Balanced control

Rosemary Evans discloses tips to enable you to approach the control account task in Unit 5 with confidence

Candidates are almost always required to prepare at least one control account in section 1 of the Unit 5 exam paper. It is, therefore, absolutely essential that students can do this important task. The control account task is often the first one on the paper, so if you can approach this task with confidence, you will be off to a flying start. Students have problems with this section of the paper for two reasons. First, the information is presented in different ways each time; and second, students’ double entry principles are weak. Let’s look at how we can overcome those problems.

Presentation of data

Don’t be put off by the fact that the information isn’t presented in exactly the same way each time. What is guaranteed is that you have all the information you need and that you can find all the required figures. If you practise as many past papers as possible, you will become familiar with the different types of scenarios presented. For example, you will sometimes need to reconstruct a bank summary, but on other occasions a bank summary is given. You will always be given guidance on the figures that need to be found, so tackle the tasks in order, read carefully what is required and follow the instructions.

Double entry principles

Your knowledge of double entry principles must be excellent if you want to succeed in this exam. There is no short cut: lots of practice is essential. It’s important to know what you’re looking for in the control accounts in incomplete records. The control account shows summary information about debtors (sales ledger control) or creditors (purchases ledger control). There are only a few entries – make sure you learn them:

Note that the accounts are a mirror image of each other: once you have learnt one, you will remember the other. If you have difficulty remembering which side entries should go on, use the cues on the exam paper. For example, if you have been given a bank summary, the entry for receipts from debtors will appear on the debit side. This means that the entry in the sales ledger control account must be on the credit side. Once you have this anchor figure, apply logic. If the bank figure, which reduces the amount owing to the business, is on the credit side, the sales figure, which increases the amount owing to the business, must be on the opposite side.

Not all tasks will include discounts. If the exam paper does not mention them, you can assume there aren’t any. Also remember that if the scenario given is a new trader, there will not be any opening balances, so read the information given carefully.

Worked example

Now let’s have a look at task 1.1 in the December 2007 exam paper. You will need to access this from the AAT website at www.aat.org.uk. The task clearly states that the missing figure is the discounts allowed. Therefore, you know that all the other figures must be given in the data on page 4. Since we are given a bank summary, let’s start with that. There must be a figure for debtors: it is £142,800 on the debit side. Therefore, we know this must go on the credit side of our control account:

Now we know the sales figure must be put on the opposite side to the bank figure, because sales increases the amount owing whereas the bank figure decreases it. We use the figure including VAT because that is the total amount owed by the debtors. The figure is £146,875:

Now we need to find the opening balances. But which way round do they go? The amount owing at the beginning must be added to the sales figure, because that gives us the total amount owing to the business. If you prefer to remember that assets are debits, then the opening balance must go on the debit side because it has a value to the business. The closing balance goes on the credit side so that it will be brought down as a debit (asset) in the next period:

Now we have everything except the discounts allowed figure, which we know is the balancing figure. Total up the columns to find it. The debit side adds to £157,375 but the credit side is only £155,700. The difference of £1,675 is the missing discounts allowed.

Now do a test to see if the answer is reasonable. The discounts allowed figure is about 1.1 per cent of the sales figure. We don’t know enough about the business to know whether this is correct, but it seems credible. If it was bigger than the sales figure, we would know that we had definitely made a mistake! What if the discounts allowed figure seems to be on the debit side – the same side as the sales figure? Since a discount allowed reduces profit, we know that can’t be right, so we should go back and check our entries. Maybe we have put something on the wrong side, or even made a mistake when entering figures on the calculator?

Try it yourself

Now have a look at the December 2006 exam paper. In this scenario, you don’t have a bank account as your anchor. You have to work out the receipts paid into the bank as the balancing figure. Part (a) of the task asks you to calculate sales inclusive of VAT for entry into the sales ledger control account, but if you feel nervous about where the sales figure should go, keep calm and try to think logically. The sales figure increases the amount owing to the business. An amount owing to the business is an asset, therefore it must go on the debit side. Once you have this figure, you can work out where all the others go.

Practise as many examples as you can find of control accounts in past papers. We’ve concentrated on the sales ledger control account in this example, but there are, of course, plenty of purchases ledger examples as well. The same principles apply: if you can do one, you can do both, as they are mirror images. Don’t be afraid of control accounts – once you have mastered them, you are almost sure to get a head start on section 1 of the Unit 5 exam.

Rosemary Evans is the Chief Assessor for Unit 5: Managing Financial Records and Preparing Accounts (NVQ/SVQ pathway) and Financial Accounting (Diploma pathway) of the AAT Accounting Qualification

Accounting Technician - May 2008 - Page 25-26