Home News FORM TWO BOOK KEEPING STUDY NOTES TOPIC 1-3.

FORM TWO BOOK KEEPING STUDY NOTES TOPIC 1-3.

TOPIC 1: BOOKS OF PRIME ENTRY 

The Meaning of Books of Original Entry or Subsidiary Books
Give the meaning of books of original entry or subsidiary books
The
ledger accounts of a business are the main source of information used
to prepare the financial statements. However, if a business were to
update their ledgers each time a transaction occurred, the ledger
accounts would quickly become cluttered and errors might be made. This
would also be a very time consuming process.
To
avoid this complication, all transactions are initially recorded in a
book of prime entry. This is a simple note of the transaction, the
relevant customer/supplier and the amount of the transaction. It is, in
essence, a long list of daily transactions.
The Functions of Books of Original Entry or Subsidiary Books
Identify the functions of books of original entry or subsidiary books
A
Journal is an accounting record that is used to record the different
types of transactions in chronological order or date order. Journals are
often called or referred to as the books of original entry. The reason
is that this is the first place that business transactions are formally
recorded.You can think of a Journal as a Financial Diary.
Specialized
Journalsare journals used to initially record special types of
transactions such as sales and purchases. All these journals are
designed to record special types of business transactions and post the
totals accumulated in these journals to the General Ledger periodically
(usually once a month).
The General Journal
The
Journal is a textual record of events(Debit and Credit)that is
characterized by the fact that all the records it contains are in a
sequential chronological order. TheGeneral Journalis used to record
unusual or infrequent types of transactions. Type of entries normally
made in the general journal include depreciation entries, correcting
entries, and adjusting and closing entries.
The Cash Book
TheCash
Bookis used to record the receipt and payment of money by the business
in the form of cash, or through the business bank account. It contains
the cash and bank accounts.
Sales Journal
The
Sales Journal is a special journal whereCredit sales to customersare
recorded. Another name for this journal is the Sales Book or Sales Day
Book.
Purchases Journal
The
Purchases Journal is a special journal whereCredit purchases from
customersare recorded. Another name for this journal is the Purchases
Book or Purchases Day Book.
Returns Inwards Journal
TheReturns
Inwards Journalis a special journal that is used to record the returns
from debtors and allowances of goods sold on credit. Another name for
this journal is the Sales Returns Book.
Returns Outwards Journal
TheReturns
Outwards Journalis a special journal that is used to record the returns
to creditors and allowances of goods purchased on credit. Another names
for this journal is the Purchases Returns Book.
The Petty Cash Book
This
is just a fancy name that describes a special fund that is set up and
used for minor and unanticipated cash expenses where a cheque can’t be
written or the amount is so small that you don’t want to write a cheque.
The petty cash account is based on the Imprest System which is a system
of cash disbursement, cash expenditure and reimbursement of that
expenditure.
Several books of prime entry exist, each recording a different type of transaction:
Book of prime entry Transaction type
Sales day book Credit sales
Purchases day book Credit purchases
Sales returns day book Returns of goods sold on credit
Purchases returns day book Returns of goods bought on credit
Cash book All bank transactions
Petty cash book All small cash transactions
The journal All transactions not recorded elsewhere
Recording Business Transactions in the Books of Accounts and their Effects to Ledger Using Different Methods
Record business transactions in the books of accounts and their effects to ledger using different methods
Types of Cash Books (With Specimen)
Here
we detail about the three types of cash book, i.e., (1) Simple Cash
Book, (2) Two Column Cash Book, and (3) Petty Cash Book.
Simple Cash Book:
Simple cash book contains only one amount column on each side (debit and credit) for recording cash receipts and cash payments.
A format of simple cash book is given below:
For
recording transactions in the simple cash book, the foremost step is to
understand the rule for recording transactions i.e., which account is
to be debited and which account is to be credited.
Rules for Recording Transactions:
We
know that cash book is also a cash account and there are two approaches
for recording business transactions in the books of accounts. One is
‘Traditional Approach’ and the other is ‘Equation Based Approach.
