Methods of Preparing Bank Reconciliation statement

Method 1: Bank reconciliation statement by Debit balance of Bank Column of Cash Book.

Method 2: Bank reconciliation statement by Credit balance as Cash Book (Overdraft).

Method 3: Bank reconciliation statement by Credit balance as per Bank Statement

Method 4: Bank reconciliation statement by Debit balance as per Bank Statement (Overdraft).

Bank Reconciliation Statement

"Bank reconciliation statement is a statement prepared mainly to reconcile the difference between the ‘Bank Balance’ shown by the Cash book and Bank statement."

A company's cash balance at bank and its cash balance according to its accounting records usually do not match. This is due to the fact that, at any particular date, checks may be outstanding, deposits may be in transit to the bank, errors may have occurred etc. Therefore companies have to carry out bank reconciliation process which prepares a statement accounting for the difference between the cash balance in company's cash account and the cash balance according to its bank statement.

  Reasons For Differences between a bank statement and cash accounting records

1	Items recorded in cash book, but not on the bank statement (timing differences)
1.1	Checks issued, but have not cleared the bank	After a check is issued, it may take some time before its holder presents it to the bank. Therefore, a bank statement would not show such checks until they are presented to the bank, but the company has already recorded such checks as cash deductions in their cash account(s).
1.2	Deposits in transit	Checks or amounts received and deposited into the bank account, but not yet processed and recorded by the bank. Similar to checks, such deposits have been recorded by the company, but are not yet reflected on a bank statement.
2	Items on the bank statement, but not in cash book
2.1	Bank interest / charges	Interest or charges already recorded by the bank, but not by the company as the company didn't know about them until the company received the bank statement.
2.2	Standing orders	A bank has a right to pay fixed amounts at regular intervals to another account. Such orders are given to the bank by the bank customer (the company). Usually the company may not know or record such amounts until a bank statement is received.
2.3	Direct debits / ACH	An instruction / permission that a bank account holder gives to another company to deduct amounts directly from its bank account. Direct debits are primarily used in Europe. In the United States, an equivalent is an ACH transfer initiated by a withdrawing party (biller). Again, the company may not know or record such amounts transferred until a bank statement is received.
2.4	Credit / wire transfers	An incoming transfer of money from one bank account to another. For example, a company returns goods purchased from its suppliers and receives the money back from them directly into the company's bank account.
2.5	Dishonored check	For example, a company's payer does not have enough money to cover the payment by check or the check is post-dated. The company has already recorded the check as a cash receipt in the cash register and ledger, but no cash was deposited into the company's bank account and is shown on a bank statement.
3	Cash book errors or bank errors
3.1	Cast errors	A transaction is recorded to an incorrect account.
3.2	Transposition	A figure in the amount is transposed by mistake.
3.3	Omissions	A transaction is not recorded.
3.4	Duplications	A transaction is posted twice.

Preparation of Bank Reconciliation statement

A bank reconciliation statement can be prepared by taking the balance either as per cash book or as per pass book as a starting point.

If the statement is started with the balance as per bank column of the cash book, the answer arrived at the end will be balance as per pass book.

Alternatively, if the statement is started with the balance as per pass book, the answer arrived at in the end will be the balance as per cash book.

A debit balance as per cash book shows the amount of the money in the bank, whereas, a credit balance means that the business has taken an overdraft. In the same way, a credit balance as per pass book shows a positive bank balance whereas debit balance as per pass book shows an Overdraft.

ADJUSTMENTS OF FINAL ACCOUNTS

In mercantile system of accounting, it is essential to adjust different accounts before the preparation of final accounts. It is quite common to adjust expenses paid in advance, incomes received in advance, income accrued but not received, bad debts, provision for bad debts depreciation on assets and soon. Journal entries are passed to effect the required adjustments; these entries are known as adjusting entries. There are many adjustments because earlier we have not passed any journal entry, so at the time of making final account we have to adjust them. 

