Question

What normally causes differences in financial reports that require reconciliation? 30–50 words .Which financial reports can require reconciliations? List and briefly describe five reports. In context of Australia

Answer 1

PART I

Reconciliation of Books is the reconciliation carried out by the company before the closing of its books of accounts in order to ensure that the books are up to date and there is no manipulation or fraud in the books of accounts of the company.

As we all know, Books of Accounts are the blueprints of any business. Maintaining the Books of Accounts is the key to financial management.

However, maintaining books of accounts is not enough. It is also necessary that the accounts should be accurate and complete. There are various checks and controls possible to ensure this but one of the most basic and essential ways is “Reconciliation of Books”.

Normal causes that make differences in financial reports that require reconciliation :-

i) Detect fraud

• It is easy to manipulate books of accounts. One way of detecting fraud is through reconciliation. Let us understand this with an example.
• The cashier of ABC Corporation is committing fraud by not recording cash received from customers. By doing this, the customer and cash ledgers are unchanged and he can pocket the cash received.
• A simple way to detect frauds like this is to perform customer ledger reconciliation. When the Customer’s ledger in the Books of ABC is compared to ABC’s ledger in the customer’s Books, the balances will not tie and the fraud will be detected.

ii)Ensure records are complete:

• At times, there are certain activities that affect our books but not be routed through the accounts team and hence, may go undetected.
• A small example is a cheque deposited by a customer directly in the bank account. If the customer does not inform, the bank ledger, as well as the customer ledger, will be incomplete leading to a misrepresentation of facts.

iii) Ensure records are accurate:

• There are chances of human errors in the process of accounting.
• One example of human errors is the incorrect placement of digits e.g. Actual value of sales was Rs. 99,736 which was incorrectly recorded as Rs. 97,936.
• These can be found out while reconciling accounts. These are nothing but transposition errors and in this case, the difference is generally divisible by 9.

PART II

Basic reconciliation statements which are important and prepared in day-to-day business accounting:

1. Bank reconciliation
2. Vendor reconciliation
3. Customer reconciliation
4. Inter-company reconciliation
5. Business-specific reconciliation

#1 – Bank Reconciliation

A bank reconciliation statement is prepared with reference to actual transactions reflected in the bank statement vis-à-vis transactions recorded in our bank book.

Some of the reasons for the difference between the bank book and bank statement are:

1. Cheque issued to a vendor but presented at a later date

(At times, there are cheques which appear in the bank statement which are very old. They are stale and cannot even be deposited anymore. It is better to write them off and keep the Bank Book clear.)

2. The amount deposited by a customer directly in our bank account
3. Bank interest credited by the bank
4. Bank charges debited by the bank
5. Bank errors (Although rare, errors can happen by data entry errors are also possible by the bank)

#2 – Vendor reconciliation

A vendor reconciliation statement is prepared to make sure that the accounting entries passed in the books of the vendor are in line with the accounting entries passed in our books.

Reasons for deviations are as follows:

1. Purchase returns booked by us may not be booked by the Vendor.
2. Cheques issued by us may not be reflected in their books. This generally happens when the cheque is misplaced or lost in transit
3. Goods-in-transit not recorded by us but recorded by the vendor

#3 – Customer reconciliation

A customer reconciliation statement is very similar to vendor reconciliation. It is prepared to check if the customer’s books are in sync with our books. Most corporate treat customer reconciliation as a priority over vendor reconciliation. This is because money is receivable from customers and it is always better to reconcile so that the payments are not pending on account of some issues with regards to accounting entries.

Reasons for deviations are as follows:

1. Returns booked by customer not appearing in our books
2. Taxes deducted by the customer not accounted for in our books
3. Goods-in-transit recorded as the sale in our ledger
4. Payments directly transferred to our bank account not recorded

A good practice is to perform monthly reconciliations of customers on a rotational basis. Let us that a corporate has 100 odd customers and reconciliations of around 10-15 customer ledgers should be done on a monthly basis.

Also, once the reconciliation is complete and certified by both the parties, a balance confirmation certificate for the given period can be issued. This will ensure that the opening balances needed not to be checked again. This also helps to resolve disputes.

#4 – Inter-company reconciliation

Group companies (Holding, subsidiary, etc.) have to prepare consolidated Books of Accounts. These Books need to eliminate inter-company transactions such as sale from Holding Co. to its Subsidiary Co. For this, it becomes utmost important that their Books of Accounts are always in sync and hence, should be reconciled regularly before the consolidation process is done.

#5 – Business-specific reconciliation

Every business will have to prepare other reconciliations over and above the basic ones mentioned above. An example of this is the Costs of Goods reconciliation

This reconciliation will not be applicable to the service industry as they do not hold inventory. However, it is very important for businesses that hold inventory.

What is the cost of goods sold?

Cost of goods sold = Opening Stock + Purchases – Closing Stock

Cost of goods sold = Sale – Profit

The cost of goods can be arrived by either of the two methods. Both need to be the same amount. If not, a reconciliation statement should be prepared to find out reasons for differences