Under
traditional approach, cash is a real account so that following the
rule: ‘Debit what comes in and credit what goes out’, receipt of cash is
to be debited (i.e., cash comes in) in the cash book and payment of
cash is to be credited (i.e., cash goes out).
Similarly,
in the equation based approach, cash is an asset and following the
rule: ‘Increase in asset is to be debited and decrease in asset is to be
credited’, receipt of cash is debited (i.e., increase in cash) and
payment of cash is to be credited (i.e., decrease in cash) in the cash
book.
Procedure for Recording Transactions:
After
knowing the rule for recording a transaction, it is essential for us to
learn the procedure for recording the transactions in the simple cash
book. It can be observed from the above format that the columns on
‘Receipts Side’ of the cash book are similar to the columns appearing on
‘Payment Side’.
However, for recording transactions in the cash book following steps should be taken:
Step 1:
  • In the ‘Date’ column, the day, month and the year, on which transaction occurs should be recorded.
Step 2:
  • In the ‘Particular’ column, the nomenclature of the accounts, from where cash is received or paid, gets recorded.
Step 3:
  • In
    the ‘L.F.’ (Ledger Folio) column, the folio (page number) of the
    respective ledger, where the posting of the transaction is made, shall
    be recorded.
Step 4:
  • In the ‘Amount’ column, the actual cash paid or received is recorded.
Step 5:
  • The
    last, but not the least, cash book is to be balanced. As already
    stated, a separate cash account in ledger is not opened when a cash book
    is maintained. Like an account is balanced in the ledger, the cash book
    is balanced in the same way. Depending upon the need and size of the
    enterprise, the cash book should be balanced daily, weekly or monthly.
Total
of the ‘Amount’ column on both sides of the cash book is compared and
the difference if any, should be entered on the credit side of the cash
book under the ‘Particulars’ column as “By Balance c/d’. By putting the
difference under the amount column both sides of the cash book become
equal.
Now
total amount under the ‘Amount’ columns on both side of the cash book
is written opposite to each other. The closing balance shown as ‘By
Balance c/d’ becomes the opening balance for the next period and is
written as ‘To Balance b/d’. opening balance for the next period and is
written as ‘To Balance b/d’.
Example;
TWO Column Cash Book- Cash Book with Bank Column:
Simple
cash book with single amount column on either side is maintained if the
organization has only cash transactions. However, due to security and
legal bindings, sometimes the transactions have to be necessarily routed
through banks. The receipt issued by the cashier is the source document
for cash receipts.
Any
document viz., invoice, bill receipt etc., through which payment has
been made, will serve as a source document for payment. These documents,
popularly known as vouchers are numbered serially and filed in a
separate file for future reference, verification and audit.
Bank
facilitates a business enterprise to open current account in which the
business enterprise can withdraw amount in excess of what is available
in the current account. In that case transactions related to cash and
banks are to be recorded separately in a cash book so that at any
particular period of time, cash balance available in the cash chest and
bank balance available in the bank account can be known immediately.
It
is better to record transactions relating to both cash and bank in the
same cash book. For this purpose, one more amount column for recording
bank transaction is to be added on both sides of the cash book. This is
known as bank column. Under bank column of the cash book, cash
transactions routed through bank are recorded.
A format of cash book with bank column is given below: A format of cash book with bank column is given below:
Similar
to simple cash book, cash transactions are recorded in the two column
cash book. The difference is that here we also record banking
transactions i.e., the transactions in which bank is also involved.
Rule for Recording Transactions:
Entries
in the cash column are recorded similar to recording transactions in
the simple cash book. For recording bank transactions there are two
approaches. One is ‘Traditional Approach’ and the other is ‘Equation
Based Approach’. Under traditional approach, bank is personal account so
that as per the rule: ‘Debit the receiver and credit the giver’,
receipt of cash by the bank is to be debited (i.e., debit the receiver)
in the cash book and payment of cash by the bank is to be credited
(i.e., credit the giver).
However,
in the equation based approach, bank is an asset and the rule:
‘Increase in asset is to be debited and decrease in asset is to be
credited’, will be followed. If in a transaction, bank column increases,
bank column of the cash book is to be debited (i.e., increase in bank)
and decrease in bank column is to be credited (i.e., decrease in bank)
in the cash book.
