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

ACCOUNTING ERRORS

ACCOUNTING ERRORS

The statement of Trial Balance is not a final and conclusive proof of the complete correctness of books. This is because, there are certain errors in the books of accounts which may be committed while recording, classifying or summarizing the financial transactions which are not disclosed by the trial balance. The following are some of the errors which will not affect the agreement of Trial Balance:

·         Classification of Errors

Errors can be classified on the basis of its nature:

I. Errors of Omission.  

II. Errors of Commission.

III. Errors of Principles.

IV. Compensating Errors.

I.       Errors of Omission: When business transaction is either completely or partly omitted to be recorded in the books of prime entry it is called an ‘error of omission’. When a business transaction is omitted completely, it is called a ‘complete error of omission”, and when a business transaction is partly omitted, it is called a “partial error of omission”. A complete error of omission does not affect the agreement of trial balance whereas a partial error of omission may or may not affect the agreement of trial balance.

An example of a complete error of omission is goods purchased or sold may not be recorded in the purchase book or sales book at all. This error will not affect the trial balance. An example of a partial error of omission is goods purchased for Rs. 5,500 recorded in Purchase Book for Rs. 550. This is a partial error of omission.

II.    Errors of Commission: Errors of Commission may be occurred by wrong recording in the books of original entry. The committed errors arise due to the negligence of the Accountant while recording, totaling, carrying forward and balancing the accounting process. The errors of commission may arise due to the following ways :

(1) Entering the wrong amount to the correct side of correct subsidiary books

(2) Entering the correct amount to the wrong side of correct subsidiary books

(3) Entering the correct amount to the correct side of wrong subsidiary books

(4) Posting wrong amount to the correct side of the accounts

(5) Posting correct amount to the wrong side of the accounts

(6) Posting to the correct side of the account but making double posting.

III. Errors of Principles: When a business transaction is recorded in the books of original entries by ignoring the basic/fundamental principles of accountancy it is called an error of principle. Some examples of these errors are:

(a)    When revenue expenditure is treated as capital expenditure or vice-versa, e.g. building purchased is debited to the purchase account instead of the building account.

(b)   Revenue expenses debited to the personal account instead of the expenses account, e.g. salary paid to Mr. Ashok, a clerk, for the month of June, debited to Ashok’s account instead of salary account.

IV. Compensating Errors: Compensating errors refer to those errors which are compensated by each other. In other words, the effect of one error is compensated by the other. Such errors which do not affect the agreement of the trial balance. For example, if wage paid Rs. 1,000 is debited in the Wage Account at Rs. 1,500 and dividend received Rs. 1,500 is credited in the Dividend Account at Rs. 2,000, the excess debit in Wage Account is compensated by an excess credit of Rs. 500 in Dividend Account.

Final Accounts of Trading Concern

FINAL ACCOUNTS OF TRADING CONCERN

1. Gross Profit =Net Sales – Cost of goods sold

Net sales =

Total Sales – Sales Returns or Returns inward

Cost of Goods sold =

Opening Stock + Net Purchases + Direct expenses - Closing Stock

Net Purchases =

Total purchases – Purchases returns or returns outward

Direct Expenses =

Purchasing expenses for goods + Manufacturing Expenses

D i r e c t  E x p e n s e s

			Purchasing expenses for goods					Manufacturing Expenses
			1.	Carriage OR Carriage Inward OR Carriage			1.	Coal, Gas, Steam, Water, Fuel, Power
				on purchases OR Carriage & Cartages.
			2.	Freight OR Railway Freight			2.	Excise duty
			3.	Octroi			3.	Productive Expenses
			4.	Royalty			4.	Wages OR Wages & salary
			5.	Import duty			5.	Factory lighting
			6.	Custom duty			6.	Factory Heating
			7.	Dock charges			7.	Factory Rent, Rates, Taxes and Insurance
			8.	Clearing charges			8.	Other Factory Expenses
			9.	Unloading Charges			9.	Haulage
			10.	Order placement expenses			10.	Factory manager or Works Manager salary
							11.	Factory worker’s / staff’s salary
							12.	Stores Overheads
							13.	Oiling and Cleaning of Machines
							14.	Technical Directors Fees

