Cambridge IGCSE® and O Level

9781316502778 Coucom: Cambridge IGCSEand O Level Accounting Coursebook Cover C M Y K

Accounting
Coursebook
Second edition

Cambridge IGCSE® and O Level Accounting Coursebook

Catherine Coucom
With more practice questions than the previous edition and content
matched to the Cambridge IGCSE and O Level Accounting syllabuses, this
coursebook increases understanding of accounting best practice. Clear

Catherine Coucom
step-by-step explanations and instructions help students learn how to
record, report, present and interpret financial information while gaining an
appreciation of the ways accounting is used in modern business contexts.
The coursebook is ideal for those new to accounting. Also available in
the series – workbook, revision guide, teacher’s resource and Cambridge
Elevate enhanced edition. Answers to the coursebook and workbook
questions are in the teacher’s resource.
Cambridge IGCSE® and O Level

Accounting
Key features:
• A range of new practice exercises builds students’ accounting skills
and confidence with the subject
• Walkthroughs illustrate key accounting principles with absolute clarity
• Key terms highlight and explain important concepts, helping students
produce clear and accurate answers

Coursebook
• Test yourself questions reinforce learning and aid self-assessment
• Revision checklists provide a quick summary of the key points covered
in a chapter to consolidate learning

Other components in this series:

Workbook: 978-1-316-50505-2
Revision Guide:
Teacher’s Resource:
978-1-108-43699-1
978-1-108-44057-8 Second edition
Coursebook Elevate enhanced edition: 978-1-108-43901-5

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 : 

Contents
Introduction iv
Where to find each section of the syllabus v
How to use this book vi
Acknowledgements iix

Section 1 1
1 Introduction to accounting 2
2 Double entry book-keeping – Part A 10
3 The trial balance 29
4 Double entry book-keeping – Part B 38
5 Petty cash books 52
Section 1: Practice questions 61

Section 2 66
6 Business documents 67
7 Books of prime entry 78
Section 2: Practice questions 89

Section 3 93
iii
8 Financial statements – Part A 94
9 Financial statements – Part B 110
10 Accounting rules 120
11 Other payables and other receivables 132
12 Accounting for depreciation and disposal of non-current assets 153
13 Irrecoverable debts and provisions for doubtful debts 171
Section 3: Practice questions 185

Section 4 193
14 Bank reconciliation statements 194
15 Journal entries and correction of errors 206
16 Control accounts 228
17 Incomplete records 241
18 Accounts of clubs and societies 261
19 Partnerships 277
20 Manufacturing accounts 290
21 Limited companies 302
22 Analysis and interpretation 312
Section 4: Practice questions 331
Glossary 345
Index 349
94

Chapter 8
Financial statements – Part A
Learning objectives
In this chapter you will learn to:
■ explain the advantages and disadvantages of operating as a sole trader 5.1
■ explain the importance of preparing income statements 5.1
■ explain the difference between a trading business and a service business 5.1
■ prepare income statements for trading businesses and for service businesses 5.1
■ make adjustments for goods taken by the owner for own use 5.1
■ balance ledger accounts as required and make transfers to financial statements. 2.1

8
 Chapter 8: Financial statements – Part A
Chapter 8
Financial statements – Part A

8.1 Introduction
All the previous chapters have covered the book-keeping records maintained by a sole trader. LINK
Similar records will be maintained by other types of businesses. You will learn about
When a person is operating a business alone as a sole trader, he/she is entitled to all the partnerships and
limited companies in
profits the business makes, but will be responsible for any losses the business makes.
Chapters 19 and 21.
Business decisions may be made quickly, as consultation is not necessary, but there is no-
one with whom to share the decision-making or the workload. The capital of the business will
be restricted to what the trader is able to invest, whereas other forms of business have access
to capital invested by other owners of the business.
When a person starts a business his/her aim is to make a profit. The profit (or loss) is
calculated in the financial statements which are usually prepared at the end of each financial
year. Financial statements basically consist of two parts: KEY TERM

1 An income statement which consists of two sections: An income

statement is a
•  a trading section in which the gross profit of the business is calculated statement prepared
•  a profit and loss section in which the profit for the year of the business is calculated. for a trading period to
show the gross profit
The trading section and the profit and loss section of the income statement are part of and profit for the year.
the double entry system.
2 A statement of financial position shows the assets and liabilities of the business at a
certain date. The statement of financial position is not part of the double entry system. LINK

Financial statements are usually prepared from a trial balance. Every item in a trial balance You will learn more
about statements of
appears once in a set of financial statements. As each item is used, it is useful to place a 95
financial position in
tick (✓) against the item. This ensures that no items are overlooked. Chapter 9.
It is common to find notes accompanying a trial balance about various adjustments which
are to be made (these are explained in the following chapters). Any notes to a trial balance
are used twice in a set of financial statements. To ensure that this is done, it is useful to
place a tick (✓) against the notes each time they are used. TIP
Tick off the items from
a trial balance and
the notes to a trial
TIP balance as you use
Every item in a trial balance is used once within a set of financial statements; any notes to a trial them so that nothing
balance are used twice within a set of financial statements. is omitted.
 Cambridge IGCSE and O Level Accounting

Walkthrough 8.1
The following trial balance was extracted from the books of Samir at 31 May 20–8.
This trial balance will be used in Walkthrough 8.2 to Walkthrough 8.7.

