3.2 Reconciling Supplier Statements

3.2 Reconciling Supplier Statements

Reconciliation is a vital internal control process in financial record-keeping. At the end of each month, suppliers send their credit customers a "Supplier Statement of Account." This statement provides a detailed summary of all transactions from the supplier's perspective, culminating in an outstanding balance. In this section, we explore the purpose of supplier statement reconciliations, the common causes of discrepancies, and how to perform calculations to establish the corrected balance.

The Purpose of Reconciling Supplier Statements

A supplier statement lists the invoices, credit notes, payments, and refunds processed by the supplier during the month. In the buyer's own accounting system, the transactions with that specific supplier are recorded in the supplier's personal account within the Payables Ledger (also known as the Purchases Ledger).

In theory, the balance on the supplier's statement should match the balance on the supplier's account in the buyer's payables ledger. In practice, they rarely agree. Reconciling these two records is essential for several reasons:

• Ensuring Accuracy: It identifies errors, omissions, or duplicate entries in both the buyer's ledger and the supplier's records.
• Preventing Fraud: By matching statements against internal records, the business ensures it only pays for goods actually ordered and received, preventing unauthorized payments.
• Managing Cash Flow: Accurate reconciliations prevent overpaying suppliers and help the business plan cash disbursements.
• Maintaining Supplier Relations: Promptly resolving discrepancies prevents disputes, late payment fees, or the suspension of credit facilities.
• Audit Compliance: Reconciled supplier statements provide external auditors with evidence that the liabilities reported on the balance sheet are complete and accurate.

Identifying and Explaining Discrepancies

When comparing the supplier statement with the purchase ledger account, differences arise from four main sources: timing differences, supplier errors, own ledger errors, and missing documents.

1. Timing Differences (Items in Transit)

These occur because of the delay in processing and transmitting documents or payments between the two businesses at the end of the reporting period.

• Payments in Transit: The buyer records a payment (e.g., electronic transfer or cheque) on the date it is sent, reducing the purchase ledger balance. However, the supplier may not receive or clear the payment until a few days later, so it does not appear on the statement. This causes the supplier statement balance to be higher than the buyer's ledger.
• Invoices in Transit: The supplier issues and records an invoice near the end of the month, but the goods and the invoice are still in transit or have not yet been approved and entered in the buyer's day books. This causes the supplier statement balance to be higher than the ledger balance.
• Credit Notes in Transit: A supplier issues a credit note at the month-end, but it is not received or processed by the buyer until the following month.

2. Errors on the Supplier Statement

Suppliers make mistakes. Common errors include:

• Charging the wrong price or calculating VAT incorrectly.
• Posting another customer's invoice to the buyer's account.
• Failing to record a payment that was successfully received.
• Action: These errors require no adjustment in the buyer's ledger. Instead, they are noted on the reconciliation and reported to the supplier so they can issue a correction.

3. Errors in Own Ledger (Payables Ledger)

The buyer's bookkeeping staff can also make errors when recording transactions:

• Transposition Errors: Writing digits in the wrong order (e.g., recording an invoice for £540 as £450).
• Omissions: Completely failing to record an invoice or credit note.
• Duplicate Entries: Recording the same invoice twice in the Purchases Day Book.
• Action: These errors must be corrected in the buyer's own books via journal entries or adjustments.

4. Missing Credit Notes

If goods were returned to the supplier, the buyer may have recorded the return, but the supplier has not yet issued or processed the credit note. This requires investigation to ensure the supplier grants the credit.

Performing the Reconciliation and Calculating Corrected Balances

To perform a reconciliation, a bookkeeper must calculate two adjusted figures to prove they match:

1. Adjusted Supplier Statement Balance: The statement balance adjusted for items the supplier has not yet recorded or has recorded in error.
2. Adjusted Purchase Ledger Balance: The ledger balance adjusted for transactions correct on the statement but omitted or recorded incorrectly in the buyer's books.

Mathematical Adjustments Guide

Detailed Worked Example

On 30 June, the ledger balance for Supplier ABC in our payables ledger is £1,880.00. The supplier statement shows a balance of £3,580.00. The following details are identified:

1. A bank transfer of £1,200.00 was paid on 29 June. It is in our ledger but not on the statement.
2. ABC issued an invoice for £450.00 on 30 June. It is on the statement but has not yet been received or recorded in our day books.
3. A credit note for £150.00 dated 28 June was received but completely omitted from our ledger.
4. The statement includes an incorrect charge of £110.00 that belongs to another company.
5. An invoice for ABC was recorded in our Purchases Day Book as £670.00, but the actual invoice amount was £760.00 (understated by £90.00).

Let's prepare the reconciliation schedule:

Adjusted Supplier Statement Balance:

• Unadjusted Statement Balance = £3,580.00
• Less: Payment in Transit = -£1,200.00
• Less: Supplier Billing Error = -£110.00
• Corrected Supplier Statement Balance = £2,270.00

Adjusted Purchase Ledger Balance:

• Unadjusted Purchase Ledger Balance = £1,880.00
• Add: Invoice in Transit = +£450.00
• Less: Omitted Credit Note = -£150.00
• Add: Understated Invoice Correction (£760.00 - £670.00) = +£90.00
• Corrected Purchase Ledger Balance = £2,270.00

Both balances now reconcile at £2,270.00, confirming the accuracy of the reconciliation and indicating that the buyer must make adjustments in their books for the invoice in transit, the omitted credit note, and the understated invoice.