Creditors' reconciliation with the creditor's statement

1. What is Creditors' Reconciliation?

Creditors' reconciliation is the process of comparing a creditor's statement with the creditor's ledger account in the books of a business to ensure accuracy.

Key Steps in Creditors' Reconciliation:

a) At the end of each month, a creditor's reconciliation is drawn up by comparing the statement received from the creditor with the creditor's ledger account in the business's books.

b) The comparison ensures that all transaction details match before any payments are made.

c) In a creditor's books, the business is a debtor. This means:

• The creditor's statement should be read as if it were a Debtors Control Account.
• A debit entry in the business's books corresponds to a credit entry in the creditor's records.
• Understanding the format of Control Accounts and knowing the Source Documents is essential.

2. Common Errors in Creditors' Reconciliation

During reconciliation, differences can arise due to errors, omissions, or timing differences. The table below provides examples of errors and their explanations.

Table: Explanation of Reconciliation Errors

Error	Explanation
A cheque for R3 000 issued by Ace Traders is missing from Kairo Suppliers' statement.	The amount paid has not yet been subtracted on the creditor's statement. The balance owing to Kairo Suppliers must be reduced by R3 000 (-R3 000).
A discount of R500 was recorded by Ace Traders but was not received by Kairo Suppliers within 7 days.	Kairo Suppliers rejected the discount since payment was late. The discount must be cancelled by adding R500 to the Creditors Control Account (+R500).
Returns recorded as R810 in Ace Traders' ledger were recorded as R900 in Kairo Suppliers' statement.	Ace Traders understated the returns by R90 (R900 • R810). The Creditors Control Account must be reduced by R90 (-R90).
An invoice from Kairo Suppliers was recorded as R7 700 in Ace Traders' books but as R7 770 in Kairo Suppliers' statement.	Kairo Suppliers overstated the invoice by R70 (R7 770 • R7 700). The Creditors Control Account must be increased by R70 (+R70).
An invoice for R3 500 was incorrectly recorded as a credit note by Ace Traders.	The creditor's ledger is correct, but the business's books incorrectly show this as a return. The error must be corrected by adding R3 500 (+R3 500).

3. Adjusting the Creditors' Ledger and Statement

After identifying errors, adjustments must be made to ensure the Creditors' Ledger and the Statement match.

Table: Adjustments to Creditors' Ledger and Statement

Item	Creditors' Ledger of Ace Traders	Statement from Kairo Suppliers
Balance	R7 910	R11 390
1. Cheque not recorded (-R3 000)	-R3 000
2. Discount error (+R500)	+R500
3. Return understatement (-R90)	-R90
4. Invoice overstated (+R70)	+R70
5. Credit note error (+R3 500)	+3 500	+3 500
Final Balance	R15 320	R15 320

4. Importance of Creditors' Reconciliation

• Ensures accuracy in records before payments are made.
• Identifies errors and discrepancies between business records and supplier statements.
• Helps avoid double payments or incorrect financial reporting.
• Essential for financial control and audit preparation.

Explanation of Transactions

This table explains common errors found in creditor reconciliation and their corrections.

Error	Explanation
1. A cheque for R3 000 issued by Ace Traders has not yet been recorded in the statement received from Kairo Suppliers.	The cheque has been paid, but the creditor has not yet subtracted it from the balance. The balance owed to Kairo Suppliers must decrease by R3 000. This is similar to the Debtors Control account. The statement must be adjusted: (• R3 000).
2. The cheque in settlement of the January account was not received by Kairo Suppliers within 7 days; therefore, the discount of R500 recorded by Ace Traders in the Creditors' Ledger must be cancelled.	Ace Traders claimed R500 discount but paid late. Kairo Suppliers did not grant the discount because the payment was late. To cancel the discount, it must be credited back to the Creditors Control account.
3. Returns recorded as R810 in the Creditors' Ledger of Ace Traders were recorded as R900 in the statement received from Kairo Suppliers.	Ace Traders recorded returns of R810, but Kairo Suppliers recorded R900. The difference is R90, meaning Ace Traders under-reported returns. The Creditors Control account must be adjusted: (• R90).
4. An invoice received from Kairo Suppliers was correctly recorded as R7 700 by Ace Traders. However, in the statement received from Kairo Suppliers, it was incorrectly recorded as R7 700.	Kairo Suppliers under-recorded the invoice by R770. The invoice amount must be corrected in the statement: (+ R930).
5. An invoice for R3 500 received from Kairo Suppliers was incorrectly recorded as a credit note by Ace Traders.	Ace Traders mistakenly recorded an invoice as a credit note. The correct invoice must be recorded on the credit side of the Creditors' Ledger to cancel the incorrect credit note. The statement must be adjusted to reflect the correct invoice: (+ R3 500 or + R7 000 total correction).

Comparison of Creditors' Ledger and Statement

This table identifies discrepancies between the Creditors' Ledger and the Statement received from Kairo Suppliers.

Creditors' Ledger of Ace Traders	Statement from Kairo Suppliers
Balance	R7 910
1. Cheque not recorded	• R3 000
2. Discount cancellation	+ R500
3. Returns miscalculated	• R90
4. Invoice incorrectly recorded
5. Credit note incorrectly recorded	+ R3 500 / + R3 500 = OR + R7 000
Final Total	R15 320

Understanding the Table

• The Creditors' Ledger of Ace Traders represents how the business recorded transactions with Kairo Suppliers.
• The Statement from Kairo Suppliers represents how Kairo Suppliers recorded the same transactions.
• Discrepancies must be identified and corrected to match both accounts.
• Positive amounts (+) indicate an increase in the balance (e.g. missed invoices).
• Negative amounts (-) indicate a decrease in the balance (e.g. cheques issued but not recorded).

Key Takeaways

✔️ Compare the creditor's statement with the business's Creditors Ledger.

✔️ Identify errors and correct them before making payments.

✔️ Adjust the Creditors' Ledger and Statement to reflect the correct balances.

✔️ Understand the format of Control Accounts and Source Documents.