Ebook Certificate in business management: Introduction to accounting – Part 1

Ebook Certificate in business management: Introduction to accounting – Part 1 include of the following content: Unit 1 nature and scope of accounting, unit 2 double-entry book-keeping and the ledger, unit 3 cash and bank transactions, unit 4 recording business transactions, unit 5 the trial balance, unit 6 final accounts 1: the trading account, unit 7 final accounts 2: the profit and loss account, unit 8 final accounts 3: the balance sheet, unit 9 final accounts 4: preparation, unit 10 control accounts.

Business Management Study Manuals Certificate in Business Management INTRODUCTION TO ACCOUNTING The Association of Business Executives 5th Floor, CI Tower  St Georges Square  High Street  New Malden Surrey KT3 4TE  United Kingdom Tel: + 44(0)20 8329 2930  Fax: + 44(0)20 8329 2945 E-mail: info@abeuk.com  www.abeuk.com © Copyright, 2008 The Association of Business Executives (ABE) and RRC Business Training All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, electrostatic, mechanical, photocopied or otherwise, without the express permission in writing from The Association of Business Executives Certificate in Business Management INTRODUCTION TO ACCOUNTING Contents Unit Title Page Nature and Scope of Accounting Purpose of Accounting Rules of Accounting (Accounting Standards) Accounting Periods The Fundamental Concepts of Accountancy Case Study A: Global Holdings Ltd 12 12 15 Double-Entry Book-Keeping and the Ledger Principles of Double-Entry Book-Keeping Ledger Accounts The Accounting Equation Balancing Off Classification of Ledger Accounts 17 18 19 22 23 28 Cash and Bank Transactions Nature of the Cash Book Bank Reconciliation Statement Stale and Post-dated Cheques The Petty Cash Book 33 34 44 47 48 Recording Business Transactions The Journal Opening Statement of Assets and Liabilities Drawings The Purchases Book The Sales Book Returns and Allowances Books A Typical Transaction 61 62 63 66 68 72 73 77 The Trial Balance Introduction to the Trial Balance Errors in the Trial Balance Correction of Errors 89 90 96 104 Final Accounts 1: The Trading Account Introduction to Final Accounts Trading Account Stock 117 118 118 119 Unit Title Page Final Accounts 2: The Profit and Loss Account Nature of the Profit and Loss Account Bad Debts Discounts Depreciation Prepayments and Accruals Allocation or Appropriation of Net Profit 127 128 130 133 133 137 142 Final Accounts 3: The Balance Sheet Essentials of a Balance Sheet Assets Liabilities Distinction Between Capital and Revenue Preparation of a Balance Sheet 151 152 154 157 159 162 Final Accounts 4: Preparation Preparation from Given Trial Balance Depreciation and Final Accounts Preparation from an Incorrect Trial Balance 169 170 178 181 10 Control Accounts Purpose of Control Accounts Debtors Control Account Creditors Control Account Sundry Journal Debits and Credits in both Debtors and Creditors Control Accounts 197 198 199 202 11 Partnerships Nature of Partnership Partnership Capital and Current Accounts Partnership Final Accounts 211 212 216 218 12 Limited Companies Nature of Limited Companies Capital of a Company Other Sources of Company Finance Company Profit and Loss Account Company Balance Sheet 231 232 234 238 239 244 13 The Published Accounts of Limited Companies The Law and Company Accounts The Balance Sheet The Profit and Loss Account Non-Statutory Information 257 258 261 269 275 14 Cash Flow Statements Introduction Contents of the Cash Flow Statement Example Use of Cash Flow Statements Case Study A – Global Holdings Ltd (cont'd) 277 278 279 282 286 289 204 Unit Title Page 15 Budgets and Budgetary Control Overview of Budgets and Budgetary Control Budget Preparation Types of Budgets Budgetary Control Systems Case Study B: Crest Computers plc 301 302 304 308 309 313 16 Interpretation of Accounts Accounting Ratios Profitability Ratios Liquidity Ratios Capital Structure Investment Ratios Limitations of Historical Cost Reporting 317 318 320 322 326 327 329 17 Introduction to Costs and Management Accounting The Nature of Management Accounting Elements of Cost The Costing Process Costing Principles and Techniques Cost Behaviour Patterns Case Study C: Reducing the Costs of High Street Banking 335 336 338 340 344 345 348 18 Overheads and Absorption Costing Overheads Cost Allocation and Apportionment Absorption Cost Accounting Treatment of Administration Overheads Treatment of Selling and Distribution Overheads Activity Based Costing (ABC) 351 352 353 358 362 362 363 19 Labour and Material Costing Stock Control Stock Valuation Methods Labour Costing and Remuneration 369 370 373 379 20 Methods of Costing Introduction Job Costing Batch Costing Process Costing 391 392 392 396 397 21 Marginal Costing The Principles of Marginal Cost Accounting Uses of Marginal