Bank Reconciliation Statement

Bank Reconciliation Statement

Definition:

“A schedule explaining any differences between the balance shown in the bank statement and the balance shown in the depositors accounting records is called as bank reconciliation statement”

Purpose:

Purpose of Bank Reconciliation Statement is to reconcile the balance of bank statement and the balance of depositors accounting records.

Causes of Difference in Bank Balance

Bank balance may differ from depositors accounting records due to following reasons

Deposit in Transit:

It means depositor has send cheques or cash etc for deposit but these cheques or cash etc is not added by bank yet due to any reason.

Example:

Cash hand over to bank security van after 5pm.

Outstanding Cheques:

Outstanding cheques are those cheques which are issued by depositor for payment. Sometimes the persons to whom these cheques are issued present these cheques for payment after a delay therefore this cause a difference between the balance of Bank Statement and the balance of Depositors Records.

Example:

Depositor Mr. “A” issued 2 cheques to his creditor Mr. “D” on December 30, 2010 but Mr. “D” presents these cheques in the bank on January 03, 2011.

Bank Errors and Omissions:

Any type of error or omission made by bank

Example:

Bank collect for depositor a dividend of Rs. 100000 but wrongly recorded as Rs. 10000.

Causes of Difference in Depositors Balance

Depositors balance may differ from bank statement due to following reasons

Direct Deposits:

Direct deposits are those deposits which are directly deposited by customers without informing the business.

Example:

a very common example of direct deposits is fee of university students which is directly deposited without informing university.

Service charges:

Any charges deducted by bank for providing any type of service. Sometimes bank deduct these charges on standing orders and depositor is informed after deducting these charges.

Example:

Bank collect dividend for depositor as according to standing orders and informed depositor after collecting these charges.

Dishonors Cheques:

Those cheques whose payment is not made by bank because the formalities are not completed.

Main Reason for Dishonoring of Cheques:

The main reason for dishonoring of cheques is insufficient funds

Book Errors or Omissions:

Any error or omission made by depositor in recording

Example:

Depositor issues a cheque for Rs. 100000 but recorded as Rs. 10000  

Summary Of IAS 2

Inventory in IAS 2:

Definition Of inventory:

In a business raw material work- in-process, semi finished and finished goods available for sale is named as inventory.

Purpose of IAS 2:

IAS 2 describes how to deal with inventory. It gives direction for assigning cost to inventory by identifying expenses attached with inventory.

It tells about

When inventory is purchased, how it should be recorded

When inventory should be recorded as an expense

Scope:

The following 3 types of inventories are included in IAS 2

Ø  Finished goods

Ø  Work in process

Ø  Raw material

The following inventories are not included in IAS 2

Ø  Work in process arising under construction contracts

Ø  Financial instruments e.g. shares and bonds

Ø  Biological assets related to agricultural activity and agricultural produce at the point of harvest e.g. cattle and crops

Fundamental Principle of IAS 2:

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories:

Cost should include all:

Ø  costs of purchase (including taxes, transport, and handling)

Ø  costs of conversion i.e. labour and overhead

Ø  Other costs incurred in bringing the inventories to their present location and condition

Note:

In some circumstances borrowing cost is also included in cost of inventory

Ø  Abnormal waste

Example: Waste by fire and accident.

Ø  Storage costs

Example: Rent of warehouse.

Ø  Administrative FOH unrelated to production

Example: Supervision expenses

Ø  Selling costs

Example: Commission to broker

Ø  Foreign exchange differences

Example: Value of PKR decreases in relation to dollar.

Ø  Interest cost when inventories are purchased with deferred settlement terms.

Example:

Cost Formulas:

Ø  Items which are not ordinarily interchangeable should be valued at individual cost basis.

Ø  For interchangeable items FIFO and Weighted Average Cost methods are used.

Write-Down to Net Realizable Value:

Ø  NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

Ø  Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.

Ø  Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Expense Recognition:

IAS 18 Revenue:

When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense.

[IAS 2.34]

Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosure

Ø  Accounting policy for inventories

Ø  Carrying amount, of merchandise, supplies, materials, work in progress, and finished goods.