Procedure for Recording Transactions:
The
procedure for recording transactions in the cash book with bank column
is the same as that stated in the case of simple cash book. Depending
upon the reputation or goodwill of the business enterprise, bank fixes a
limit on withdrawals, which is known as credit limit. It means bank
column may either show debit or credit balance depending upon how
receipts and payments made through bank column of the cash book have
affected the credit limit.
Difference between General Ledger and Purchase Ledger and Sales Ledger as Applies by Businessmen
Distinguish General ledger from purchase ledger and sales Ledger as applies by businessmen
A
general ledger is a company’s set of numbered accounts for
itsaccounting records. The ledger provides a complete record of
financial transactions over the life of the company. The ledger holds
account information that is needed to preparefinancial statementsand
includes accounts for assets,liabilities, owners’ equity, revenues and
expenses.
ThePurchase Ledgeris your record of yourpurchasesand
expenses, whether or not you have paid them and how much you still owe.
On a Balance Sheet, the total unpaid bills will usually will be called
Trade Creditors or Accounts Payable. ThePurchase Ledgerhas an Account for every Supplier.

TOPIC 2: Petty Cash And Imprest Sysem ( Columnal Petty Cash Book) 

Operation of the Petty Cash Book
Determine the operation of the petty cash Book
Petty Cash Book:
Petty
cash book is a kind of cash book which records large number of small
payments such as conveyance, cartage, postage, telegrams and other
expenses under the imprest system. These expenses are repetitive in
nature. The procedure becomes cumbersome if all small and repetitive
payments are handled by the main cashier and are recorded in the main
cash book.
The
cash book may become very bulky and the cashier may be overburdened.
Applying the rule of ‘management by exception’ the main cashier should
not be disturbed for small and petty items.
Big
organizations normally appoint one or more cashier known as ‘Petty
Cashier’ and assign the handling of petty expenses. Sometimes the work
of handling small and petty expenses is assigned to an existing employee
who in addition to his normal duties maintains a separate cash book to
record these petty and small cash transactions. For this purpose petty
cash book is to be maintained by such employee. The petty cashier so
appointed for recording the small and petty expenses works on the
imprest system.
Difference between Cash Overage and Shortage
Distinguish between cash overage and shortage
Situation
in which the physical amount of cash on hand differs from the book
recorded amount of cash. When a business is involved with
over-the-counter cash receipts, occasional errors may occur in making
change. The cash shortage or overage is revealed when the physical cash
count at the end of the day does not agree with the cash register tape.
Assuming that the count is Sh.60000 and the cash register reading shows
Sh.62000, the cash shortage and overage account would be charged for
2000. It is shown in the income statement.
Meaning and Implication of the Imprest System and Petty Cash Vouchers
Explain the meaning and application of the imprest system and petty cash vouchers
Imprest System:
Under
the impress system, a fixed amount say Rs. 5,000 is given to the petty
cashier for incurring small and petty expenses. This amount is called
imprest money. The petty cashier makes all the payments for which he is
authorized out of the imprest amount. After a specific period or as soon
as he exhausts the full imprest amount, whichever is earlier, he gets
reimbursement for the actual amount spent by him from the main cashier.
Thus
at the beginning of the next period he once again has the full imprest
amount. Keeping in view the quantum of amount involved and frequency of
transactions, reimbursement of amount is made on a weekly, fortnightly,
monthly basis. Sometimes the petty cash system is operated through the
main cash book and in that case petty cash book is not maintained
independently.
Advantages:
  1. Reduces the labour: Petty
    cash book is based on the division of labour and works on imprest
    system; hence, it reduces the work and labour of main cashier.
  2. Controls irregular expenses: One
    of the famous principles of management is ‘control by exception’ which
    means that if one person tries to control everything, he may end up
    controlling nothing. Based on this principle, a petty cashier is
    appointed who can control the irregular expenses. In the absence of
    petty cashier, it is very difficult to watch and control the necessities
    of incurring any expenses.
  3. Main cash book does not become over bulky: Petty
    cash book helps to keep the main cash book in a compact form because
    numerous entries for small and petty items are recorded in the petty
    cash book itself.
