurs when the positions or sequence of the figures are changed when recording.

In other words, this occurs when the digits of an amount are accidentally reversed during recording.

Example 2.9

A payment of GH¢462 to a supplier was recorded in the cash account as GH¢426, but was correctly entered in the supplier’s account.

It should, however, be noted here that when the same wrong figure is used in both the cash and suppliers accounts, the trial balance totals will agree.

3. Partial Reversal of Entries

This type of error happens when a transaction is posted correctly in one account but mistakenly recorded on the wrong side of the corresponding account (i.e. debit instead of credit or vice versa).

Although the transaction is recorded, the placement on the wrong side alters the intended impact on the financial records.

Example 2.10

A cash payment of GH¢1,200 to a supplier was recorded by debiting the supplier’s account and debiting the cash account

4. Error of Casting (under-cast and over-cast) This error occurs where the amount involved is overstated or understated in one of the accounts.

In other words, this error happens when the figures in one account are added up or stated incorrectly, thereby resulting in an over-cast (overstatement) or under-cast (understatement).

It is important to note that this mistake only affects one account and does not impact the corresponding entry.

Example 2.11

Payment for office rent amounting to GH¢1,200 was recorded in the rent expense account as GH¢12,000.

This is an example of an overcast, where the amount was overstated in the account.

On the other hand, if the rent expense had been recorded as GH¢120, that would be an undercast where the amount was understated in the account.

5. Other errors may also occur through the addition of the trial balance figures.

Activity 2.3 Identification of errors Copy Table 2.2 into your book.

1. For each of the scenarios, identify the type of error that has occurred from the following list:

a. Single entry (Partial omission)

b. Error of transposition

c. Partial reversal of entries

d. Error of casting

Table 2.2: Types of Accounting Errors

An electricity expense of GH¢1,280 is mistakenly recorded as GH¢1,820 in the expense account.

a A cheque of GH¢4,600 issued in payment to a supplier is recorded only in the supplier’s account b Overcast of a page in the return inwards journal amounting to GH¢ 2,300 c A credit sale of GH¢1,000 to a customer has been correctly entered in the sales account but credited to the customer’s account d Return inwards for the week amounting to GH¢570 is posted to the personal account only e A rent expense of GH¢ 450 has been correctly entered in the cashbook but debited to the rent expense account as GH¢ 405 f The total sales for the month in the sales daybook are incorrectly added up as GH¢50,000 g Weekly total of discount allowed of GH¢820 to debtors from the debit side of the cashbook is posted to the credit side of discount allowed account h A credit purchase of GH¢ 5,200 has been correctly entered in the purchases daybook, but credited in the suppliers' account as GH¢ 2,500 i A careless addition of the purchases daybook resulted in the total purchases for the month being overstated by GH¢ 750 j Goods sold worth GH¢ 3,700 to a debtor have been correctly entered in the sales daybook but not posted to the debtor’s account

2. Share and discuss your answers with a colleague for feedback.

Activity 2.4 Test yourself!

Answer at least one of the following questions to support the review of your learning from this lesson.

1. Explain three types of errors in financial accounting.

2. For each type of error you explained above, discuss one example and its potential impact on financial statements.

Now that you are familiar with the types of errors and their examples, we can move on to discussing how these errors impact the trial balance and the financial statements.

Errors That Do Not Affect the Trial Balance

Agreement Even if the trial balance totals are equal, there can still be errors in the accounts that have important effects on financial reporting. We will now look at how these errors affect the trial balance and financial statements.

Trial Balance

₁. Balanced Trial Balance: A trial balance can show equal totals on both sides (debits and credits), but there can still be errors in individual accounts.

Examples of these include

a. Compensating Errors: When one mistake cancels out another, such as overstating one expense by GH¢1,000 and understating another by the same amount, resulting in balanced totals.

b. Errors of Omission: A transaction is completely missed and not recorded at all.

c. Errors of Principle: Transactions are recorded in the wrong type of account, like recording a repair cost as an asset instead of an expense.

2. Impact on Individual Accounts: Even if the trial balance looks correct, specific accounts may be inaccurate due to errors, which will affect the correctness of financial information represented in the trial balance.

For example, errors can lead to the overstatement or understatement of assets, liabilities, revenues, or expenses, though the debit and credit side of the trial balance matches.

This will affect the true financial picture of the company.

Financial Statements

₁. Misstatement of Financial Results: Errors can lead to misstated financial results in the income statement and balance sheet.

a. Income Statement: Errors can change the reported net income as incorrect revenue or expense amounts are used to calculate the final profit or loss.

b. Balance Sheet: Errors can misstate the values of assets, liabilities and equity, which will eventually affect the company’s overall financial position.

2. Decision Making: Incorrect financial statements can mislead managers, investors and lenders in their decisions when they rely on the inaccurate financial information for assessments and projections.

3. Audit and Compliance: Serious errors can lead to audit problems and non- compliance with regulations, which may result in fines or penalties and other legal consequences.

Example of Scenarios

Example 2.12

A company records electricity expenses of GH¢1,500 as GH¢15,000. Even if another mistake balances this out, the total expenses would be overstated and therefore affect the income statement and balance sheet.

Example 2.13

If revenue from a GH¢10,000 sale is not recorded, revenue and net income will be understated, even though the trial balance stays balanced.

NOTE: Errors that do not affect the trial balance totals can still cause significant problems by misrepresenting financial information. Accountants need to identify and fix these errors to ensure that financial statements are accurate and reliable.

Errors That Affect the Trial Balance Agreement

These types of errors not only affect the trial balance by making the total debits and credits unequal, but they also have a significant impact on financial statements.

Trial Balance

₁. Unbalanced Trial Balance: If the trial balance does not balance (debits do not equal credits), this shows that there are errors that need to be fixed. Common causes include:

a. Mathematical Errors: When mistakes in adding or subtracting figures in the ledger accounts or preparing the trial balance.

b. Posting Errors: When amounts are posted incorrectly from the journal to the ledger.

c. Transposition Errors: When numbers are switched around when recording, which results in disagreement of the totals of the trial balance (e.g., writing GH¢1,250 as GH¢2,150).

2. Detection of Errors: When the trial balance does not balance, it alerts accountants to search for and correct the mistakes before preparing the financial statements to ensure accurate financial reporting.

