1. Cash sales $2000 posted in the books as $200.
2. Cash sales $ 2000 posted correctly in the sales account but recorded in the cash book at $200.
3. Sales of $69000 posted in the trial balance as $67000
4. Total receivables amounted to $21000 but posted in the trial balance as $20000.
Bank Reconciliation Statements:
When the business prepares a bank account because of its transactions with the bank, the bank also prepares the account of the business. When a certain amount of money is deposited into the bank, it is an asset for the business, but the same amount of money is a liability for the bank. Similarly, when an amount is overdrawn by the business, it is a liability for the business, but it is an asset for the bank. Thus, every single transaction is recorded in the ledgers of both the business as well as the bank holding the account of the business, but on the opposite sides. At the end of the accounting month when statements are being made, the balance achieved for the bank balance by the business and by the bank should always be the same. However, unfortunately, this is not usually true, and there is a discrepancy in the balances that the business and the bank holds, and hence there is a need to reconcile as to why there is a difference between the two balances.
The causes of the differences between the two are as follows:
1. Standing Order:
On the off chance that the business educates the bank to move a fixed measure of cash on a fixed date to a fixed individuals account, it is called standing order. It is quickly mulled over by the bank, however, it is recorded in the cash book once the bank statement is received at the end of the time span decided.
2. Direct Debit:
If the business instructs the bank to transfer a certain amount of money on a certain day to some person's account, the bank will record it immediately, but it will be documented in the cashbook once the bank statement is received.
3. Credit Transfer:
If someone deposits the money in the bank account of the business without informing the business, then it is immediately recorded in the bank but will be documented in the cashbook once the bank statement will be received. Also known as bank gyros.
4. Interest on Deposit:
If a certain amount of money is deposited into the bank account, then it earns an interest; these interests are the income of the business. The moment this interest is received, it is immediately recorded by the bank but will be recorded by the business once the bank statement will be received.
5. Interest in Overdraft:
If the business has overdrawn the bank account, then it has to pay interest daily until an overdraft is settled. This amount of interest on overdraft is immediately taken into consideration by the bank but will be recorded in the cash book once the bank statement will be received.
6. Bank Charges/ Service Charges:
The bank charges a certain amount of money against the services it provides to the business; these changes vary month to month depending on the services utilized. The amount of bank charges is only known to the bank and will be recorded by the business once the bank statements are received.
7. Dishonored Cheques:
These are those cheques that are bounced back or returned unpaid and are immediately taken into consideration by the bank but will be recorded by the business once the bank statement is received.
All the things mentioned above are those that are present in the bank statement but are not there in the cash book and hence are to be recorded in the adjusted cashbook. the following are the things that are present in the cashbook but are not there in the bank statement.
1. Uncredited Deposits:
These are the amounts that are deposited into the bank and recorded in the cashbook but are still in the process of clearing and hence are not recorded in the bank statement.
2. Unpresented Cheques:
These are the cheques issued by the business and recorded in the cashbook but are not presented to the bank for payment and hence are there in the cashbook but not in the bank statement.
All those things that are present in the cashbook but are not there in the bank statement are to be recorded in the bank reconciliation statement.
Why are cheques dishonored?
• Insufficient funds in the account of the business or individual who has issued the cheque.
• The signature on the cheque is not satisfied.
• Amount in words and amount in figures is different
• The individual who has issued the cheque died.
• The individual who has issued the cheque has become mentally disabled.
• The cheque is stale (a cheque becomes stale when it is more than six months old)
• Overwriting on the cheque
• The cheque is post-dated.
• The cheque is mutilated.
The accounting treatment of questions involving bank reconciliation comprises of:
1. Adjusted cashbook
2. Bank reconciliation statement
A bank is the only thing in accounting that can either be an asset or a liability. If there is a bank balance, then it is an asset for the business and hence will be recorded on the debit end. However, if there is a bank overdraft, then it is a liability, and hence there is a credit balance.
Bank Reconciliation Statement as at (the date mentioned of the year ending):
Balance as per bank statement xxx
Add: uncredited deposits xxx
Less: un-presented cheques xxx
Balance as per adjusted cashbook xxx
If the question has not given the balance as per bank statement but has given balance as per adjusted cash book and we have to calculate the balance as per bank statement, the statement will be as follows:
Balance as per Adjusted cashbook xxx
Add: un-presented cheques xxx
Less: uncredited deposit xxx
Balance as per bank statement xxx
When reconciling, we must ignore the following two things:
1. Any error corrected by the bank is to be ignored.
2. If the cheque number in the bank statement is older than the cheque number in the cashbook then all such entries are to be ignored.
In one variety of questions you will not be provided with the cashbook or the bank statement instead you will only be given the closing balances of the cashbook and the bank statement which obviously will be different thus creating a need to reconcile the cashbook with the bank statement. In such questions, you will also be provided with the causes of differences between the cashbook and the bank statement you have to read those differences and identify whether they are affecting cashbook or bank statement or both. If an adjustment is affecting the cashbook, it will be recorded in the adjusted cashbook, and if it is affecting the bank statement, it will be recorded in the bank reconciliation statement. Finally, the adjusted cash book balance will be equal to the bank reconciliation statement balance. In some questions, both of the statements are given and we have to compare as to what is present in the statement and what is not and then reconciling it.
The amount of bank balance present in the statement of financial position is always the adjusted cash book balance.
Note: The debit balance in the cashbook represents a positive balance, and it should be equal to the credit balance in the bank statement, which also represents a positive balance. The credit balance in the cashbook is a negative balance, which should be equal to the debit balance in the bank statement.
1. If an account is understated, then it will be corrected by making an entry on the same side by the amount of understatement.
2. If an account is overstated, it will be corrected by making an entry on the opposite side by the amount of understatement.
3. If an entry is made on the wrong side, it will be corrected by making an entry on the correct side by the double amount.
4. A bank is the only thing in accounting that can either be an asset or a liability. If there is a bank balance, then it will be a debit balance, and hence current assets, if there will be a bank overdraft, it will be a credit balance and hence current liability.
5. The amount of bank balance or bank overdraft in the statement of financial position is always the adjusted cash book balance. If the adjusted cash book balance is a debit balance, it is a current asset, and if the adjusted cash book balance is a credit balance, then it is a bank overdraft.
Control accounts are divided into two categories, sales ledger control account, and purchases ledger control account.
Sales ledger control accounts:
They are also named as revenue ledger or total receivables account. This is because it contains details of total receivables. Whatever is recorded in an individual receivables account is also recorded in the total receivables account.
Purchases ledger control account:
Purchases ledger control are also called total payable accounts as it contains details of total payables. Whatever is recorded in an individual payables account is also recorded in the total payables.
Contra setoff is always made with the minor of the two balances.
The source through which control accounts are prepared are the books of original entries.
The purpose of preparing control accounts are as follows:
1. To avoid errors
2. To detect frauds
3. To find credit purchases and credit sales
4. To find total receivables and total payables
5. To reconcile the control accounts with individuals accounts.
Minor balance occurs when a receivable for a very short period becomes payable or when the payable for a very short period becomes receivable.
Why does a minor balance exist?
1. Overpayment – not settled by a refund.
2. Return of goods after payment
3. Allowance for overcharge
4. Advance payment for goods to be bought later
5. Allowance for damaged goods after payment has been made
There are four important things in any control account, of which three must always be given, and fourth must be found. These are as follows:
1. Opening balances
2. Cash or bank amount (receipts or payments made depending on the title of the control account)
3. Credit sales/ Credit purchases
4. Closing balances