Bank reconciliation statement is a report which compares the bank
balance as per company's accounting records with the balance stated in the bank statement. It is normal for a company's bank balance as per accounting records to differ from the balance as per bank statement due to timing differences. Certain transactions are recorded by the entity that are updated in the bank's system after a certain time lag. Likewise, some transactions are accounted for in the bank's financial system before the company incorporates them into its own accounting system. Such timing differences appear as reconciling items in the Bank Reconciliation Statement. The purpose of preparing a Bank Reconciliation Statement is to detect any discrepancies between the accounting records of the entity and the bank besides those due to normal timing differences. Such discrepancies might exist due to an error on the part of the company or the bank.
1. Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank. 2. 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. 3. 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
When a check is issued to a creditor, it is recorded on the credit side of the cash book in bank column. The bank will record it on the date when it is paid. In most of the cases a check cannot be presented for the payment by the creditor on the date on which it is drawn. So long the check is not presented to the bank, the cash book balance and the pass book balance will differ.
When a check is received from a debtor, it is recorded in the cash book on the date when it is deposited with the bank for collection. But the bank will record it in depositor's account on the ate when it is actually collected by the bank from the concerned bank. So long the bank cannot collect the amount, the cash book balance and pass book balance will disagree.
Sometimes the debtors deposit the amount directly to our bank a/c instead of paying cash to us. In such a case the bank will transfer the amount to our account and sends us an intimation of this transaction. But usually, there is some delay in receiving this information from the bank. So long the intimation is not received by us, the cash book balance and the pass book balance will disagree. For this, the cash book will show less balance and the pass book will show more balance.
Sometimes the bank collects and credits our account with dividend on shares, interest on govt. securities etc. as per our instructions and sends an intimation to us. But it takes a few days to receive this intimation from the bank and we record it in cash book on the date of receipt of this intimation. For this, the cash book will show less balance and the pass book will show more balance.
The bank allows us interest on our deposits and credits the amount of interest to our account and sends intimation to us On receipt of the intimation, we record it in the cash book. So long the information is not received by us, the cash book balance and the pass book balance will not agree. For this, the cash book will show less balance and pass book will show more balance.
Sometimes the bank pays insurance premium, factory rent, interest on debentures, trade subscription etc. on our behalf as per standing order. The bank debits our accounts and sends intimation to us. On receipt of intimation for the bank, we record it in our cash book. For this, there will be a disagreement between cash book and pass book.
Our account is debited with bank charges and interest on overdraft and intimation is sent to us by the bank. On receiving the intimation from the bank, we record them in the cash book. For this the cash book will show more balance and the pass book will show less balance.
In business, errors and omissions are very common. Someone may forget to record something or record it but in a wrong way. The cash book balance and the pass book balance can also disagree if there is an error or mistake in the cash book or in the pass book.
Recoding the transactions in general journal is very convenient, if the transactions are a few. But where numerous bills are drawn and accepted by a business man, than it is advisable for him to record them in special journals (books) known as bills receivable book and bills payable book. The bills drawn and received are recorded in bills receivable books and bills accepted are recorded in bills payable book. The total of the bills receivable book shows the total amount of the bills drawn and received. This total will be posted to the debit side of bill receivable in ledger. The parties from whom the bills have been received will be credited with the amount shown against their names. In the same way, the total of the bills payable book will be posted to the credit side of bills payable account in ledger. The parties to whom acceptances have been given are debited. When these two special books are maintained in a business, the general journal is used only when a bill is endorsed in favor of a creditor.When a bill receivable and a bill payable are dishonored.When a bill is renewed.
A suspense account is the section of a company's books where it records its unclassified debits and credits. The suspense account temporarily holds these unclassified transactions while the company makes a decision about their classification. Transactions in the suspense account continue to appear in the general ledger for the company. In investing, a suspense account is a brokerage account where an investor places cash or short-term securities temporarily while deciding where to invest them for a longer term.Suspense accounts are used when your trial balance is out of balance or when you have an unidentified transaction. The suspense account is a general ledger account that acts as a holding account until the error is discovered or the unknown transaction is identified. When working with the trial balance, you can open one suspense account to hold all of the discrepancies until you find them. However, suspense accounts are temporary accounts that must be closed by the end of your accounting cycle.
The suspense account is listed on the trial balance under the Other Assets heading. It remains there until the reasons for the imbalance are discovered and corrected. If your trial balance debits are larger than the credits, the difference is recorded in the suspense account as a credit. Conversely, if the trial balance credits are larger than the debits, the difference is recorded in the suspense account as a debit. Once you find the reason for the trial balance and correct it, the account is closed and removed from the trial balance.
