Accounting fundamentals: Chapter 6 - Reconciliations and errors

Reconciling to external documents

Comparing internal records with external documents to make sure the accounts match

Reconciling trade payables

Checking that what we owe suppliers in our books matches their statements.

Reconciling trade receivables

Checking that what customers owe in our ledger matches customer statements and correcting any differences.

How do you reconcile Trade Receivables or Payables (DRCRE)?

Adjust for: Discounts, Returns, Contras, Refunds, Errors → balance = statement.

How to reconcile in ledger accounts CFAM

Step-by-step in simple terms:

1. Compare the two → Compare books with external statement

2. Find the differences → Find the differences

3. Adjust → Record missing transactions or correct mistakes

4. Match → Ledger and external statement should now match

How to know when something requires a cash book adjustment + 3 examples (BAD)

If the item is on the bank statements but not in your books it requires a cash book adjustment

• Bank charges/interest: Costs charged by the bank.

• Automatic payments: Payments taken automatically from a bank account.

• Dishonoured cheques: Cheques that the bank refuses to pay, usually due to insufficient funds or errors.

How to know when something requires use of the reconciliation statement + 2 examples (UO)

If the item is in your books but not the bank statement, a reconciliation statement is required

• Unpresented cheques: Cheques you’ve paid and recorded, but the bank hasn’t processed yet.

• Outstanding lodgements: Cheques you’ve received and recorded, but the bank hasn’t processed yet.

How are sales returned handled in ledger accounts?

• Dr Sales returns (decreased income)

• Cr Trade receivables (decreased asset)

How are purchase returns handles in ledger accounts?

• Dr Trade payables (decreased liability)

• Cr Purchase returns (decreased expense)

Contras + 1 example

When two businesses owe each other, the amounts are subtracted so only the net balance remains.

Example of contra:

We owe Supplier A £1,000
Supplier A owes us £300
Contra of £300 applied → Net payable £700

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

How are contras recorded

• Dr Trade Payables → reduces your liability (what you owe them)

• Cr Trade Receivables → reduces your asset (what they owe you)

How to Record Refunds (to customers and from suppliers) NEEDS CLARIFICATION

Refund to customer:

• Dr Sales returns (decreased income)

• Cr Cash (decreased asset)

Refund from supplier:

• Dr Cash (cash comes in / increases asset)

• Cr Purchase returns (reduces expense)

Adjusted profit after correcting errors (for overstated and understated expenses and income)

• Overstated expenses → profit increases

• Understated expenses → profit decreases

• Overstated income → profit decreases

• Understated income → profit increases

“Cash at Bank” account

Cash at Bank
An asset account recording money held in the bank.
• Receipts → Dr
• Payments → Cr

Suspense account

A temporary account for trial balance errors. Cleared when corrected. Shown as current asset or liability.

What is a suspense account used for?

When debit and credit do not match in the trial balance and the difference cannot immediately be identified.

Exception report

Shows transactions that do not look routine so they can be spotted 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.

Types of accounting errors

• Error of omission
  Forgot to record

• Error of commission
  Wrong personal account

• Error of principle
  Wrong type of account

• Error of original entry
  Wrong amount

• Compensating error
  Two errors cancel each other out.

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.