Accounting fundamentals: Chapter 6 - Reconciliations and errors

Reconciling to external documents

Checking that your books match official documents from outside sources (bank, suppliers and customers statements) to make sure your accounts are correct.

Reconciling trade payables

Checking that what we owe suppliers in our books matches their statements, and fixing any differences.

Reconciling trade receivables

Checking that what customers owe in your ledger matches what they actually owe according to statements.

How to reconcile in ledger accounts CFAM

Step-by-step in simple terms:

1. Compare the two → Are the book amounts the same as statement amounts?

2. Find the differences → Maybe the customer paid and you didn’t record it, or there’s an invoice missing, or you made a mistake.

3. Adjust → Record missing payments, correct mistakes, or ask the customer to clarify.

4. Match → Your ledger and the customer statement agree.

How are sales returned handled in ledger accounts?

• Dr Sales returns

• Cr Trade receivables

How are purchase returns handles in ledger accounts?

• Dr Trade payables

• Cr Purchase returns

Contras + 2 examples

Accounts that reduce another account.
They have the opposite normal balance to the account they relate to.

Examples:

• Sales Returns → reduces Sales

• Purchase Returns → reduces Purchases

Memory tip:
Contra = Counter (counteracts the main account).

How to Record Refunds

Refunds involve a cash movement.

• Refund to a customer: we pay cash → Cr Cash

• Refund from a supplier: we receive cash → Dr Cash

We only refund a customer if we owe them money (their TR balance has turned into a credit).

“Cash at Bank” account

Cash at Bank is an asset account that records all money the business holds in its bank account.
It shows cash received (Dr) and cash paid out (Cr) through the bank.

Bank reconciliation

A process that compares the Cash at Bank ledger with the bank statement to find differences and correct them (timing issues, charges, or errors).

Goal: Make both balances agree.

Suspense account

A temporary place to put a transaction until the error is fixed.

Exception report

An exception report shows things that don’t look normal so you can spot problems quickly.

Bank Reconciliation – What Causes Differences + How to Fix Them

Differences happen because the cash book and bank statement are updated at different times.

1. Adjust in the Cash T account (business hasn’t recorded yet):

• Bank charges/interest

• Automatic payments or receipts

• Dishonoured cheques

2. Put in the Reconciliation Statement (bank hasn’t recorded yet):

• Unpresented cheques (you’ve paid, bank hasn’t processed)

• Outstanding/uncleared lodgements (you’ve received, bank hasn’t processed)

Exam tip:
To find the correct cash balance, adjust either the cash book or the bank statement — not both.

How to Correct Accounting Errors

Use the Did / Should Have / Correcting Journal method:

1. Write what you did (Dr / Cr).

2. Write what you should have done (Dr / Cr).

3. The correcting journal is the entry needed to move from what you did → to what you should have done.

Memory tip:
Did → Should → Fix.