A suspense account is opened whenever you receive a payment and you cannot identify which invoice the customer wants paid or which customer made the payment. If your customer sent in a partial payment, contact the customer to find out which items or invoices the payment covers. If you do not know who made the payment, review the open invoices to try to match up the payment. Before posting the payment, call your customer to verify the payment is correct. If you cannot identify the customer, hold the payment in suspense until a customer comes forward to claim the payment.
Accounts payable suspense accounts are opened when you purchase a fixed asset by making payments but will not receive the asset until it is fully paid off. The suspense account lets you record your payments without assigning the payments to a specific equipment or machinery account. Otherwise, combining the payments with an existing fixed asset would distort the value of that asset. Once the final payment is made and the asset is received, you close the suspense account and open a separate account for the new fixed asset.
Open a suspense account by recording the full amount in question. For example, you might receive an unknown payment for $500. To account for the payment, open a Suspense Account and credit the account with the full $500. To balance the transaction, make a debit to Cash for $500. When you find out which customer made the payment, debit the Suspense Account for $500 and credit your Account Receivable customers account for $500. This closes out your suspense account and posts the payment to the correct customer account.
A bad debt is an account receivable that has been clearly identified as not being collectible. This means that you remove that specific account receivable from the accounts receivable account, usually by creating a credit memo in the billing software and then matching the credit memo against the original invoice; doing so removes both the credit memo and the invoice from the accounts receivable report. When you create the credit memo, credit the accounts receivable account and debit either the bad debt expense account (if there is no reserve set up for bad debts) or the allowance for doubtful accounts (which is a reserve account that is set up in anticipation of bad debts). The first alternative for creating a credit memo is called the direct write off method, while the second alternative is called the allowance method for doubtful accounts. A doubtful debt is an account receivable that might become a bad debt at some point in the future. You may not even be able to specifically identify which open invoice to a customer might be so classified. In this case, create a reserve account (also known as a contra account) for accounts receivable that may eventually become bad debts, estimate the amount of accounts receivable that may become bad debts in any given period, and create a credit to enter the amount of your estimate in this reserve account, which is known as the allowance for doubtful accounts. The debit in the transaction is to the bad debt expense. When you eventually identify an actual bad debt, write it off (asdescribed above for a bad debt) by debiting the allowance for doubtful accounts and crediting the accounts receivable account. For example, ABC International has $100,000 of accounts receivable, of which it estimates that $5,000 will eventually become bad debts. It therefore charges $5,000 to the bad debt expense (which appears in the income statement) and a credit to the allowance for doubtful accounts (which appears just below the accounts receivable line in the balance sheet). A month later, ABC knows that a $1,500 invoice is indeed a bad debt. It creates a credit memo for $1,500, which reduces the accounts receivable account by $1,500 and the allowance for doubtful accounts by $1,500. Thus, when ABC recognizes the actual bad debt, there is no impact on the income statement - only a reduction of the accounts receivable and allowance for doubtful accounts line items in the balance sheet (which offset each other). Thus, a bad debt is a specifically-identified account receivable that will not be paid and so should be written off at once, while a doubtful debt is one that may become a bad debt in the future and for which it may be necessary to create an allowance for doubtful What is Balance Sheet ?
A balance sheet (also called the statement of financial position), can be defined as a statement of a firm’s assets, liabilities and net worth. It provides a snapshot of a business at a point in time. These are prepared at the end of an accounting period like a month, quarter or year end. Comparison of balance sheets over years helps to gauge the financial health of a business. It got its name as assets minus liabilities (net assets) must equal the owner’s equity (they must balance). Every business will generally need a balance sheet while applying for loans or grants, submitting taxes or seeking potential investors. balance sheet Balance sheet is based on the formula: Assets = liabilities + Net worth
The three major components of the balance-sheet that indicate what the company owns and owes are Assets, Liabilities and Owner’s Equity. Assets: Assets can be defined as the valuables that the company owns to benefit from or are used to generate income. They are the resources of the company that have future economic value. These are categorized into tangible and intangible assets. The tangible assets are further bifurcated into current, long term and other assets. The intangible assets are trademark, copyrights, goodwill to mention a few. Current assets include the cash, accounts receivable, prepaid expenses and all that can be converted into cash within a year. Long term assets are also called fixed assets. They are distinguished from the current assets due to their longevity in generating revenues. All fixed assets except for land are shown on the balance-sheet at original cost less depreciation. Liabilities: Liabilities are debts owed by the business. These are claims of the creditors against the assets of the business. These are claims or obligations that arise out of past or current transactions. Liabilities are classified into current and long term liabilities. Current liabilities are accounts payable, accrued expenses, taxes payable, the current due within one year portion of long term debt and any other obligations due within a year.Long term liabilities are debts that must be repaid by the business in more than one year from the date of the balance sheet. Net worth (Owner’s Equity): Owner’s equity (called when it’s sole proprietorship) sometimes is also referred to as the book value of the company because owner’s equity is equal to the reported asset minus the reported liability.
Assets = liabilities + Net worth, this can be reposed to yield the definition of net worth, which is the balance after the liabilities are subtracted from the assets of the business. This section of the balance sheet includes: Paid up capital Retained earnings Treasury stock balance sheet
The two most common formats of reporting the balance sheet are the vertical balance sheet (where all line items are presented down the left side of the page) and the horizontal balance sheet (where asset line items are listed down the first column and liabilities and equity line items are listed in a later column). The vertical format is easier to use when information is being presented for multiple periods. Example of Balance Sheet balance sheet of Indian Hume Pipes Ltd.
The general financial state of the business at a specific point in time The amount of capital retained in the business The productivity, growth and solvency of the business The pace at which the assets can be converted to capital
Balance Sheet provides an accurate picture of the business status. While the profit and loss statement provides the profit made in a transaction, balance sheet gives the details of the bills the business owes to the vendors. Every balance sheet is unique; while a business may experience a high profit account, it can simultaneously have a poor balance sheet if the total net asset value is low and vice versa. Balance sheet determines the financial strength of a business and helps in future financial planning.
Balance-Sheet provides the investors and potential lenders with the information needed to take decisions while lending money or resources. It reflects the company’s ability to collect and pay debts on time. On the basis of this, one can form an opinion of the company’s risk and return prospects.
Balance Sheet helps to calculate the ratios to determine a company’s long-term profitability and short-term financial outlook. Ratios like the current ratio and the acid test or liquidity ratio are calculated using information from the balance sheet. These ratios help obtain a very thorough summary of the company’s financial health by analyzing its cash position, working capital, liquidity and leverage. It also provides insight into the company’s likelihood of defaulting on its credit obligations or even its bankruptcy risk.
As the balance-sheet gives the financial snapshot at a given point of time, it could be misleading sometimes. For e.g. the analysis could get distorted if the company’s cash position at year end is high, indicating high reserves, but the company may intend to distribute it in the form of dividends.
The balance sheet does not provide the true value of the assets as they are reported at the historical costs. It does not reflect the current market valuation.
The balance sheet has some of the current assets valued on estimated basis, so it does not reflect the true financial position of the business. Also there is complete omission of the valuable non monetary assets from the balance-sheet.
Balance-sheet is one of the essential financial statements needed to take appropriate and sound financial decisions. Blended with the other components (Profit and Loss Statement, Cash Flow Statement and Statement of Owner’s Equity) of financial reporting, one can decide whether the business under focus is right as an investment option.
( a ) It is a primary source of income of a non-profit organisation. It is usually collected every month from all the ordinary members. Subscription is the amount paid by the members to keep their membership alive. The subscription amounts are treated as revenue receipts. Subscription received from members is credited to Income and Expenditure Account on accrual basis i.e. total amount receivable from all the members as subscription should be considered as income for the year.
( b ) Charitable institution may receive donations from time to time. If the amount is smalland if such collections are frequent, then they may be treated as an income. Donations may also be of two types— General Donations and Specific Donations. Any donations received, not for a specific purpose, are treated as General Donations. The General Donations of comparatively small amount may be taken to Income and Expenditure Account. General Donations of comparatively huge amount, which are of non-recurring nature, may be added to the Capital Fund. The nature and size of the organisation decide about the amount of donation being small or big.In case of donations received for any specific purpose then it is termed Specific
Donations. Such amount cannot be used for any other purpose, except the purpose of donor.Therefore, such amount may be shown in Balance Sheet (liability side). All the Donations debited to Receipts and Payments Account and these amounts may be credited to Income and Expenditure Account or Liability side of the Balance Sheet, if it is for a specific purpose.
( c ) It is like donation. It is the amount given to a non-trading concern as per the will of deceased person. It is taken to the Receipts and Payments Account as Capital Receipts. These are not income but may appear in Balance Sheet. These types of receipts are of non-recurring nature.
( d ) Non-trading concerns usually collect subscriptions every month from their ordinary members. There are another category of members called “Life Members”, from whomthe subscriptions are collected as a lump sum.Such subscriptions are called life subscription and are capital receipts. This can also be kept in a separate account and an amount equal to annual subscription can be transferred to subscription account. The balance in such account, on the death of the member must be transferred to Capital Fund. ( e) It is a Real Account. It is a consolidated summary of Cash Book. It is prepared at the end of the accounting period. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.Cash Book consisting of entries of receipts and payments in a chronological order while the Receipts and payments is a summary of total cash receipts and cash payments.It starts with opening balance of Cash and Bank and ends with closing balance of Cash and Bank. It does not take into account outstanding amounts of receipts and payments.Receipts and Payments may be of Capital or Revenue nature; they may relate to the current or previous year or subsequent year; so long as they are actually received or paid, they must appear in this account.
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate from the participants' other business interests.
Mainly there are two ways of keeping joint venture account. Those are 1. Without keeping separate separate set of books, 2. With keeping separate set of books.
1. A separate set of books for joint venture transaction is not made under this method. in this method, every co-ventures record all the transactions in his books in connection with the joint venture. Two types of accounts are maintained under this method namely joint venture account and co-venture's account. There are again three variations. i. Each co-venture records his own transactions as well as the transactions of the other co-venture and also opening other co-venture's account for final settlement. ii. Only one co-venture records the account iii. Each co-venture records his own transactions only, which is known as memorandum joint venture method. Each co-venture will open two principal accounts under this method. Those are Joint venture account and personal accounts of the co-venture.
This account is prepared to ascertain the profit or loss on joint venture. Hence, it can be treated as nominal account. Goods purchased, goods supplied by the co-ventures, expenses incurred etc. are debited and sale proceeds, unsold stock, stock taken over by co-venture etc. are credited to joint venture account. The final balance of joint venture account shows profit or loss which is transferred to co-ventures' account according to their profit sharing ratio.
The co-venture's account is debited with goods and sales proceeds taken over, remittance share of profit. Similarly, the personal account is credited with cash, goods supplied by the co-ventures. 2. When the size of the venture is considerably large, then a separate set of books of accounts may be maintained. Under this system, accounts are maintained just like in the case of partnership. While preparing the accounts, the principle of double entry must be followed. Under this method, the following ledgers are maintained. i. Joint Venture Account ii. Joint Bank Account iii. Co-venture's Account Joint Venture Account The joint venture account is very unique one where all the purchases, procurement related expenses, selling and distribution expenses as well as expenses related to the joint ventures are being debited like trading and profit and loss account. No any separate account of purchases, wages or any other expenses are opened. The goods supplied by co-ventures etc. are also debited to it. Likewise, sale proceeds, closing stock, goods taken over by co-ventures are credited to joint venture account. If the joint venture account shows credit balance, it means profit and if it shows debit balance, it is loss and transferred to co-ventures personal account.
It is just like a cash book. It records all the cash and bank transactions. It is opened with the contribution of cash made by co-ventures. The investment made by then are deposited into a bank account and will operate this in their joint name. Any receipts of cash and any expenses related to venture are recorded in their account. The joint bank account is closed by transferring balance to the personal account of co-ventures.
Like the capital accounts in partnership, co-venture account is opened in joint venture. it is credited with the investment of each co-venture and debited with the drawings made by them. The profits of the venture is credited and loss of venture is debited. This account comes to end by cash payment from joint bank account.
(i) In general, commission agents purchase and sell items on behalf of a principal, usually a company. The nature of the job depends on the field of employment. Agriculture produce commission agents who work for small businesses, for instance, travel to farms and orchards, purchasing fruits, vegetables and dairy products for principals such as grocers and restaurants, or sell such items to grocers and restaurants on behalf of farmers. These individuals work independently as contracted, third-party workers, not employees of their principals. Commission agents conduct business under their own names, which affords a measure of anonymity to their principals while allowing the agents a certain degree of autonomy. As experts in their field, commission agents can assist small businesses in making the most of their limited budgets
( ii )
Normal loss means that loss which is inherent in the processing operations. It can be expected or anticipated in advance i.e. at the time of estimation.