Samir
Trial balance at 31 May 20–8
Dr Cr
$ $
TIP Revenue 95 700
The term ‘revenue’ is Sales returns 1 000
used instead of ‘sales’
in a trial balance Purchases 65 000
and in an income Purchases returns 500
statement.
Carriage inwards 1 500
Inventory 1 Jun 20–8 7 100
Discount received 400
Discount allowed 900
Wages 11 200
General expenses 2 800
Property tax 600
Loan interest 500
96
Premises 80 000
Fixtures and equipment 13 900
Trade receivables 7 500
Trade payables 7 800
Bank 3 300
Cash 100
Long-term loan 10 000
Capital 90 000
Drawings 209 000 204 400
204 400 204 400

• The inventory at 31 May 20–8 was valued at $7 600.

• During the year ended 31 May 20–8, Samir took goods costing $300 for his own use.
No entries have been made in the accounting records.
 Chapter 8: Financial statements – Part A

8.2 Trading section of the income statement

The trading section is concerned with buying and selling, and its purpose is to calculate KEY TERM
the profit earned on the goods sold. This is known as the gross profit. The formula for
The gross profit is the
calculating gross profit is:
difference between the
Gross profit = Selling price of goods – Cost of sales selling price and the
cost of those goods.
The selling price represents the total sales less any sales returns.
The cost of sales represents the total cost of the goods actually sold. This is not necessarily
the cost of goods purchased during the year: some goods may have been in stock at the start
of the year, and some of the goods purchased during the year may remain unsold at the end
of the year. The formula for calculating cost of sales is:
Cost of sales = Opening inventory + Purchases – Closing inventory
The purchases figure represents the total cost of purchases less any purchases returns. If
carriage inwards has been paid on goods purchased this must be added to the purchases as it
increases the cost of the goods. If the owner of the business has withdrawn goods for personal
use the cost of these is credited to the purchases account, so reducing the cost of goods
available for sale. If goods taken by the owner have not already been recorded they must be
deducted from the purchases. The formula for calculating the net purchases figure is:
Net purchases = Purchases – Purchases returns + Carriage inwards – Goods for own use
The calculation of gross profit is shown in the trading section of the income statement. This
must have a heading which includes the period of time covered by the statement. It is also
usual to include the name under which the business trades. 97

TEST YOURSELF 8.1

1 State what is calculated in:

a a trading account section of an income statement
b a profit and loss account section of an income statement.
2 State the formula for calculating gross profit.
3 State the formula for calculating cost of sales.

There are two ways in which a trading section of an income statement can be prepared –
horizontal and vertical.
The horizontal format is similar to a traditional ledger account. Using this method, the
revenue is shown on the credit side and the cost of sales on the debit side. The difference
(or balance) between the two sides equals the gross profit.
 Cambridge IGCSE and O Level Accounting

Walkthrough 8.2
Using the trial balance and accompanying notes shown in Walkthrough 8.1, prepare the
trading section of the income statement of Samir for the year ended 31 May 20–8. Use the
horizontal format.

Samir
Income statement (trading section) for the year ended 31 May 20–8
$ $ $ $
Opening inventory 7 100 Revenue 95 700
Purchases 65 000 Less Sales returns 91 000 94 700
Less Purchases returns 94 500
64 500
Less Goods for own use 94 300
64 200
Carriage inwards 91 500 65 700
72 800
Less Closing inventory 97 600
Cost of sales 65 200
Gross profit c/d 29 500 94 700
94 700 94 700
98

• As these items are entered in the trading section of the income statement, they should be
ticked-off in the trial balance and accompanying notes.
• The gross profit is carried down to the profit and loss section (see Section 8.3).
• The first money column on each side has been used for adding and subtracting items and
the final column had been used for the section total.

A trading section of an income statement can also be prepared using the vertical format.
This is the format used by most businesses. A statement prepared using this method contains
the same information as a horizontal account, but looks like an arithmetic calculation.

Walkthrough 8.3
Using the trial balance and accompanying notes shown in Walkthrough 8.1, prepare the
trading section of the income statement of Samir for the year ended 31 May 20–8. Use the
vertical format.
 Chapter 8: Financial statements – Part A

Samir
Income statement (Trading Section) for the year ended 31 May 20–8
$ $ $
Revenue 95 700
Less Sales returns 61 000 94 700
Less Cost of sales
Opening inventory 7 100
Purchases 65 000
Less Purchases returns 61 500
64 500
Less Goods for own use 61 300
64 200
Carriage inwards 61 500 65 700
72 800
Less Closing inventory 67 600 65 200
Gross profit 29 500

• The first two money columns have been used for adding and subtracting items and the
final column for the final section total. For example, the first column has been used to
adjust the purchases for returns, carriage and goods for own use and the final cost of
purchases has been entered in the second column. 99

You can now answer Questions 1 and 2 at the end of this chapter.

8.3 Profit and loss section of the income statement

The profit and loss section of an income statement is concerned with profits and losses,
gains and expenses. Its purpose is to calculate the final profit after all running expenses and KEY TERM
other items of income. This is known as the profit for the year. The formula for calculating
profit for the year is: The profit for the
year is the final profit
Profit for the year = Gross profit + Other income – Expenses after any other income
has been added to
The profit and loss section of an income statement must have a heading which includes the the gross profit and
period of time covered by the statement. It is also usual to include the name under which the the running expenses
business trades. have been deducted.

