Reconcile outstanding balances

Submitted by sylvia.wong@up… on Fri, 12/17/2021 - 12:59

It is common practice for suppliers to send out a statement of account to all customers with a balance owing at the end of the month, by post or email. This statement of account provides the basis for a supplier statement reconciliation.

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A financial control officer auditing some a printed transaction record

Reconciling supplier statements is a critical control for Accounts Payable to ensure the suppliers ledger is accurate. A supplier statement reconciliation involves reconciling an individual supplier balance in the accounts payable subsidiary ledger with a statement submitted by a supplier. The process for reconciling supplier statements is:

Agree the Opening Balance

The starting point is to agree on the opening balance shown on the supplier statement with the opening balance on the accounts payable ledger account for the supplier.

Agree this Periods Entries

All the items which appear on both the supplier statement and on the supplier’s account in the accounts payable ledger should be ticked off.

Allocate Credit Notes and Payments

Ensure all credit notes and payments shown on the supplier statement are allocated against invoices.

A finance team member investigating discrepancies in monthly transactions

Investigate Differences

All remaining items not ticked off in steps one to three above represent either items on the supplier statement not in the accounts payable ledger, or items in the accounts payable ledger not on the supplier statement. These items need to be investigated. If you become aware that an invoice or credit note has not been received, you should contact the supplier and have them issue the invoice or credit note immediately. By contacting the supplier, you let them know that you are honest and are not trying to refuse payment.

Sometimes a business might receive goods purchased from a supplier and there is a delay in receiving the invoice for the goods. This may result on the invoice bot appearing on the supplier statement.

If the business is using a perpetual inventory system* because the goods have been received, they need to be entered into their inventory.

As the invoice has not been received from the supplier, the liability to pay for the goods cannot be recorded as an account payable, and an alternative account needs to be established.

*A business can account for its inventory using an inventory accounting system. There are two main inventory accounting systems:

  1. Periodic inventory accounting system
  2. Perpetual inventory accounting system

For example, Demo Company purchases goods from JK Book to the value of $1500.00 on 28 June 2020. The goods are received on 30 June 2020 however the invoice is not received until 15 July 2020. Demo Company uses a perpetual inventory system.

Because the invoice has not been received, the liability to pay for the goods cannot be posted to accounts payable account. It is therefore temporarily posted to the goods received not invoiced account which is also a liability account.

Date Details Debit Credit
30-Jun-20 Inventory 1363.64  
  GST Input tax credit 136.36  
  Goods Received not invoiced   1500.00
  Goods received from JK Book not invoiced    

When the invoice is received from the supplier a journal entry is recorded to transfer the liability from the goods invoiced not received account to the accounts payable account of the supplier.

Date Details Debit Credit
15-Jul-20 Goods Received not invoiced 1500.00  
  Accounts payable   1500.00
  Invoice for goods received on 30/06 from JK Book    

This example only applies to businesses who use a perpetual inventory system. Businesses who use a periodic inventory system, will enter the invoice on the date the invoice is received from the supplier.

A professional entering financial data into accounting software on their personal computer

Computerised accounting systems manage the accounts payable reconciliation process for you. The video below explains the process in MYOB.

The reconciliation process in Xero is only for accounts set up as bank accounts. To reconcile Accounts Payable, you need to run the account transaction report and complete the reconciliation in a spreadsheet program.

The video below explains the reconciliation of supplier payments using Xero.

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A finance team member reconciling the balance of a major account
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