Financial Statements

₁. Misstated Financial Results: Errors in the trial balance can result in inaccuracies in the financial statements.

a. Income Statement: Errors can lead to incorrect revenue or expense figures. This will affect the determination of net income as well as profitability analysis and impact on associated decision-making.

b. Balance Sheet: Assets, liabilities or equity may be misstated. For example, an overstated accounts receivable or understated loans payable can mislead users about the company’s financial health.

c. Impact on Ratios and Analysis: Incorrect data affects financial ratios, leading to faulty analysis of liquidity, profitability, and the overall financial status of a company.

2. Legal and Regulatory Compliance: Preparation of incorrect financial statements due to errors can lead to non-compliance with accounting rules, resulting in fines and other legal problems.

Example of Scenarios

Example 2.14

A posting error where a GH¢8,000 rent payment is entered as GH¢80,000 in the rent account. This misstated expense causes the trial balance to be unbalanced, as well as affects the income statement and the balance sheet.

Example 2.15

A transposition error where a sale of GH¢2,300 is recorded as GH¢3,200. This mistake means the trial balance does not agree and leads to an incorrect revenue figure being stated in the income statement, which in turn affects the determination of net income

Activity 2.5 Effect of Accounting Errors

1. Study these scenarios

a. An expense of GH¢7,000 is recorded by debiting the cash account and crediting the expense account.

b. Purchases of GH¢1,800 are correctly debited in the purchases account but credited as GH¢18,000 in a supplier’s account.

c. Debiting motor repair expense of GH¢1,200 paid by cheque to the Motor Vehicle account and missing the credit bank account entry.

d. A credit purchase of GH¢2,000 is left out of the books entirely.

e. Sales of GH¢1,204 are recorded as GH¢2,014 in both the debtor’s account and the sales accounts.

f. A loan repayment of GH¢15,000 is correctly entered in the bank account but omitted from the loan account.

g. Recording only the debit for a payment of GH¢3,000 to a supplier without the corresponding credit to the bank account.

h. A payment of GH¢4,000 received from a customer is recorded by debiting the sales account and crediting the cash account.

i. Travelling expenses of GH¢500 paid in cash are posted twice as a debit to the travelling expenses account but only once as a credit to the cash account.

j. An amount of GH¢3,000 received from Musah is recorded in Mensah’s account.

2. For each of the scenarios, indicate “YES” or “NO” to show whether or not it adversely affects the recording of revenues, expenses, assets or liabilities.

3. Share your response with a colleague for feedback.

You can use the table below to support your response. An example has been provided.

Table 2.3: Effect of Accounting Errors

S/N SCENARIO Does the error adversely affect the recording of:

A cash sales transaction of GH¢4,500 is recorded as GH¢5,400 Yes No Yes No a An expense of GH¢7,000 is recorded by debiting the cash account and crediting the expense account.

b Purchases of GH¢1,800 is correctly debited in the purchases account but credited as GH¢18,000 in a supplier’s account.

c Debiting motor repair expense of GH¢1,200 paid by cheque to the Motor Vehicle account and missing the credit bank account entry.

d A credit purchases of GH¢2,000 is left out of the books entirely.

e Sales of GH¢1,204 is recorded as GH¢2,014 in both the debtor’s account and the sales accounts.

f A loan repayment of GH¢15,000 is correctly entered in the bank account but omitted from the loan account.

g Recording only the debit for a payment of GH¢3,000 to a supplier without the corresponding credit to the bank account.

h A payment of GH¢4,000 received from a customer is recorded by debiting the sales account and crediting cash account.

i Travelling expenses of GH¢500 paid in cash is posted twice as a debit to the traveling expenses account but only once as a credit to the cash account.

j An amount of GH¢3,000 received from Musah is recorded in Mensah’s account.

Activity 2.6 Effect of Accounting Errors

Organise yourselves into groups of not more than five. Each group will be assigned a specific type of error.

In your groups, analyse the impact of this type of error. It might help to come up with a scenario to put the error into context. Record this in your workbooks.

Discuss:

1. whether or not the error will affect the agreement of the trial balance

2. which accounts are affected by the error

3. how this type of error impact financial statements and may distort financial reporting.

Type your response in MS Word format and present it to the class for discussion and feedback.

Engage with the presentations of other groups and ask questions. You may find it helpful to make notes on the discussions on types of errors presented by other groups.

Activity 2.7 Self-Assessment

1. Identify and explain five types of errors in financial accounting and their potential impact.

2. Explain the effect of errors that affect the agreement of the trial balance on the trial balance and the financial statements.

Meaning of the Suspense Account

₁. A suspense account is a temporary account used to record any differences in the trial balance while errors in the ledger accounts are being found and fixed.

2. When the trial balance totals do not match, a suspense account is created to hold the difference until the errors are traced and corrected.

3. This account helps to keep the trial balance balanced temporarily.

4. Once the errors are located and corrected, the suspense account is adjusted and should have a zero balance.

Correction of Errors That Do Not Affect the

Agreement of the Trial Balance

These types of errors are corrected using the general journal or journal proper. The correction of such errors usually involves two accounts, where one account is debited and the other is credited. To fix the error, it is important to check if the balance of an account was increased or decreased by mistake.

For instance,

1. If the error made the account balance higher, it needs to be corrected by decreasing that balance.

2. If the error made the account balance lower, it needs to be corrected by increasing that balance.

Correction of Errors That Affect the Agreement of

the Trial Balance These errors are fixed using the journal proper and the suspense account. The difference found in the trial balance is placed in the suspense account.

Therefore;

1. If the debit side of the trial balance is lower than the credit side, the difference is entered on the debit side of the suspense account.

2. If the credit side is lower, the difference is entered on the credit side of the suspense account

Example 2.16

DEBIT CREDIT

GH¢ GH¢

Sales 4,400 Purchases 3,110

Furniture at cost 5,710 Trade creditors 740 Trade Debtors 165 Stock 210 Capital 10,000 Administrative expenses 1,020 10,215 15,140

DEBIT CREDIT

GH¢ GH¢

Sales 4,400 Purchases 3,110

Furniture at cost 5,710 Trade creditors 740 Trade Debtors 165 Stock 210 Capital 10,000 Administrative expenses 1,020 Suspense Account 4,925 15,140 15,140 The suspense account would therefore look like this:

Suspense Account

GH¢ GH¢

Trial balance difference 4,925 These errors usually affect only one account, so the corresponding entry is made in the suspense account to balance the transaction.

The affected account is debited or credited as needed and the suspense account is debited or credited to complete the journal entry.

Once all the errors that affected the trial balance have been corrected, the suspense account should balance out to zero.

Note: When completing the activities, every journal entry should include an explanation (narration) of the change, unless otherwise specified by the question that this is not required.

Activity 2.8 Suspense account Organise yourselves into small groups of not more than five. In your groups, brainstorm the meaning and purpose of a suspense account.

In your discussions, consider how the suspense account is used in the correction of errors.

Record the outcomes of your discussion in your books or on a flip chart to present to the class.

Activity 2.9 Correction of Errors

In groups, study the case below.

The trial balance of OSIKA Enterprise failed to agree. The difference was entered in the suspense account.

The following errors were detected:

1. A sum of GH¢1,000 received from Sammy has not been posted to his account.

2. The sales daybook was undercast by GH¢560

3. Return on outwards book was overcast by GH¢140.

4. Discount received GH¢410 from Doris had been correctly entered in the cashbook but not posted to Doris’s account.

5. Goods worth GH¢750 returned to a supplier were recorded in his personal account as GH¢570.

a. Discount allowed was overcast by GH¢310.

b. Discount received column in the cashbook has been overcast by GH¢400.

Working in your groups, prepare the following:

• Journal entries to correct the errors for:

o Sammy’s account o Sales daybook o Return outwards book o Doris’s account o Supplier’s account o Discount allowed and received

• Suspense account entries What is the difference in the suspense account balance?

Activity 2.10 Correction of errors (Extension task) Read the case study below and complete the tasks which follow.

Nsabaa Ltd. is preparing its financial statements for the year. When the accountant was preparing the trial balance, a difference of GH¢1,165 was found. After some investigation, the accountant decided to credit the suspense account temporarily until the errors causing the difference were identified and corrected.

Upon further investigation the following errors were detected.

a. A payment of GH¢3,000 for office equipment was wrongly debited to the Repairs and Maintenance Account.

b. A sale of GH¢ 1,000 was completely omitted from the Sales Account.

c. A sales invoice of GH¢8,500 correctly recorded in the sales ledger had been entered in the sales daybook as GH¢7,925.

d. A purchase invoice for GH¢1,500 posted to the purchase ledger has been recorded in the sales daybook.

e. A credit sale of two pieces of machinery worth GH¢5,000 each was wrongly credited in the sales account.

f. The purchases daybook has been overcast by GH¢1,720.

g. A trade discount of GH¢700 on goods purchased has been recorded as part of the purchase price. The correct amount has been paid to the supplier.

h. A cheque for GH¢530 received from a debtor has been entered in the cashbook as payment.

i. A cheque payment of GH¢ 500 for rent was entered twice in both the rent account and the Bank account.

j. An amount of GH¢6,735 in the cash payment book has been carried forward as GH¢6,375.

k. Return of goods worth GH¢215 to a supplier had been posted to the credit side of his account even though it was correctly entered in the return outwards book.

l. The discount received, amounting to GH¢650 in the cashbook, had been posted to the wrong side in the nominal ledger.

1. For each error, identify the type of error and explain its effect on the trial balance.

2. Describe how each error should be corrected.

3. Prepare the journal entries needed to fix the mistakes.

4. Show the suspense account and its closing balance.

5. Share your response with your teacher for feedback.

You have been introduced to types of errors, their examples and how to correct these errors using journal entries and the suspense account.

You will now be given further activities to apply the principles of error correction using journal entries and the suspense account.

Activity 2.11 Correction of errors Business Studies Enterprise extracted its trial balance and discovered a difference of GH¢1,030 debit. A review of the ledger revealed the following errors:

a. A sum of GH¢120 on a creditor’s account was omitted from the balance of creditors.

b. An item of furniture purchased for GH¢960 was debited to repairs.

c. The payment side of the cash account had been undercast by GH¢650.

d. The total of one page of the sales daybook had been carried forward as GH¢2,154, whereas the correct amount was GH¢2,514.

e. A debit note of GH¢210 received from a customer had been posted to the wrong side of his account.

f. A debit of GH¢520, presumed bad earlier and written off, was recovered during the year. The debtor’s personal account was credited, but no corresponding entry was made.

You are required to:

1. Prepare journal entries to correct the errors.

2. Write up the suspense account.

Study the suggested answer for Activity 2.11 below to support your work on

Activity 2.12 and 2.13

Table 2.4: Journal Entries

PARTICULARS DEBIT CREDIT

GH¢ GH¢

a. Suspense account 120 Creditors’ account 120 Omission of GH¢120 from the creditors' balance has now been corrected

b. Furniture Account 960 Repairs account 960 Purchase of furniture debited to repairs, now corrected

c. Suspense account 650 Cash account 650 Correction of an undercast of the payment side of the cash account

d. Suspense account 360 Sales account 360 Correction of the undercast of the sales day book

e. Suspense account 420 Customer’s account 420 Entry of a debit note on the wrong side of the customer's account corrected

f. Cash book 520 Suspense Account 520 Bad debt recovered, omitted from the cash book now corrected Suspense Account GH¢ GH¢ Creditors' A/c 120 Trial Balance Diff 1,030 Cash A/c 650 Cash A/c 520 Sales A/c 360 Customer's A/c 420 1,550 1,550

Activity 2.12 Correction of errors

1. Working in groups, review the following case study.

A sole trader prepared a trial balance which failed to agree, and the difference was placed in a suspense account. An audit of the books revealed the following errors:

a. Trade discount of GH¢19,000 received from a supplier had been posted to the purchases account.

b. One of the pages of the sales returns journal totalling GH¢8,000 was not posted to the return inwards account.

c. A payment of GH¢19,600 for insurance has not been entered in the cashbook.

d. A cheque for GH¢49,000 paid to a supplier was entered in the cashbook as a receipt.

e. A payment of minor repairs of GH¢11,000 to plant and machinery was wrongly posted to the plant and machinery account.

f. A sales invoice of GH¢158,950 to a customer was not entered in the books.

g. A discount received from a supplier of GH¢25,500 was entered on the wrong side of the personal account.

2. For each of these errors, consider how these mistakes were made what type of errors they are.

3. Discuss how you would correct each of these mistakes in the relevant journals and how this would be presented.

4. You are required to prepare:

a. Journal entries to correct the errors.

b. A summary of the suspense account

5. Present your work on flip charts to the class for discussion.

Activity 2.13 Correction of Errors

1. In pairs, study the case below.

The accountant of Abima Koka Trading Ltd. has prepared the trial balance, but it shows a difference of GH¢ 1,260.

To balance the trial balance, the difference was credited to the suspense account.

