For a suggested answer, see the 'Answers' section at the end of the book.

5 SUPPLIER STATEMENT RECONCILIATIONS

5.1 INTRODUCTION

The objective of a supplier statement reconciliation is to provide assurance that the payable ledger account balance for that supplier is fairly stated. This is achieved by reconciling any differences between:

the memorandum-only payable account for a supplier i.e. the business's record of its account and balance outstanding with that supplier, and
the supplier statement balance, i.e. the supplier's record of transactions and the balance outstanding at a specific date.

Note that, as with a bank statement, debits and credits are reversed on the supplier statement as the supplier will record transactions from its own perspective. It may be that, depending upon presentation of the statement, it may use terminology other than debit or credit, such as 'invoice', 'receipt' etc.

Whilst the payables' ledger account in the general ledger may provide some confidence in the integrity of the double-entry system involving transactions with payables, it cannot reveal whether all purchase invoices, credit notes and payments to suppliers have been recorded correctly in the general ledger. However, many suppliers send a monthly statement to their customers detailing the movements on their account during that month. Therefore, it is possible to use this statement to check whether all transactions are included correctly by comparing the statement from the supplier with the business's own payables ledger account for that supplier.

5.2 THE APPROACH TO RECONCILIATION OF A SUPPLIER STATEMENT

This is a very similar procedure to the preparation of a bank reconciliation. The objective is to gain assurance that the payable account is fairly stated, after accounting for any errors or omissions identified when doing the reconciliation.

This is best illustrated by examples.

EXAMPLE 1

The following transactions occurred with a new supplier, MNP, during May and June.

6 May: Purchased goods on credit, costing $987 including sales tax at 20%.
24 May: Purchased goods on credit for which the invoice price is $1,168 including sales tax. The supplier has offered an early settlement discount of 4% ($40) on this invoice.
5 June: Purchased goods on credit for which the invoice price is $1,752. The supplier has offered an early settlement discount of 4% ($60) on this invoice.
12 June: Purchased goods on credit for $141 including sales tax.
12 May: Received a credit note for $188 for damaged goods returned to the supplier.
3 June: Paid the supplier $1,927. Part of this payment was to settle the 24 May invoice, and the settlement discount of $40 was taken.

The payable ledger account number for this supplier is 71003.

Task

Show the supplier's account for May and June, and carry forward the balance on the account at the end of June.

SOLUTION 1

MNP account

Date	Details	Folio	$	Date	Details	Folio	$
12/05	Purchase returns	PR	188	6/05	Purchases	PU	987
3/06	Bank	BK	1,927	24/05	Purchases	PU	1,168
3/06	Disc. rec'd	BK	40	5/06	Purchases	PU	1,752
30/06	Balance c/d		1,893	12/06	Purchases	PU	141
Balance			4,048				4,048
1/07	b/d		1,893

71003

Notes

The closing balance on the account is calculated by totalling the total of the entries on the debit side ($2,155) and the total of all the entries on the credit side ($4,048). The credit entries exceed the debit entries by $1,893 ($4,048-$2,155), so there is a credit balance of $1,893 on the account.
The credit balance in this example represents the unpaid invoices of 5th and 12th June: ($1,752 +$141=$1,893).
The account is ruled off by entering the closing balance to carry forward on the debit side, to make the two column totals equal above the line, and to bring forward the balance below the line, on the credit side of the account.

FA1: RECORDING FINANCIAL TRANSACTIONS

EXAMPLE 2

W Mossop received the following statement of account from a supplier, MHB

MHB

Statement of account

Customer: W Mossop

5 May 20X8

Date	Description	Dr $	Cr $	Balance $
14 April	Balance b/f			1,729.46
26 April	Invoice 314/X5		397.42	2,126.88
29 April	Invoice 386/X5		927.04	3,053.92
3 May	Cheque received	1,529.46		1,524.46
4 May	Invoice 019/X6		1,062.96	2,587.42
5 May	Credit note CR174	123.26		2,464.16
Now due				2,464.16

MHB's account in the payables' ledger shows a balance due of $2,804.16. Upon investigation, W Mossop finds the following:

invoice 019/X6 was actually for $1,602.96
a cheque for $200 was sent to MHB on 5 May, having been entered in W Mossop's general ledger accounts.

Reconcile the supplier statement to the balance per the payables' ledger.

SOLUTION 2

Begin the reconciliation by identifying the balance at the end of the month covered by the supplier statement.

Then tick-off or match items which appear in the supplier statement and also the payable ledger account for that supplier.

Next, identify unticked or unmatched items in the supplier statement - any such items are likely to form part of the reconciliation. It may be, for example, an invoice issued by the supplier but which had not been received and processed prior to the month-end.

Then, identify any unticked or unmatched items in the payable ledger account - any such items are likely to form part of the reconciliation. It may be, for example, cash paid and recorded but which had not yet been received and recorded by the supplier prior to the month-end.

Balance per supplier statement	2,464.16
Cheque not yet received by MHB	(200.00)
Error in recording invoice 019/X6	540.00
Revised balance (agreed to ledger)	2,804.16

($1,602.96-$1,062.96)

However, differences between the supplier statement and the individual payable ledger account do arise for a number of reasons.

RECONCILIATIONS CHAPTER 13

In addition to the situations noted in the example, other instances of differences arising include:

discount received recorded in the general ledger but not yet recorded in the supplier statement, or vice versa
goods returned to the supplier for a refund or credit note but not yet included in the supplier statement
differences in monetary amounts recorded in the payables' ledger account when compared with the supplier statement e.g. invoice amount per statement is, say, $345.00 and the amount recorded in the general ledger and individual payable's ledger account is $435.00. The correct amount needs to be investigated and confirmed. If the error is in the supplier statement, the supplier should be informed and a revised statement requested.

If, following investigation an amendment is required, remember that any amendment required to an individual payable account, it will also require amendment in the purchases and payables general ledger accounts. Remember that, as the general ledger is updated, there will also be simultaneous update of the individual payable ledger accounts.

ACTIVITY 4

Hermes Co receives a supplier statement from Albus. Hermes Co extracts details from the payables ledger for Albus so that a supplier statement reconciliation can be prepared.

All items on the statement could be agreed with the payable ledger account for Albus, except for the following:

(a) The supplier statement shows an outstanding balance of $1,715 for an invoice which was settled. The remaining balance relates to an early settlement discount that Hermes Co was eligible for and therefore settled the invoice net of this.
(b) In the payables ledger an invoice for $205 has been incorrectly recorded as a credit note.
(c) Hermes Co paid $63 by cheque prior to year-end. This amount has not yet been recognised on the supplier statement.

Briefly explain what action, if any, Hermes Co should take relating to the three issues noted above.

For a suggested answer, see the 'Answers' section at the end of the book