Reconciliations

We carry out a reconciliation to verify the completeness and accuracy of a particular part of the accounting records by comparing it with another record, as noted in the table below. As can be seen, two reconciliations (debtors’ control and creditors’ control) deal entirely with the firm’s own records, while two (bank and creditors’ account) also deal with records maintained outside the firm. This article outlines a structured approach to debtors’ control and creditors’ control reconciliations.

Control accounts

Debtors’ control

Debtors increase when sales are made to customers on credit. Therefore, sales are shown as a debit entry in the debtors’ control account (with the double entry being completed by a credit entry in the sales account).

Debtors decrease when payments are received from customers. Cash received is shown as a credit entry in the debtors’ control account (with the double entry being completed by a debit entry in the cash account).

Debtors also decrease if discount is allowed to customers. Discount allowed is shown as a credit entry in the debtors’ control account (with the double entry being completed by a debit entry in the discount allowed account).

The result of these entries will be the closing balance of debtors, which will appear on the credit side of the account before being brought down on the debit side.

Thus, the debtors’ control account is constructed as in Figure 1.

Creditors’ control

Creditors increase when purchases are made from suppliers on credit. Purchases are shown as a credit entry in the creditors’ control account (with the double entry being completed by a debit entry in the purchases account).

Creditors decrease when payments are made to suppliers. Payments are shown as a debit entry in the creditors’ control account (with the double entry being completed by a credit entry in the bank account).

Creditors also decrease if discount is received from suppliers. Discount received is shown as a debit entry in the creditors’ control account (with the double entry being completed by a credit entry in the discount received account).

The result of these entries will be the closing balance of creditors, which will appear on the debit side of the account before being brought down on the credit side.

Thus, the creditors’ control account is constructed as in Figure 2.

Approach

1 identify the differences between the two records;
2 decide if the difference affects the nominal ledger or the personal ledger;
3 update the nominal ledger;
4 prepare a reconciliation statement.

Step 1: Identify the differences between the two records.
The starting point for a reconciliation is to compare the two records and identify the differences. In most examination questions this step will have been completed and the information obtained from the comparison of the two sets of records will be given in the question.

Step 2: Decide if the difference affects the nominal ledger or the personal ledger.
For each difference identified, decide whether the nominal ledger or the personal ledger has been affected. If the error has been made in the nominal ledger, process the necessary adjusting entry in the nominal ledger (see step 3). If the error has been made in the personal ledger, prepare a reconciliation statement (see step 4).

Step 3: Update the nominal ledger.
The best way to do this is to consider how the balance as stated in the question has been affected by the error. This will indicate how to process the necessary adjustment.

If an entry has been omitted or understated, the adjustment will be on the same side of the control account as the original entry. If an entry has been overstated, the adjusting entry will be on the opposite side of the account.

Step 4: Prepare a reconciliation statement.
This shows whether the adjustment will increase or decrease the total balances on the personal ledger.

Example 1 — Debtors’ control reconciliation

The following differences have been identified:

(i) discount allowed to customers totalling £765 has been posted only to the customers’ accounts;
(ii) the cash book had been incorrectly added, with the total being overstated by £99;
(iii) an invoice for £670 had been posted to the customer’s account as £760;
(iv) a credit balance of £388 on a customer’s account had been listed as a debit balance.

Step 1: Has already been completed.

Step 2:

(i) omitted from the nominal ledger;
(ii) affects the nominal ledger;
(iii) affects the personal ledger;
(iv) affects the listing of balances from the personal ledger.

Step 3: (i) this entry should have been made on the credit side of the account, so a credit entry of £765 is needed;
(ii) a credit entry has been overstated, so a debit entry of £99 is needed:

Step 4:

(iii) the customer’s balance has been overstated by £90 — the total list of balances must be reduced;
(iv) £388 has been added to the listing, but should have been deducted. An adjustment of £776 (£338 x 2) is needed, reducing the total balances:
   The listing of balances can now be revised :

Example 2 — Creditors control reconciliation

The following differences have been identified (Step 1):

(i) the purchases day book was added incorrectly, with the total being understated by £1,000;
(ii) the total value of cheques paid was entered in the nominal ledger as £22,450. The correct total was £24,250;
(iii) a balance of £758 on a customer’s account has been included in the list of balances as £578.

Step 2:

(i) affects the nominal ledger;
(ii) affects the nominal ledger;
(iii) affects the listing of balances.

Step 3:

(i) a credit entry has been understated, so a credit entry is required (£1,000);
(ii) a debit entry has been understated, so a debit entry is required (£1,800):

Step 4:
(iii) the listing has been understated by £180, so it must be increased: