BAF 1101

FINANCIAL ACCOUNTING ONE

What is accounting?

Accounting can be defined as the process of identifying, measuring and communicating

economic information to permit informed judgments and decisions by users of the information.
Accounting is the process that aids these decisions by recording, classifying, summarizing, and
reporting business transactions and interpreting their effects on the affairs of the business entity.

Identification this is the process of understanding information involving the business

transactions. This is a process of selecting those events that are considered evidence of economic
activity relevant to a particular business organization.

Measuring this is the process of valuing all the business transactions in monetary value .

Reports. After identifying the business transactions and measuring them, the information is
presented in financial statements/ financial reporting. Which may include?

i) Statement of comprehensive income

ii) Statement of financial positions

Users these are the interested parties who will be given these financial statement e.g. employee,
lenders, investors, government, auditor's public

Objective of Accounting

The following are the main objectives of accounting:-

i) To keep Systematic Records

The main objective of accounting is to keep a systematic record of financial transactions which
helps the users to understand the day to day transactions in a systematic manner so as to gain
knowledge about overall business.

ii) To Protect Business Properties

Accounting provides protection to business properties from unjustified and unwarranted use.
Information about the above matters helps the proprietor in assuring that the funds of the
business are not necessarily kept idle or underutilized.

iii) Ascertain Profit

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Another objective of accounting is that it helps in ascertaining the net profit earned or loss
suffered on account of carrying the business which is done by keeping a proper record of all
books of accounts with respect to revenues and expenses of a particular period.

iv) Ascertain the Financial Position

The accounting also helps the businessman to know about his financial position. This objective is
served by the Balance Sheet or Position Statement. The Balance Sheet is a statement of assets
and liabilities of the business on a particular date. It serves as a tool for ascertaining the financial
health of the business.

v) Facilitate Decision Making

Accounting also helps in the collection, analysis, and reporting of information at the required
points of time to the required levels of authority in order to facilitate rational decision-making.

vii) Information System

Another objective of accounting is that it can be defined as accounting functions as an

information system for collecting and communicating economic information about the business
enterprise. This information helps the management in taking appropriate decisions.

Branches of Accounting

i) Financial Accounting: It is that branch of accounting, which involves the recording of the
transactions, inclined towards the preparation of trial balance and final accounts.

ii) Cost Accounting: Cost account is the accounting discipline, which deals with costs, i.e. the
unit costs of the goods produced and services provided. It helps the management of the
organization in fixing the price, controlling costs and providing relevant information for the
purpose of decision making.

iii) Management Accounting: The accounting system which supplies the necessary information
to the management, for rational decision making. The information may be concerned with funds,
costs, profits and losses and so forth. This information is helpful in determining the effect of the
decisions and analyzing the performance of the entity.

iv) Tax Accounting: The accounting system that deals with the tax return and its payment,
instead of preparation of final accounts of the enterprise, is called tax accounting.

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 Financial accounting

Financial accounting is a branch of accounting that involves classifying and recording business
transactions as well as presenting and preparing financial statements to be used by both external
and internal users. It focuses mainly on the preparation of the five basic financial statements
including the statement of changes in equity, statement of financial position, statement of cash
flows, statement of comprehensive income and notes to financial statements which are used by
banks, creditors, tax authorities and financial institutions to assess the company's financial status
and calculate the amount of taxes owed.

Characteristics of financial accounting

 It is monetary.

 It is mandatory to prepare and disclose financial accounting information

 It is historical in nature

 It is regulated by accounting rules and regulations

 It reports on the performance of the entire organization

 It is more useful to external users

 It aims at presenting a true and fair view of the company's financial status

 It is subject to auditing

 Classification of items in this branch is normally based on the transaction type

Cost accounting

Cost accounting refers to the process of collecting, summarizing, determining, evaluating and
analyzing costs to enable various alternative courses of action. It deals with evaluating the cost of
products and services offered and calculate the cost by taking into account all the factors that
contribute to the production of the output.

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 Characteristics of cost accounting

 Its reports and systems are not subject to accounting standards and rules

 It is futuristic in nature

 It is both non-monetary and monetary

 It doesn't necessitate preparation and disclosure of financial information

 It's more useful to internal users of financial information

 It is not subject to auditing

 Classification is normally on the basis of products, functions, activities and internal planning and
control as well as the information needs of a business enterprise

 It is more inclined to estimates of performance rather than a true and fair view of the accounts

Management accounting

Management accounting is the branch of accounting that is normally involved with providing -
and financial information that enables managers to better plan for activities.

Characteristics of management accounting

 It is futuristic

 It is model based with a hint of abstraction so as to support generic decision making

 It is computed with reference to the needs of managers

Tax accounting

Tax accounting largely deals with matters taxation. It helps clients follow rules that have been
put in place by tax authorities. Its main functions include dealing with legal implications and
filing and preparing various tax returns

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 Characteristics of tax accounting

 It is governed by tax laws that dictate the specific rules and regulations that must be complied
with

 It requires special training and education

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) provides the rules for the preparation of the
accounting statements, in the form of concepts, conventions, assumptions and principles. It not
only removes confusion but also provide consistency and uniformity in the process. These are
the fundamental assumptions, on which the entire system of accounting is based.