  4. Quick payment possible: In
    petty cash book, payments for petty items are recorded. Though they are
    small, yet they are essential. Sometimes they are so urgent that they
    cannot wait for approval of the higher authority. In that case quick
    payment is required and this can be made by the petty cashier.
Sorting out Different Petty Expenditures and the Technique of Recording them in the Petty Cash Book and Journals
Sort out different petty expenditures and the technique of recording them in the petty cash book and journals
Types of Petty Cash Books:
There are the two methods of preparing petty cash book:
  1. Simple Petty Cash Book
  2. Analytical Petty Cash Book or Columnar Petty Cash Book
I. Simple Petty Cash Book:
In
simple petty cash book there is one column each for recording of
receipt of cash from the main cashier and for payment of petty expenses.
‘Date’ and ‘Particulars’ column is same for receipts and payments. In
the ‘C.B. Folio’ column, page number of cash book in which payment to
petty cashier is made is to be recorded.
In
the particular column heads of the items are to be mentioned. In ‘V
.No’ column, voucher number of the transactions are recorded. ‘L.F.’
column shows where the posting of these items have been made in
respective ledgers. ‘Amount’ column shows the money value of the
transactions.
The format of simple petty cash book is as under:
II. Analytical Petty Cash Book:
Analytical
Petty Cash Book or Columnar Petty Cash Book is different from the
simple petty cash book in the sense that in this type of petty cash
book, an analytical presentation of cash payment is made. All petty
payments are to be classified into different heads and different columns
are maintained.
The format of the analytical petty cash book is as under:
Explanations to the Various Columns & Balancing the Analytical Petty Cash Book:
Receipts
are recorded in one amount column on the receipts (debit) side known as
‘Amount Received’ column. However, for recording receipts and payments
the column for date, voucher number and particulars are common. For
recording petty expenses, petty cash book has one column on the payment
(credit) side which is known as ‘Total Amount’ column.
In
this column total of various expenses paid by same voucher and on the
same day are recorded at one place. The total amount column is followed
by number of columns for recording the heads of items which are most
common in the business enterprise.
After
allotting the columns to most common heads, one column is allotted for
recording miscellaneous items which are known as “Miscellaneous’ column.
Payments for which a separate column does not exist are recorded in
this column.
The
last column is allotted for ‘Remarks’. The nature of payments is
recorded in this column. All amount columns are totaled at the end of
the period. The total amount spent and the amount reimbursed shall be
shown in the total amount column.
Illustration 3: (Petty Cash Book)
Sharma
Sports Goods Co. follows the imprest system of petty cash under which,
Rs 6,000 was handed over to the petty cashier as on 1st March 2011.The expenses during the month were as follows:
Format of the Three Column Cash Book:
Example of Three Column Cash Book:
1991
Jan.1 Purchased office typewriter for cash $750; cash sales $315
Deposited cash $500
” 4 Received from A. Hussan a cheque for $2,550 in part payment of his account
” 6 Paid by cheque for merchandise purchased worth $1,005
” 8 Deposited into bank the cheque received from A. Hussan.
” 10 Received from Hayat Khan a cheque for $775 in full settlement of his account and allowed him discount $15.
” 12 Sold merchandise to Divan Bros. for $1,500 who paid by cheque which was deposited in the bank.
” 16 Paid Salman $915 by cheque, discount received $5
” 27 Paid to Gulzar Ahmad by cheque $650
” 30 Paid salaries by cheque $1,750
” 31 Deposited into bank the cheque of Hayat Khan.
” 31 Drew from bank for office use $250.
You are required to enter the above transactions in three column cash book and balance it.
Solution:
<!– [if !supportLists]–>A. <!–[endif]–>Hussan
Hayat Khan
Office Equipment Account
Purchase Account
Salman
Gulzar Ahmad
Salaries Account
Discount Account
Journal Entries
Journal
entries are the first step in the accounting cycle and are used to
record all business transactions and events in the accounting system. As
business events occur throughout the accounting period, journal entries
are recorded in the general journal to show how the event changed in
the accounting equation. For example, when the company spends cash to
purchase a new vehicle, the cash account is decreased or credited and
the vehicle account is increased or debited.