After reviewing the records, the following errors were identified.

a. Sales of GH¢ 540 were recorded on the credit side of the purchases account.

b. A payment of GH¢ 300 for stationery was posted to the office equipment account.

c. A cash sale of GH¢ 720 was completely omitted from the books.

d. Rent paid, GH¢ 500, was recorded in the debit side of the wages account.

e. Discount allowed of GH¢ 60 was posted to the credit side of discount received.

f. The balance of GH¢ 450 in the debtor’s account was incorrectly carried forward as GH¢ 540.

g. A purchase of goods on credit for GH¢ 850 was recorded as GH¢ 580.

h. A credit sale of GH¢395 was entered in the debtors account but wrongly debited to the purchases account.

i. A GH¢ 400 insurance premium paid was entered on the debit side of the insurance expense account but was not posted to the cash book.

j. A purchase return of GH¢ 250 was debited to the purchases account instead of being credited.

k. A loan repayment of GH¢ 200 was correctly entered on the credit side of the bank account but was not recorded in the loan account.

2. Identify the effect of each error on the trial balance.

3. Prepare journal entries needed to correct the errors.

4. Post the corrected entries to the relevant accounts.

5. Prepare the suspense account.

6. Share your responses with another pair for feedback.

Meaning of bank statement and bank reconciliation statement Cashbook A cashbook is a document used by businesses to keep track of all cash, bank, and discount transactions. It shows the money that comes in and goes out of the business (i.e., cash receipts and payments). This helps businesses to manage their cash flow effectively.

Bank Statement

A bank statement is a report provided by the bank that lists all debit (outgoing) and credit (incoming) cash transactions in a specific bank account. This statement is sent by banks to their customers periodically (often monthly) and shows the balance of an account as of a specific date. It helps customers to see all the transactions that have been processed by the bank during the period.

Bank Reconciliation Statement

A bank reconciliation statement is a report prepared by a business at the end of a month or accounting period. It compares the balance shown in the cashbook of a company (specifically the bank column) to the balance shown on the bank statement. The purpose is to find and explain any differences between these two balances.

Why Prepare a Bank Reconciliation Statement?

Some of the key reasons for preparing a bank reconciliation statement are summarised in Table 2.5.

Table 2.5: Reasons for preparing a bank reconciliation statement Reason Explanation Detection of Errors Bank reconciliation helps to identify mistakes such as recording a transaction with the wrong amount, omitting a transaction, or posting the same transaction twice.

It also helps to identify errors made by the bank such as deductions or deposits which have not been recorded correctly.

Prevention of

Fraud Reconciliation can reveal unauthorised or fraudulent transactions that may have gone unnoticed.

By regularly comparing the cashbook and bank statement, a business can ensure that all cash transactions are legitimate and correctly recorded. This acts as a safeguard against fraud.

Ensuring Accurate

Financial Records

Bank reconciliation ensures that the cash balance shown in the business’s records is correct.

This is important for creating accurate financial reports which are necessary for assessing the financial health of the business.

Reliable financial records help stakeholders like managers and investors to make better decisions.

Identification of Unrecorded

Transactions During reconciliation, a business may discover bank charges, interest earned, or other transactions not yet recorded in its books.

This ensures that all deposits made, and cheques issued are accounted for and helps to provide a complete picture of the company’s financial transactions.

Compliance and Audit

Requirements Regular bank reconciliations help a business stay compliant with financial regulations and standards.

It also provides a clear audit trail for external auditors by showing that the company’s cash transactions are accurate and verified.

This is essential for passing audits and demonstrating good financial practices.

Activity 2.14 Banking errors

1. Take five minutes to think about the types of errors that might be made by banks in the preparation of accounts. Make a note of these in your workbooks.

2. Turn to the person sitting next to you and compare your ideas, and then share as part of a wider class discussion. Add to your list based on the feedback and ideas of your classmates.

Activity 2.15 Bank Statement and Bank Reconciliation Statement

1. In pairs, discuss the meaning of the following.

a. A Bank Reconciliation Statement

b. A Bank Statement Record your definitions in your workbook.

Identify and explain five (5) reasons to prepare a bank reconciliation statement.

Reasons to prepare a bank reconciliation statement 1 2 3 4 5

2. Compare your responses with another pair

Activity 2.16 Identification of items on a Bank Statement

1. In your group Scan the QR code below and download the PDF file.

2. Open the downloaded file and examine it to identify and write down these components

a. The account type

b. The start date of the statement

c. The end date of the Statement

d. The total number of deposits made

e. The total number of withdrawals made

f. The total debit amount

g. The total credit amount

h. The opening balance

i. The closing balance

3. Record your answers in a table in your workbooks and compare your responses with another group for feedback.

Causes of the Differences between the Cashbook and the Bank Statement Balances There are several reasons why the balance shown in the cashbook may not match with the balance on the bank statement. Here are some common causes and explanations.

1. Unpresented Cheques: These are cheques that a business has given to suppliers or creditors for payment but have not yet been cashed by the supplier or presented at the bank for withdrawal. While these cheques are recorded as payments in the cashbook, they do not appear in the bank statement until the supplier or creditor cashes them. In other words, if a business writes a cheque to a supplier but the supplier has not taken it to the bank yet, the bank statement would not show this payment.

2. Uncredited Cheques: These are cheques that a business has received from customers and recorded as receipts in the cashbook but have not yet been processed by the bank.

This means that while the cashbook shows the cheque as received, the bank statement does not, since the bank has not yet credited it to the account. For instance, if a customer settles the amount owed a business by cheque and the business records it but the bank has not yet cleared the cheque, it will cause a difference between the cashbook and the bank statement.

3. Standing Orders: A standing order is a regular instruction from a business to its bank to make periodic payments to certain people or organisations (e.g., monthly rent, utility bills, or insurance premiums). These transactions show up in the bank statement automatically but may not be recorded in the cashbook until the statement is received.

For example, a monthly payment for insurance might be deducted by the bank without the business immediately noting it in the cashbook.

4. Credit Transfers: These are payments made directly into the bank account of a business by third parties, often without the business knowing until they check their bank statement. For instance, a customer might pay an invoice directly into the bank which shows up in the bank statement but has not been recorded in the cashbook yet.

5. Bank Charges and Commissions: Banks often charge fees for services such as maintaining the account, processing transactions, or handling foreign transfers. These charges are debited against the bank account of the business and will appear on the bank statement, but will not be found in the cashbook until they are recorded. For

example, if the bank charges a GH¢50 service fee, it will reduce the bank statement balance but will not reflect in the cashbook until the business updates its records.

6. Dividends or Interest Received: If a business earns dividends from investments or receives interest income, this money is often paid directly into the bank account. These payments will appear on the bank statement but may not be recorded in the cashbook until the bank statement is reviewed. For example, a dividend payment of GH¢1,000 from shares will show on the bank statement but would not be in the cashbook until it is noted.

7. Errors Made by the Bank: Sometimes, banks make mistakes in the account of a business, such as leaving out transactions, duplicating entries, recording the wrong amounts or reversing entries. These errors can be on either the debit or credit side of the bank statement and will cause differences until they are corrected.

8. Errors Made by the Business: Businesses can also make mistakes in their cashbook, such as leaving out entries, recording the wrong amount or totalling account balances incorrectly. These errors can lead to discrepancies between the cashbook and the bank statement until they are corrected.

9. Dishonoured Cheques: These are cheques that the bank refuses to pay when they are presented for payment. When a cheque is dishonoured, it means that even though the business has recorded it as a receipt, the bank rejects it and returns it unpaid. This could be due to reasons such as:

a. Insufficient funds: The account does not have enough money to cover the cheque amount.

b. Mismatch between words and figures: The amount written in words does not match the numbers.

c. Stale cheque: The cheque is dated too far in the past and is no longer valid.

d. Post-dated cheque presented early: The cheque is dated for a future date and is presented before that date.

e. Signature irregularities: The signature does not match the specimen signature on file.

f. Wrong date: The cheque has an incorrect date.

Activity 2.17 Cashbook and Bank Statement Balance Differences

1. In groups, discuss the reasons for the differences between the cashbook balance and bank statement balance.

2. Identify and explain six (6) reasons why a cheque may be dishonoured.

3. Make a poster presentation or PowerPoint presentation to your classmates.

Activity 2.18 Differences between cashbooks and bank statements

1. Organise yourselves into groups of not more than five. You will be provided with some examples of cashbooks and bank statements.

2. In your groups, identify the differences between the documents. What might have caused these differences?

3. Record your analysis within your workbooks and be prepared to share your findings with the class for discussion and feedback.

The best way to prepare an updated cashbook is to review the bank statement and identify if any transactions have been left out of the cashbook. It is important to identify transactions that should have been recorded in the cashbook but were not.

Once these items are found, they need to be added to the cashbook to ensure it matches the bank records.

Examples of items that may need to be added ₁. Dishonoured cheques (cheques the bank did not pay)

2. Credit transfers (money directly paid into the bank account by others)

3. Standing orders (regular payments made by the bank on behalf of the business)

4. Bank charges and fees

5. Dividends and interest received

6. Any errors that were made.

The rule for recording these items is straightforward

1. Items that decrease the bank balance (e.g., bank charges, standing orders and dishonoured cheques) should be credited in the cashbook.

2. Items that increase the bank balance (e.g., credit transfers, interest and dividends received) should be debited in the cashbook.

Once you have ensured that all transactions are recorded in the cashbook, it will show a revised and accurate bank column balance for comparison with the bank statement balance. This updated balance is essential for matching the cashbook with the bank statement and ensuring accurate financial records.

Format of updated cashbook

Table 2.6: Updated Cashbook

GH¢ GH¢

Balance b/d xxx Balance b/d (if any) xxx Credit Transfer xxx Standing Order xxx Dividend received xxx Bank Charges and Commissions xxx Interest received xxx Dishonoured cheques xxx Error (undercast) xxx Error (undercast) xxx Error (overcast) xxx Error (overcast) xxx Balance c/d xxx xxxx xxxx Balance b/d xxx

Activity 2.19 Preparing an updated cashbook

1. In pairs, discuss the steps involved in preparing an updated cashbook.

2. Summarise the process in a flow chart and record this in your workbooks.

Activity 2.20 Format of the Updated Cashbook

1. In groups, prepare a template for an updated cashbook. Your teacher will provide you with examples to examine.

2. Select four items each from the debit and credit side of the updated cashbook format and discuss the reasons why those items are shown on the debit or credit side.

3. Summarise your discussion in your workbooks and share your responses with another group for feedback.

You can use Table 2.7 to support your work

Table 2.7: Format of the Updated Cashbook

S/N ITEMS ON CREDIT SIDE REASON FOR SHOWING ON THE CREDIT SIDE Dishonoured Cheques These represent amounts that were initially recorded as receipts (debit) but were later not received due to insufficient funds or other issues. Since the expected cash inflow did not occur, it reduces the cashbook balance hence requiring a credit entry to adjust for the unrealised funds (i.e. offset the initial debit in the cashbook) 1 2 3 4 5 S/N ITEMS ON DEBIT SIDE REASON FOR SHOWING ON THE DEBIT SIDE 1 2 3 4 5

Activity 2.21 Preparing an updated cashbook

1. Organise yourselves into groups of not more than five. In your groups, read and review the case study below.

Stephen’s cashbook on 30ᵗʰJune, 20X1 showed a credit balance of GH¢ 60,500 while his bank statement on the same day showed a debit balance of GH¢35,300.

An investigation revealed the following:

a. The receipts side of the cashbook had been undercast by GH¢5,000.

b. Bank charges of GH¢3,800 entered on the bank statement had not been entered in the cashbook.

c. A cheque for GH¢26,000 drawn by Duodo had been charged by the bank in error to another customer’s account.

d. A dividend of GH¢1,500 paid directly to the bank had not been entered in the cashbook.

e. A cheque for GH¢3,500 paid into the bank had been dishonoured and shown as such by the bank but no entry 1of the dishonour had been made in the cashbook.

f. A cheque drawn for GH¢3,200 had been entered in the cashbook in error as GH¢2,300.

g. A cheque for GH¢2,100 drawn by another customer of the same name had been charged to Stephen’s bank account in error.

2. Prepare an updated cashbook for Stephen.

3. Share your response with another group for comparison, feedback and discussion.

Activity 2.22 Preparation of the Updated Cashbook (Extension activity)

1. Analyse the case study below The Cashbook of BIGGLES CLOTHING showed a debit balance of GH¢7,560 on 31ˢᵗMarch, 20X3, while the bank statement showed a credit balance of GH¢ 5,630.

