Reconciliation procedures and checks - Reconciling items and...

Learning Outcomes

After studying this article, you will be able to explain why reconciliation procedures are essential, describe how to perform bank and supplier statement reconciliations, identify typical reconciling items, and prepare adjusting entries for discrepancies. You will understand how these processes detect and correct errors in accounting records and help maintain accuracy and control, as required for the ACCA FA1 exam.

ACCA Recording Financial Transactions (FA1) Syllabus

For ACCA Recording Financial Transactions (FA1), you are required to understand the role of reconciliations in maintaining accurate accounting records. This article addresses the following syllabus requirements:

• Explain the purpose of regular reconciliations, especially to external statements such as bank statements and supplier statements.
• Recognise the need to deal promptly and correctly with any discrepancies discovered during reconciliations.
• Perform reconciliations of the cash at bank general ledger account to a bank statement, identifying and adjusting for reconciling items.
• Perform reconciliations of supplier ledger accounts to supplier statements, resolving differences as necessary.
• Prepare journal entries or make adjustments for correcting errors identified during reconciliation procedures.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following best describes a reconciling item in a bank reconciliation?
   1. A settled invoice not yet processed
   2. An unpresented cheque
   3. An authorised purchase order
   4. A credit note approved but not issued

2. Why is it important to reconcile supplier (payable) ledger balances to supplier statements?

3. List two common reasons why a bank statement balance might differ from the cash at bank ledger account.

4. If an error is found during reconciliation, what is the appropriate accounting response?

Introduction

Reconciliation procedures are a critical control in accounting systems. They compare internal records to external evidence, such as bank or supplier statements, to ensure accuracy and completeness. Regular reconciliations reveal timing differences, errors, or omissions, allowing businesses to correct records and maintain reliable financial information. These processes are required not just for exam success, but for real-world financial integrity.

Key Term: reconciliation
The process of comparing two sets of records and resolving any differences to ensure that they agree.

Key Term: reconciling item
A transaction recorded in one record (such as the cash book) but not yet shown in the other (such as a bank statement), usually due to timing differences.

RECONCILIATION PROCEDURES: OVERVIEW

Reconciliations focus on comparing the balances between internal records (for example, the general ledger) and independent records maintained by third parties (such as banks and suppliers). Regular reconciliations help detect both simple mistakes and evidence of fraud.

Common Reconciliation Types

• Bank reconciliation: Compares the cash at bank ledger account with the bank statement.
• Supplier statement reconciliation: Compares a supplier’s ledger account balance with the supplier's own statement.

Errors and differences identified must be investigated and corrected.

BANK RECONCILIATION

The bank reconciliation is a foundational procedure in accounting.

Steps in Bank Reconciliation

1. Match entries: Compare payments and receipts in the cash at bank ledger account to those on the bank statement.
2. Identify reconciling items: Spot transactions recorded in one place but not the other.
   • Common examples:
     • Outstanding lodgements (deposits made but not yet credited by the bank).
     • Unpresented cheques (payments recorded but not yet cleared by the bank).
3. Adjust the ledger: Account for items missed in the ledger, such as bank charges, direct debits, and interest that appear first on the bank statement.
4. Prepare the reconciliation statement: Show how the two balances can be matched after considering all reconciling items.

Key Term: outstanding lodgement
A deposit that has been recorded in the business’s records but not yet credited by the bank.

Key Term: unpresented cheque
A cheque issued and recorded by the business, but not yet cleared and deducted on the bank statement.

Key Term: bank statement
A document provided by the bank listing all transactions and the balance of an account over a period.

Worked Example 1.1

A company’s bank statement at 31 March shows a balance of $4,770. The bank statement includes a direct debit for electricity of $120 and bank charges of $15 not yet in the ledger. Two cheques issued, $400 and $350, have not yet cleared. A deposit of $900 paid in on 31 March is also not yet credited by the bank. What is the corrected cash at bank ledger balance and the balance per the bank reconciliation statement?

Answer:
The ledger must be adjusted for the direct debit and bank charges:

Opening balance per ledger = balance not provided. Adjust for direct debit and bank charges (deduct $120 + $15 = $135). The reconciliation statement would add back unpresented cheques ($400 + $350 = $750) and subtract outstanding lodgement ($900):

Bank statement balance $4,770 + unpresented cheques $750 – outstanding lodgement $900 = $4,620 (should match the adjusted ledger balance).

Common Reconciling Items

Bank reconciliations frequently reveal:

• Timing differences (such as deposits in transit and cheques not yet cleared)
• Unrecorded transactions (bank fees, direct debits)
• Errors (recording mistakes in amount, duplication, or omission)

Revision Tip

Perform bank reconciliations promptly each month. The longer you leave unreconciled items, the harder it becomes to detect errors.

SUPPLIER STATEMENT RECONCILIATION

Supplier, or payable, statement reconciliations compare your record of what is owed to a supplier, against the statement provided by the supplier. Discrepancies may indicate missing invoices, payments not recorded, or errors in posting credit notes.

Key Term: supplier statement
A summary sent by a supplier showing the transactions and outstanding balance for a specific period from their records.

Key Term: supplier reconciliation
A process of matching and resolving any differences between the supplier statement and the balance of the supplier’s account in the payables ledger.

Steps in Reconciling Supplier Statements

1. Match all invoices, payments, and credit notes between your payables ledger and the supplier’s statement.
2. Investigate any differences:
   • Invoices on the statement not in your records: Check for delivery or missing documentation.
   • Payments recorded by you but not yet by supplier: Consider timing of cheques posted or electronic transfers.
   • Credit notes or discounts: Ensure they are present in both records.
3. Adjust the ledger or notify the supplier to correct errors in their records.

Worked Example 1.2

You receive a supplier statement showing a balance owing of $2,400 as of 30 April. Your payables ledger balance is $2,190. On review, you find a supplier invoice for $210 received on 29 April has not yet been entered in your records. What action should you take?

Answer:
The missing invoice should be entered, bringing your payables ledger into agreement with the supplier’s statement: $2,190 + $210 = $2,400.

Exam Warning

Be alert: Not all differences require an immediate correction in your accounts. Some are simply due to timing (e.g., payments sent but not yet received by the supplier).

DEALING WITH ERRORS AND ADJUSTMENTS

If reconciliation reveals an error in your records, correct it using the appropriate accounting entry, such as a journal to record missed expenses, bank charges, or incorrect amounts. If the error is on the side of the bank or supplier, communicate directly with them to resolve it, but do not adjust your own records unless agreed.

Key Term: adjusting entry
A journal entry made to correct errors or record previously omitted items identified during reconciliation.

Worked Example 1.3

During bank reconciliation, you discover bank charges of $20 shown only on the bank statement. What double entry records this in your accounts?

Answer:
Debit: Bank charges expense $20
Credit: Cash at bank $20

Summary

Reconciliations compare your records with external evidence to detect and correct errors. Bank and supplier reconciliations are essential for ensuring accuracy, highlighting timing differences, and supporting control over cash and liabilities. Prompt adjustments prevent small mistakes from becoming larger issues.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain why reconciliation is essential for reliable accounts
• Perform a bank reconciliation and identify common reconciling items
• Reconcile supplier account balances to supplier statements
• Recognise and process required adjustments for errors or omissions
• Prepare and record correcting or adjusting entries in the ledger

Key Terms and Concepts

• reconciliation
• reconciling item
• outstanding lodgement
• unpresented cheque
• bank statement
• supplier statement
• supplier reconciliation
• adjusting entry