Tubah General Store: Missing Credit Sales and Incomplete Records
Tubah General Store is a sole trader who keeps only a cash book and some unpaid invoices. He provides the following information for the year ended 31 December 20X4. Sales ledger control account balance at 1 January: debit 845,000 FCFA. Cash received from credit customers 3,120,000 FCFA; discount allowed 48,000 FCFA; sales returns 62,000 FCFA; bad debts written off 35,000 FCFA; interest charged on overdue accounts 12,000 FCFA; contra settlement with the purchases ledger 27,000 FCFA. The closing sales ledger control balance is 910,000 FCFA. The trader believes credit sales were about 3,300,000 FCFA, but he is not sure. Cash sales were 1,450,000 FCFA. Opening stock 620,000 FCFA; purchases 2,780,000 FCFA; closing stock 710,000 FCFA; other expenses 540,000 FCFA. There is no complete double-entry system, and the trader wants to know why his estimate of credit sales differs from the control account figure and whether the business made a profit.
1. Prepare the sales ledger control account for 20X4 and determine the actual credit sales. Explain why the trader's estimate differs.
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Sales ledger control account
| Dr | FCFA | Cr | FCFA |
|---|---|---|---|
| Balance b/d | 845,000 | Cash received | 3,120,000 |
| Credit sales (balancing figure) | 3,345,000 | Discount allowed | 48,000 |
| Interest charged | 12,000 | Sales returns | 62,000 |
| Bad debts | 35,000 | ||
| Contra with purchases ledger | 27,000 | ||
| Balance c/d | 910,000 | ||
| Total | 4,202,000 | Total | 4,202,000 |
Credit sales = 4,202,000 - 845,000 - 12,000 = 3,345,000 FCFA. The trader estimated 3,300,000, so he understated credit sales by 45,000. The control account is not proof that every invoice is correct; possible causes include unrecorded sales invoices, returns or discounts omitted, or a compensating error. A control account only checks that postings to the ledger total agree.
2. Using the control account figure, calculate total sales, cost of goods sold, gross profit, and net profit for 20X4. Comment on whether the business is profitable.
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Total sales = credit sales 3,345,000 + cash sales 1,450,000 = 4,795,000 FCFA. Cost of goods sold = opening stock 620,000 + purchases 2,780,000 - closing stock 710,000 = 2,690,000. Gross profit = 4,795,000 - 2,690,000 = 2,105,000. Net profit = gross profit 2,105,000 - expenses 540,000 = 1,565,000 FCFA. Gross margin = 2,105,000/4,795,000 = 43.9%; net margin = 32.6%. The business is profitable on these figures, but the result depends on unverified stock and on the control account being correct. Cash sales and stock should be checked because incomplete records increase the risk of error or fraud.
3. Identify two weaknesses in the trader's record-keeping and recommend two controls.
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Two weaknesses: no complete double-entry system and no regular control accounts, so credit sales had to be inferred; cash and stock records are not independently checked. Recommendations: write up sales day book and post monthly to the sales ledger; prepare a sales ledger control account each month and reconcile it; bank all cash daily and issue duplicate receipts; carry out periodic stock counts and compare with records. These controls improve reliability of profit figures and reduce the chance of unrecorded sales.