Cost Accounting Contribution and the Key Factor Opportunity Cost Comparison of Marginal and Absorption Cost Accounting 403 404 406 410 413 413 Unit Title Page 22 Break-Even and Profit Volume Analysis Break-Even Analysis Break- Even Chart Profit Volume Graph The Profit/Volume or Contribution/Sales Ratio Case Study D: Whizzo Ltd 415 416 419 422 423 428 23 Standard Costing and Variance Analysis Standard Costing Variances from Standard Costs Summarising and Investigating Variances 435 436 440 443 24 Capital Investment Appraisal Capital Investment and Decision Making Payback Accounting Rate of Return Discounted Cash Flow (DCF) 449 450 451 454 455 Study Unit Nature and Scope of Accounting Contents Page A Purpose of Accounting Financial and Management Accounting The World of Accounting and Finance Business Functions Money as the Common Denominator The Concept of the Business Entity Users of Accounting Information B Rules of Accounting (Accounting Standards) Development of Accounting Standards Current Standards Setting Structure Statements of Standard Accounting Practice Financial Reporting Standards 1-7 7 11 C Accounting Periods 12 D The Fundamental Concepts of Accountancy The Four Fundamental Concepts Other Concepts of Accountancy 12 13 13 Case Study A: Global Holdings Ltd Background Part – Energy Saving Products © ABE and RRC 2 5 15 15 15 Nature and Scope of Accounting A PURPOSE OF ACCOUNTING A business proprietor normally runs a business to make money He or she needs information to know whether the business is doing well The following questions might be asked by the owner of a business: How much profit or loss has the business made? How much money I owe? Will I have sufficient funds to meet my commitments? The purpose of conventional business accounting is to provide the answers to such questions by presenting a summary of the transactions of the business in a standard form Financial and Management Accounting Accounting may be split into financial accounting and management accounting (a) Financial accounting Financial accounting comprises two stages: (b)  book-keeping, which is the recording of day-to-day business transactions; and  preparation of accounts, which is the preparation of statements from the bookkeeping records; these statements summarise the performance of the business – usually over the period of one year Management accounting Management accounting is defined by the Chartered Institute of Management Accountants as: "The application of professional knowledge and skill in the preparation and presentation of accounting information in such a way as to assist management in the formulation of policies and in the planning and control of the operations of the undertaking" Management accounting, therefore, seeks to provide information which will be used for decision-making purposes (e.g pricing, investment), for planning and control The World of Accounting and Finance In everyday speech, the terms "data" and "information" are often used interchangeably However, in the context of accounting systems, the terms have distinct meanings – data is raw facts, such as a group of figures, a list of names and such like, whereas information is data which has been processed in such a way as to be meaningful to the person who receives it The difference might be summarised as follows: Data + Meaning = Information For example, the string of numbers 060463-413283-110985 does not have any meaning to you as you read this sentence for the first time It is data This data can be given meaning if you are told that employee 413283 was born on 6th April 1963 and started work with the organisation on 11th September 1985 It has now become information Similarly, the numbers 9180, 17689 and 9800 are, without further embellishment, data If you are told that they are actually the list prices of the three company cars in your department, required by the Inland Revenue for tax purposes, they become information Today, the vast majority of organisations operate computerised bookkeeping and accounting systems These systems take data from the various activities of the business and turn that data into meaningful financial information The basis on which this transformation from data © ABE and RRC Nature and Scope of Accounting to information takes place are the rules, principles and practices of accounting which we shall examine in this course You should note that, whilst most financial information is obtained from computerised systems, it is most important that these rules, principles and practices are fully understood so that you are able to acquire the right information and interpret it correctly Indeed, there remain many managers and employees who face major problems in obtaining coherent and comprehensive information they need from these systems Business Functions Having explained the purpose of