As with a trading section of an income statement, a profit and loss section can be prepared
using either the horizontal or the vertical method. Using the horizontal format, the gross
profit and any other income are shown on the credit side and the expenses are shown on the
debit side. The difference (or balance) between the two sides equals the profit for the year
(if the credit side is the largest) or the loss for the year (if the debit side is the largest).

Walkthrough 8.4
Using the trial balance and accompanying notes shown in Walkthrough 8.1, prepare the
profit and loss section of the income statement of Samir for the year ended 31 May 20–8.
Use the horizontal format.
 Cambridge IGCSE and O Level Accounting

Samir
Income statement (profit and loss section) for the year ended 31 May 20–8
$ $ $ $
Discount allowed 900 Gross profit b/d 29 500
Wages 11 200 Discount received 400
General expenses 2 800
Property tax 600
Loan interest 500
Profit for the year 13 900 29 900
29 900 29 900

• As these items are entered in the profit and loss section of the income statement they
should be ticked-off in the trial balance and accompanying notes.
• The gross profit is brought down from the trading section where it was calculated.

A profit and loss section of an income statement can also be prepared using the vertical
format. This format is used by most businesses. A statement prepared using this method
contains the same information but looks like an arithmetic calculation.

Walkthrough 8.5
100 Using the trial balance and accompanying notes shown in Walkthrough 8.1, prepare the
profit and loss section of the income statement of Samir for the year ended 31 May 20–8.
Use the vertical format.

Samir
Income statement (profit and loss section) for the year ended 31 May 20–8
$ $ $
Gross profit 29 500
Add Discount received 13 400
29 900
Less Discount allowed 900
Wages 11 200
General expenses 2 800
Property tax 13 600 15 500
Profit from operations 14 400
Less Loan interest 13 500 13 900
Profit for the year 13 900

• Using the vertical presentation it is easy to show the profit earned from the normal trading
or operating activities and then final profit for the year after the deduction of any finance
costs.
 Chapter 8: Financial statements – Part A

TEST YOURSELF 8.2

1 Suggest six business expenses (excluding those shown in the walkthroughs).

2 State the formula for calculating profit for the year.

The two sections of the income statement are usually presented in the form of one combined
statement, which is normally presented in vertical format. The profit and loss section follows
on immediately after the trading section, with the words ‘gross profit’ being written only once.
The heading of the income statement includes the period of time covered by the statement
and the name under which the business trades.
As most businesses prepare their income statements using the vertical format this method
will be followed in the remainder of this book.

Walkthrough 8.6
Using either the trial balance and accompanying notes shown in Walkthrough 8.1 or the
separate sections of the income statement prepared in Walkthroughs 8.3 and 8.5, prepare
the income statement of Samir for the year ended 31 May 20–8.

Samir
Income statement for the year ended 31 May 20–8
$ $ $
Revenue 95 700
Less Sales returns 61 000 94 700
101
Less Cost of sales
Opening inventory 7 100
Purchases 65 000
Less Purchases returns 61 500
64 500
Less Goods for own use 61 300
64 200
Carriage inwards 61 500 65 700
72 800
Less Closing inventory 67 600 65 200
Gross profit 29 500
Add Discount received 61 400
29 900
Less Discount allowed 900
Wages 11 200
General expenses 2 800
Property tax 61 600 15 500
LINK
Profit from operations 14 400
Less Loan interest 61 500 13 900 You will learn more
about income
Profit for the year 13 900 statements in Chapters
11, 12 and 13.

You can now answer Questions 3 and 4 at the end of this chapter.
 Cambridge IGCSE and O Level Accounting

8.4  Transferring ledger account totals to the

income statement
Anything appearing in the income statement must have a double entry in another account.
Anything credited to the income statement must be debited in the appropriate ledger
account. Anything debited to the income statement must be credited in the appropriate
ledger account.
When something is deducted from a debit item in the income statement this is equal to a
credit entry, so a debit entry is required in the ledger. In the same way, when something is
deducted from a credit item in the income statement this is equal to a debit entry, so a credit
entry is required in the ledger.

Walkthrough 8.7
Using the income statement prepared for Samir in Walkthrough 8.6, prepare the following
ledger accounts to show how each is closed by transfer to the income statement:
a purchases account b purchases returns account
c discount received account d wages account

a
Samir
Nominal ledger
Purchases account

102 Date Details Folio $ Date Details Folio $

20–8 20–8
May 31 Total to date 65 000 May 31 Income statement 65 000
65 000 65 000

b
Purchases returns account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 31 Income statement 65 500 May 31 Total to date 65 500
65 500 65 500

c
Discount received account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 31 Income statement 65 400 May 31 Total to date 65 400
65 400 65 400
 Chapter 8: Financial statements – Part A

d
Wages account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 31 Total to date 11 200 May 31 Income statement 11 200
11 200 11 200

• The entries shown as ‘totals to date’ represent the total of the individual entries made in
the account for the year ended 31 May 20–8.
• All the other items in the income statement (excluding inventory, gross profit and profit for
the year) have similar transfers from the appropriate ledger accounts.
• The gross profit technically has a double entry within the income statement as it is
transferred from the trading account section to the profit and loss account section
(refer to Walkthroughs 8.2 and 8.4).
• The entries for inventory and profit for the year are explained next.

There are two entries for inventory in the income statement – the inventory at the start of the
year and the inventory at the end of the year. The inventory account will have a debit balance
representing the inventory at the start of the year – this is credited to the inventory account
and transferred to the debit of the income statement. The inventory at the end of the year
is shown as a deduction from the debit entries in the income statement (which is equal to a
credit entry), so this must be debited in the inventory account. 103

TIP
Walkthrough 8.8
The income statement
Using the income statement prepared for Samir in Walkthrough 8.6, prepare the inventory consists of the trading
account in Samir’s ledger on 31 May 20–8. account and the profit
and loss account
Samir which are part of the
double entry system.
Nominal ledger
Inventory account
Date Details Folio $ Date Details Folio $
20–7 20–8
Jun 1 Balance b/d 7 100 May 31 Income statement 7 100
7 100 7 100
20–8
May 31 Income statement 7 600

• The entry of $7 600 on the debit side, representing the inventory at the end of the financial
year on 31 May 20–8, becomes the opening inventory for the year beginning 1 June 20–8.

A profit for the year represents the return on the owner’s investment. This will appear as a
debit entry in the income statement and should be transferred to the credit of the capital
account as it increases the amount the business owes the owner. A loss for the year will
 Cambridge IGCSE and O Level Accounting

appear as a credit entry in the income statement and should be transferred to the debit of the
capital account as it reduces the amount the business owes the owner.
As explained in Chapter 2, the total of the drawings account is transferred to the capital
account at the end of the year.

Walkthrough 8.9
On 1 June 20–7 the credit balance on Samir’s capital account was $90 000. During the year
ended 31 May 20–8 he had withdrawn $9 000 in cash and $300 in goods.His profit for the year
ended 31 May 20–8 was $13 900.
Prepare the capital account and the drawings account in Samir’s ledger on 31 May 20–8.

Samir
Nominal ledger
Capital account
Date Details Folio $ Date Details Folio $
20–8 20–7
May 31 Drawings 9 300 Jun 1 Balance b/d 90 000
Balance c/d 94 600 20–8
103 900 May 31 Profit 113 900
TIP
103 900 103 900
If a business makes a
104 profit it is credited to 20–8
the capital account
Jun 1 Balance b/d 94 600
as it increases the
owner’s capital. If a
business makes a loss
it is debited to the Drawings account
capital account as it
reduces the owner’s
Date Details Folio $ Date Details Folio $
capital. 20–8 20–8
May 31 Total to date May 31 Capital 9 300
Cash 9 000
Purchases 9 300 9 300
9 300 9 300

TEST YOURSELF 8.3

1 Explain why it is necessary to make two transfers from the income statement to the
inventory account at the end of the financial year.
2 Explain why a loss for the year is debited to the owner’s capital account.

You can now answer Question 5 at the end of this chapter.

 Chapter 8: Financial statements – Part A

8.5 Income statement of a service business

A service business is one which does not buy and sell goods, such as an accountant, an KEY TERMS
insurance company, a travel agent, a hairdresser and so on. At the end of the financial
A service business
year, these businesses still need to prepare financial statements. However, the trading
is one which provides
account section of the income statement is not prepared as no goods are bought and sold. a service.
Only the profit and loss section of the income statement and a statement of financial
A trading business is
position are prepared. one which buys and
In the income statement all the items of revenue receivable such as fees from clients, sells goods.
commission and other income are credited and expenses are debited. The statement of financial
position is exactly the same as the statement of financial position of a trading business.

Walkthrough 8.10
Anita is a business consultant. She provided the following information at the end of her
financial year on 30 September 20–5.

$
Property tax 6 400
General expenses 8 950
Insurance 2 670
Printing and stationery 4 560
Loan interest 1 500
105
Wages 43 500
Rent receivable 7 300
Commissions received 92 150

a Prepare the income statement for Anita for the year ended 30 September 20–5.
Use the horizontal format.

Anita
Income statement for the year ended 30 September 20–5
$ $ $ $
Property tax 6 400 Commissions received 92 150
General expenses 8 950 Rent receivable 7 300
Insurance 2 670
Printing and stationery 4 560
Loan interest 1 500
Wages 43 500
Profit for the year 31 870 31 870
99 450 99 450
 Cambridge IGCSE and O Level Accounting

b Prepare the income statement for Anita for the year ended 30 September 20–5.
TIP Use the vertical format.
The income statement
of a service business
Anita
does not have a trading
account section. Income statement for the year ended 30 September 20–5
$ $ $
Commissions received 92 150
Add Rent receivable 67 300
99 450
Less Property tax 6 400
General expenses 8 950
Insurance 2 670
Printing and stationery 4 560
Wages 43 500 66 080
Profit from operations 33 370
Less Loan interest 61 500
Profit for the year 31 870

You can now answer Question 6 at the end of this chapter.

106

Revision checklist
■ The difference between the selling price and the cost price is known as the gross profit. This is
calculated in the trading account section of the income statement.
■ The difference between the gross profit, plus other income, less expenses is known as the profit for the
year. This is calculated in the profit and loss account section of the income statement.
■ All the items appearing in the income statement are transferred from the ledger accounts to complete
the double entry.
■ A profit for the year is transferred to the credit of the capital account and a loss for the year is transferred
to the debit of the capital account.
■ A business which provides a service only prepares the profit and loss account section of the
income statement.
 Chapter 8: Financial statements – Part A

Exam-style questions
1 How is the cost of sales calculated?
A opening inventory + purchases – carriage inwards – purchases returns – closing inventory
B opening inventory + purchases – carriage inwards + purchases returns – closing inventory
C opening inventory + purchases + carriage inwards – purchases returns – closing inventory
D opening inventory + purchases + carriage inwards + purchases returns + closing inventory

2 At the end of his first year of trading, Rashid provided the following information.

$
Revenue 72 500
Purchases 49 700
Closing inventory 4 800
Carriage inwards 1 150
Carriage outwards 2 950

What was Rashid’s gross profit?

A $22 800 B $24 650 C $26 450 D $27 600

3 Mai, a fashion retailer, did not record goods costing $500 taken for personal use.
107
What was the effect of this error?

Gross profit Profit for the year

Overstated Understated Overstated Understated
A ✓ ✓
B ✓ ✓
C ✓ ✓
D ✓ ✓
 Cambridge IGCSE and O Level Accounting

4 Leo is a wholesaler. He has little knowledge of accounting. He prepared the following

income statement which contains some errors.

Leo
Income statement for the year ended 30 April 20–1
$ $
Revenue 82 300
Add Discount received 110
Opening inventory 44 910
87 320
Less Purchases 49 520
Returns from customers 41 190
50 710
Less Closing inventory 45 080 45 630
Profit on goods 41 690
Add Discount allowed 44 220
41 910
Less Rent payable 8 100
Less Rent receivable 46 000
2 100
108
Wages 12 100
Carriage inwards 100
Sundry expenses 44 960 15 260
Final profit 26 650

Prepare a corrected income statement for Leo for the year ended 30 April 20–1.

5 Oliver has been in business as a retailer for one year. He is unsure about some of the terms
used in business.
a Explain the difference between the following terms and how they are recorded in an
income statement:
i gross profit and profit for the year
ii carriage inwards and carriage outwards
iii discount allowed and discount received
iv purchases returns and sales returns
 Chapter 8: Financial statements – Part A

Oliver provided the following totals for the year ended 31 December 20–5:

$
Rates 3 140
Office expenses 1 170
Commissions received 5 830
Sales returns 1 480

b Enter these totals in the appropriate accounts. Close the accounts by making transfers
to the income statement.

6 Candy provided the following information at the end of her financial year on
30 September 20–3:

$
Capital at 1 October 20–2 198 000
Fees received from clients 82 300
Staff wages 49 600
Rent and rates 7 420
Insurance 3 830
Commissions received 4 810
Light and heat 2 180
Office expenses 1 730 109
Drawings 18 750

a State whether Candy’s business is a trading business or a service business. Give a

reason for your answer.
b Prepare Candy’s income statement for the year ended 30 September 20–3.
c Prepare Candy’s capital account on 30 September 20–3. Balance the account and
bring down the balance on 1 October 20–3.
228

Chapter 16
Control accounts
Learning objectives
In this chapter you will learn to:
■ understand the purposes of purchases ledger and sales ledger control accounts 3.4
■ identify the books of prime entry as sources of information for the control
account entries 3.4
■ prepare purchases ledger and sales ledger control accounts to include credit purchases and
sales, receipts and payments, cash discounts, returns, irrecoverable debts, dishonoured
cheques, interest on overdue accounts, contra entries, refunds, opening and closing balances
(debit and credit within each account). 3.4

16
 Chapter 16: Control accounts
Chapter 16
Control accounts

16.1 Introduction
Control accounts are also known as total accounts. If the trial balance fails to balance and LINK
the error cannot be readily located, it is necessary to check all the accounting records. This
You learned about the
can take a considerable amount of time. The checking process can be speeded up if a control division of the ledger in
account for the sales ledger (which contains the accounts of the debtors) and a control Chapter 4.
account for the purchases ledger (which contains the accounts of the creditors) have been
prepared. These accounts act as a check on the individual accounts within these ledgers.
LINK
Like the trial balance, however, these accounts can only check the arithmetical accuracy:
You learned about the
errors such as omission and commission will not be revealed by a control account. errors not revealed by
a trial balance in
16.2 Advantages of control accounts Chapter 3.

Where a full set of accounting records is maintained, it is usual to prepare a sales ledger
KEY TERMS
control account and a purchases ledger control account. The advantages of preparing
these accounts are as follows: A sales ledger
control account is an
1 They can assist in locating errors when the trial balance fails to balance.
account summarising
2 They are proof of the arithmetical accuracy of the ledgers they control. all the accounts of the
3 The balances on these accounts are regarded as being equal to the total of the trade trade receivables and
a purchases ledger
receivables and the total of the trade payables, so this information is available immediately.
control account is an
4 Draft financial statements can be prepared quickly because of the balances provided by account summarising
the control accounts. all the accounts of the
trade payables.
5 They help to reduce fraud as the control accounts are prepared by someone who has not
been involved in making the entries in those particular ledgers. 229

6 They provide a summary of the transactions affecting the trade receivables and trade
payables for each financial period.

TEST YOURSELF 16.1

1 Name the account which summarises all the sales ledger accounts.
2 Name the account which summarises all the purchases ledger accounts.
3 State three reasons for preparing control accounts.

16.3 Sales ledger control account

This is also referred to as a total trade receivables account. This account resembles the
account of a credit customer, but instead of containing transactions concerned with just one
person or business it contains transactions relating to all the debtors. A typical sales ledger
control account is shown here.
 Cambridge IGCSE and O Level Accounting

Nominal ledger
Sales ledger control account
Date Details Folio $ Date Details Folio $
Balance b/d Sales returns
Sales Cash
Bank Bank
(dishonoured Discount allowed
cheque)
Bank/Cash Irrecoverable debts
(refunds)
Interest charged 110 000 Balance c/d 110 000
110 000 110 000
Balance b/d

As this account acts as a check on the individual credit customers’ accounts, it should be
prepared independently and information in the individual accounts of the credit customers
must not be used. (An error in the sales ledger would not be revealed if the control account
is prepared from the accounts in that ledger.) The information to prepare a sales ledger
control account is obtained from the books of prime entry. The sources of information are
summarised as follows:
Item Source of information
230
Sales Sales journal
Sales returns Sales returns journal
Receipts from credit customers Cash book
Discounts allowed to credit customers Cash book
Dishonoured cheques Cash book
Refunds to credit customers Cash book
Irrecoverable debts written off Journal
Interest charged on overdue accounts Journal
The sales ledger control account is drawn up at the end of the financial period (often
monthly) and balanced. The total of the balances on all the individual credit customers’
accounts should agree with the balance on the control account. If they differ, it indicates
that there is an error in one of the customers’ accounts or an error in the control account, so
further checks are required.

TIP
A sales ledger account is a summary of the accounts of credit customers (trade receivables) so will
not include items which do not appear in the account of a credit customer, such as cash sales and
provision for doubtful debts.
 Chapter 16: Control accounts

Walkthrough 16.1
Shweta maintains a full set of accounting records and prepares control accounts at the end
of each month.
She provided the following information:
$
20–8 March 1 Sales ledger control account balance 1 200 debit
March 31 Totals for the month:
Sales journal 4 890
Sales returns journal 250
Cheques and bank transfers received from credit customers 3 892
Discount allowed to credit customers 8
Cash received from credit customers 120
Cash refunds to credit customers 19
Cheque received (included in the above figure) later dishonoured 80
Irrecoverable debts written off 94
Prepare Shweta’s sales ledger control account for the month of March 20–8.

Shweta
Nominal ledger 231

Sales ledger control account

Date Details Folio $ Date Details Folio $
20–8 20–8
Mar 1 Balance b/d 1 200 Mar 31 Sales returns 250
31 Sales 4 890 Cash 120
Bank (dishonoured 80 Bank 3 892
cheque) Discount allowed 8
Cash (refunds) 1 819 Irrecoverable debts 94
6 189 Balance c/d 1 825
6 189 6 189
20–8
Apr 1 Balance b/d 1 825
 Cambridge IGCSE and O Level Accounting

16.4 Purchases ledger control account

This is also known as a total trade payables account. This account resembles the account
of a credit supplier, but instead of containing transactions concerned with just one person
or business it contains transactions relating to all the creditors. A typical purchases ledger
control account is shown here.

Nominal ledger
Purchases ledger control account
Date Details Folio $ Date Details Folio $
Purchases returns Balance b/d
Cash Purchases
Bank Interest charged
Discount received Bank/Cash
(refunds)
Balance c/d 110 000 110 000
110 000 110 000
Balance b/d

This account serves a similar purpose to the sales ledger control account. It acts as a check
TIP on the individual credit suppliers’ accounts and must be prepared independently and not
The accounts in the from information in the individual accounts of the credit suppliers. The information to
232 prepare a purchases ledger control account is obtained from the books of prime entry.
sales and purchases
ledgers are not used The sources of information are summarised as follows:
to provide information
for preparing a control Item Source of information
account otherwise
Purchases Purchases journal
errors in the ledgers
would not be revealed. Purchases returns Purchases returns journal
Payments to credit suppliers Cash book
Discounts received from credit suppliers Cash book
Refunds from credit suppliers Cash book
Interest charged on overdue accounts Journal

Like the sales ledger control account, the purchases ledger control account is drawn up at the
end of the financial period (often monthly) and balanced. The total of the balances on all the
individual credit suppliers’ accounts should agree with the balance on the control account.
If they differ it indicates that there is an error in one of the suppliers’ accounts or the control
account, so further checks are required.

TIP
A purchases ledger account is a summary of the accounts of credit suppliers (trade payables) so will
not include items which do not appear in the account of a credit supplier such as cash purchases.
 Chapter 16: Control accounts

Walkthrough 16.2
Shweta maintains a full set of accounting records and prepares control accounts at the end
of each month.
She provided the following information:
$
20–8 March 1 Purchases ledger control account balance 1 880 credit
March 31 Totals for the month:
Purchases journal 4 230
Purchases returns journal 180
Cheques and bank transfers paid to credit suppliers 3 900
Discount received from credit suppliers 104
Cheque refunds from credit suppliers 100
Interest charged on overdue account 12
Prepare Shweta’s purchases ledger control account for the month of March 20–8.