There are ten basic principles that make up these standards:

i) The Business as a Single Entity Concept:

A business is a separate entity in the eyes of the law. All its activities are treated separately from
that of its owners. In legal terms a business can exist long after the existence of its promoters or
owners.

ii) The Specific Currency Principle:

A currency is specified for reporting the financial statements. In the United States all the
numbers have to be expressed in US dollars. Companies who conduct parts of their businesses in
foreign currencies have to convert the amounts in US dollars using the prevalent exchange rate
while reporting their financial statements.

iii) The Specific Time Period Principle:

Financial statements always pertain to a specific time. Income statements have a start date and an
end date. Balance sheets are reported as on a certain date. This way the readers know during
which period the business transactions were conducted in.

iv) The Historical Cost Principle:

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Historical costs are used for valuing items. The prices at which items were brought and sold are
used for the valuations. Real values do change during the course of time due to inflation and
recession, but these are not considered for reporting purposes.

v) The Full Disclosure Principle:

The full disclosure principle is always in keen focus what with all the accounting scandals in the
news nowadays. It is required that companies reveal every aspect of the functioning in their
financial statements.

vi) The Recognition Principle:

There is also the recognition principle which states that companies reveal their income and
expenses in the same time period in which they were accrued.

vii) The Non-Death Principle of Businesses:/going concern concept

The accounting principles assume that businesses will continue to function eternally and have no
end date as such.

viii) The Matching Principle:

The matching principle states that the accrual system of accounting be used and for every debit
there should be a credit and vice versa.

ix) The Principle of Materiality:

Then there are a couple of principles which require the bookkeepers to use their judgment rather
than sure shot rules. There are inaccuracies in all accounting records. After all, nobody is perfect.
But when errors are made how important are they for the book keeper to break his head over. A
ten dollar error can be ignored, but not a thousand dollars one. This is where the principle of
materiality comes in and this is where the accountants have to use their judgments.

x) The Principle of Conservative Accounting:

Conservative accounting is another principle to be adopted for the good of the company. When
expenses happen they are to be recorded immediately, but incomes are to be recorded only when

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the actual cash has been received. Of course, what policies companies follow depend on their
own internal strategy.

Accounting policies

Accounting policies are the internal policies set by the entity to process, measure, recognize,
records, as well as disclose the specific items or transactions in its financial statements.

Accounting Policies might be different from one company to another; however, those policies
are tailor to meet the specific International Accounting Standard or other standard bodies like
local standard or regulation relate in the purpose of Financial Reporting.

To ensure this, the companies setting up their own procedures and manuals to ensure the
consistency of practices and to make sure that their accounting records are compliant with those
accounting standards or local regulations.

Users of financial information

There are many possible users of the financial information generated by a business. The
following list presents the more likely users:

1) Customers. Major prospective customers will want to review a firm’s financial information to
see if it is stable enough to be a long-term supplier, or if the firm has the financial resources to
complete a major project on their behalf.

2) Employees. Employees want to review the information in order to make decisions about
whether the company is a stable employer. Providing this information to them can increase their
level of interest and participation in the business.

3) Governments. The government jurisdictions in which a company does business may request
the information in order to determine whether the firm paid the required amount of taxes.

4)Investment analysts. A public company may be followed by a group of investment analysts.

If so, these analysts need the firm’s financial information as part of their examination of whether
the organization would be a good investment for their clients.

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5) Investors. Investors want to examine the information to make decisions about whether the
business will continue to grow and perform well enough to justify their investment decision, or
whether they should sell off their investment to a third party.

5) Lenders and creditors. Lenders and creditors will require the information as part of their
decisions about whether to extend credit to the business, and in what amounts. They will
continue to have an interest in the information over time, in order to decide whether their loaned
funds are at risk.

6) Management team. The managers of the reporting entity need financial information in order
to make operational and financial decisions about how to enhance the financial results, financial
position, and cash flows of the organization.

7) Rating agencies. A rating agency needs to closely examine a firm’s accounting information in
order to derive a credit rating for the firm as a whole or its various security issuances.

8) Unions. Any labor unions representing a company’s employees want to see the firm’s
financial information in order to set a bargaining position that they believe the company can
afford to pay.

Characteristics of useful information

Desirable attributes which financial information should have if it is likely to be useful:-

i. Relevance

a report must give the user what he or she wants. This presupposes that we as the accountants
preparing the report know:-

-who the user is

-what their purpose is

-what information he or she requires for this purpose. Clearly this requirement may change as
time goes by.

ii.) Understandability

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Different users will obviously have different levels of ability as regards understanding
accounting information. Understandability does not necessarily mean simplicity. It means that
the reports must be geared to the abilities and knowledge of the users concerned.

iii. Reliability

The user should be able to have a high degree of confidence in the information presented to him
or her. Preferably, it should be independently verified, e.g. by an independent qualified auditors.

iv. Completeness

The user should be given a total picture of the reporting business as far as possible.

v. objectivity

The information presented should be unbiased in that it should meet all proper user needs and
neutral in that the perception of the measurer should not be biased towards the interest of any one
user group. Report should not be biased by the personal perception, the personal opinion, of the
preparer of these reports.

vi. Timeliness

This means that information should be provided to the user in time for use to be made of it.
Information presented should be up-to-date as possible. Approximate information, made
available in time to assist with some decision or action, is likely to be more useful than precise
and accurate information presented after the decision has already been made.

vii. Comparability

Information about any one business for any one period should be presented so that:

- It can be easily compared with information about the same business for a different period

-it can be easily compared with information about a different business for the same, or even a
different, period.

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Double-Entry System

Definition of Double-Entry System

The double-entry system of accounting or bookkeeping means that for every business
transaction, amounts must be recorded in a minimum of two accounts. The double-entry system
also requires that for all transactions, the amounts entered as debits must be equal to the amounts
entered as credits.

