CHAPTER 4 Reconciliations: Creditors reconciliations Progression Grade 10: Preparation of debtors’ and creditors’ lists to reconcile with the debtors’ and creditors’ control accounts Grade 11: Preparation of reconciliation statements by reconciling to bank and creditors’ statements Grade 12: Analysis and interpretation of bank, debtors’ and creditors’ reconciliations and age-analysis _______________________________________________ Introduction At the end of each month, the business will receive a statement of account from each of its creditors. A statement of account is: – an external document, – which shows all the transactions that took place between the business and the creditor, – over a given period, – as recorded by the creditor. These statements must be compared to the creditors’ accounts in the Creditors Ledger to ensure that the details of all invoices and other transactions reflected on the statements are correct. _________________________________________________________________________ Control over creditors A business should maintain good control over their creditors in order to ensure that: the creditors clerk does his job efficiently in order to prevent errors from occurring. the procurement policy is being adhered (e.g. all purchases are authorised) orders received from creditors are correct and in a good condition. creditors are paid on time so that the business qualifies for any available discounts. full use is made of the credit terms (60–90 days) in order to maintain good cash flow. there is adequate division of duties so that one employee checks another employee’s work. the balance in the Creditors Control account is reconciled to the total Creditors List to ensure that records are accurately updated. statements received from creditors are reconciled with their accounts in the Creditors Ledger. internal audits are conducted in order to minimise the possibility of fraud or error. ________________________________________________________________________________ The Creditors Control account The Creditors Control account increases on the credit side and decreases on the debit side. It is a summary of all the transactions between the business and its creditors. It serves as a “control measure” for the proper administration of the individual creditor’s accounts. Dr Date 2015 Jan Details 31 Bank and discount received – Creditors Control Fol. Amount Date CPJ 54 000 00 Journal debits CAJ 3 100 00 GJ 80 00 Balance c/d 35 230 00 Total returns 2015 Jan + B11 Cr Details Fol. Amount 01 Balance b/d 30 000 00 31 Total purchases CJ 62 000 00 Bank Journal credits CRJ 250 00 GJ 160 00 92 410 00 92 410 00 2015 Feb 01 Balance Explanation of entries in the Creditors Control account Total amount of credit purchases for the month. A cheque previously issued to a creditor was dishonoured or cancelled. Refund received from a creditor. The creditor charged the business interest on an overdue/arrear account. Payments made to creditors as well as discounts received for early payment. The business returned items to the creditor that were previously bought on credit. Correction of error or transfers between accounts. b/d 35 230 00 The Creditors Ledger accounts The Creditors Ledger accounts increase on the credit side and decrease on the debit side. Each creditor has a separate account in the Creditors Ledger. These accounts reflect the individual creditor’s transactions with the business. Mbasa’s Manufacturers Date 2015 Jan M001 Payee Fol. 01 Balance (opening balance) b/d 03 Interest charged 05 Cheque no. 224 08 Receipt no. 105 (refund for overpayment) 09 Invoice no. 93 28 31 Debit – 90 00 8190 00 CRJ Cheque no. 239 Discount received Debit note no. 23 CJ 8090 00 (100) 00 100 00 15 300 00 – – 15 300 00 CPJ 7 450 00 7 850 00 CPJ 200 00 7 650 00 CAJ 620 00 7 030 00 Explanation of entries in the Creditors Control account Balance 8 000 00 GJ CPJ Credit + The creditor charged the business interest on an overdue/arrear account. Payments made to the creditor as well as discounts received for early payment. Refund received from the creditor for overpayment. Goods bought on credit from the creditor. The business returned items to the creditor that were previously bought on credit. The Creditors List The Creditors List is a summary of all individual creditors’ balances in the Creditors Ledger. The total of the Creditors List the closing balance in the should equal Creditors Control account Creditors List of Mango Clothing Store on 31 January 2015 Ambrose Wholesalers 8 200 00 Mbasa’s Manufacturers 7 030 00 Harry Hatters 7 300 00 Mvuyo’s Suits 12 700 00 Balance in Creditors Control account 35 230 00 Closing balances of all the individual