Identify Transactions
There
are generally three steps to making a journal entry. First, the
business transaction has to be identified. Obviously, if you don’t know a
transaction occurred, you can’t record one. Using our vehicle example
above, you must identify what transaction took place. In this case, the
company purchased a vehicle. This means a new asset must be added to the
accounting equation.
Analyze Transactions
After
an event is identified to have an economic impact on the accounting
equation, the business event must be analyzed to see how the transaction
changed the accounting equation. When the company purchased the
vehicle, it spent cash and received a vehicle. Both of these accounts
are asset accounts, so the overall accounting equation didn’t change.
Total assets increased and decreased by the same amount, but an economic
transaction still took place because the cash was essentially
transferred into a vehicle.
Journalizing Transactions
After
the business event is identified and analyzed, it can be recorded.
Journal entries use debits and credits to record the changes of the
accounting equation in the general journal. Traditional journal entry
format dictates that debited accounts are listed before credited
accounts. Each journal entry is also accompanied by the transaction
date, title, and description of the event. Here is an example of how the
vehicle purchase would be recorded.
Since
there are so many different types of business transactions, accountants
usually categorize them and record them in separate journal to help
keep track of business events. For instance, cash was used to purchase
this vehicle, so this transaction would most likely be recorded in the
cash disbursements journal. There are numerous other journals like the
sales journal, purchases journal, and accounts receivable journal.
Example
We
are following Paul around for the first year as he starts his guitar
store called Paul’s Guitar Shop, Inc. Here are the events that take
place.
Journal Entry 1 — Paul forms the corporation by purchasing 10,000 shares of $1 par stock.
Journal Entry 2 — Paul finds a nice retail storefront in the local mall and signs a lease for $500 a month.
Journal
Entry 3 — PGS takes out a bank loan to renovate the new store location
for $100,000 and agrees to pay $1,000 a month. He spends all of the
money on improving and updating the store’s fixtures and looks.
Journal
Entry 4 — PGS purchases $50,000 worth of inventory to sell to
customers on account with its vendors. He agrees to pay $1,000 a month.
Journal Entry 5 — PGS’s first rent payment is due.
Journal Entry 6 — PGS has a grand opening and makes it first sale. It sells a guitar for $500 that cost $100.
Journal Entry 7 — PGS sells another guitar to a customer on account for $300. The cost of this guitar was $100.
Journal Entry 8 — PGS pays electric bill for $200.
Journal Entry 9 — PGS purchases supplies to use around the store.
Journal
Entry 10 — Paul is getting so busy that he decides to hire an employee
for $500 a week. Pay makes his first payroll payment.
Journal Entry 11 — PGS’s first vendor inventory payment is due of $1,000.
Journal Entry 12 — Paul starts giving guitar lessons and receives $2,000 in lesson income.
Journal
Entry 13 — PGS’s first bank loan payment is due.
Journal Entry 14 — PGS has more cash sales of $25,000 with cost of goods of $10,000.
Journal Entry 15 — In lieu of paying himself, Paul decides to declare a $1,000 dividend for the year.
Now
that these transactions are recorded in their journals, they must be
posted to the T-accounts or ledger accounts in the next step of the
accounting cycle.
Exercise 1
Exercise: 1
What’s the entries for the following: <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
  1. Business started with cash 8,000 and plant & machinery 3,000.
  2. Stock purchase for sale (cash purchase)= 3,000, credit purchase = 5,000
  3. Wages paid 120,000(including 20,000 of future year).
  4. Salary paid 200,000 but due 110,000.
  5. Sale made for cash 600,000 & on credit 800,000.
  6. Depreciation 10 percent on plant & machinery.
  7. Goods costing 20,000 destroyed by fire.
  8. Payment made to creditor of 200,000 at 10 percent discount.
Exercise 2
Exercise 2.
Enter The Following Transactions In Cash Book With Cash And Bank Column Of Rao & Sons.