The cost of normal loss is considered as part of the cost of production in which it occurs. If normal loss units have any realisable scrap value, the process account is f credited by that amount. If there is no abnormal gain, then there is no necessity to maintain a separate account for normal loss. Journal Entry: (i) Normal Loss A/c …Dr. To Process A/c (ii) Cost Ledger Control A/c …Dr. (Scrap value) To Normal Loss
Abnormal loss means that loss which is caused by unexpected or abnormal conditions such as accident, machine breakdown, substandard material etc. From accounting point of view we can say that abnormal loss is that loss which occurred over and above normal loss. These losses are segregated from process costs and investigated to prevent their occurrence in future. Process account is to be credited by abnormal loss account with cost of material, labour and overhead equivalent to good units and the loss due to abnormal is transferred to Costing Profit and Loss Account. Journal Entries:
(i) Abnormal Loss A/c …Dr. To Process A/c (ii) Cost Ledger Control A/c …Dr. (Scrap value) Costing Profit & Loss A/c …Dr. To Abnormal Loss
Accounting records not strictly based on principles of double entry system but based on incomplete records and mere memory is known as accounting from incomplete records. Single entry is a misnomer, as no such system exists for recording transaction in accounting. Actually, accounting from incomplete records is a mixed system of recording business transactions in which some transactions are recorded as per double entry system and for certain transactions only a single entry is made in the books of accounts. It is worth mentioning that for certain transactions no recording is made in the books of accounts. Under this system, records related to cash account and personal accounts of debtors and creditors are maintained as per double entry system. Information relating to cash sales, cash purchases are recorded partially and information related to depreciation etc. are not recorded at all. In other words, we can say that accounting from incomplete records is just an attempt to record business transactions on the lines of double entry system. Reasons of Incomplete Records: The reasons for incomplete records in the business organizations are as under: (i) The mechanism of keeping incomplete records is due to improper knowledge of accounting principles. (ii) This method is less expensive as compared to keeping records as per double entry system. As people having specialized knowledge in accounting are not appointed and the staff engaged in other activities and sometimes the owner himself maintains the records. (iii) This method is time saving in the sense that only a few records are maintained under such system. The information related to profit can be immediately ascertained without going with the lengthy process of preparation of trial balance first. (iv) This method is very convenient in the sense that no rules and principles are to be followed. Business entities depending on the need, adapt different techniques for recording business transactions in the books of accounts.
The features of incomplete records are as under: (i) This is an unsystematic method for recording business transactions in the books of accounts. There are no rules and principles which are applicable for recording business transactions in the case of incomplete records. (ii) Accounting from incomplete records is a mixed system of recording business transactions in which some transactions are recorded as per double entry system and for certain transactions only a single entry is made in the books of accounts. In some cases no recording is made in the books of accounts. (iii) The system of recording business transactions under this mechanism differs from organization to organization as recording is made as per their need and convenience. (iv) Personal transactions of the owners are usually mixed up with business transactions. Sometimes it is very difficult to segregate the business expenses and personal expenses of the owners. For example, maintenance expense of a car which is used by the owner for business and domestic purposes both. (v) The profit is based on estimation, hence cannot be relied upon. Similarly, the position of assets and liabilities does not show true and fair view of the business concern. (vi) This mechanism is not based on any set rules, principles and accounting standards, so it can be modified and changed as per the need and availability of time. (vii) Though the information provided by this system is inaccurate and not authentic yet this system is time and cost saving, hence adapted by those small business entities that are not bound to keep records of business transactions as per double entry system. (viii) Under this system, mainly personal accounts are maintained and no record of real and personal accounts is maintained. Advantages of Incomplete Records: Following are some advantages of incomplete records: (i) This method is time saving in the sense that only a few records are maintained under such system.
(ii) This method is less expensive as compared to keeping records as per double entry system. (iii) This method is very convenient in the sense that no rules and principles are to be followed. (iv) This mechanism is not based on any set rules, principles and accounting standards, as such it can be modified and changed as per the need and availability of time.
The limitations of incomplete records are as under: (i) Under this method all ledger accounts related to real, personal and nominal are not maintained as such trial balance cannot be prepared. Hence, arithmetical accuracy cannot be checked. (ii) The profit is based on estimation, hence cannot be relied upon.
(iii) The position of assets and liabilities does not show true and fair view of the business concern as very often recording is made on the basis of memory and sometimes on the basis of information available. (iv) In the absence of complete books of accounts, based on double entry system, proper analysis of profitability and solvency cannot be made. Hence, it may cause a great problem in raising loans from financial institutions. (v) Under this system it is very difficult to detect errors and frauds because various checks which are imposed by double entry system are not available. (vi) Under this system, legal requirements cannot be complied with. Hence, taxation authorities and other governmental agencies do not satisfy with the incomplete information.