Name of items	Adjustment entry	Effect on trading and profit and loss account	Effect on balance sheet
1. Closing stock	Closing stock a/c dr. xxx   To trading account xxx	Closing stock will write on the credit side of trading account	It will show as asset in the Balance sheet
2. outstanding expenses or expenses payable or expenses due but not paid	Expenses account dr. xxx   To outstanding exp. xxx	Outstanding expenses will add in respective expenses.  If it is direct it will go to trading account’s debit side , if it is indirect in nature then it will go to the debit side of profit and loss account	It will be the current liability so it will go to the liability side of balance sheet.
3. Advance or Prepaid expenses	Advance expenses a/c dr.    To expenses account xxx	It will deduct from respective expenses paid.	It will be the current asset so it will go to assets side of balance sheet
4. Accrued Income	Outstanding income dr. xx      To income account xxx	It will add in the income and go to credit side of profit and loss account	It will show as asset in the assets side of balance sheet
5. Income received in advance	Income account dr. xxx  To advance income a/c xx	It will deduct from the income received	It will shown as liability in the liabilities side of balance sheet
6 Goods use for personal use	Drawing account dr. xxx       To purchase account	It will deduct from purchase in the debit side of trading account =purchase –drawing in goods	It will deduct from capital in the liabilities side of balance sheet =capital- drawing in goods
7. Loss of goods by Fire or Accident	loss by fire a/c   Dr. xx To trading a/c If there is no insurance It will also go to profit and loss account Profit and loss a/c  dr. xxx     To loss by fire / accident	It will show on credit side of trading account. And also in profit and loss account’s debit side	It will not go to balance sheet
8. Depreciation	Depreciation account dr.xx  To respective asset a/c xxx	It will go to the debit side of profit and loss account	It will deduct from fixed asset. Because it decrease the value of an asset =fixed asset -depreciation
9. provisional for doubtful debts	If you have make any provision for doubt ful debts, its journal entry will passed: Provision for doubtful debts a/c                   dr. xx    To Bad debts account xx ( New bad debts which is not shown in trial balance will transfer to provision for doubtful debt account )	Net value of provision for doubtful debt account transfer to profit and loss account’s debit side =total bad debt + closing balance or provision of doubtful debt or this year provision - opening balance of provision for doubtful debts	Deduct from debtor = debtor – new bad debts – this year provision or closing balance of provision for bad debts
10. Prov. for discount on debtors	Profit and loss a/c  dr. xxx To Prov. for discount on Debtors a/c   xxx	The amount of provision for discount is calculated after deducting the provision for bad debts from sundry debtors. The amount should be debited to the profit and loss account of that year in which sales are made.	Deduct from Debtors = debtor – new bad debts – this year provision or closing balance of provision for bad debts – Prov. for discount on debtors.
11. Prov. for discount on creditors	Provision for discount on Creditor’s a/c Dr.        xxx   To Profit and loss a/c  xxx	Amount should be credited to the profit and loss account of that year in which purchases are made.	Deduct from Creditors. The amount of prov. for discount on creditors is calculated on total creditors.
12. Interest on Capital	Intt. on capital a/c dr. xx            To Capital a/c xxx	Interest on capital being an expense is debited to profit and loss account	Same amount of interest on capital is added to Capital.
13. Interest on Drawings	Capital a/c Dr.  To Interest on drawings a/c	The interest on drawings being an income is credited to profit and loss account	Same amount is shown as a deduction from the capital.
14. Goods given as charity or distributed as free samples.	Charity or Advertisement expenses a/c    dr.       xxx        To Purchase a/c   xxx	It will deduct from purchases in trading account and It will go to the debit side of P/L a/c as Charity or Advertisement expenses.
15. Commission to manager	Commission a/c  dr. xxx   To outstanding commission	It will shown in the debit side of profit and loss account as o/s commission to manager If it charge on the amount after charging such commission then we will calculate = profit before comm.*Rate/ 100+rate	It will shown as liability

Mind Map for Ratio Analysis Formulas

RATIO ANALYSIS

Important Formulas:

(1) Gross Profit Ratio     =          Gross Profit X 100

                                                        Net Sales

Gross Profit              = Net Sales – Cost of Goods Sold

Net Sales                 = Total Sales – Sales Return

Total Sales               = Cash Sales + Credit Sales

Cost of Goods Sold   = Opening Stock + Purchases + Direct Expenses  – Purchase Return –  Closing Stock

(2) Net Profit Ratio       =          Net Profit X 100

                                                      Net Sales

Net Profit          = Gross Profit – Operating Expenses + Non Operating Incomes – Non Operating Expenses

Operating Expenses = (SODA) Selling Expenses + Office Expenses   

                                                + Distribution Expenses + Administrative Expenses

(3) Operating Profit Ratio     =    Operating Profit X 100

                                                           Net Sales

Operating Profit        =    Gross Profit – Operating Expenses

      OR

Operating Profit        =    Net Profit + Non Operating Expenses – Non Operating Income

(4) Operating Ratio    =          Operating Cost X 100

                                                        Net Sales

Operating Cost       =          Cost of Goods Sold + Operating Expenses

(5) Operating Ratio + Operating Profit Ratio = 1

(6) Return on Investment (ROI)       =  Profit before Interest, Tax & Dividend X 100

                                                                             Capital Employed

Where, Profit before interest, Tax & Dividend = Profit after Tax + Interest + Tax

                                                = Profit after Interest + Interest

Capital Employed    =  Share Capital (Equity + Preference) + Reserves + Surplus/Profit & Loss A/c (Cr.)/Accumulated Profit + Debentures + Long term loans – [Preliminary Expenses – Discount/Commission or Issue of Share / Debenture – Profit & Loss A/c (Dr. Balance)]

ALTERNATIVELY

Capital Employed       =  Net Fixed Assets + Long Term Investments + Working  Capital