JUNE 2010 Particulars <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
  • 1 started business with cash Rs. 1,00,000
  • 3 opened a bank current a/c with SBI Rs. 60,000
  • 6 brought goods from ashok Rs. 15,000
  • 8 paid ashok by cheque Rs. 14,700 and received discount Rs. 300

TOPIC 3: Bank Reconciliation Statement

Meaning of Bank Reconciliation Statement
Define Bank reconciliation Statement
Bank
reconciliation is the process of matching the balances in an entity’s
accounting records for a cash account to the corresponding information
on a bank statement. The goal of this process is toascertain the
differences between the two, and to book changes to the accounting
records as appropriate. The information on the bank statement is the
bank’s record of all transactions impacting the entity’s bank account
during the past month. A bank reconciliation should be completed at
regular intervals for all bank accounts, to ensure that a company’s cash
records are correct. Otherwise, it may find that cash balances are much
lower than expected, resulting in bounced checks or overdraft fees. A
bank reconciliation will also detect some types of fraud after the fact;
this information can be used to design better controls over the receipt
and payment of cash.
If
there is so little activity in a bank account that there really is no
need for a periodic bank reconciliation, you should question why the
account even exists. It may be better to terminate the account and roll
any residual funds into a more active account. By doing so, it may be
easier to invest the residual funds, as well as to monitor the status of
the investment.
At
a minimum, conduct a bank reconciliation shortly after the end of each
month, when the bank sends the company a bank statement containing the
bank’s beginning cash balance, transactions during the month, and ending
cash balance. It is even better to conduct a bank reconciliation every
day, based on the bank’s month-to-date information, which should be
accessible on the bank’s web site. By completing a bank reconciliation
every day, you can spot and correct problems immediately. In particular,
a daily reconciliation will highlight any ACH debits from the account
that you did not authorize; you can then install a debit block on the
account to prevent these ACH debits from being used to withdraw funds
from the account without your permission.
It
is extremely unlikely that a company’s ending cash balance and the
bank’s ending cash balance will be identical, since there are probably
multiple payments and deposits in transit at all times, as well as bank
service fees (for accepting checks, recording deposits, and so forth),
penalties (usually for overdrafts), and not sufficient funds deposits
that the company has not yet recorded.
The
essential process flow for a bank reconciliation is to start with the
bank’s ending cash balance, add to it any deposits in transit from the
company to the bank, subtract any checks that have not yet cleared the
bank, and either add or deduct any other items. Then, go to the
company’s ending cash balance and deduct from it any bank service fees,
NSF checks and penalties, and add to it any interest earned. At the end
of this process, the adjusted bank balance should equal the company’s
ending adjusted cash balance.
Importance of Preparing a Bank Reconciliation Statement
Explain the importance of preparing a bank Reconciliation statement
Importance of Bank Reconciliation
  • Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
  • Cash
    is the most vulnerable asset of an entity. Bank reconciliations provide
    the necessary control mechanism to help protect the valuable resource
    through uncovering irregularities such as unauthorized bank withdrawals.
    However, in order for the control process to work effectively, it is
    necessary to segregate the duties of persons responsible for accounting
    and authorizing of bank transactions and those responsible for preparing
    and monitoring bank reconciliation statements.
  • If the bank
    balance appearing in the accounting records can be confirmed to be
    correct by comparing it with the bank statement balance, it provides
    added comfort that the bank transactions have been recorded correctly in
    the company records.
  • Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.
Reasons for the Differences between the Cash Book and the Bank Statement Balances
Give reasons for the differences between the Cash book and the Bank Statement Balances
The
reasons for the difference between the balance on the bank statement
and the balance on the books includeoutstanding checks,deposits in
transit, bank service charges, check printing charges, errors on the
books, errors by the bank, electronic charges on the bank statement not
yet recorded on the books, and electronic deposits on the bank statement
that are not yet recorded on the books.
If
an item is on the books but has not yet appeared on the bank statement
(outstanding checks, deposits in transit), the items are entered as an
adjustment to the balance per bank statement. Outstanding checks are a
deduction to the balance per bank; deposits in transit are an addition
to the balance per bank.
If
an item is on the bank statement but has not yet been entered on the
books, the items are entered as an adjustment to the balance per books.
