July stock reconciliation, a duplicated advance and an inflated bill
The accounts wing of a depot is closing the July stock ledger. The ledger shows opening stock of 4,200 MT, receipts of 3,100 MT and issues of 2,850 MT based on issue slips received up to 31 July; the physical verification on 1 August returned 4,410 MT. Three issue slips dated 29–30 July were still lying with the despatch clerk, unsigned by the receiving officer. Separately, while reconciling a supplier's ledger, the assistant finds that an advance of ₹5,00,000 paid in June has been debited twice - once in the cash book and once again through a journal entry passed on the same date. A purchase bill for 250 MT is also awaiting payment: the accepted tender rate is ₹2,150 per quintal, freight ₹18 per quintal and handling ₹7 per quintal, but the supplier's bill shows ₹2,250 per quintal with the same freight and handling.
1. Quantify the stock difference, value it, and state how it should be treated in the accounts before any write-off.
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Book position. 4,200 + 3,100 − 2,850 = 4,450 MT. Physical stock = 4,410 MT. Difference = 4,450 − 4,410 = 40 MT shortage.
Value. 40 MT = 400 quintals; 400 × ₹2,150 = ₹8,60,000.
Treatment. The shortage is not yet a loss. The three unsigned issue slips must be traced first: if they relate to July despatch, the issues are understated and the book stock falls, closing part or all of the gap. Weighment differences at the weighbridge and moisture/driage loss within sanctioned limits are the next legitimate explanations.
Until that exercise is complete the amount should sit as a shortage pending investigation under current assets, not be charged to the profit and loss account. Only the portion falling within the permitted driage norm may be written off, and only with the sanction of the competent authority under the delegation of powers; any excess points to pilferage and requires recovery proceedings or a police complaint. Writing off ₹8,60,000 on the closing date without investigation is exactly what the audit will object to.
2. Show the effect of the duplicated ₹5,00,000 advance and give the correcting entry.
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What went wrong. The advance was paid once, so the bank has a single debit of ₹5,00,000. The books carry two debits to the supplier's account: one through the cash book and one through a journal entry on the same date. The supplier's ledger therefore shows ₹10,00,000 adjusted against a real advance of ₹5,00,000.
Effects. (a) The supplier's account is understated by ₹5,00,000, so his balance and any subsequent settlement are wrong. (b) The cash book shows two payments while the bank shows one, producing a ₹5,00,000 difference in the bank reconciliation statement - the clue that usually exposes the error.
Correcting entry. Reverse the erroneous second debit: Bank A/c … Dr ₹5,00,000; To Supplier A/c ₹5,00,000. The supplier's account is then restored to the true advance, and the bank reconciliation difference disappears.
Control point. A journal entry passed on the same date as a cash payment, for the same amount and the same party, should be caught by a duplicate-payment check in the reconciliation. Recommend a monthly party-wise advance review rather than relying on year-end audit.
3. Verify the purchase bill and decide what should be paid.
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Quantity conversion. 250 MT = 2,500 quintals.
As per the accepted tender rate.
- Material: 2,500 × ₹2,150 = ₹53,75,000
- Freight: 2,500 × ₹18 = ₹45,000
- Handling: 2,500 × ₹7 = ₹17,500
- Payable = ₹54,37,500
As per the supplier's bill (₹2,250 per quintal).
- Material: 2,500 × ₹2,250 = ₹56,25,000
- Freight and handling unchanged = ₹62,500
- Billed = ₹56,87,500
Excess claimed = 56,87,500 − 54,37,500 = ₹2,50,000, which is exactly ₹100 × 2,500 quintals - a rate difference, not an arithmetic slip.
Decision. Pay ₹54,37,500 only, since the accepted tender rate governs the contract and an invoice cannot vary it unilaterally. Return the bill for revision or raise a debit note for ₹2,50,000, and confirm the quantity against the weighment slips before releasing payment. If the supplier claims a rate revision, it must be supported by an approved amendment order - otherwise the excess is an overpayment that is difficult to recover later.