Reconciliations Grade 12 Notes Accounting Study Guide

On this page you will find Reconciliations Grade 12 Notes Accounting Study Guide

Reconciliation is a form of internal control where two sets of information are compared and, when there are differences, these are corrected or explained.

Use mobile notes to help you learn these reconciliation concepts.

5.1 Bank reconciliation

5.2 Debtors’ reconciliation

These are the steps the bookkeeper will need to follow to correct differences between the debtors’ control account and debtors’ list:

1. Check entries in the journals against the source documents.
2. Check casting (totalling) of journals.
3. Check posting from journals to general and debtors ledgers.

A. Procedure to follow when the balance of the debtors control account and the debtor’s account do not correlate.

1. The ENTRY in the journal will be posted on a daily basis to the debtors ledger and the TOTAL at the bottom of the journal will be posted at the end of the month to the control account
2. When the balance in the Debtors control account does not correlate with the total of the Debtors list, you need to establish where the error is. Is the error in the control account or in the list of debtors?
3. Is the error in the original ENTRY or is it in the TOTAL of the Journal?
   If the ENTRY is incorrect the TOTAL will also be wrong, so the control account and the list must be corrected.
4. Study the following examples.
   The following rules will assist you when you compare the Debtors Control account with the list of Debtors. The list of debtors is made up by the balances of the debtors from the Debtors Ledger.4.1 Example: The ENTRY is posted daily to the Debtors ledger (Debtor’s list) and the TOTAL is posted to the control account at the end of the month.

   Journal
   Name	entry
   	total

   Debtors ledger
   Name of debtor	Dr	Cr	B/d

   Dr. Debtors Control Cr.
   4.2 Example: Sold goods to Monki for R10 and issued an invoice.

   Debtors Journal
   Monki	10 (The ENTRY goes to the debtors ledger or/to the List of Debtors)
   	10 (The TOTAL of the Debtors Journal is posted to the Control account at the end of the month.)

   Debtors ledger
   Name of debtor	Dr	Cr	B/d
   Invoice	10

   Dr. D ebtors Control Cr.
   Sales Dj 10

5. The following are some of the types of errors and omissions that could arise:
   –– Errors on source documents
   –– Recording errors in Subsidiary Journals
   –– Incorrect posting from the Journals to the General ledger and Debtors- or Creditors ledger.
   –– Incorrect additions in the lists of debtors and creditors.
   –– Incorrect addition of Journal totals – too much (overcast) – too little (undercast)

Basic rule:

GENERAL LEDGER:
Dr. D ebtors Control (A) Cr.
total
Sales 110

BASIC RULES:

1. The individual entry goes to the debtor’s account in the Debtors Ledger.
2. The Total of the journal will be posted to the Debtors Control account.
   • The entry goes to the Debtors Ledger on a daily basis.
   • The Total is posted to the Debtors Control account at the end of the month.
3. When reading the transaction, you need to establish where the error occurred.
   –– If the error is the entry, then the total will automatically be incorrect as well. Then the Debtors list and the Debtors Control must be corrected. E.g. The entry in the DJ was incorrectly recorded as R56 instead of R50.

GENERAL LEDGER:
Dr. Debtors Control (A)     Cr.
total
Sales 116 X
(116 – 6)
–– If the Total was incorrectly added, then there is no error in the entry and the error will be only corrected in the Debtors control account.
E.g. The total of the DJ was incorrectly totaled as R100 instead of R110.

GENERAL LEDGER:
Dr. Debtors Control (A) Cr.
total
Sales 100 X
(100 + 10)
–– If the entry is correct then the Total will also be correct. So you need to establish where the error is. The error will be in the posting to the ledgers.
–– If the entry was not posted to the Debtor ledger, then the entry will be recorded.
E.g. The amount of R50 in the DJ was not posted to the debtor’s account.

Dr. Debtors Control (A) Cr.
Sales total
110
–– If the entry was recorded but the amount was wrongly recorded. UNDER CAST:
E.g. The amount of R50 in the DJ was posted to the debtor’s account as R30.

(therefore the account was undercasted by R50 + R30 = R20)

–– If the entry was recorded but the amount was wrongly recorded. OVER CAST:
E.g. The amount was R50 in the DJ was posted to the debtor’s account as R59.
(therefore the account was over casted by R59 – R50 = R9)

Dr. D ebtors Control (A) Cr.
Sales total
110
–– If the entry was posted but to the wrong side of the account.
The entry was recorded on the credit side instead of the debit side therefore the entry will be recorded on the debit side twice
– cancel the wrong entry on the credit side and once more to have the entry on the correct side.
E.g.: The amount of R50 in the DJ was posted to the debtor’s account in the Debtors Ledger however the entry was recorded on the credit side of the account (or the wording can read; the R50 was recorded on the credit side.)