Shweta
Nominal ledger
Purchases ledger control account
Date Details Folio $ Date Details Folio $ 233
20–8 20–8
Mar 31 Purchases returns 180 Mar 1 Balance 1 880
Bank 3 900 31 Purchases 4 230
Discount received 104 Bank (refunds) 100
LINK
Balance c/d 2 038 Interest charged 2 012
You will learn about the
6 222 6 222
use of total accounts
20–8 for calculating missing
Apr 1 Balance b/d 2 038 information in
Chapter 17.

You can now answer Questions 1 and 2 at the end of this chapter.

TEST YOURSELF 16.2

1 Explain why the information used for preparing control accounts must be obtained from
books of prime entry.
2 State the source of information for each of the following:
a purchases returns
b discount allowed
c irrecoverable debts.
 Cambridge IGCSE and O Level Accounting

16.5  Balances on both sides of a control account

Occasionally a credit customer’s account may show a credit balance. This may occur due to:
• an overpayment by the customer
• the customer returning goods after paying the account
• the customer paying in advance for the goods
• cash discount not being deducted before payment was made.
In the sales ledger control account it is usual to keep any credit balance separate from the
debit balance. The control account will, therefore, have two balances – the usual debit
balance representing money owing by credit customers, and the more unusual credit
balance representing money owing to credit customers. Any credit balance is entered on the
debit side of the control account and carried down as a credit balance. The account can then
be balanced in the usual way.

Walkthrough 16.3
Shweta maintains a full set of accounting records and prepares control accounts at the end
of each month.
She provided the following information:
$
20–8 April 1 Sales ledger control account balance 1 825 debit
April 30 Totals for the month:
234 Sales journal 4 910
Sales returns journal 210
Cheques and bank transfers received from credit customers 4 788
Discount allowed to credit customers 12
Interest charged on overdue account 10
May 1 Sales ledger credit balances 115
Prepare Shweta’s sales ledger control account for the month of April 20–8.

Shweta
Nominal ledger
Sales ledger control account
Date Details Folio $ Date Details Folio $
20–8 20–8
Apl 1 Balance b/d 1 825 Apl 30 Sales returns 210
30 Sales 4 910 Bank 4 788
Interest charged 10 Discount allowed 12
Balance c/d 1 115 Balance c/d 1 850
6 860 6 860
20–8 20–8
May 1 Balance b/d 1 850 May 1 Balance b/d 115
 Chapter 16: Control accounts

In a similar way, a credit supplier’s account can show a debit balance. This may occur due to:
• an overpayment to the supplier
• returning goods to the supplier after paying the account
• paying the supplier in advance for the goods
• cash discount not being deducted before payment was made.
As in the sales ledger control account, the debit balance and the credit balance are shown
separately in the purchases ledger control account. The purchases ledger control account
will, therefore, have two balances – the usual credit balance representing money owing to
credit suppliers, and the more unusual debit balance representing money owing by credit
suppliers. Any debit balance is entered on the credit side of the control account and carried
down as a debit balance. The account can then be balanced in the usual way.

TEST YOURSELF 16.3

1 Explain how it is possible for a customer’s account to have a credit balance.

You can now answer Questions 3 and 4 at the end of this chapter.
KEY TERM

16.6 Contra entries in control accounts Contra entries may

be referred to as inter-
Contra entries are also known as inter-ledger transfers or set-offs.
ledger transfers or
It may happen that a business sells goods to another business and also buys different goods set-offs and are when
from that business. This means that there will be two ledger accounts for that business – one a transfer is made
from an account in 235
in the sales ledger and the other in the purchases ledger.
the sales ledger to an
Rather than each business sending the other a cheque to cover the amount due, they may account of the same
agree to set one account off against the other. Any remaining amount will be settled by one business/person in the
purchases ledger.
business issuing a cheque.

Walkthrough 16.4
Shweta provided the following information:
20–8
May 15 Sold goods, $190, on credit to Mansingh Road Stores
22 Bought goods, $320, on credit from Mansingh Road Stores
30 The balances of the two accounts for Mansingh Road Stores were set-off and
Shweta sent a cheque for the remaining balance.
Record these transactions in the account for Mansingh Road Stores in the sales ledger and
the account for Mansingh Road Stores in the purchases ledger.

Shweta
Sales ledger
Mansingh Road Stores account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 15 Sales 190 May 30 Purchases ledger 190
190 190
 Cambridge IGCSE and O Level Accounting

Purchases ledger
Mansingh Road Stores account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 30 Sales ledger 190 May 22 Purchases 320
TIP Bank 130 130
A contra entry,
320 320
sometimes known
as an inter-ledger
transfer or set-off, is • A journal entry would be made for the transfer of $190 on 30 May as it is a non-regular
recorded in both the
transaction.
sales ledger control
account and the • As the transfer of $190 on 30 May affected both the accounts in sales ledger and
purchases ledger purchases ledger, it would affect both the sales ledger control account and the purchases
control account. ledger control account. See Walkthrough 16.5.

Walkthrough 16.5
Shweta provided the following information for the month of May 20-8.
$
20–8
May 1 Sales ledger control account debit balance 1 850
236 Sales ledger control account credit balance 115
Purchases ledger control account credit balance 2 118
31 Totals for the month:
Sales journal 5 360
Purchases journal 5 110
Sales returns journal 134
Purchases returns journal 216
Cheques and bank transfers received from credit customers 4 965
Cheques and bank transfers paid to credit suppliers 4 508
Discount received from credit suppliers 92
Irrecoverable debt written off 35
Interest charged by credit supplier on overdue account 14
Contra entry 190

June 1 Sales ledger control account debit balance ?