creditors in the Creditors Ledger This total should equal the closing balance in the Creditors Control account A comparison between the Creditors List and the Creditors Control account will reveal any bookkeeping errors made during the current month. If the balance of the Creditors List does not equal the balance in the Creditors Control account, an error occurred and the error must be systematically tracked and corrected. ___________________________________________________________________________________ Supplier–customer relationship Defining creditors and debtors In any supplier–customer relationship, one party is the creditor and the other is the debtor. The following illustration explains this: Transaction 1: On 1 October 2019, Mango Clothing Store bought stock from Mbasa’s Manufacturers on credit for R10 000. Transaction 2: On 24 October, Mango Clothing Store paid Mbasa’s Manufacturers R7 500 in part payment of their account. Mango Clothing Store Mbasa’s Manufacturers From Mango’s point of view: Mbasa is their creditor because they bought on credit from her and owe her money. From Mbasa’s point of view: Mango is her debtor because she sold to Mango on credit and therefore they owe her money. Supplier–customer relationship (cont.) From the previous example: Mbasa’s Manufacturers is recorded as a creditor in the books of Mango Clothing Store Mango Clothing Store is recorded as a debtor in the books of Mbasa’s Manufacturers Creditors Ledger Mango Clothing Store Notes Mbasa’s Manufacturers (L) Since these two accounts will record the same transactions, they will contain the same information. 10 000 00 However, these two accounts will be “mirror images” of each other. Credit (–) In other words: Date 2019 Oct Payee / document no. 1 Fol. Debit (–) Invoice no. 2110 24 Cheque Credit (+) 7 500 00 27 Debit note 500 00 Debtors Ledger of Mbasa’s Manufacturers Mango Clothing Store (A) Date 2019 Oct Details / document no. 1 Invoice no. 2110 24 Receipt 27 Credit note Fol. Debit (+) where the one account is debited, the other will be credited, and 10 000 00 7 500 00 500 00 where the one account is credited, the other will be debited. Reconciling creditors’ statements to Creditors Ledger accounts We have seen that creditors of a business record the same information in their books as the business does in its books. Therefore the business can use the statements received from its creditors (Statements of Account) as external documents of control. These statements are compared to the individual accounts in the Creditors Ledger in order to identify any mistakes or omissions. Possible mistakes and omissions The creditor may have closed off the statement on a different date to the date that the business closed off their Creditors Ledger account. Invoices, credit notes, cheques, discounts, interest could have been omitted or entered incorrectly in the Creditors Ledger account. Invoices, receipts, debit notes, discounts, interest could have been omitted or entered incorrectly on the statement. Posting errors could have occurred. Addition or subtraction errors could have occurred. Fraud could have been committed. ___________________________________________________________________________________ Comparing the Creditors Ledger to the Statement of Account Comparing the Creditors Ledger to the Statement of Account involves the following steps: Step1: Compare the credit (+) column of the Creditors Ledger with the debit (+) column of the statement. Creditors Ledger Invoices Statement of Account are compared with Invoices Step 2: Compare the debit (–) column of the Creditors Ledger with the credit (–) column of the statement. Creditors Ledger Statement of Account Debit notes are compared with Credit notes Cheques are compared with Receipts Discount received are compared with Discount allowed Step 3: Tick the amounts that appear in both the Creditors Ledger and the statement. Circle the amounts that do not appear in both the Creditors Ledger and the statement. Step 4: Any errors or omissions in the Creditors Ledger: the business must correct these errors and omissions in the Creditors Ledger. Step 5: Any errors or omissions on the statement: the business must notify the creditor so that they can correct it on the next statement. the business must draw up a Creditors Reconciliation Statement to reconcile these errors and omissions. Example: Creditors reconciliation process Extract from the Creditors Ledger of Mango Stores Performing a comparison Mbasa’s Manufacturers (L) Date 2020 Jan Details / document no. 1 Fol. Debit (–) Credit (+) Balance b/d Balance 1 780 00 16 Invoice no. 186 3 640 00 520 1 780 20 Debit note no. 87 26 Cheque no. 142 Cheque