Net Fixed Assets        = Total Fixed Assets – Depreciation

Working Capital         = Current Assets – Current Liabilities

(7) (a)

Return on Shareholder's Funds   = Profit after Interest & Tax but before Dividend X 100

                                                            Equity or Shareholder's Funds

Equity or Shareholders' Fund  = Share Capital (Equity + Preference) + Reserve + Surplus / Profit & Loss A/c (Cr. Balance) or accumulated profits

                                                – Preliminary Exp. – Dis./Comm. on Issue Share & Debentures – Profit &   Loss A/c (Dr. Balance) or Accumulated Losses

Profit after Interest, Tax but before Preference Dividend

            = Profit after Tax – Preference Dividend

            = Profit after Interest – Tax – Preference Dividend

            = Profit before Interest – Interest – Tax – Preference Dividend

(7) (b) Return on Equity (ROE)

            = Profit after interest, Tax & Pref. Dividend X 100

                        Equity Shareholder's Funds

Equity shareholder's Fund         =          Equity Share Capital + Reserve + Surplus / Profit & Loss A/c (Cr.                                           Balance) or accumulated profits – Preliminary Expenses – Discount /                                        commission on issue of Share Debentures – Profit & Loss A/c (Dr.                                      Balance) or Accumulated Losses

(8) Interest coverage (Debt Service) Ratio = Profit before Interest, Tax & Dividend

                                                                            Interest on Debentures & Loans

(9) Current Ratio      =  Current Assets 

                                      Current Liabilities

Current Assets  = Cash in Hand + Cash at Bank + Bills Receivable + Sundry Debtors + Marketable Securities or Short term  investments + Loans & Advances + Stock / Inventories + Prepaid Expenses + Accrued Incomes

Current Liabilities  = Sundry Creditors + Bills Payable + Provision for Bad Debts + Provision for Taxation + Bank Overdraft + Outstanding Expenses + Income received in Advance + Short term Loans

(10) Liquid Ratio / Quick Ratio / Acid Test Ratio

                                                =          Liquid Assets or Quick Assets

                                                                 Current Liabilities

            Liquid Assets = Current Assets – Closing Stock – Prepaid Expenses

(11) Stock Turnover Ratio (STR)  =          Cost of Goods Sold

                                                                      Average Stock

            Average Stock = ½ (Opening Stock + Closing Stock)

(12) Debtors Turnover Ratio (DTR) =              Net Credit Sales in a year 

                                                                     Average Accounts Receivable

        Average A/c Receivable = ½ (Opening A/c Receivable + Closing A/c Receivable)

            Accounts Receivable = Debtors + B/R

                        OR

   Account Receivable = Opening Debtor + Opening B/R + Closing Debtors + Closing B/R

                                                                        2

(13) Average Debt Collection Period   =        Days or Months in a year

                                                                        Debtors Turnover Ratio

Alternatively, Average Debt Collection Period

            = Days or Months in a year X Accounts Receivable in a year

                           Net Credit Sales in a year

(14) Creditors Turnover Ratio (CTR)   =    Net Credit Purchases  

                                                                Average Accounts Payable

            Average A/c Payable = ½ (Opening A/c Payable + closing A/c Payable)

            Accounts Payable      = Creditors + B/P

(15) Average Payment Period =     Days or Months in a year

                                                         Creditors Turnover Ratio

Alternatively,

 Average Payment Period =   Days or Months in a year X Accounts Payable in a year

                                                            Net Credit Purchases in a year

(16) Capital Turnover Ratio     =       Net Sales    

                                                      Capital Employed

(17) Fixed Assets Turnover Ratio   =               Net Sales   

                                                                     Net Fixed Assets

            Net Fixed Assets = Gross Fixed Assets - Depreciation

(18) Working Capital Turnover Ratio   =            Net Sales  

                                                                     Working Capital

           

            Working Capital = current Assets – Current Liabilities

(19) Assets Turnover Ratio      =           Net Sales    

                                                            Total Assets

            Total Assets = Fixed Assets + Long Term Investment Current Assets

(20) Debt-Equity Ratio      =   Long term Debt or Loans  

                                               Equity or Shareholders' Funds

            Long term Debts            =          Debentures + Loans or Mortgage

      OR Long Term Debts            =          Total Debts – Current Liabilities

(21) Debt Total Fund Ratio         =          Long Term Debts   

                                                            Total Long Term Funds

            Total Funds Term Fund = shareholder's Funds + Long Term Debts

(22) Proprietary Ratio      =          Shareholder's Funds or Proprietor's Fund

                                                                        Total Assets

Shareholder's Funds = Share Capital (Equity + Preference) + Reserves+ Surplus/Accumulated Profit or P/L A/c(Cr) + Preliminary Exp. –  Discount on issue of Shares/Debentures– P/L A/c (Dr.)