- 20 Marks
Question
a) Odaw Ltd operates a manual set of accounts. A trial balance was extracted for the year ended 31 March 2021. The trial balance did not agree. Odaw Ltd does not operate a system of control accounts. The following errors have now been discovered:
- A cheque for GHȼ4,300 received from Kwame, a debtor, had been correctly recorded in the cash book but posted as a credit to Kwamena.
- Goods purchased on credit for GHȼ2,600 from Birim Ltd. had been correctly recorded in the purchases account but the corresponding double entry had not been made.
- A payment of GHȼ820 for Motor Vehicle repairs was entered in error as a debit in the Motor Vehicles account. No entries have been made to record depreciation in relation to this payment. The correct depreciation has been made for motor vehicles held by the business.
- Discounts allowed of GHȼ910 had been entered as a credit entry in the discounts received account.
- A cheque received for GHȼ7,500 from Awuah, a debtor, had been processed for the correct amount in the cash book but entered as GHȼ5,700 in Awuah’s account.
- Sales for the year ending 31 March 2021 had been undercast by GHȼ750.
Required:
i) Prepare journal entries with narratives to correct the above errors. (7 marks)
ii) Prepare the Suspense Account. (3 marks)
iii) Explain the use of a Suspense Account. (4 marks)
b) Odaw Ltd is considering introducing a system of control accounts.
Required:
Evaluate how control accounts would assist in each of the following;
i) Detection of errors; (3 marks)
ii) Prevention of fraud. (3 marks)
Answer
iii) Uses of Suspense Account
- Suspense accounts are used when errors have made the trial balance totals disagree. It temporarily holds the difference between debits and credits until errors are identified and corrected.
- A suspense account can also be used when the bookkeeper knows the debit or credit entry for a transaction but not the corresponding entry. It acts as a placeholder until the correct entry is determined.
- The suspense account is a temporary account that is required only until the errors have been identified and corrected, allowing the business to continue producing final accounts. (4 marks)
b)
i) How Control Accounts Help in Detecting Errors
- The balance on the receivables control account should equal the balance on the schedule of receivables, and the balance on the payables control account should equal the balance on the schedule of payables. By comparing these balances, it is possible to identify that errors have been made.
- The possibility of errors in the sales ledger and purchase ledger can be reduced since they have been reconciled before inclusion in the trial balance.
- If no controls were used and the trial balance did not agree, all the accounts would need to be checked. Control accounts save time in finding errors. (3 marks)
ii) How Control Accounts Help in Preventing Fraud
- Division of duties will mean control accounts are the responsibility of more than one person.
- This makes it difficult for employees to commit fraud, as the control account acts as an independent check on the work of ledger clerks. (3 marks)
- Tags: Error Detection, Fraud Prevention, Journal Entries, Suspense account
- Level: Level 1
- Topic: Control accounts and account reconciliations, Correction of errors
- Series: DEC 2023
- Uploader: Theophilus