Dr. D ebtors Control (A) Cr.
Sales total
110

Worked example 1
Example adapted from March 2012 NSC question paper.
Crystal Traders sells glassware for cash and on credit.
Required
Study the information provided and answer the questions that follow.

1. Calculate the correct closing balance of the debtors’ control account on 31 March 2011. [5]
2. Calculate the correct amounts owing by the following debtors of Crystal Traders:
   1. R Jansen
   2. S Wonder
   3. P Collins [12]

Information

1. Balance of debtors’ control account on 31 March 2011 is R200 000
   (Can you see that the Debtors’ control account and the Debtors’ Ledger are not the same?)
2. Balances per Debtors’ Ledger on 31 March 2011:
   

   M Carey	R64 500
   R Jansen	R41 200
   S Wonder	R23 000
   C Dion	R51 500
   P Collins	R7 900
   TOTAL	R188 100

3. The following errors and omissions were discovered and must be corrected:
   1. The debtors’ journal has been overcast by R2 600.
      (Overcast means that the journal has been added up incorrectly and the amount is too big.
      Undercast means that the journal has been added up incorrectly and the amount is too small.)
   2. An invoice issued to S Wonder for R1 800 had not yet been recorded in the books of Crystal Traders.
   3. Stock sold on credit to P Collins was incorrectly charged to the account of R Jansen, R8 300.
   4. An invoice issued to P Collins for R6 000 had been posted to the wrong side of his account.
   5. A cheque of R13 500, originally received from R Jansen in settlement of an invoice of R15 000, was returned by the bank due to insufficient funds. No entries have yet been made.
   6. Goods sold on credit to S Wonder for R5 800 were correctly recorded in the debtors’ journal but incorrectly posted as R8 500 to S Wonder’s account in the Debtors’ Ledger.

Answers to worked example 1 (see page 89)

Calculate the correct closing balance of the debtors’ control account on 31 March 2011.
200 0003 – 2 6003 (A) + 1 8003 (B) + 15 0003 (E)
= 214 200 [5]

Calculate the correct amounts owing by the following debtors of Crystal Traders:

[12]

5.3 Debtors’ age analysis

Introduction
Any business must keep a careful control of all the accounts in the Debtors Ledger. The debtor’s credit controller has the responsibility to monitor a debtor’s credit rating before extending any credit to the debtor. The debtor’s clerk’s responsibility includes that no debtors exceed their credit limit and that payments are regularly received according to their agreement with them.
Before any order can be despatched to a debtor, the debtor’s clerk must first approve of the credit sale. The debtor’s clerk must verify the balance of the debtor’s account and the agreed credit limit allowed for that debtor.
Debtor’s Age analysis is used where the debtor’s ledger account is broken down into time periods so that it is clear how long an amount has been outstanding.
When calculating age analysis there are TWO RULES to apply:

• Returns are subtracted from the latest sale.
  (A credit note is subtracted from the most recent invoice issued because goods usually can be returned within a certain number of days, e.g. 7 days.)
• Payments are subtracted from the oldest outstanding balance.
  (A receipt will be issued for the payment and for discount allowed. This amount will be subtracted from the oldest amount owed by the debtor.)

Reasons for debtors age analysis

• To ensure that Debtors honour the agreement of e.g. 30 days.
• To charge interest on overdue balances according to the agreement.
• To take legal action if the account is not settled within a certain period, e.g. more than 90 days.
• To minimise debts to be written off.
• To ensure liquidity in the business and a proper cash flow.
• To be aware of debtors who honour their credit agreement and those who do not.
• To follow up on those debtors who signed a payment plan due to previous late payments.
• To follow up on possible errors that could be on a debtor’s statement where the debtor paid the correct amount without letting the business know of the statement error.

Example of a debtor’s statement and age analysis
Study the following statement to understand the calculation of age analysis. A possible format was used for the breaking down of Moja and Sons account into time periods, February to May. Take into account the TWO RULES.

• Returns are subtracted from the most recent invoice
• Payments are subtracted from the oldest outstanding balance

(Current month means the month of the statement
The Table below was used to calculate the age analysis)

Steps to follow to see how the Age analysis was calculated:

Check your answer: 1 900 + 1 800 + 750 = R4 450
Take note: The total of the analysis must be equal to the total balance on the statement and debtor’s ledger account.
Remember the rule: Subtract payments from the longest outstanding balance.

