Maintaining and Reconciling Accounting Records
Reconciliation proves that two independently maintained records agree and explains any difference. The examinable reconciliations are the receivables and payables ledger control accounts, the bank reconciliation, the agreement of supplier statements to the payables ledger, and the agreement of inventory records to physical counts.
Control accounts are built from the books of prime entry, not from the individual ledger accounts, and act as a check on the memorandum ledgers. Credit sales debit the receivables control; cash received credits it; irrecoverable debts written off credit it; discount allowed credits it; interest charged on overdue accounts debits it. A difference that cannot be explained by a genuine error is a discrepancy to investigate, never a figure to force with a balancing entry.
In a bank reconciliation, adjust the cash book first for items the bank has already recorded but the business has not - standing orders, direct debits, bank charges, interest and dishonoured cheques. Then reconcile the corrected cash book balance to the bank statement using timing differences: unpresented cheques and lodgements not yet credited. Errors made by the bank are corrected in the reconciliation statement, not in the cash book.
Worked example. Cash book shows a debit of £1,240. Unrecorded bank charges of £40 give a corrected balance of £1,200. The bank statement shows £1,250 credit; there are unpresented cheques of £350 and outstanding lodgements of £300. £1,250 − £350 + £300 = £1,200, so the two records agree.