Purchases ledger control account credit balance ?
Purchases ledger control account debit balance 135
Prepare Shweta’s sales ledger control account and purchases ledger control account for the
month of May 20–8. Balance the accounts and bring down the balances on 1 June 20–8.
 Chapter 16: Control accounts

Shweta
Nominal ledger
Sales ledger control account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 1 Balance b/d 1 850 May 1 Balance b/d 1 115
31 Sales 5 360 31 Sales returns 1 134
Bank 4 965
Irrecoverable debt 1 835
Contra entry 1 190
7 210 Balance c/d 1 771
7 210 7 210
20–8
June 1 Balance b/d 1 771

Shweta
Nominal ledger
Purchases ledger control account
Date Details Folio $ Date Details Folio $
20–8 20–8
May 1 Purchases returns 1 216 May 1 Balance b/d 2 118
237
Bank 4 508 31 Purchases 5 110
Discount received 1 192 Interest charged 1 114
Contra entry 1 190 Balance c/d 1 135
Balance c/d 2 371 1 771
7 377 7 377
20–8 20–8
June 1 Balance b/d 1 135 June 1 Balance b/d 2 371

TEST YOURSELF 16.4

1 In connection with control accounts, explain the meaning of a contra entry.

You can now answer Questions 5 and 6 at the end of this chapter.

Revision checklist
■ The main purpose of control accounts is to assist in locating errors in the sales ledger and the purchases ledger.
■ A sales ledger control account resembles the account of a credit customer but contains transactions affecting all credit
customers.
■ A purchases ledger control account resembles the account of a credit supplier but contains transactions affecting all credit
suppliers.
■ The information to prepare control accounts is obtained from the books of prime entry.
■ It is possible to have a balance on each side of a control account.
■ If a business is both a customer and a supplier, a contra entry may be made to transfer a balance from the sales ledger
account to the purchases ledger account.
 Cambridge IGCSE and O Level Accounting

Exam-style questions
1 What is the purpose of preparing a sales ledger control account?
A to calculate the total credit sales for the period
B to calculate the total sales for the period
C to check the arithmetical accuracy of the sales account
D to check the arithmetical accuracy of the sales ledger accounts

2 What may appear on the debit side of a purchases ledger control account?
A credit purchases
B discount allowed
C payments to credit suppliers
D returns by credit customers

3 Shilpa’s sales ledger control account had an opening credit balance. What does this mean?
A total amount owing by credit customers
B goods returned by credit customers
C interest charged on credit customers’ accounts
D overpayment made by credit customers

4 Hamir is a trader who maintains full set of accounting records. He divides his ledger into
238
three sections – nominal (general), sales and purchases.
a State one advantage of dividing the ledger into these sections.
b State two advantages of maintaining a purchases ledger control account.

Hamir provided the following information for the month of May 20–1:

$
May 1 Debit balances in purchases ledger 105
Credit balances in purchases ledger 4 897
May 31 Totals for the month:
Credit purchases 5 424
Purchases returns 657
Payments to suppliers 4 312
Discount received 88
Interest charged by credit supplier 20
June 1 Debit balances in purchases ledger 76

c Prepare the purchases ledger control account for the month of May 20–1. Balance the
account and bring down the balances on 1 June 20–1.
d Name the book of prime entry Hamir would use to provide information about:
i interest charged by credit supplier
ii purchases returns
iii discount received.
 Chapter 16: Control accounts

5 a Complete the following table to state where the items would appear in a purchases
ledger control account. For each item name the book of prime entry from which the
information would be obtained.

Entry in purchases ledger Source of

control account information
Debit Credit
i payments to credit suppliers
ii cheques paid to credit
suppliers later dishonoured
iii credit purchases
iv contra entry to sales ledger
account
v discount received
vi interest charged by supplier
on overdue account
vii returns to credit suppliers

b Explain why the information required to prepare a purchases ledger control account is
not obtained from the purchases ledger.
c Explain the contra entry to the sales ledger and why it was needed.
239

6 Eva is a trader who maintains a full set of accounting records and prepares control
accounts at the end of each month. She provided the following information:

20–5 $
February 1 Debit balance in the sales ledger control account 2 470
Credit balance in the sales ledger 110
Provision for doubtful debts 100
February 28 Totals for the month:
Credit sales 3 480
Cash sales 1 950
Returns by credit customers 118
Cheques received from credit customers 3 403
Cheque received from credit customer (included in the
cheques received above) later dishonoured 104
Discount allowed 144
Discount received 176
Irrecoverable debts written off 200
Contra entry 240
March 1 Debit balance in the sales ledger control account ?
Credit balance in the sales ledger control account 95
 Cambridge IGCSE and O Level Accounting

a Select the relevant figures and prepare the sales ledger control account for the month
of May 20–1. Balance the account and bring down the balances on 1 June 20–1.
b For each entry (excluding the balances) in the sales ledger control account prepared in
a name the book of prime entry which would be used as a source of information.
c Select two items listed that should not appear in a sales ledger control account and
explain why they do not appear.
d Suggest two reasons for the credit balance on the sales ledger control account on
1 March 20–1.

240