Worked example 2: Debtors’ age analysis
Study the debtors’ age analysis below and answer the questions that follow:

Credit terms

• Debtors are given 60 days from statement date (end of the month) in which to settle their debts.
• Debtors settling within 60 days will be granted a discount of 10%.
• Debtors older than 60 days are charged interest of 12.5% p.a.

Required

1. Which debtor(s) are not adhering to (meeting) the credit terms?
   Why? (2)
2. If Z Ndlovu settled her account after receiving her statement, and within the credit terms, how much would she be required to pay? (4)
3. If these were the only 3 debtors, what would the balance on the debtors’ control account be? (2)
4. Is this business controlling their debtors effectively? Explain, quoting figures. (4)
   [12]

Answers to worked example 2 (see page 93)

1. Which debtor(s) is/are not adhering to (meeting) the credit terms? Why?
   B. Barney
   He owes amounts for longer than the credit terms of 60 days.  [2]
2. If Z Ndlovu settled her account after receiving her statement, and within the credit terms, how much would she be required to pay?
   R3 000 – 10% (R300) = R2 700 [4]
3. If these were the only 3 debtors, what would the balance on the debtors’ control account be?
   Total of debtors’ accounts = balance on debtors’ control account.
   R13 50033 [2]
4. Is this business controlling their debtors effectively? Explain, quoting figures.
   The answer to this question could be yes or no.
   Yes, because only one of the 3 debtors is outstanding.
   or
   No, because the amount outstanding for more than 60 days is R1 700 out of the total of R13 500 owed by the debtors. [4]

5.4 Creditors reconciliation with the creditor’s statement

1. At the end of each month a creditor’s reconciliation is drawn up when the statement is received from a creditor and compared against the creditor’s ledger account in the Creditors Ledger.
2. The comparison must be done to ensure that all the details of the transactions with the creditor are correct prior to any payments being done.
3. Ensure that you are aware that in the books of the creditor you are a debtor. So when you interpret the statement received from the Creditor, you read it as if you read a Debtors control account. In that way this section becomes very easy. Look and see that for every debit entry in your books, the creditor will credit the transaction. So, know the FORMAT of both the CONTROL ACCOUNTS and know the SOURCE DOCUMENTS.

Example

• Creditor gives you an invoice and you receive the invoice (renumber the invoice)
• You sent goods back to Creditor and issue a debit note and the creditor acknowledges the return and issues a credit note
• You pay your account by cheque and the Creditor acknowledges it by issuing a receipt

Study the following schematic illustration

SCHEMATIC ILLUSTRATION OF THE CORRELATION BETWEEN THE CREDITOR AND DEBTOR

Remember the source documents will not be the same used by the debtor and the creditor. The one receives and the other one issues.
Example adapted from November 2011 NSC question paper
CREDITORS’ RECONCILIATION
A statement received from a creditor, Kairo Suppliers, on 28 February 2011, reflects that Ace Traders owes them R11 390. According to Ace Traders, the amount outstanding is only R7 910.
REQUIRED:
Use the Table in the ANSWER BOOK to indicate the differences that were discovered when comparing the account in the Creditors’ Ledger with the statement received from Kairo Suppliers.
Write only the amounts in the appropriate column and a plus (+) or minus (–) sign to indicate an increase or decrease in the balance. Calculate the correct balance/total at the end.

INFORMATION:
On investigation, it was found that:

1. A cheque for R3 000 issued by Ace Traders has not yet been recorded in the statement received from Kairo Suppliers.
2. The cheque in settlement of the January account was not received by Kairo Suppliers within 7 days; therefore the discount of R500 recorded by Ace Traders in the Creditors’ Ledger must be cancelled.
3. Returns recorded as R810 in the Creditors’ Ledger of Ace Traders were recorded as R900 in the statement received from Kairo Suppliers. Ace Traders had miscalculated the cost of goods returned.
4. An invoice received from Kairo Suppliers was correctly recorded as R7 700 by Ace Traders. However, in the statement received from Kairo Suppliers it was incorrectly recorded as R770.
5. An invoice for R3 500 received from Kairo Suppliers was incorrectly recorded as a credit note by Ace Traders.

Explanation of the transactions:

Use the Table to indicate the differences that were discovered when comparing the account in the Creditors’ Ledger with the statement received from Kairo Suppliers.
Write only the amounts in the appropriate column and a plus (+) or minus (–) sign to indicate an increase or decrease in the balance. Calculate the correct balance/total at the end.

Below is a list of suggested past examination questions for extra practice: