Sales and Purchase Returns by taoyni


									Cambridge VCE Accounting Podcast Notes

Control accounts and subsidiary ledgers
It is unlikely that a business will have only one debtor, or only one creditor. As such, the
business will need to keep track of the individual debtors and creditors, as well as the
total of all the debtors and creditors in one place.

A control account is an account that summarises all transactions involving Debtors or
Creditors in one ledger account. This account provides the ‘bigger picture’ of the overall
situation involving these items. Control accounts are maintained in the general ledger.
Remember to refer to these accounts as Debtors Control, Creditors Control and
Stock Control as marks will be lost on the exam if this is not done correctly.

A subsidiary ledger is an additional set of ledger accounts that is used to record all
transactions involving each individual debtors and creditors. It is important to note that
the subsidiary ledger is not part of the general ledger, but an additional set of records
kept separate from the general ledger. If both the control accounts and subsidiary ledger
were part of the general ledger, the transactions involving debtors, creditors and stock
would be counted twice. Of course, if a business has only one creditor or one debtor, it
will have no need for a subsidiary ledger system.

It should be noted that the Stock Control account is also a control account in the general
ledger, and it provides a summary of all transactions involving the purchase and sale of
all lines of stock. The stock cards form a system of subsidiary records, where each stock
card records the purchase and sale of each individual line of stock.

Advantages of using control accounts and subsidiary ledgers
           Provides for a built-in cross-checking mechanism between the control
                   account and the subsidiary ledger. This will assist in detecting errors
                   made in either the ledger accounts or the subsidiary ledger. Accounts can
                   be sent to each individual debtor and creditor for cross-checking against
                   their records.
                  Allows for the separation of duties. One employee can look after all
                   transactions involving debtors and creditors, whilst another can deal with
                   the general ledger. This will ensure greater accuracy in the accounting

© Baron, Bamford 2008                    Cambridge University Press                             1
Cambridge VCE Accounting Podcast Notes

Disadvantage of using control accounts and subsidiary ledgers
           Additional recording is required. This will mean more time and money will
                   be spent on recording accounting information. Many small businesses
                   may find this additional recording burden difficult to maintain.

© Baron, Bamford 2008                    Cambridge University Press                      2
Cambridge VCE Accounting Podcast Notes

Control Account Templates – Unit 3

Debtors Control
  Date    Cross reference                   $            Date           Cross reference       $
          Balance - opening                                             Bank/Discount
                Sales/GST                                               Bad debts
                                                                        Balance - closing

Creditors Control
  Date     Cross reference                  $            Date           Cross reference       $
           Bank/Discount                                                Balance
           Balance - closing                                            Stock Control/GST

Stock Control
  Date    Cross reference                   $            Date           Cross reference       $
          Balance - opening                                             Cost of Sales – CRJ
          Creditors Control                                             Cost of Sales – SJ
          Bank                                                          Drawings
          Stock Gain                                                    Advertising
                                                                        Stock loss
                                                                        Balance - closing

                  Students need to know these templates off by heart before the exam.
                  The subsidiary ledger accounts have the same debit and credit entries as
                   the control accounts, but there is a difference in the posting dates:
                   o    Control accounts are posted on the first day of the period and the last
                        day; subsidiary account transactions need to be posted on the day of
                        the transaction;
                   o    Totals from the four journals can be posted to the control account; in
                        the subsidiary ledger, every transaction that affects the individual
                        debtor of creditor must be posted on the day they occurred.

© Baron, Bamford 2008                      Cambridge University Press                             3
Cambridge VCE Accounting Podcast Notes

The Examiner’s Perspective
Control Accounts and Subsidiary Records
              Stock Control                                         Stock cards
              Debtors Control                                       Debtors Subsidiary Ledger
              Creditors Control                                     Creditors Subsidiary Ledger

Students must be aware that
                  Control accounts are summary accounts in the general ledger
                   summarising the transactions recorded in the subsidiary ledger accounts.
                  A control account system should be used in a business, which has a large
                   number of debtors, creditors or stock items.

When recording in Control Accounts in the General Ledger remember the
           Only totals are posted from the relevant journals
                  When posting to the general ledger the final date of the reporting period
                   is used (note this may not be for a year) so read the question carefully
                  The opening and closing balances in the general ledger for the control
                   accounts must be equal to the total of the opening and closing balances
                   of the individual accounts in the subsidiary ledger

When recording in the Subsidiary Ledger remember that
           Posting is done ON the actual date of transaction.
                  And that the cross referencing in the subsidiary ledger must be the same
                   as for the control account.

                  Prior to the preparation of business reports, it is necessary to prepare
                   schedules to ensure that the total of the individual debtors, creditors and
                   stock items equal the control account balances.

If a Control Account system were not used in a business the following complications
would arise:

             1. There would be an increase in the General ledger’s size, detail and
                complexity making it difficult to interpret.

© Baron, Bamford 2008                    Cambridge University Press                                 4
Cambridge VCE Accounting Podcast Notes

             2. It would lead to large reports as they would need to list the individual data
                for each of the many debtors, creditors and stock items making the reports
                difficult to analyse and interpret.
             3. It would be more difficult to determine the total final balances of the debtors,
                creditors and stock items.

When should a business use a Control Account System?

                  The decision to set up a control account system will vary from business to
                   business and with each business’s information needs.
                  E.g. a business that only deals in cash would not need a control account
                   system for debtors and creditors but may still choose to use it for stock.

Why should a business use a Control Account System
           It allows for the Detection of errors
                  It allows for the Allocation of responsibility
                  It assist with the Ease of reporting

What are the Disadvantages of using a Control Account System
            There is additional recording involved
                  Staff require additional skills
                  There is the possibility of increased administration costs especially if
                   more staff are required to operate the system

For the exam it is important to note the following:
                  Control accounts provide a summary of debtors, creditors and stock
                   whilst their subsidiary ledgers and stock cards provide details of the
                   individual transactions relating to debtors, creditors and stock items.
                  Transactions involving debtors and creditors should be posted to the
                   Debtors Control and Creditors Control account. Debtors and Creditors
                   are NOT acceptable titles.
                  Information contained in the cross-reference column of subsidiary
                   ledgers (debtors and creditors) must reflect the titles used in the relevant
                   control accounts.

© Baron, Bamford 2008                    Cambridge University Press                               5
Cambridge VCE Accounting Podcast Notes

Be careful to read questions carefully to see if the business operates a control account
system for debtors, creditors and stock. If this is stated in the question then regardless
of the terminology used students must write control accounts as part of their titles for
debtors, creditors and stock and include details relating to subsidiary creditors and
debtors throughout the task

Common errors in control accounts continue to centre on the use of dates and the
posting of individual transactions rather than totals to the control account and the posting
of totals at the end of the reporting period in the subsidiary ledgers.

In addition students need to watch out for things like discounts. Whilst the control
account title might well be Bank/Discount unless the individual debtor received a
discount this would be considered an incorrect title in the subsidiary ledger.

Theory responses – make sure that you are providing enough depth.
A good approach is to try to explain the benefits or advantages of control accounts in

For example: In a discussion on RECORDING - The benefits of using a control account
system is that it removes bulky detail from the general ledger as the detail is maintained
in a subsidiary ledger.

In terms of REPORTING – the control account system provides a summary of
transactions as only one amount is reported in the Trial Balance and the Balance Sheet
which assists in upholding relevance as only the information that is important for
decision making is provided.

In terms of MANAGEMENT – the control account system enables separation of duties in
a manual accounting system and allows for a check of the control account balance with
a schedule of a stock card.

© Baron, Bamford 2008                    Cambridge University Press                          6

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