accounting and the difference between "data" and "information", it is important to understand the nature of the different business functions in an organisation and the information they produce  Wages control and accounting A paramount feature of all business enterprises is the necessity to employ and remunerate a workforce The workforce usually comprises people with a wide of skills – manual, technical and managerial – all of whom must be paid It is necessary to maintain a record for each employee containing full and absolutely accurate details of pay items This record must be kept up-to-date in terms of amendments as well as the updating of totals-to-date  Sales control and accounting Customer order control entails procedures for ensuring that orders from customers/clients are received, recorded and acknowledged in an efficient organised manner At a later stage, order control is necessary to ensure that orders are actually fulfilled, i.e customers receive the correct goods on time and at the right destination The purpose of sales analysis is to forecast future sales demands and to plan marketing activities  Purchases control and accounting Purchasing involves the procedures for ensuring that all the materials, components, tools, equipment and other items needed by the company are made available at the right time, right place and right price The precise nature of the purchasing function depends upon the type of items purchased It is beneficial to analyse the company's purchases in various ways – for example, in order to measure the effectiveness of suppliers, to ascertain the efficiency of the company in handling materials and reducing waste, etc  Stock control Stock control involves the maintenance of records relating to stock levels, issues, outstanding orders, reorder levels, and so on From the accounting information viewpoint, an important requirement is stock valuation – i.e the book value of all stockin-hand at a certain time These figures should be accurate, and allow for stock losses, deterioration and enhanced value since these contribute to the firm's balance sheet  Production control Production planning covers what to make and how many to make, whilst production control ensures that the plans are achieved The information required for production control purposes includes material requirements for each time period, quantities of components and subassemblies to be made by each period, the amounts of equipment and machines, etc needed for each stage, the amount of each labour category needed during each period, and the progress of each job and reasons for delays © ABE and RRC Nature and Scope of Accounting  Marketing function The marketing function is concerned with researching the business potential of the market and for developing the right products and services to satisfy the needs of customers Accounting records are a vital source of information concerning customers – they show buying patterns, types of products bought, etc  Customer services function Generating new customers is very important for any successful business However, customer retention is also vital if a company is going to continue to grow and develop Therefore, the customer services function is responsible for liasing the customer and providing added valued services, such as where a garage would provide a courtesy car, etc  Human resources function This function is responsible for satisfying the personnel needs of the organisation This involves recruiting and training the right type of people The HR function also deals with staff appraisal, disciplinary procedures, grievances and the legal aspects of employing staff  Information systems function In a large organisation the information technology and accounting functions must work in close harmony to produce systems capable of providing the financial information needed by the different business functions The information required will not only vary between functions, it will also vary between different levels within an organisation For example, what is perceived as information at the operational levels will invariably be viewed as raw data by middle and senior managers The systems must, therefore, be capable of converting data into a variety of information forms in order to allow managers at different levels to make effective business decisions Money as the Common Denominator Accounting is concerned only with information which can be given a monetary value We put money values on items such as land, machinery and stock, and this is necessary for comparison purposes For example, it is not very helpful to say: "Last year we had four machines and 60 items of stock, and this year we have five machines and 45 items of stock." It is the money values which are useful to us Whilst we are concerned with money, we should note that there are limitations to the use of money as the unit of measurement (a) Human asset and social responsibility accounting We have seen that accounting includes financial accounting and management accounting Both of these make use of money measurement However, we may want further information about a business:  Are industrial relations good or bad?  