Ø  carrying amount of any inventories carried at fair value less costs to sell 

Solution of Adjusting Entries - Case 4.1 - Financial and Managerial Accounting

Solution of Adjusting Entries - Case 4.1 - Financial and Managerial Accounting

Solution of Adjusting Entries - Case 4.1 - Financial and Managerial Accounting 15e is given blow;

A.  

No adjusting entry is required because the revenue has already been earned prior to December 31^st.

B.  

Adjusting Entry:

Unearned Revenue……….Dr

Revenue Earned ……….Cr

Explanation

3 months revenue was collected in advance on December 1^st and was credited to an Unearned Revenue A/c. At December 31^st an adjusting entry is needed to recognize 1/3 of this amount as revenue.

Effect of Adjusting Entry:

The effect of this adjusting entry will be reduced the liability, increase the revenue earned in this period and thus increase in owner’s equity.

C.  

Adjusting Entry:

Accounts Receivable……….Dr

Revenue Earned……….Cr

Explanation

Adjusting entry is required to record the revenue which we have earned because we have rendered a part of the services to the customer before the billed. Therefore the services we have rendered should be recorded.

Effect of Adjusting Entry:

The effect of the adjusting entry will increase in asset, increase the revenue which lead to increase in owner’s equity.

D.  

No adjusting entry is required because the benefit of insurance policy will start from January 2, 2010 and entry for the payment of unexpired insurance has already been recorded which is

Unexpired Insurance……….Dr

            Cash……………………..Cr

E.  

Adjusting Entry:

Depreciation Expense: Equipment………………Dr

Accumulated Depreciation: Equipment………Cr

Explanation

Equipment is our asset, it was debited to assets account, it is correct. But the adjusting entry is required because the depreciation of asset (equipment) is not recorded.

Effect of Adjusting Entry:

This adjusting entry will increase the expense which leads to decrease in revenue and thus owner’s equity also decreases.

F.   

Adjusting Entry:

Salaries Expense………..Dr

Salaries Payable…….Cr

Explanation

Adjusting entry is required because salaries have been earned by employees and due on January 2, 2010, but not yet have been recorded.

Effect of Adjusting Entry:

This adjusting entry will increase liabilities of business and expenses will be increased which leads to decrease in revenue earned thus owner’s equity also decrease.

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ACCOUNTING CYCLE

Following are the steps of accounting cycle

1.   Journal: First time entries are recorded in journal. Journal can be described as:

“It is a day to day record of business transactions which are recorded chronologically as they happened.”

Journal may include purchases journal, sales journal, and general journal etc.

2.   Ledger: After the journal, entries are posted in ledger. And for every accounting head there must be a ledger. Normally every ledger account has some balance

Ø  Debit Balance Of Ledger: If debit side of ledger is greater than credit side

Ø  Credit Balance Of Ledger: If credit side of ledger is greater than debit side

3.   Unadjusted Trial Balance: Balances of ledger are transferred in trial balance. Trial balance has two sides. One is debit side and other is credit side. Both sides of trial balance should be equal. And if both sides of trial balance are not equal it means there is some mistake either in journal or in posting.

4.   Adjustments: whenever we make advance payments or there are advance receipts then there is a need of adjustments.

Adjusting entries are made under matching concept according to which:

“Accounting period for which revenue recorded expenses should also recorded for that accounting period”

Note: Always remember that there is no word “cash” in adjusting entries.

5.   Adjusted Trial Balance: The trial balance which is prepared after adjustments is called adjusted trial balance and that amounts of accounting heads should be included in adjusted trial balance which will appear after adjustments.

6.   Financial Statements: After adjusted trial balance some financial statements are prepared. These are generally prepared financial statements:

Ø  Income Statement

Ø  Statement Of Retained Earnings

Ø  Balance Sheet

Ø  Cash Flow Statement

Ø  Statement Of Changes In Equity

7.   Closing Entries: Normally closing entries are performed at the end of accounting year.

8.   After Closing Trial Balance: Trial balance which is prepared after closing entries is called trial balance after closing entries.

It is just like “balance sheet” and includes only balance sheet items i.e. Assets, Liabilities, Owner’s Equity.

Accounting