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Bookkeeping Controls
This unit is about the controls that are in place to ensure that
the accounts are accurate and complete.
In particular, we will be looking at reconciliations. This is where
we compare, for example, the total of the subsidiary (sales) ledger
accounts and the total of the control account in the main
ledger.
The totals should be the same and checking will identify some of
the possible errors that could be made.
The purpose of a reconciliation is to find and understand any
differences between items that should be the same.
We will also look at how to correct errors by using a new book of
prime entry called The Journal. The Journal is used for non-routine
transactions that do not fit into the other Books of Prime
Entry.
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Control Account Reconciliations
The purpose of a reconciliation is to find and understand any
differences between items that should be the same.
Let’s start by looking at the Sales Ledger Control Account and the
Sales Ledger, which is where we record our receivables.
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Control Account Reconciliations (cont.)
Everything should match. The balance as per the individual accounts
equals £2,912.04. The balance as per the control account equals
£2,912.04. In this case, they do match.
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Purchases Control Account Reconciliation
Let’s look at another example. This time it’s a Purchase Ledger
Control account from later in the year. In this case we have only
the totals and the control account and we need to identify a
problem that has shown up. The difference is £52.48 which equals
the discount received figure that you can see in the control
account.
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Purchases Control Account Reconciliation (cont.)
In this case, it is likely that the discount received figure has
been posted twice to the individual accounts. This is why we
reconcile - to try to detect mistakes before they can cause a
problem.
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Reconciliation Tips
There are many errors that can cause the control account
reconciliations to show an imbalance.
In the workplace you will have a lot of information to look at that
will help you to identify the error, but if a recognisable figure
suggests a particular problem, that would be where you should start
making your checks.
When doing a control account reconciliation, look for a figure that
is the same as your calculated difference and try to understand
where something is either missing or has been entered twice.
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The Journal
The Journal is used for non-routine transactions that do not fit
into the other Books of Prime Entry.
Journal transactions will typically be used for:
Introduction of capital and the initial transactions of a new
business Transactions such as writing off bad or irrecoverable
debts Entering payroll figures into the accounts from the Wages Day
Book Correcting errors
So what does the Journal look like? Well, it looks a bit like the
trial balance but with a column for the date.
Journal
The Journal in Use
The journal is fairly straightforward to complete but there are
some rules that you should be aware of.
Firstly, a journal is part of the double entry so, as always, total
Debits must equal total Credits.
Secondly, it is expected that the debit entries are written down
before the credit entries.
Thirdly, each journal must have a narrative – a note to say why the
journal has been written. The narrative usually starts with the
word ‘being’ and need not be long but must give enough information
to enable the reader to understand the circumstances surrounding
the transaction.
Journal
Example Credit Entry £
Being the narrative
Journals for the Start of a New Business - Opening Capital
Let’s have a go at writing the journal for the opening capital when
we start a new business from scratch.
Start with the date, which was 1st of January. Then enter the Debit
side of the transaction: Debit -- Bank -- £10,000 Then the Credit
side: Credit -- Capital -- £10,000 And finally the narrative:
“Being opening capital”.
Journal
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Journals for the Start of a New Business - Buying a Van
Now, let’s add the journals for the van that we bought when we
started our business.
Start with the date, which was 1st of January. Then enter the Debit
side of the transaction: Debit -- Van at Cost -- £3,000 Then the
Credit side: Credit -- Bank -- £3,000 And finally the narrative:
“Being purchase of Van registration AB 12 CDE”.
Journal
Bank 3,000.00
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Journals for the Start of a New Business - Opening Balances
As well as transactions for a new business, we might use the
journal to transfer balances to a new computerised system or a sole
trader may have made a few transactions without using proper
accounting systems so you may start your accounts with a longer
journal like this one: Journal
Date Details Dr Cr
Petty Cash 100.00
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Checking Journals
You should always check that debits = credits with your journals,
as you do elsewhere in the double entry system. Remember, journals
are simply double entry bookkeeping written slightly differently
prior to entering into the accounts.
Journal
Petty Cash 100.00
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Common Journals: Irrecoverable Debts
Irrecoverable debts are part of the cost of allowing credit. When
we decide to sell goods on credit we do so knowing that
occasionally payment for the goods will not be received, either
because of loss, damage, disagreement or customer businesses going
bankrupt.
For disagreement or bankruptcy, we need to write a journal to
remove the irrecoverable debt from our accounts as it is no longer
an asset for the business. Irrecoverable debts are seen to be an
expense, and expenses are debited to the accounts. The journal
entry format is always the same and can be memorised. Let’s write
one for a customer who has been invoiced for £100 + VAT, with a
note under the narrative to remind us to credit the customer’s
account in the Subsidiary (Sales) Ledger.
Journal
VAT 20.00
Sales Ledger Control 120.00
Being debt for Customer X, who has gone into administration Credit
Customer X £120
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Posting Journals
Like every book of prime entry, the information must be posted to
the accounts. Posting Journals is very easy. Put simply, if the
journal says: Debit -- Irrecoverable debts -- £100, then Debit
Irrecoverable debts by £100. You do exactly what it says on the
tin!
Journal
VAT 20.00
Sales Ledger Control 120.00
Being debt for customer X, who has gone into administration Credit
customer X £120
Debit Irrecoverable Debts Credit
Date Details £ Date Details £
01 Jan Journal 100.00
Date Details £ Date Details £
01 Jan Journal 120.00
Credit
In this lesson we have looked at: