A control account, often called a controlling account, is a general ledger account that summarizes and combines all of the subsidiary accounts for a specific type. In other words, it’s a summary account that equals the sum of the subsidiary account and is used to simplify and organize the general ledger.
i)Control accounts provides a check on the accuracy of entries made in the personal accounts in the sales ledger and purchase ledger
ii)It could also assist in the location of errors, where posting to the control accounts are made daily or weekly, or even monthly
iii)Where there is a separate of clerical bookkeeping duties, the control account provides an internal check.
1ci) Uses of Accounting ratios/Financial ratios
Financial ratios are not very useful on a stand-alone basis; they must be benchmarked against something. Analysts compare ratios against the following:
1. The Industry norm – This is the most common type of comparison. Analysts will typically look for companies within the same industry and develop an industry average, which they will compare to the company they are evaluating. Ratios per industry are also provided by Bloomberg and the S&P. These are good sources of general industry information. Unfortunately, there are several companies included in an index that can distort certain ratios. If we look at the food and beverage ratio index, it will include companies that make prepared foods and some that are distributors. The ratios in this case would be distorted because one is a capital-intensive business and the other is not. As a result, it is better to use a cross-sectional analysis, i.e. individually select the companies that best fit the company being analyzed.
2. Aggregate economy – It is sometimes important to analyze a company’s ratio over a full economic cycle. This will help the analyst understand and estimate a company’s performance in changing economic conditions, such as a recession.
3. The company’s past performance – This is a very common analysis. It is similar to a time-series analysis, which looks mostly for trends in ratios.
1cii) Limitations to Accounting ratios/Financial ratios
There are some important limitations of financial ratios that analysts should be conscious of:
i)Many large firms operate different divisions in different industries. For these companies it is difficult to find a meaningful set of industry-average ratios.
ii)Inflation may have badly distorted a company’s balance sheet. In this case, profits will also be affected. Thus a ratio analysis of one company over time or a comparative analysis of companies of different ages must be interpreted with judgment
2a. Working capital is the amount of a company’s current assets minus the amount of its current liabilities.
2b. Capital employed, also known as funds employed, is the total amount of capital used for the acquisition of profits. It is the value of all the assets employed in a business and can be calculated by adding fixed assets to working capital or subtracting current liabilities from total assets.
2c. A fixed asset is an item with a useful life greater than one reporting period, and which exceeds an entity’s minimum capitalization limit .
2d. A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company’s balance sheet. (If a company has an operating cycle that is longer than one year, an asset that will turn to cash within the length of its operating cycle is considered to be a current asset.)
2e. The rate of stock turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold or net sales divided by the average inventory.
3a. The accrual concept in accounting means that expenses and revenues are recorded in the period they occur, whether or not cash is involved.
3b. The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner.
3c. Dual Aspect Concept, also known as Duality Principle, is a fundamental convention of accounting that necessitates the recognition of all aspects of an accounting transaction.
3d. PERIODICITY CONCEPT is the concept that each accounting period has an economic activity associated with it, and that the activity can be measured, accounted for, and reported upon.
3e. The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices.
A company is a legal entity made up of an association of persons, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.
4bi) An ordinary share represents equity ownership in a company proportionally with all other ordinary shareholders, according to their percentage ownership in the company. All other shares of a company’s stock are, by
definition , preferred shares
4b(ii)Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, the shareholders with preferred stock are entitled to be paid from company assets first.
4b(iii) A debenture is a type of debt instrument that is not secured by physical assets or collateral.
Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital.
4b(iv) The authorised capital of a company (sometimes referred to as the authorised share capital, registered capital or nominal
capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its constitutional documents to issue (allocate) to shareholders.