Is staff morale high?  Is the management team effective?  What is the employment policy?  Is there a responsible ecology policy? © ABE and RRC 196 Final Accounts 4: Preparation © ABE and RRC 197 Study Unit 10 Control Accounts Contents Page A Purpose of Control Accounts Dealing with Errors Practical Points 198 198 198 B Debtors Control Account Methods Format and Double Entry 199 199 199 C Creditors Control Account Methods Format and Double Entry 202 202 202 D Sundry Journal Debits and Credits in both Debtors and Creditors Control Accounts 204 Answers to Question for Practice © ABE and RRC 209 198 Control Accounts A PURPOSE OF CONTROL ACCOUNTS In a business of any appreciable size, the number of accounts, comprising assets and liabilities, expenses and gains, debtors and creditors is so large that it is physically impossible to contain them within one binder (the ledger) For this reason, it is usual to find one or more debtors ledgers, i.e those ledger accounts are kept separately from the rest in a separate binder, although they are of course still within the double entry system of bookkeeping Similarly, the creditors ledger accounts may be kept separately from the rest A control account is therefore defined as a total account to which is debited and credited in total all the transactions which have been debited and credited in detail to individual ledger accounts Dealing with Errors The greater the number of accounts and the greater the number of transactions recorded, the greater is the likelihood that errors may creep into the work Even the systematic checking of each entry after it is made does not entirely eliminate this danger Perhaps errors may come to light only when a trial balance is prepared, either periodically or at the year end We have already considered how to locate errors where a trial balance does not agree If such 'short cut' methods fail to locate the mistake(s), nothing else can be done but to check all entries since the trial balance was last extracted and the books agreed This complete check can take days or even weeks and is very unproductive Even with a complete check, errors can be missed a second time Further, agreement of a trial balance is only prima facie evidence of the arithmetical accuracy of the books; it is not at all uncommon for compensating errors to occur, which are not disclosed by a disagreement of the trial balance Total (or control) accounts provide an answer or alternative to the detailed checking A total (or control) account shows, in total, on its debit side all amounts which have been debited in detail to individual debtors or creditors accounts and on its credit side all items that have been credited in detail to individual debtors or creditors accounts Provided that no errors have been made in the books of prime entry (day books), posting or balancing of the two control accounts (one for debtors and the other for creditors), the balances should agree with the total of all the individual debtors and creditors accounts of the business Thus, if a difference arises on the trial balance, the debtors and creditors accounts can be reconciled to the total (or control) account and if no error is highlighted there (i.e individual debtors and creditors ledger accounts agree to their respective total accounts) the error must be located in the remainder of the ledger entries and a considerable bulk of rechecking entries need not be done Practical Points (a) Control accounts are usually kept by a senior official of a business, with semi-senior employees maintaining the individual ledger cards In no circumstances should the two be kept by the same person (b) Provided that the accuracy of the control account is constantly proved, management is placed in the position of knowing the net amounts due to and by the business at any time, without the necessity of preparing detailed lists of debtors and creditors from the ledger cards This is of the utmost importance for directing financial policy and as an aid to management (c) In a very large concern, it may be desirable to have several debtors and creditors control accounts Accounts may be divided on the following lines:  Alphabetical, e.g Debtors Control A – K © ABE and RRC Control Accounts 199  Numerical, e.g Debtors Control – 100, where a system of numerical accounts is in operation and an index will be necessary  Geographical, e.g Debtors Control SE England  Departmental, e.g 'Hardware' Debtors Control There are several other methods in use (d) To get the information we need