Bank service charges, check printing charges, and other electronic
deductions that are not yet recorded on the books aredeductions from the cash balance on the books. Electronic deposits not yet on the books are added to the cash balance per books.
Techniques of Choking Accuracy of the Cash Book Recordings in Comparison with Bank Entries and their Resultant Balance
Determine
the techniques of choking accuracy of the cash Book recordings in
comparison with bank entries and their resultant balance
Preparing a Bank Reconciliation Statement
Following is a sample Bank Reconciliation Statement:
ABC LTD
Bank Reconciliation Statement as at 31 December 2011
Balance as per corrected Cash Book 1 xxx
Add:
Unpresented Cheques 2 xxx
Less:
Deposits in Transit 3 (xxx)
Errors in Bank Statement 4 (xxx)
Balance as per Bank Statement Xxx
1. Balance as per corrected Cash Book:
This
is the starting point of a bank reconciliation. Corrected bank balance
is calculated by adjusting the cash book ledger balance for transactions
that are recorded by the bank but not by the entity as shown below:
Balance as per Cash Book xxx
Add:
Direct Credits 5 xxx
Interest on Deposit 6 xxx
Less:
Bank Charges 7 (xxx)
Direct Debits 8 (xxx)
Standing Order 9 (xxx)
Errors in Cash Book 10 (xxx)
Balance as per corrected Cash Book Xxx
Bank Reconciliation Terminology
The key terms to be aware of when dealing with a bank reconciliation are:
  • Deposit in transit.
    Cash and/or checks that have been received and recorded by an entity,
    but which have not yet been recorded in the records of the bank where
    the entity deposits the funds. If this occurs at month-end, the deposit
    will not appear in the bank statement, and so becomes a reconciling item
    in the bank reconciliation. A deposit in transit occurs when a deposit
    arrives at the bank too late for it to be recorded that day, or if the
    entity mails the deposit to the bank (in which case a mail float of
    several days can cause a delay), or the entity has not yet sent the
    deposit to the bank at all.
  • Outstanding check. A check
    payment that has been recorded by the issuing entity, but which has not
    yet cleared its bank account as a deduction from cash. If it has not yet
    cleared the bank by the end of the month, it does not appear on the
    month-end bank statement, and so is a reconciling item in the month-end
    bank reconciliation.
  • NSF check. A check that was not
    honored by the bank of the entity issuing the check, on the grounds that
    the entity’s bank account does not contain sufficient funds. NSF is an
    acronym for “not sufficient funds.” The entity attempting to cash an NSF
    check may be charged a processing fee by its bank. The entity issuing
    an NSF check will certainly be charged a fee by its bank.
Bank Reconciliation Procedure
The
following bank reconciliation procedure assumes that you are creating
the bank reconciliation in an accounting software package, which makes
the reconciliation process easier:
  1. Enter the bank reconciliation software module. A listing of unclear checks and unclear deposits will appear.
  2. Check off in the bank reconciliation module all checks that are listed on the bank statement as having cleared the bank.
  3. Check off in the bank reconciliation module all deposits that are listed on the bank statement as having cleared the bank.
  4. Enter
    as expenses all bank charges appearing on the bank statement, and which
    have not already been recorded in the company’s records.
  5. Enter
    the ending balance on the bank statement. If the book and bank balances
    match, then post all changes recorded in the bank reconciliation, and
    close the module. If the balances do not match, then continue reviewing
    the bank reconciliation for additional reconciling items. Look for the
    following items:
  • Checks recorded in the bank records at a different amount from what is recorded in the company’s records.
  • Deposits recorded in the bank records at a different amount from what is recorded in the company’s records.
  • Checks recorded in the bank records that are not recorded at all in the company’s records.
  • Deposits recorded in the bank records that are not recorded at all in the company’s records.
  • Inbound wire transfers from which a lifting fee has been extracted.
Bank Reconciliation Problems
There
are several problems that continually arise as part of the bank
reconciliation, and which you should be aware of. They are:
  • Uncleared checks that continue to not be presented. There will be a residual number of checks that either are not presented to the bank for payment for a long time, or which are
  • never presented for payment. In the short term, you should treat them in the same manner as any other uncleared che
  • cks
    – just keep them in the uncleared checks listing in your accounting
    software, so they will be an ongoing reconciling item. In the long term,
    you should contact the payee to see if they ever received the check;
    you will likely need to void the old check and issue them a new one.