Example of a Double-Entry System

To illustrate double entry, let's assume that a company borrows $10,000 from its bank. The
company's Cash account must be increased by $10,000 and a liability account must be increased
by $10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is
required. Hence, the account Cash will be debited for $10,000 and the liability Loans Payable
will be credited for $10,000.

Double Entry Keeps the Accounting Equation in Balance

Double entry also means that the accounting equation (assets = liabilities + owner's equity) will
always be in balance. In our example, the accounting equation remained in balance because both
assets and liabilities were each increased by $10,000.

Journal Entries

What is a Journal Entry?

Journal entries are the first step in the accounting cycle and are used to record all business
transactions and events in the accounting system. As business events occur throughout the
accounting period, journal entries are recorded in the general journal to show how the event
changed in the accounting equation.

For example, when the company spends cash to purchase a new vehicle, the cash account is
decreased or credited and the vehicle account is increased or debited

How to Make a Journal Entry

1. Identify Transactions

There are generally three steps to making a journal entry. First, the business transaction has to be
identified. Obviously, if you don’t know a transaction occurred, you can’t record one. Using our

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vehicle example above, you must identify what transaction took place. In this case, the company
purchased a vehicle. This means a new asset must be added to the accounting equation.

2. Analyze Transactions

After an event is identified to have an economic impact on the accounting equation, the business
event must be analyzed to see how the transaction changed the accounting equation. When the
company purchased the vehicle, it spent cash and received a vehicle. Both of these accounts are
asset accounts, so the overall accounting equation didn’t change. Total assets increased and
decreased by the same amount, but an economic transaction still took place because the cash was
essentially transferred into a vehicle.

3. Journalizing Transactions

After the business event is identified and analyzed, it can be recorded. Journal entries use debits
and credits to record the changes of the accounting equation in the general journal. Traditional
journal entry format dictates that debited accounts are listed before credited accounts. Each
journal entry is also accompanied by the transaction date, title, and description of the event. Here
is an example of how the vehicle purchase would be recorded.

Example
We are following Paul around for the first year as he starts his guitar store called Paul’s Guitar
Shop, Inc. Here are the events that take place.

Entry #1 — Paul forms the corporation by purchasing 10,000 shares of $1 par stock.

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Entry #2 — Paul finds a nice retail storefront in the local mall and signs a lease for $500 a
month.

Entry #3 — PGS takes out a bank loan to renovate the new store location for $100,000 and
agrees to pay $1,000 a month. He spends all of the money on improving and updating the store’s
fixtures and looks.

Entry #4 — PGS purchases $50,000 worth of inventory to sell to customers on account with its
vendors. He agrees to pay $1,000 a month.

Entry #5 — PGS’s first rent payment is due.

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Entry #6 — PGS has a grand opening and makes it first sale. It sells a guitar for $500 that cost
$100.

Entry #7 — PGS sells another guitar to a customer on account for $300. The cost of this guitar
was $100.

Entry #8 — PGS pays electric bill for $200.

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Entry #9 — PGS purchases supplies to use around the store.

Entry #10 — Paul is getting so busy that he decides to hire an employee for $500 a week. Pay
makes his first payroll payment.

Entry #11 — PGS’s first vendor inventory payment is due of $1,000.

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Entry #12 — Paul starts giving guitar lessons and receives $2,000 in lesson income.

Entry #13 — PGS’s first bank loan payment is due.

Entry #14 — PGS has more cash sales of $25,000 with cost of goods of $10,000.

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Entry #15 — In lieu of paying himself, Paul decides to declare a $1,000 dividend for the year.
The following example illustrates how to record journal entries:

Example 2 journal entries

Company A was incorporated on January 1, 20X0 with an initial capital of 5,000 shares of
common stock having $20 par value. During the first month of its operations, the company
engaged in the following transactions:

Date Transaction
Jan 2 An amount of $36,000 was paid as advance rent for three months.
Paid $60,000 cash on the purchase of equipment costing $80,000. The remaining
Jan 3
amount was recognized as a one year note payable with an interest rate of 9%.
Jan 4 Purchased office supplies costing $17,600 on account.
Jan 13 Provided services to its customers and received $28,500 in cash.
Jan 13 Paid the accounts payable on the office supplies purchased on January 4.

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 Jan 14 Paid wages to its employees for the first two weeks of January, aggregating $19,100.
Provided $54,100 worth of services to its customers. They paid $32,900 and promised
Jan 18
to pay the remaining amount.
Jan 23 Received $15,300 from customers for the services provided on January 18.
Jan 25 Received $4,000 as an advance payment from customers.
Jan 26 Purchased office supplies costing $5,200 on account.
Jan 28 Paid wages to its employees for the third and fourth week of January: $19,100.
Jan 31 Paid $5,000 as dividends.
Jan 31 Received an electricity bill of $2,470.
Jan 31 Received a telephone bill of $1,494.
Jan 31 Miscellaneous expenses paid during the month totaled $3,470
The following table shows the journal entries for the above transactions.

Date Account Debit Credit

Jan 1 Cash 100,000
Common Stock 100,000
Jan 2 Prepaid Rent 36,000
Cash 36,000
Jan 3 Equipment 80,000
Cash 60,000
Notes Payable 20,000
Jan 4 Office Supplies 17,600
Accounts Payable 17,600
Jan 13 Cash 28,500
Service Revenue 28,500
Jan 13 Accounts Payable 17,600
Cash 17,600
Jan 14 Wages Expense 19,100
Cash 19,100
Jan 18 Cash 32,900
Accounts 21,200

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 Receivable
Service Revenue 54,100
Jan 23 Cash 15,300
Accounts
15,300
Receivable
Jan 25 Cash 4,000
Unearned Revenue 4,000
Jan 26 Office Supplies 5,200
Accounts Payable 5,200
Jan 28 Wages Expense 19,100
Cash 19,100
Jan 31 Dividends 5,000
Cash 5,000
Jan 31 Electricity Expense 2,470
Utilities Payable 2,470
Jan 31 Telephone Expense 1,494
Utilities Payable 1,494
Jan 31 Miscellaneous Expense 3,470
Cash 3,470
At the end of the period, all the journal for the period are posted to the ledger accounts.

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CASH BOOK

The cash book is used to record receipts and payments of cash. It works as a book of original
entry as well as a ledger account. The entries related to receipt and payment of cash are first
recorded in the cash book and then posted to the relevant ledger accounts. Moreover, a cash book
is a substitute for cash account in the ledger. A company that properly maintains a cash book
does not need to open a cash account in its ledger

Identify four uses of the cash book

i) Provides information on balances of cash

ii) Shows the summary of payments made

iii) Shows the summary of receipt made

iv) Shows the summary of discounts received

v) Shows the summary of discount allowed

vi) Analyzing the cash flow.

Types of cash book

There are four major types of cash book that companies usually maintain to account for their
cash flows. These are given below:

i)A single column cash book to record only cash transactions.

ii) A double/two column cash book to record cash as well as bank transactions.

iii) A triple/three column cash book to record cash, bank and purchase discount and sales
discount.

iv) A petty cash book to record small day to day cash expenditures.

Double column cash book

The double column cash book (also known as two column cash book) has two money columns
on both debit and credit sides – one to record cash transactions and one to record bank
transactions. In other words, we can say that if we add a bank column to both sides of a single

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column cash book, it would become a double column cash book. The cash column is used to
record all cash transactions and works as a cash account whereas bank column is used to record
all receipts and payments made by checks and works as a bank account. Both the columns are
totaled and balanced like a traditional T-account at the end of an appropriate period which is
usually one month.

Since a double column cash book provides cash as well as bank balance at the end of a period,
some organizations prefer to maintain a double column cash book rather than maintaining two
separate ledger accounts for recording cash and bank transactions.

Format

The format/specimen of a double column cash book is given below:

The above format of double column cash book has six columns on both debit and credit sides.
The purpose of cash and bank columns has been explained at the start of this article and the
purpose of date, description, voucher number (VN) and posting reference (PR) columns has been
explained in single column cash book article.

Important points to remember while making entries in a double column cash book

Recording cash transactions:

1. All cash receipts are recorded in cash column on the debit side and all cash payments are
recorded in cash column on credit side of the double column cash book.

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 2. If cash is received from a debtor or customer and is deposited into the bank account on
the same date, the entry will be made in the bank column on the debit side, not in the cash
column.

Recording bank transactions:

1. When a check is received and the same is deposited into the bank account on the same
date, the amount of the check is entered in the bank column on the debit side.
2. When a check is received and the same is not deposited into the bank on the same date,
the amount of the check is entered in the cash column, not in the bank column.
3. When a check received from a receivable on a date subsequent to its receipt is deposited
into the bank account, the entry is made in the bank column on the debit side and in the
cash column on credit side. It is called a contra entry.
4. When a check is issued, the amount of the check is entered in the bank column on the
credit side.

Recording contra entries:

The “contra” is a Latin word which means against or opposite. The contra entry is an entry which
involves a cash account and a bank account and which is recorded on both debit and credit sides
of the double column cash book at the same time. This entry is not posted to any ledger account
because both debit and credit aspects of transaction are handled within the cash book and the
double entry work is completed. In posting reference column, the letter “C” is written to denote
that the entry is a contra entry and will not be posted to any ledger account. A contra entry is
made in the following circumstances:

(1). When cash is deposited into the bank account:

The entry for depositing cash into the bank account is:

Bank

[Dr]
Cash [Cr]

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The deposited amount is written in the bank column on debit side and cash column on credit
side.

(2). When cash is withdrawn from bank account for business use:

The entry for withdrawal of cash from bank account for business purpose is:

Cash

[Dr]
Bank [Cr]

The withdrawn amount is written in the cash column on debit side and bank column on credit
side.

Important: The contra entry is made only when the cash is withdrawn for business use. If cash
is withdrawn for personal use, it will be recorded only in the bank column on credit side of the
cash book.

(3). When a check received from a receivable or customer on a date subsequent to its
receipt is deposited into the bank account:

When a check is received and is not deposited into the bank account on the same date, it is
recorded in the cash book just like a normal cash receipt. On a subsequent date, when the check
is deposited into the bank account, the following entry is made:

Bank

[Dr]
Cash [Cr]

The amount of the check is recorded in the bank column on debit side and cash column on credit
side.

Balancing and posting a double column cash book

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Both cash column and bank column of double column cash book are totaled and balanced at the
end of an appropriate period. The process of balancing and posting a cash book has been
explained in detail in single column cash book article. The same process is also applicable to a
double column cash book.

The following example summarizes the whole explanation given above.

