Chapter 11 Reconciliations

Question 1

1.1 Receivables and payables accounts

Answer 1

The trade receivables and trade payables accounts represent the total balances as recorded in the nominal ledger.
Contra entries: this arises where a customer is also a supplier. Instead of owing each other money, it may be agreed that there is a contra of the balances (balances are cancelled). The double entry for this is:
Dr Payables account Cr Receivables account

The individual accounts in the receivable and payable ledgers must be updated to reflect this.
Credit balances on the receivables account: this is when we owe the customer money, this occurs when the customer has overpaid, credit notes have been issued when the goods are paid for and payment is received in advance of raising invoices. The payables account may show a debit balance for similar reasons.
Dishonoured cheques: when the customer issues a cheque, which does not clear. The business needs to reverse the receipt that was originally recorded. The double entry is Dr Receivables account Cr Cash
Discounts allowed / received: these entries represent prompt discounts which had not been expected to be taken at the time of the original sale/purchase, but which require processing if payment is made within the discount period.

Question 2

2.1 Supplier statement reconciliations

Answer 2

The payables ledger should contain the same totals as the nominal ledger, but with the additional advantage of splitting the total by supplier. Many suppliers issue periodic statements of outstanding balances that can be used to check the accuracy of accounting records by supplier. If errors are identified these will be corrected both in the payables ledger and the nominal ledger.
Supplier statement shows debit balances on the statement because they are receivables balances from the suppliers point of view.
The transactions included in the payables ledger for the supplier are agreed to those on the supplier statement. Any differences are investigated.

Question 3

2.2 Approach to reconciliation

Answer 3

 Match invoices and credit notes from the supplier statement to the payables ledger
 Investigate any unmatched amounts
 Consider whether differences are due to errors in the supplier statement or the payables ledger
 Consider if differences are due to timing
 Any adjustments made to the payables ledger will also be updated in the nominal ledger

Question 4

2.3 Customer statement reconciliation

Answer 4

If the business sends customer statements, then a similar process can be used to check the balance for receivables. The customer can notify the business of any discrepancies, if the customer does not communicate any issues:
- Reconciliation could be performed with no discrepancies noted
- Customer did not perform a reconciliation

Question 5

3.1 Bank reconciliation

Answer 5

A bank reconciliation is a statement agreeing the balance on the bank statement to the balance on the cash account. The balances should be equal but in practice this does not always happen.
Note that debits and credits are reversed in the bank statement as the bank records transactions from its point of view. Bank credit means we have money, the bank has a liability, an asset in our books and a liability for the bank. Bank debit means we owe money, the bank has an asset, and we have a liability in our books.

Question 6

3.2 differences between the bank statement and the balance on our cash ledger

Answer 6

There are three main differences:
- Unrecorded items in the cash at bank ledger account: items in the bank statement but have not been recorded in the cash account such as interest, bank charges, dishonoured cheques, standing orders and direct debits and unmatched items. These are not recorded in the cash account because the business does not know these items have arisen until they see the bank statement
- Timing differences: items recorded in the cash account but due to bank clearing, not in the bank statement. Outstanding / unpresented cheques (cheques paid by the business) and outstanding / uncleared lodgements (cheques received by the business)
- Errors: the business may make a mistake when recorded an item in the cash account. The bank may make a mistake as well.