On investigation, the following discoveries were made;

a. A trade association membership due of GH¢1,560 paid by the bankers of Biggles Clothing directly under a standing order instruction had not been recorded in the cashbook.

b. Interest on government Treasury Bills totalling GH¢930 was credited by the bank on 31ˢᵗMarch; no entries were made in the Cashbook.

c. A cheque of GH¢330 issued for the payment of rent had been entered on the wrong side of the Cashbook.

d. The receipt side of the Cashbook had been overcast by GH¢1,500

e. A dividend warrants for GH¢1,890 had been correctly credited to the account of Biggles Clothing, but nothing appeared in the Cashbook

f. A cheque for GH¢3,090 deposited had been returned by the bank with the remarks “No funds available”, but no adjustment had been made in the Cashbook.

g. A payment of GH¢1,830 by cheque to Mr. Kudiagbor had been entered in the Cashbook as GH¢1,930

h. A Cheque for GH¢240 drawn in respect of electricity had been incorrectly entered in the Cashbook as GH¢420

i. A customer, ABC Ltd, had transferred GH¢1,340 directly into the bank account of Biggles Clothing to settle an outstanding invoice. This had not yet been recorded in the Cashbook j. The bank statement showed banker’s charges totalling GH¢220. These had not been entered in the Cashbook

2. Prepare the updated cashbook from the information given above.

3. Compare your response with one of your peers for discussion and submit your updated cashbook to your teacher for feedback.

Preparing a bank reconciliation statement means matching the corrected cashbook balance with the bank statement balance. This process involves adjusting for certain items, such as unpresented cheques, uncredited cheques and errors made by the bank.

To do that, the following rules mentioned below must be followed.

1. Unpresented Cheques

These are cheques that the business has issued and recorded in the cashbook (reducing the balance) but have not yet been cashed or presented to the bank for payment. Since they have already been deducted in the cashbook but have not yet appeared on the bank statement, they need to be added back to the adjusted cashbook balance to match the bank statement.

Example 2.17

If a business wrote a cheque for GH¢2,000 to a supplier, this amount is credited in the cashbook and reduces the balance. If the cheque has not been presented to the bank, it would not show on the bank statement so the GH¢2,000 must be added back when preparing the reconciliation.

2. Uncredited Cheques

These are cheques that the business has received and recorded in the cashbook as deposits, thereby increasing the cashbook balance, but which have not yet been processed and credited by the bankers of the business. Since these amounts have been added to the cashbook but do not appear in the bank statement, they need to be subtracted from the adjusted cashbook balance to align it with the bank statement.

Example 2.18

If a customer’s cheque for GH¢1,500 is recorded in the cashbook as a receipt, it increases the cashbook balance. However, if the bank has not yet processed this cheque, the GH¢1,500 should be subtracted from the adjusted cashbook balance.

3. Errors Made by the Bank

Sometimes, banks make mistakes that can affect the balance. These errors need to be corrected in the reconciliation. These errors can be categorised into debit in error and credit in error.

a. Credit in Error: If the bank mistakenly credits (adds) money to the account of a business, it means the bank statement would show a higher balance than it should. To correct this and match the cashbook with the bank statement, the same amount should be added to the adjusted cashbook balance.

b. Debit in Error: If the bank mistakenly debits (deducts) money from the account of a business, it means the bank statement would show a lower balance than it should. To correct this, the amount needs to be subtracted from the adjusted cashbook balance.

Example 2.19

If the bank accidentally credits GH¢500 to the account of a business, the same GH¢500 should be added to the adjusted cashbook balance to match the bank statement.

Conversely, if the bank mistakenly debits GH¢300, then an equal amount of GH¢300 should be subtracted from the adjusted cashbook balance to match the bank balance.

Preparing the Reconciliation Statement

The reconciliation statement can be prepared using different starting points:

1. Balance as per the adjusted cashbook

2. Overdraft as per the cashbook

3. Balance as per the bank statement

4. Overdraft as per the bank statement The goal is to ensure that the adjusted cashbook balance matches the balance shown in the bank statement after all adjustments are made.

This process helps to identify any differences and ensures that the financial records are accurate and complete.

Format of bank reconciliation statement

Example of a bank reconciliation statement using an adjusted cashbook as the starting point.

Bank Reconciliation statement as at GH¢ GH¢ Balance as per updated cashbook xxx add: Unpresented Cheques xxx Credited in Error xxx xxx xxx less: Uncredited Cheques xxx Debited in Error xxx xxx Balance as per Bank Statement xxx Alternatively

Example of a bank reconciliation statement using the bank statement balance as the starting point.

Bank Reconciliation statement as at GH¢ GH¢ Balance as per bank statement add: Uncredited Cheques Debited in Error xxx xxx xxx xxx xxx less: Unpresented Cheques Credited in Error xxx xxx xxx Balance as per updated Cashbook xxx

Activity 2.23 Process of preparing a bank reconciliation statement

1. Turn to your partner and discuss the process of preparing a bank reconciliation statement.

2. Record this as a flow chart in your workbooks. Take part in a wider class discussion on how bank reconciliation statements are prepared and amend your recorded process as necessary.

Activity 2.24 Preparation of Bank Reconciliation Statement

1. Working in small groups, study the case below.

Dorvic Enterprise cashbook showed a debit balance of GH¢ 4,500 on December 31, 20X2. Further examination revealed the following:

a. A direct debit of GH¢350 for subscription had been paid by the bank.

b. Bank charges of GH¢500 had not been reflected in the cashbook.

c. Payments settled by standing orders were omitted from the cashbook;

electricity bill GH¢ 70, insurance GH¢100, medical bill GH¢120.

d. A dividend of GH¢320 paid directly into the bank had not been entered in the cashbook.

e. It was discovered that the cashbook balance brought down was undercast by GH¢ 180.

f. Cheques amounting to GH¢4,800 issued had not been presented for payment.

g. Cheques amounting to GH¢1,990 paid into the bank had not yet been credited.

2. Prepare the updated cashbook and the bank reconciliation statement as of December 31ˢᵗ20X2.

3. Record your answers on flipcharts and present to the wider class for discussion and feedback.

Activity 2.25 Cashbook balance

1. In groups, study the case below.

Franstech Enterprise

Franstech Enterprise, a small business, maintains a current account with GCB Bank. As of September 30, 2024, the Bank Statement of Franstech Enterprise showed a closing balance of GH¢12,500. However, the cashbook, maintained by Franstech Enterprise, showed a different balance of GH¢13,200 at the end of the same month.

After further investigation to find out what caused the difference it was discovered that Franstech Enterprises issued cheques to suppliers totalling GH¢2,500, but these cheques had not yet been presented to the bank for payment.

Also, deposits of GH¢1,200, being customer payments paid into the bank on September 29, had not been recorded by the bank.

Furthermore, the bank deducted GH¢150 as service charges, which the business had not yet recorded in the cashbook. Again, the bank credited Franstech Enterprise account with GH¢200 in interest, which is not reflected in Franstech Enterprise cashbook.

2. In your groups, update the cashbook balance and prepare the Bank Reconciliation Statement for Franstech Enterprise as of 30ᵗʰSeptember.

3. Present your response to your teacher for review.

Bank Overdraft

A bank overdraft is a type of short-term loan facility provided by a bank to its customers that allows a customer to withdraw more money than they currently have in their account up to an agreed limit. This means the customer’s account balance can go below zero (that is, have a negative balance). The bank charges interest on the amount that is overdrawn until the overdraft is repaid. This means the customer pays for using the extra money. A bank overdraft is useful for covering short-term cash needs, such as paying bills or making urgent purchases when funds are low.

Format of bank reconciliation statement when the balances are overdraft Bank Reconciliation statement as at GH¢ GH¢ Overdraft as per updated Cashbook add: Uncredited Cheques Debited in error by bank xxx xxx xxx xxx xxx less: Unpresented Cheques Credited in error by bank xxx xxx xxx Overdraft as per Bank Statement xxx Alternatively, Bank Reconciliation statement as at GH¢ GH¢ Balance as per Bank Statement(O/D) add: Unpresented Cheques Credited in Error xxx xxx xxx xxx xxx less: Uncredited Cheques Debited in Error xxx xxx xxx Balance as per updated cashbook (O/D) xxx

Activity 2.26 Discussion on bank reconciliation statements

1. Your teacher will share examples of bank reconciliation statements with you.

Alternatively, go back and review the examples given above.

2. Working in small groups, identify five items in the statement and explain what they tell you.

3. Consider how you tell if the statement was prepared from a balance that was in debit or credit.

4. Share your answers as part of a wider class discussion examining the format of bank reconciliation statements.

Activity 2.27 Preparation of Bank Reconciliation when the balances are overdrawn

1. Carefully study the information below.

As the newly appointed accountant of a company, you are presented with a bank statement and a cashbook for October. At the end of September, the cashbook showed an overdraft balance of GH¢5,000, while the bank statement showed an overdraft of GH¢4,500. After examining the records for October, you identified the following differences:

a. A check for GH¢1,200 was issued but has not been presented to the bank.

b. A deposit of GH¢800 was made by a client directly into the bank account but was not recorded in the cashbook.

c. Bank charges of GH¢50 were not recorded in the cashbook.

d. The bank statement includes an error in which a GH¢100 debit entry was recorded twice.

e. The bank has credited GH¢500 for interest on the overdraft, which has not been recorded in the cashbook.

2. Use the information provided to prepare a bank reconciliation statement for October

3. Analyse the impact of each adjustment on the overdraft balance and decision- making.

4. Compare your responses with those of your colleague for feedback.

Meaning of Control Account

A control account is a summary-level account in the general ledger which summarises transactions in all subsidiary accounts. A ledger's control account at the end of a financial period indicates that the entries were made correctly if it matches the sum of the balances of the individual accounts in that ledger. As a discrepancy would indicate the ledger that needs careful examination to identify errors, this might facilitate checks.

It is important to remember that not all errors can be detected by control accounts. The control account will still balance even if specific types of errors (for example errors or omission, compensating errors) occur, just like in the trial balance.

Control accounts are often referred to as self-balancing ledgers because ledgers, which have control accounts system are proved to be correct as far as the double entry is concerned. Although the concept might theoretically be applied to all ledgers, the control account is often limited to purchases and sales. Control accounts are sometimes called total accounts since they are basically summaries of the transactions that are recorded in a specific ledger.

Importance of control accounts ₁. They provide a check on the accuracy of entries made in the personal accounts.

2. They assist in the location/identification and correction of errors.

3. They act as an internal check on the work of clerical staff.

4. They are used to determine debtors’ and creditors balances more quickly.

5. They are used to find missing figures when preparing accounts for Single Entry and Incomplete Records.

6. They serve as a check on fraudulent acts and checks on the accuracy of the ledger keepers.

Types of control controls Receivables (Sales) Ledger Control Account An account in which records are kept of all transactions relating to all debtors in total. The balance on the receivables control account therefore represents the sum of the individual balances owed by credit customers in the sales ledger. It simply tracks any amounts owed to the business.

It is also called the sales ledger control account or total debtors account.

It is debited with all items that increase debtors’ balance and credited with all items that decrease the debtors’ balance.

Payables (Purchases) Ledger Control

Account An account in which records are kept of all transactions relating to all creditors in total. The balance on payables control account therefore represents the sum of the individual balances owed to trade creditors in the payable ledger.

It is credited with all items that increase creditors’ balance and debited with all items that decrease creditors’ balance

Activity 2.28 Control accounts

1. Working in pairs, discuss the meaning of control accounts. Share your definition with another pair and refine your meaning if needed.

2. Record your agreed definition in your workbooks.

3. Organise yourselves into groups of not more than five to look in more detail at control accounts. In your groups, discuss the following:

a. the importance of control accounts

b. the names of different types of control accounts

c. the purpose of different types of control accounts Share the outcomes of your discussion with the class for feedback. You could record your responses in Table 2.8 such as the one below.

Table 2.8: Recording Template

Control Accounts

Definition Why are they important?

Types of control account Name Purpose

The format for the receivables control account is shown below. In this lesson we will examine this more closely and practice preparing a receivables control account.

Receivables control account Balance b/d xxx Balance c/d xxx Credit sales xxx Cash received from customers xxx Dishonoured cheques xxx Cheques received from customers xxx Bills receivables dishonoured xxx Bills receivables xxx Cash refunds to customers xxx Discounts allowed xxx Interest Charge on customers' overdue a/c xxx Return inwards xxx Noting charges xxx Bad debts written off xxx Balance c/d xxx Allowances on goods damaged xxx Set off Balance c/d xxx XXX XXX Balance b/d xxx Balance b/d xxx

NOTE

a. Opening credit balance: In a receivables ledger control account, the usual balance is a debit, representing amounts customers owe. However, an opening credit balance can occur due to customer overpayments, advance payments, or returns awaiting refunds.