Example

The Edward Company uses a double column cash book to record its cash and bank related
transactions. It engaged in the following transactions during the month of March 2018:

 March 01: Cash balance $1,450 (Dr.), bank balance $1,500 (Dr.).
 March 02: Paid Mark & Co. by check $120.
 March 04: Received from John & Co. a check amounting to $400.
 March 05: Deposited into bank the check received from John & Co. on March 04.
 March 08: Purchased stationary for cash, $25.
 March 12: Purchased merchandise for cash, $525.
 March 13: Sold merchandise for cash, $1,800.
 March 15: Cash deposited into bank, $850.
 March 17: Withdrew from bank for personal expenses, $40.
 March 19: Issued a check for merchandise purchased, $630.
 March 20: Drew from bank for office use, $150.
 March 22: Received a check from Peter & Co. and deposited the same into bank
immediately, $880.
 March 25: Paid a check to Daniel Inc. for $270.
 March 26: Bought furniture for cash for office use, $175.
 March 28: Paid office rent by check, $120.
 March 29: Cash sales, $650.
 March 30: Withdrew from bank for office use, $145.
 March 31: Paid salary to employees by check, $300.

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Required: Record the above transactions in a double column cash book and post entries
therefrom into relevant ledger accounts.

Solution

Cash book:

General ledger:

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Accounts receivable subsidiary ledger:

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Accounts payable subsidiary ledger:

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Example 2
On January 1, 2017, Humna Faisal’s cash book showed debit balance of cash Rs. 1,500 and bank
Rs. 12,500. During the month of January following business was transacted:
2017
Jan.1 Deposited cash Rs. 500 to business bank account.
7 Purchased office furniture for cash Rs. 700; cash sales Rs. 2,000.
9 Received from Mr. Shabir a cheque for Rs. 2,550 in part payment of his account and not
deposited.
12 Paid by cheque for goods purchased to Mr. Gulzar worth Rs. 1,000
18 Drew from bank for owner domestic use Rs. 200.
21 Sold merchandise to Zeshan Bros. for Rs. 1,500 who paid by cheque which was deposited
in the bank.
24 Paid to Mr. Salman Rs. 900 by cheque.
28 Deposited into bank the cheque received from Mr. Shabir.
29 Paid salaries by cash Rs. 950.
30 Drew from bank for office use Rs. 450.

Requirement: Draw up Cash Book with Cash and Bank Columns.

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Solution:

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THREE COLUMN CASH BOOK

The format of a triple/three column cash book is given below:

The triple column cash book has 7 columns on both debit and credit sides. The purpose of each
column is briefly explained below:

1) Date: The date column is used to enter the transaction date.

2) Description: The description column is used to write the name of the account to be debited or
credited in the ledger as a result of cash or bank transaction.
3) Voucher number (VN): A voucher is a document in support of a transaction. The serial
number of the voucher is entered in this column.
4) Posting reference (PR): Each account in the ledger is assigned a unique numbered. The
number each ledger account that is written in description column is entered in PR column.
5) Discount: The amount of discount allowed is recorded on debit side and the amount of
discount received is recorded on credit side in discount column.The totals of debit column and
credit column are posted to discount allowed account and discount received account
respectively.
6) Cash: The amount of cash received (net of any discount allowed) is entered on the debit side
and the amount of cash paid (net of any discount received) is entered on the credit side in cash
column. This column is totaled and balanced like a ledger account.
7) Bank: The amount of all receipts and payments made by the bank account are entered in bank
column of the cash book. This column is also totaled and balanced like a ledger account.

Posting a three column cash book to ledger accounts

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As explained earlier in this article, only cash and bank columns of triple column cash book work
as accounts and are therefore balanced. The discount columns on both receipt and payment sides
are only totaled and not balanced.

The procedure of posting entries from a cash book to ledger accounts has been explained
in single column cash book article. The same procedure is followed for posting entries from
double as well as triple column cash book to ledger accounts.

The following example summarizes the whole explanation of triple column cash book given
above.

Example

The P&G LLC records its cash and bank transactions in a triple column cash book. The
following transactions were performed by the company during the month of June 2018.

 Jun 01: Cash in hand $800 (debit balance), Cash at bank $3,365 (debit balance).
 Jun 03: Paid James & Co. by check $1,175, discount received from him $25.
 Jun 05: Received from David & Co. a check amounting to $990, discount allowed to him
$10.
 Jun 07: Deposited into bank the check received from David & Co.
 Jun 10: Purchased stationary for cash, $170.
 Jun 15: Purchased merchandise for cash, $1,280.
 Jun 15: Cash sales for the first half of the month, $2,450.
 Jun 16: Deposited into bank $1,250.
 Jun 18: Withdrawn from bank for personal expenses $100.
 Jun 19: Issued a check amounting to $1,630 to James & Co. and discount received from
him $20.
 Jun 21: Drew from bank for office use, $420.
 Jun 24: Received a check amounting to $1,435 from Henry & Co. and allowed him a
discount of $15. The Henry’s check was deposited into bank immediately.
 Jun 25: Paid a check to Jacob Inc. amounting to $385 and received a discount of $15.

31
  Jun 27: Bought furniture for cash for office use, $380.
 Jun 29: Paid office rent by check, $350.
 Jun 30: Cash sales for the second half of the month $4,550.
 Jun 30: Paid salaries by check $760.
 Jun 30: Withdrew from bank for office use $470.

Required:

1. Record the above transactions in a triple/three column cash book of P & G LLC and
balance the cash and bank columns of the cash book.
2. Post entries from triple/three column cash book to appropriate accounts in general ledger,
accounts receivable subsidiary ledger and accounts payable subsidiary ledger.