2. Net Profit =

Gross profit + All Incomes + All Gains OR Profits - Indirect expenses – All Losses

Incomes

Gains

Indirect expenses

Losses

Operating Expenses

Non

Office and

Selling and

Operating

Distribution

Administrative

Expenses

Expenses

Expenses

Commission

Profit on sale of

Salaries &

Carriage

Loss on sales of

Interest on loan

Received A/c

Assets

Wages

outward

fixed Assets

Discount

Profit on sale of

Rent, rates &

Carriage on

Interest on

Loss on Sales of

Received A/c

investments

Taxes

sales

capital

Investments

Interest

Bad debts

Printing &

Loading

Donations

Bad Debts

Received A/c

recovered

Stationery

Charges

Rent Received

Grant received

Lighting

Advertisement

Charity

Loss by fire

Interest on

Insurance

Commission

Finance

Loss by theft

Investments

premium

Charges

Dividends on

Telephone

Brokerage

Loss by

Shares

Charges

accidents

Tax refund

Legal charges

Export duty

Interest on

Audit fees

packing charges

drawings

Establishment

Delivery van

exp.

exp.

Trade exp.

Stable exp.

Discount

General Charges

allowed

Bank Charges

Agent’s Salary

Postage &

Sales tax

Telegrams

Depreciation on

Depreciation on

Sales

office’s Fixed

Department’s

Assets

Fixed Assets

Repairs &

Entertainment

Maintenance

Expenses

Director fees

Sales Promotion

Expenses

Trading and Profit & Loss Accounts (For the year ended …..)

Dr.					Cr.
Particulars		Amounts	Particulars		Amounts
To Opening Stock		XXX	By Sales	XXX
To Purchases	XXX		(-) Sales Returns	(XXX)	XXX
(-) Purchases returns	(XXX)
(-) Dis. on purchases	(XXX)	XXX
To Direct Expenses		XXX	By Goods withdrawn by Owner*		XXX
To Gross profit c/d		(B/F)	By Goods distributed as sample*		XXX
*These items, alternatively			By Goods gave as charity*		XXX
			By Goods lost*		XXX
deducted from purchases.			By Closing Stock		XXX
			By Gross loss c/d		(B/F)
Total		XXX	Total		XXX
To Gross loss b/d		XXX	By Gross profit b/d		XXX
To Indirect Expenses		XXX	By All Incomes		XXX
To All Losses		XXX	By All Gains & profits		XXX
To Net Profit		(B/F)	By Net Loss		(B/F)
(Transferred to Capital A/c)			(Transferred to Capital A/c)
Total		XXX	Total		XXX

Balance Sheet (As on ……………………)

Liabilities

Amounts

Assets

Amounts

Bank overdraft

XXX

Cash in Hand

XXX

B/P

XXX

Cash at bank

XXX

Creditors

XXX

Debtors

XXX

Outstanding Expenses

XXX

B/R

XXX

Advance Income

XXX

Closing Stock:

XXX

Loans

XXX

Prepaid Expenses

XXX

Bank Loans

XXX

Accrued Incomes

XXX

Capital

XXX

Investments

XXX

(+) Additional Capital

XXX

Loan and Advances

XXX

(+) Interest on Capital

XXX

Goodwill

XXX

(+) Net Profit

XXX

Land and Building

XXX

XXX

Plant & Machinery

XXX

(-) Drawings

(XXX)

Furniture, Fixtures & Fittings

XXX

(-) Interest on Drawings

(XXX)

Car

XXX

(-) Net Loss

(XXX)

XXX

Loose Tools

XXX

Patents right

XXX

Copy right

XXX

Trade Mark

XXX

Total

XXX

Total

XXX