This credit balance reflects money the business owes to customers.

b. Set off: These arise where there are balances on both supplier’s account and customer’s account for the same individual or business. A person may be both a customer and a supplier and it is sometimes necessary to set off one balance against the other. The set offs are sometimes referred to as contra entries.

c. Noting charges: This is a charge by the bank for processing bill of exchanges. It is therefore debited to the sales ledger control account.

Activity 2.29 Receivables control account

1. You will be provided with an example of a receivables control account. In pairs, study the format.

2. Identify items in the format of receivables control account.

3. Write down five items each in the debit side and credit side of the receivables control account and compare with another pair. Record your responses in your workbook.

Table 2.9: Recording Template

Debit side Credit side 1 1 2 2 3 3 4 4 5 5

Activity 2.30 Contra entry

1. In groups, discuss instances where an account can have a set off or contra entry.

2. Write down your responses and share with another group. Record your answers in your workbooks and add to or adjust these based on your discussions.

Activity 2.31 Creating a template for formatting receivables control ac- count

1. In groups, create a template for the format of a receivables control account.

2. Use the information below, to prepare the receivables control account for Takashi Ltd. for the month of March, 20X4.

GH¢ Debtors’ balance at 1/3/20X4 5,000 Credit balance on customers account at 1/3/20X4 1,250 Discount allowed 750 Bills receivable 4,500 Bad debts 3,250 Receipts from debtors 21,500 Set – off of a customer’s account against a credit balance 900 Credit sales 32,500 Dishonoured cheques 1,600 Bills receivable dishonoured 750 Allowances to debtors for defective goods 200 Balances of debtor from the receivable ledger at the end 20,000

3. Present your answer on a flip chart for discussion and feedback.

The format of a payables control accounts is shown below. In this lesson we will examine this more closely and practice preparing a payables control account.

NOTES Opening credit balance: The payables control account usually has an opening credit balance representing the amount owed to suppliers. It is therefore unusual to have an opening debit balance in the payables control account, but it can happen at times.

An opening debit balance represents an amount owed by the suppliers to the business, probably as a result of overpayments in settlement of the firm’s accounts, or cash deposits made by the firm to the suppliers for which goods have not yet been supplied.

The following items are not shown in the control account:

1. provision for bad debts

2. cash sales and cash purchases

3. provision for trade discount

4. carriage inwards and outwards.

Activity 2.32 Payables control account

1. You will be provided with an example of a payables control account. In pairs, study the format of payables ledger control account.

2. Identify items in the format of payables control account.

3. Write down four items each in the debit side and credit side of the payables control account and compare with another pair.

4. Write your responses in your workbook.

Table 2.10: Recording Template

Debit side Credit side 1 1 2 2 3 3 4 4

Activity 2.33 Missing items from payables ledger

1. In groups, discuss items that are not shown in the control account.

2. Write down two of these items and share with another group for comparison.

Activity 2.34 Creating a template for formatting payables ledger control account

1. In groups, create a template for the format of a payables ledger control account.

2. The following balances were extracted from the books of Nimfour Trading Co. Ltd.

at the end of the year 31ˢᵗDecember, 20X2. Prepare the payables ledger control account for the company to determine the amount owed to suppliers.

GH¢ Bills payable 2,000 Cheques paid to creditors 4,000 Credit purchases 8,300 Creditors balances on 31/12/20X1 250 Debit balance on 31/12/20X1 870 Discount received 310 Purchases returns 440 Set – off 450 Debit balances on 31/12/20X2 3 00

Note: A cheque paid to a creditor for GH¢ 2,350 was dishonoured.

3. Present your answer on a flip chart for discussion and feedback.

This lesson will be dedicated to working through additional examples to prepare receivables and payables accounts. You will be working in groups so will have lots of opportunities to collaborate with your peers. Ask questions if you are unclear on any of the activities – there will be lots of opportunities for discussion.

Activity 2.35 Preparing the receivables and payables ledger control ac- counts

1. In groups, create templates for the format of the receivables ledger control account and payables ledger control account.

2. Analyse the following information and use it to prepare both the receivables ledger control account and the payables ledger control account for XZY company for the month of October, 20X4.

Balance as of 1st October, 20X4 GH¢

Payable ledger 224,500 (Credit) 1,000 (Debit) Receivable ledger 860,000 (Debit) 2,200 (Credit) Transactions during October, 20X4 GH¢ Cash purchases 4,500,000 Credit sales 8,000,000 Cash sales 9,200,000 Credit purchases 6,300,000 Allowances from suppliers 25,000 Cheques received from credit customers 6,000,000 Cash received from credit customers 800,000 Discount received 120,000 Cheques paid to creditors 4,700,000 Receivable ledger debit balance transferred to payable ledger 150,000 Allowances to customers 300,000 Bills of exchange payable 1,000,000 Bills of exchange receivable 200,000 Cheques from customers dishonoured 180,000 Provision for discount on debtors 50,000 Bad debts written off 80,000 Discount allowed 100,000 Refund to customers for overpayment 210,000 Interest charged on debtors’ overdue account 20,000 Receivable returns 100,000 Returns outwards 60,000 Balance on 31st October, 20X4:

Sales ledger 2,000 (Credit) Purchases ledger 900 (Debit)

Activity 2.36 Creating template for formatting payable ledger control account

1. Use the templates for the format of the receivables ledger control account and payables ledger control account that you created for the previous activity.

2. Analyse the following information and use it to prepare both the receivables ledger control account and the payables ledger control account for this company for the month of June, 20X4 Balance as of 1ˢᵗJune, 20X4 GH¢ Payable ledger 112,500 (Cr) 1,000 (Dr) Receivable ledger 460,000 (Dr) 1,200 (Cr) Transactions during June, 20X4 Cash purchases 2,500,000 Credit sales 4,000,000 Cash sales 4,700,000 Credit purchases 3,300,000 Allowances from suppliers 23,000 Cheques received from credit customers 3,000,000 Cash received from credit customers 400,000 Discount received 60,000 Cheques paid to creditors 2,700,000 Receivable ledger debit balance transferred to payable ledger 75,000 Allowances to customers 150,000 Bills of exchange payable 500,000 Bills of exchange receivable 100,000 Cheques from customers dishonoured 90,000 Provision for discount on debtors 25,000 Bad debts written off 40,000 Discount allowed 50,000 Refund to customers for overpayment 110,000 Interest charged on debtors’ overdue account 10,000 Receivable returns 50,000 Returns outwards 30,000 Balance on 30ᵗʰJune, 20X4:

Receivable ledger 1,000(Cr) Payable ledger 500 (Dr)

3. Present your answer on a flip chart and share with another group.