Solution

1. Triple/three column cash book

32
1. Posting to ledger account

1. Check received from David & Co. on June 05 has been recorded in the cash column because it
was not deposited into bank on the same date.

2. 450 is the number of discount allowed account in the general ledger. The discount allowed
account is an expense account.

3. 455 is the number of discount received account in the ledger. Discount received account is an
income/revenue account.

Petty cash book

Besides maintaining a main or general cash book, many companies also maintain a small cash
book known as petty cash book to record small day to day expenditures of the business.

33
Petty cash book is a type of cash book that is used to record minor regular expenditures such as
office teas, bus fares, fuel, newspapers, cleaning, pins, and causal labor etc. These small
expenditures are usually paid using coins and currency notes rather than checks. The person
responsible for spending petty cash and recording it in a petty cash book is known as petty
cashier.

The chief cashier (also known as head or main cashier) bears the heavy responsibility of
maintaining company’s general cash book in which receipts and payments amounting to
hundreds or even thousands of dollars are recorded by him every day. He, therefore, usually
delegates the responsibility for handling small day to day cash transactions to a bookkeeper,
receptionist or some other reliable staff member. Like a general cash book, a petty cash book has
a debit and a credit side. All receipts are recorded on the debit side and all payments are recorded
on the credit side of petty cash book by the petty cashier.

Petty cash systems

The cash allocated for petty expenditures for a specific period is entered on the credit side of
general cash book and on the debit side of petty cash book.

The cash is given to the petty cashier either on ordinary system or imprest system which are
briefly explained below:

1. Ordinary system

Under ordinary system, a lump sum amount of cash is given to the petty cashier. When the whole
amount is spent, the petty cashier submits the details of petty expenditures recorded in the petty
cash book to the head or chief cashier for review.

2. Imprest system

Under imprest system, a fixed amount of money known as float is given to the petty cashier to
meet petty expenditures for an agreed period which usually consists of a week or month. At the
end of agreed period, the petty cashier submits the details of all expenditures incurred by him to
the chief cashier. The total cash spent by the petty cashier during the period is reimbursed to him
and the total cash available to spend at the start of the next period becomes equal to the original

34
sum (i.e., float). At any time, the total of petty cash balance and all expenditures that have not
been reimbursed to the petty cashier is equal to the agreed float.

Advantages of imprest system:

The imprest system of petty cash is used by most of the companies because of the following
advantages:

i) The imprest system reduces the chances of misuse of cash because the float can be
immediately reduced if it is found to be more than adequate for the agreed period.

ii) Under this system, the chief cashier periodically checks the record of petty cash. If an error is
committed by petty cashier, it can be detected and rectified soon.

iii) It saves the

time of the firm’s chief cashier who is usually a busy person with heavy responsibilities of
handling large receipts and payments by cash and checks.

iv) The imprest system enables significant saving to be effected to post small items to accounts
in the ledger since it uses an analysis system that collects small items together into weekly or
monthly totals.

v) This system trains young staff members in handling cash with responsibility.

vi) There are little to no chance of misappropriation of cash by the person in charge because the
imprested sum is usually very small.

Format of petty cash book

A simple format of petty cash book is given below:

35
Example

The petty cashier of John and James Company paid cash for the following expenditures during
March 2018.

 March 01: Balance brought forward; petty cash $50.

 March 01: The amount of petty expenditures for previous moth reimbursed by chief
cashier $200.
 March 05: Bought some liquid material for cleaning purpose $25.
 March 10: Paid $20 for van wash.
 March 13: Bought pens and pencils $15.
 March 17: Paid for fuel $35.
 March 20: Paid $55 for casual labor.
 March 22: Donated $10 to SBA – a charitable institution.
 March 30: Bought a broom for office $5

Required: Record the above transactions in a petty cash book assuming a petty cash imprest
system is used by the John and James company.

Solution

36
37
FINAL ACCOUNTS FOR SOLE TRADER

The final accounts for a sole trader business are

i) The Income Statement (Trading and Profit & loss Account)

ii) The Balance Sheet.

The final accounts give a picture of the financial position of your business. It shows where or
not your business has made a profit or loss during the accounting period and whether you are
able to pay your debts as they become due. Let’s now have a look at the final accounts of a sole
trader business.

Objectives

Upon the completion of this topic you should be able to;

1. Understand how profit/loss is calculated,

2. Calculate the cost of goods sold, gross profit and net profit,

3. Transfer net profit and drawings to the capital account at the end of the period, and

4. Prepare an Income Statement from a trial balance.

Final Accounts

After your trial balance is completed your final accounts are prepared. The final accounts of a
sole trader business include the Income Statement (trading and Profit & loss account) and the
balance sheet. Remember that your trial balance is the summary of the balances in all your
accounts. Some of these balances (those from your nominal accounts) affect the profit and are
transferred to the Income statement; the others (real and personal accounts) are transferred to
your balance sheet. The Income Statement and the Balance Sheet are prepared at the end of each
financial period to record how well the business operated during that financial period.

Income Statement

One of the most important financial statements of any business is the Income Statement. It is
used to determine the following:

1. How profitable a business is being run; and

2. Comparing the results received with the results expected.

The Income Statement can be divided into two sections the trading account and the Profit & loss
account. The gross profit which is the amount of profit made before the expenses are deducted is
calculated in the trading account. The purpose of the trading account is to determine the gross

38
profit made from sales. Therefore the accounts that are directly related to buying and selling
(trading) will be transferred to the trading account. The accounts directly related to trading are:

• Sales

• Purchase

• Sales Return

• Purchases Return

• Carriage Inwards

Gross profit is calculated as:

Gross Profit = Net Sales – Cost of Goods Sold (COGS)

Along with gross profit the net sales, cost of goods sold (COGS) and the cost of goods available
for sale(COGAFS) is also calculated in the trading account:

Net Sales = Sales – Sales Return (Return Inwards)

Net sales are the total sales figure after allowances have been made for sales returned to the
business.