  • Checks clear the bank after having been voided.
    As noted in the preceding special issue, if a check remains uncleared
    for a long time, you will probably void the old check and issue a
    replacement check. But what if the payee then cashes the original check?
    If you voided it with the bank, the bank should reject the check when
    it is presented. If you did not void it with the bank, then you must
    record the check with a credit to the cash account and a debit to
    indicate the reason for the payment (such as an expense account, or an
    increase in a cash account or decrease in a liability account). If the
    payee has not yet cashed the replacement check, you should void it with
    the bank at once to avoid a double payment. Otherwise, you will need to
    pursue repayment of the second check with the payee.
  • Deposited checks are returned.
    There are cases where the bank will refuse to deposit a check, usually
    because it is drawn on a bank account located in another country. In
    this case, you must reverse the original entry related to that deposit,
    which will be a credit to the cash account to reduce the cash balance,
    with a corresponding debit (increase) in the accounts receivable
    account.
Another
possibility that may be causing problems is that the dates covered by
the bank statement have changed, so that some items are included or
excluded. This situation should only arise if someone at the company
requested the bank to alter the closing date for the company’s bank
account.
A bank statement or account statement
is a summary of financial transactions which have occurred over a given
period on a bank account held by a person or business with a financial
institution.Bank statements have historically been and continue to be
typically printed on one or several pieces of paper and either mailed
directly to the account holder, or kept at the financial institution’s
local branch for pick-up. In recent years there has been a shift towards
paperless, electronic statements, and some financial institutions offer
direct download into account holders accounting software.Some ATMs
offer the possibility to print, at any time, a condensed version of a
bank statement, commonly called a transaction history, or a transaction history may be viewed on the financial institution’s website or available via telephone banking.
Unpresented cheque
is a check that was written but has not yet been paid by the bank on
which it is drawn. An unpresented checkis also referred to as an
outstandingcheck or a check that has not yet cleared the
bank.Outstanding checks are deducted from the balance per the bank
in order to arrive at the adjusted or corrected balance per bank.When a
checkiswritten, it will be recorded as a credit to the Cash account in
thecompany’s general ledger. Whether the check clears the bank or not,
the company’s Cash account balance is proper.The Cash account balance
will be presented on thebalance sheet without any adjustment for
unpresented or outstanding checks.
Uncredited
check: is a check that has been presented to the bank but still are
under process by the bank. The customer account has been debited
already.
Example 1
Example !: balance of $4,000.00 <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
His bank statement showed a balance of $4,270.00 <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
On comparison the following were found: <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
  • check issued amounting to $2,500.00 has not been cashed
  • the bank rejected checks amounting to $140.00
  • standing order for a staples order of $700.00 was not noted.
  • a customer paid $170.00 directly into the bank without any notice to us.
  • bank charges of $160.00 were entered in the bank statement only.
  • a dividend of $250.00 was paid directly into the bank and not recorded in the cash book
  • checks for $1,650.00 were entered into the cash book and deposited in the bank but had not been cleared (deposited)
Prepare a bank reconciliation statement for the month.
Answer:
What
do we know? We know that the closing balance at the bank is $4,270 and
the closing cashbook balance is $4,000. Our aim is get the cash book
balance reconciled with the bank statement balance.
Step One <!– [if !supportLineBreakNewLine]–> <!–[endif]–>
Step 2
Here is where the reconciliation actually happens.
In
the original scenario we are told that $2,500 had not yet been cashed
so it does not show on the bank statement, and the $1,650 has been
deposited to the bank but not cleared so the bank has not included it in
the balance. We cannot add information to the bank statement (like we
did with the cashbook) because obviously the bank has control of that so
now we need to do our reconciliation table to sort this out, here it
is:-
Our
reconciliation table above does not affect the actual cashbook balances
but does help us to rest assured that all our figures are correct. The
outstanding withdrawals and deposits will show up on the next bank
statement.
Exercise 1

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