in order to divide up the debtors and creditors control accounts, we have to provide further analysis columns in the books of prime entry, or to maintain separate books of prime entry for each control account division As far as each is concerned, we must provide each debtors control with a cash received book and each creditors control with a cash paid book, the totals of these cash books being transferred daily to a general cash book B DEBTORS CONTROL ACCOUNT This is often known as sales control account or total debtors account It is a summary account of the individual debtors ledger balances Methods There are two approaches to using this type of account  Treat the individual ledger accounts as part of the double entry system and regard the control account purely as memorandum  Treat the control account as part of the double entry system and regard the individual ledger accounts as memoranda Both methods are perfectly acceptable, but we will illustrate their use by means of the second method above You should, therefore, regard the individual debtors ledger accounts as purely memoranda, maintained only to show the individual sums owing from customers, and the control account as a ledger account within the double entry system Format and Double Entry The general format of the debtors control account is shown below Debtors Control Account Balance b/d Sales Dishonoured bills of exchange Returned cheques Sundry journal debits Balance c/d £ X X X X X X Balance b/d Cash Discount allowed Sales returns Bad debts Bills receivable Sundry journal credits Balance c/d £ X X X X X X X X X Balance b/d X X Balance b/d X We shall now consider each of the above entries in turn, together with the double entry © ABE and RRC 200 Control Accounts Remember that we are regarding the control account as part of the double entry system (and not the individual debtors ledger accounts) On the debit side (a) Balance b/d This represents the total amount owing by debtors at the beginning of the period (b) Sales This information has been obtained from the sales day book and the double entry is: Debit: Debtors control account Credit: Sales account Memo entries are also made on the individual debtors ledger cards or accounts (although the format of these is not important as they are outside the double entry system) (c) Dishonoured bills of exchange (d) Bounced (returned cheques) Both the above items occur because a bill of exchange proves non-collectable or a cheque is dishonoured – it 'bounces' The original bill or cheque will have removed the debt from the control account and this can be considered as a reinstatement of the sum owing entry Information is obtained from the journal, in the case of a bill of exchange, and from the cash book in the case of a cheque The double entry is: Debit: Debtors control account Credit: Bills of exchange account or cash at bank account (e) Sundry journal debits These will be considered together with sundry journal credits once the total creditors account has also been discussed, as they often arise because of transfers between control accounts (f) Balance c/d This arises where (say) a debtor has overpaid his account; for example, he has been sold goods worth £75 and paid £80 It would be incorrect to deduct the £5 overpaid from the total owing by the other debtors as this would result in an understatement of debtors on the balance sheet Instead, it is shown separately in the debtors control account and classified as a current liability (overpayment by debtor) on any balance sheet On the credit side (a) Balance b/d This represents the total amount owing to (back to) debtors at the beginning of the period (b) Cash This represents sums received from debtors during the period and the information has been obtained from the cash book Often the trader will add an extra column on the debit side of his cash book (in a similar manner to 'discounts allowed' discussed in an earlier study unit) into which all cash received from debtors is inserted: © ABE and RRC Control Accounts 201 Cash at Bank (Extract) Discount Allowed £ Debtors Total £ Total (Bank) £ 50 450 20 900 800 450 5,000 900 800 70 2,150 Fred – Debtor Sales of Fixed Assets Joe – Debtor Carol – Debtor (Total columns are balanced to find cash at bank in the normal manner.) The double entry is therefore (as illustrated by the above example): £ Debit: Bank account Credit: Debtors control account (c) 2,150 2,150 Discount allowed As shown above, this information can be also obtained from the cash book: £ Debit: Discount allowed account Credit: Debtors control account (d) 70 70 Sales returns This information is obtained from the sales returns day book and the double entry is: Debit: Sales returns account Credit: Debtors control account (e) Bad debts This information is obtained from the journal The double entry is: Debt: Bad