no. 142 (discount) 4 900 00 00 3 120 00 120 00 3 000 00 4 790 00 30 Cheque no. 158 5 420 00 00 28 Invoice no. 203 1 730 00 7 790 00 6 060 00 Extract from statement received from Mbasa’s Manufacturers Invoice no. 186 is correct in the Creditors Ledger. Mbasa will correct the error. Mbasa forgot to deduct the discount allowed by them on the 26th. They will reflect this amount on next month’s statement. The transactions on 28 and 30 January in Creditors Ledger do not appear on the statement and will only be reflected in the next statement from Mbasa. Account of Mango Clothing Store Date 2020 Jan Transaction 1 Opening balance Fol. Debit (+) 16 Invoice no. 186 3 460 00 18 Invoice no. 188 2 120 00 Invoice no. 186 is correct in the Creditors Ledger. Mbasa will correct the error. 1 780 20 Credit note no. 381 520 00 26 Receipt no. 54 27 Closing balance Credit (–) 1780 00 5 060 00 00 It was discovered that invoice no. 188 on 18 January was actually issued to Manga Suppliers. Mbasa were notified and will correct the error. Example: Creditors reconciliation process (cont.) Once the comparison is completed, a Creditors Reconciliation Statement (CRS) is drawn up to reconcile the errors and omissions. In this statement, the business will show all the corrections that the creditor is expected to make, by: – debiting all invoices and incorrect credits – crediting all payments, discounts, returns and incorrect debits The CRS is checked against the next month’s statement received from the creditor. Preparing the Creditors Reconciliation Statement CREDITORS RECONCILIATION STATEMENT ON 31 JANUARY 2020 Debit Debit balance as per creditor’s statement on 27 January Invoice no. 186 incorrectly recorded on statement (3 640 – 3 460) 5 060 00 180 00 Incorrect debit on statement 2 120 00 Discount not recorded on statement Invoice no. 203 not on statement Credit 120 00 4 790 00 Payment not on statement 1 730 00 Credit balance as per Creditors Ledger account 6 060 00 10 030 00 10 030 00 Invoice no. 188 issued to Manga Suppliers. Transactions after 27 January: in the Creditors Ledger, but not on the statement. Debit and credit totals must be equal. Example: Creditors reconciliation process (cont.) Alternative format The Creditors Reconciliation Statement can also be prepared using a single column format: Creditors Reconciliation Statement (alternative format) CREDITORS RECONCILIATION STATEMENT ON 31 JANUARY 2020 Debit balance as per creditor’s statement on 27 January Invoice no. 186 incorrectly recorded on statement (3 640 – 3 460) Incorrect debit on statement 5 060 00 180 00 (2 120) 00 Discount not recorded on statement (120) 00 Invoice no. 203 not on statement 4 790 00 Payment not on statement Balance as per Creditors Ledger account (1 730) 00 6 060 00 All of the credit entries are recorded in brackets (as negative) and will therefore be subtracted from the debit entries. This total should be the same as the balance in the Creditors Ledger account. Errors and omissions in the Creditors Ledger Errors and omissions can also occur in the Creditors Ledger of the business. These errors or omissions must then be corrected in the Creditors Ledger. _____________________________________________________________________________________ Summary of errors and omissions and their corrections Creditors Reconciliation Statement Creditors Ledger Error or omission Debit (+) Invoices recorded in Creditors Ledger, but not on creditor’s statement An incorrect credit on the creditor’s statement An amount understated in the debit column on the creditor’s statement An amount overstated in the credit column on the creditor’s statement Credit (–) Payments, discounts and debit notes recorded in Creditors Ledger, but not on creditor’s statement An incorrect debit on the creditor’s statement An amount understated in the credit column on the creditor’s statement An amount overstated in the debit column on the creditor’s statement Debit (–) Receipts, discounts and credit notes recorded on creditor’s statement, but not in Creditors Ledger An amount understated in the debit column in the Creditors Ledger An amount overstated in the credit column in the Creditors Ledger Credit (+) Invoices recorded on creditor’s statement, but not in Creditors Ledger An amount understated in the credit column in the Creditors Ledger An amount overstated in the debit column in the Creditors Ledger Solutions to activities Activity 4.1 Activity 4.2 Activity 4.3 Activity 4.4 Activity 4.5 Activity 4.6 ________________________________________________________ Please note: Adobe Reader is required in order to view the solutions to the activities. 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