debts account Credit: Debtors control account (f) Bills receivable These are a method of 'paying' for debtors and are really a 'swap' of an unofficial undertaking to pay for goods for an official one The definition of a bill of exchange is: "An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is given to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person or bearer." The double entry is: Debit: Bills receivable account Credit: Debtors control account © ABE and RRC 202 Control Accounts (g) Sundry journal credits See later (h) Balance c/d This represents sums owed by debtors at the end of the period concerned, capable of proof against individual debtors records Hence, the control account is built up not from an analysis of debtors accounts but from information provided from subsidiary books such as day books, journal and cash book C CREDITORS CONTROL ACCOUNT This is often known as purchase control account or total creditors account This is also a summary account of the individual creditors' ledger balances Methods As with debtors control, two methods of accounting exist, namely:  treating the individual ledger accounts as part of the double entry system and regarding the control account as purely memorandum; or  treating the control account as part of the double entry system and the individual ledger accounts as memoranda Again, we will consider the second method Format and Double Entry The general format of the creditors control account is shown below Creditors Control Account Balance b/d Cash Discount received Purchase returns Bills payable Sundry journal debits Balance c/d Balance b/d £ X X X X X X X X X £ X X X X X Balance b/d Purchases Returned cheques Sundry journal credits Balance c/d X Balance b/d X We shall now consider the double entry of each of the above On the debit side (a) Balance b/d As with debtors control, it is likely that the trader has overpaid some accounts by small sums and this balance represents those sums due back to the trader (although in practice he will use them as part payment for future goods bought) In the final accounts such debit balances would be shown as current assets and not reduce the current liability which the credit balance represents © ABE and RRC Control Accounts (b) 203 Cash This represents sums paid to creditors during the period and the information has been obtained from the cash book by adding an extra column on the credit side Cash at Bank (Extract) Discount Received £ Creditors Total £ Total (Bank) £ 20 280 900 280 900 270 20 1,180 Jane – Creditor Peter – Creditor Wages (Total columns are balanced to find cash at bank in the normal manner.) The double entry is therefore (as illustrated above): £ Debit: Creditors control account Credit: Bank account (c) 1,180 1,180 Discount received As shown above, this information also can be obtained from the cash book: £ Debit: Creditors control account Credit: Discount received (d) 20 20 Purchase returns This information is obtained from the purchase returns day book and the double entry is: Debit: Creditors control account Credit: Purchase returns account (e) Bills payable These are bills of exchange, used by the trader to 'pay' his suppliers and the double entry is: Debit: Creditors control account Credit: Bills payable account On the credit side (a) Opening credit balance This represents sums due to suppliers at the beginning of the period and will correspond with balance on individual ledger 'accounts' or cards © ABE and RRC 204 Control Accounts (b) Purchases The information is obtained from the purchase day book and the double entry is: Debit: Purchases account Credit: Creditors control account (c) Returned cheques These should be uncommon as they represent cheques the trader has either incorrectly written out or cheques he has bounced (dishonoured) ! The double entry is: Debit: Bank account Credit: Creditors control account (d) Sundry journal credits See later (e) Balance c/d This represents any small sums owed back to the trader for overpayments, at the end of the period concerned D SUNDRY JOURNAL DEBITS AND CREDITS IN BOTH DEBTORS AND CREDITORS CONTROL ACCOUNTS The best way to illustrate these is by examples: Example J Dewhurst supplied the business with £1,000 of goods and the business sold him £490 of goods The sums are to be set off against one another, leaving a net amount owing by the business Ledger accounts would appear as: Dr Sales Account Cr £ £ Balance b/d (which includes £490 Dewhurst from sales day book) Dr Purchases Account Cr £ Balance b/d (which includes £1,000 Dewhurst from purchase day book) X £ X © ABE and RRC Control Accounts Dr Debtors Control £ Balance b/d (which includes £490 Dewhurst from sales day book) Dr X Creditors control Cr £ 490 Creditors Control £ 490 Debtors control 205 Cr £ Balance b/d (which includes £1,000 Dewhurst from purchase day book) X Note the entry (via the journal): £ Debit: Creditors control Credit: Debtors control 490 490 being offset of debts A corresponding entry would be made on each of the individual debtor and creditor cards of Dewhurst The above example dealt with sundry journal debits in the creditors control, and sundry journal credits in the debtors control Let us now turn to the other 'pair' of sundry items Example J Brown is both a debtor and a creditor of a business In error, the creditors control is debited with a cheque for £100 returned from the bank marked "no funds J Brown Account" The ledgers showing the correcting entries would appear as follows: Dr Debtors Control £ Balance b/d Creditors control (to correct error) £ X 100 Dr Bank £ Balance b/d © ABE and RRC Cr X Creditors control (This should have read debtors control) £ 100 206 Control Accounts Dr Creditors Control Cash (Error – this should have been debited to debtors control) £ 100 £ Balance c/d Debtors control (to correct error) X 100 Note what has happened here (a) The entries: Dr Creditors control – in error Cr Bank (b) The correction: Dr Debtors control Cr Creditors control © ABE and RRC Control Accounts Question for Practice The following balances appear in the books for a business on 31 December 20x1: £ Cash balance 360 Balance at bank in favour of business 7,540 Debtors ledger control account 17,650 Creditors ledger control account 9,740 During the month of January 20x2, the following transactions occur: £ Jan Received cheque from Debtor A Allowed discount Debtor A Received cheque from Debtor B Allowed discount Debtor B Paid by cheque – Creditor E Paid by cheque – Creditor F Paid by cash – Creditor G 1,540 10 770 10 470 2,640 100 10 Paid cash – Salaries 250 18 Received – Cash sales 490 22 Received cheque from Debtor C after deducting contra account £500 Drew cash from bank 2,500 1,000 22 Paid wages out of cash Paid petty cashier out of cash Paid by cheque Creditor H 1,230 250 970 23 Received cheque Debtor D 31 Received cash – sales Banked cash Credit sales during month were Returns and allowances to customers were Bad debts written off were Purchases during month were Credits for packages returned to creditors were 80 570 350 6,940 140 100 4,960 150 Required: Write up cash book and debtors and creditors ledger control accounts for the month of January 20x2 Now check your answer with that given at the end of the unit © ABE and RRC 207 208 Control Accounts Review Questions Section A Identify and explain three reasons why a company would maintain a set of control accounts Why is it important that the same person in an organisation does not maintain a control account and the associated individual ledger cards? Section B Explain the alternative methods of maintaining a debtors' control account Identify three items that will reduce the amount owing by debtors Section C If a company is having a problem with converting debtors into cash, explain how this could be reflected in the creditors' control account Identify two items that will increase the amount owed to creditors Section D If a company is both a customer and a supplier, explain how this is reconciled in the debtors' and creditors' control accounts © ABE and RRC Control Accounts 209 ANSWER TO QUESTION FOR PRACTICE Dr 20x2 Jan Debtors Control Account £ 17,650 Balance b/d Jan 31 Sales 6,940 20x2 Jan 31 Sundry journal credit (creditors control) Returns and allowances Bad debts Cash & discount Balance c/d 24,590 Dr Creditors Control Account 20x2 Jan 31 Sundry journal debits (debtors control) Returns Cash Balance c/d £ 500 150 4,180 9,870 14,700 The cash book is shown on the next page © ABE and RRC 20x2 Jan Balance b/d Jan 31 Purchases Cr £ 500 140 100 4,910 18,940 24,590 Cr £ 9,740 4,960 14,700 C 22 Cash sales 31 Cash D 23 Bank Cash sales 20 10 B £ 4,890 80 2,500 770 1,540 £ Disc Debtor allowed 10 Ref A Balance b/d Details 18 Jan 20x2 Date 2,420 570 1,000 490 360 £ Cash 12,780 350 80 2,500 770 1,540 7,540 £ Bank 31 23 22 10 Jan 20x2 Date CASH BOOK 4,180 250 1,230 250 100 £ 2,420 240 970 100 2,640 470 £ Balance b/d £ Disc Creditor Cash allowed 350 C Ref Bank H Petty cash Wages Cash Salaries G F E Details 12,780 7,700 970 1,000 2,640 470 £ Bank 210 Control Accounts © ABE and RRC ... 5 15 15 15 Nature and Scope of Accounting A PURPOSE OF ACCOUNTING A business proprietor normally runs a business to make money He or she needs information to know whether the business is doing... split into financial accounting and management accounting (a) Financial accounting Financial accounting comprises two stages: (b)  book-keeping, which is the recording of day -to- day business. .. Methods of Costing Introduction Job Costing Batch Costing Process Costing 3 91 392 392 396 397 21 Marginal Costing The Principles of Marginal Cost Accounting Uses of Marginal Cost Accounting Contribution