COGS = Cost of goods available for sale (COGAFS) – Closing Stock

COGAFS = Opening Stock + (Purchases – Purchases Return) + Carriage Inwards

The net profit of your business is calculated in the Profit & loss account. Net profit is the balance
of profit after allowance is made for revenue and expenses. It is calculated as:

Net Profit = Gross profit + Revenue – expenses

The revenue and expense charged to the Profit & loss account are those that are not directly
related to trading but more to do with the running of the business. Some of these accounts are:

• Rent

• Telephone

• Carriage outwards

• Discount allowed

• Discount received

• Commission received

39
• Commission paid

• Salary

In Unit Two these accounts were closed off and transferred to the income statement. The income
statement can be shown horizontally or vertically.

Balance Sheet

The other half of our final accounts is the Balance Sheet. The Balance Sheet is a financial
statement showing the book values of the assets, liabilities and capital at the end of the financial
period. It shows what the business owes and what it owns.

The assets of the business is divided into two categories and recorded as follows

1. Non-Current Assets are assets that:

• are expected to be of use in the business for long time;

• are to be used in the business; and

• were not bought only for the purpose of resale.

Non-current assets are recorded in the balance sheet starting with those assets that will in the
business the longest down to those that will be kept for a shorter period. Example of non-current
assets and the order of record are:

• Land and Buildings.

• Fixtures and Fittings.

• Machinery.

• Motor Vehicles.

2. Current Assets are recorded next. These are assets will change within the next twelve
months. They are recorded as follows:

• Stock (goods bought for resale)

• Debtors.

• Cash at Bank.

• Cash in Hand.

40
3. Non-current Liability - Sometime referred to as long term liability are those debts that take
more than a year to settle. This includes large loans and mortgages.

4. Current Liability - are debts that will be settled in one year or less. This includes creditors
and small loans.

example one

Trading Account and Profit and Loss Account and Balance Sheet - An Example:

The following trial balance have been taken out from the books of XYZ as on 31st December,
2005.

Dr. Cr.
$ $
Plant and Machinery 100,000
Opening stock 60,000
Purchases 160,000
Building 170,000
Carriage inward 3,400
Carriage outward 5,000
Wages 32,000
Sundry debtors 100,000
Salaries 24,000
Furniture 36,000
Trade expense 12,000
Discount on sales 1,900
Advertisement 5,000
Bad debts 1,800
Drawings 10,000
Bills receivable 50,000
Insurance 4,400
Bank balances 20,000
Sales 480,000
Interest received 2,000
Sundry creditors 40,000
Bank loan 100,000
Discount on purchases 2,000
Capital 171,500

795,500 795,500

41
Closing stock is valued at $90,000

Required: Prepare the trading and profit and loss account of the business for the year ended
31.12.2005 and a balance sheet as at that date.

XYZ
Trading and Profit and Loss Account
For the year ended 31st, December 2005

Opening stock 60,000 Sales 480,000

Less
Purchases 160,000 1,900 478,100
discount
Less discount 2,000 158,000
Closing
90,000
stock
Carriage inward 3,400
Wages 32,000
Gross profit
314,700
(transferred to P&L)

568,100 568,000

Gross
profit
Carriage outward 5,000 314,700
(transferred
to P&L)
Interest
Salaries 24,000 2,000
received
Trade expenses 12,000
Advertisement 5,000
Bad debts 1,800
Insurance 4,400
Net profit (transferred
264,500
to capital)

316,700 316,700

Note: Discount on purchases and discount on sales are deducted from purchases and sales
respectively. They may be shown on the credit and debit side of profit and loss account
respectively and it will not affect the net profit of the business. The gross profit will be affected
if discount is treated so.

42
XYZ
Balance Sheet
For the year ended 31st, December 2005

Assets $ Liabilities $
Current Assets: Current Liabilities:
Bank balance 20,000 Sundry creditors 40,000
Bills receivable 50,000 Bank loan 100,000
Fixed and Long
Sundry debtors 100,000
Term:
Closing stock 90,000 Capital 171,500
Fixed Assets: +Net profit 264,500
Furniture 36,000
Plant and Machinery 100,000 -Drawings 10,000 426,000
Building 170,000

566,000 566,000

Types of Adjustments Entries in Final Accounts

i) Outstanding Expenses:

43
These are the expenses incurred within the accounting year but the payment has not been
made. Outstanding or unpaid expenses should be added to the concerned expenses a/c in
P&L a/c and will be shown as a current liability in the B/S.

For example, the Rent for the month of December 2002 Rs. 1,000 remain unpaid. The
calendar year is the accounting year.

Adjusting Entry:

Rent account Dr. Rs.1000

To Outstanding Rent a/c Rs. 1,000

ii) Prepaid Expenses:

These are the expenses, which have been paid, but part of the amount paid extends to the
next year. It is also called as ‘Un-expired expenses’. Advance amount paid should be
deducted from the concerned expenses and be shown as a Current Asset in the B/S.

For example, the insurance premium of Rs.2,400 a year was paid on 1st July 2002. The
calendar year is the accounting year. Since one year’s premium has been paid on 1st July,
the premium for 6 months, i.e., half the amount relates to the current year and the other
half relates to the next year.

Hence, Rs. 1,200 must be treated as prepaid and deducted from the premium paid and be
shown as an asset in the B/S.

Adjusting Entry:

Prepaid Insurance a/c Dr. Rs. 1, 200

To Insurance Premium a/c Rs. 1, 200

44
iii) Accrued Income::

It is the income that has already been earned [i.e., the service has already been rendered]
but the money has not been received. For example, Interest on investments accrued Rs.
1,200.

The interest for the current year is due at the close of the year. The amount may be
actually received in the next year. At present it represents an income, which has become
receivable or accrued. Hence it is credited to P&L a/c and being accounts receivable, shown
as an asset in the B/S.

Adjusting Entry:

Accrued Interest a/c Dr. Rs. 1,200

To Interest a/c Rs. 1,200

iv) Incomes Received in Advance:

These are incomes received during the current year, but part of the amount received
relates to the next year. Such amount must be deducted from the total amount received in
P&L a/c and shown on the liabilities side of the B/S as it represents an amount, which the
business is obliged to return.

For example, a business concern has received apprentice premium for three years
amounting to Rs.6, 000. In this amount Rs.2, 000 i.e., 1/3 of Rs.6, 000 is for current year

45
and should be credited to P&L a/c as income. And the balance Rs.4, 000 represents a
liability as the business is obliged to return.

Adjusting Entry:

Apprentice Premium a/c Dr. Rs. 4000

To Apprentice Premium received in advance Rs. 4000

v) Depreciation on Assets:

Depreciation means diminution or fall in value of an asset due to its constant use. It may
also arise on account of wear and tear, lapse of time and obsolescence. It is a loss to the
business.

It is usually calculated at a certain percentage on the value of asset and the amount so
obtained is first shown on the debit side of the P&L a/c and then deducted from the
original value of asset in the B/S.

For Example, a business has furniture of the value of Rs.50, 000 at the end of the year it is
depreciated at 5%.

Adjusting Entry:

Depreciation a/c Dr. Rs. 2,500

To Furniture a/c Rs. 2,500

[5% on Rs.50, 000 = 2,500]

46
vi) Bad Debts:

Debts represent money due from debtors [i.e., uncollected portion of credit sales]. When
debts become irrecoverable, it becomes bad debts and is treated as a loss. The amount of
bad debts is debited to P&L a/c and is deducted from Sundry Debtors in the B/S.

For example, the ledger balance in respect of sundry debtors of a trader shows Rs.20, 000
and of this Rs. 1,000 is estimated to be irrecoverable.

Adjusting Entry:

Bad Debts a/c Dr. Rs. 1,000

To Sundry Debtors a/c Rs. 1,000

vii) Provision for Bad and Doubtful Debts:

Every business has a lot of dealings by way of credit transactions. This gives rise to a
sizable amount of book debts or debtors. But it is seldom that 100 percent of these debts
will be recovered.

Hence, it becomes necessary to bring down the debtors balance to it true position. The
usual practice is to calculate such doubtful debts at a certain percentage, based on past
experience on debtors. It is called as Provision or Reserve for Doubtful Debts.

However, the provision for bad and doubtful debts is calculated on good debts i.e., after
deducting bad debts not adjusted earlier.

Example:

The sundry debtors of a trader at the close of the year stood at Rs.21, 000. It is estimated
that Rs. 1,000 is written off as bad debts and 5% provision is created for doubtful debts.

Adjusting Entries:

Bad Debts a/c Dr. Rs. 1,000

47
 To Sundry Debtors a/c Rs. 1,000

Profit and Loss a/c Dr. Rs. 2,000

To Bad Debts a/c Rs. 1,000

To Provision for Doubtful Debts 1,000

If there is an old provision for doubtful debts, it should be adjusted [deducted] against the
new provision.

viii) Provision for Discount on Debtors:

Cash discounts are allowed to debtors in order to encourage them to make prompt
payments. After providing for bad and doubtful debts, the balance of debtors represents
debts due from sound parties.

They may try to pay their dues on time and avail themselves of the cash discounts
permissible. Hence, this discount should be anticipated and provided for. It is, therefore,
the usual practice in business is to provide for discount on debtors at certain percentage on
good debts.

Example:

Suppose a trader has sundry debtors amounting to Rs.20, 000 and he estimates that after a
provision of 5% for doubtful debts, a provision for discounts at 2% is desirable. Then, on
the sound debts, i.e., Rs. 19,000 a provision of 2% is made as Reserve for Discount on
Debtors.

Adjusting Entry:

Profit and Loss a/c Dr. Rs.380

48
 To Reserve for Discount on Debtors a/c Rs.380

ix)Provision for Discount on Creditors:

Creditors represent the amount owed by the business to suppliers of goods on credit. Sound
business concerns make it a practice to settle accounts with creditors in time to earn
goodwill of the creditors and also the discount allowed by them.

In that case the liability in respect of sundry creditors can be reduced to the extent of
discounts anticipated. Based on the past practice, a certain percentage on creditors balance
is calculated as Provision for discounts and deducted from the creditors balance in the B/S
and the same amount is credited as gain in the P&L a/c.

Example:

A trader had sundry creditors at Rs. 10,000 on 31st December 2002. It is desired to make a
provision of 3% on this amount for discounts.

Adjusting Entry:

Reserve for Discounts on Creditors a/c Dr. Rs. 300

To Profit and Loss a/c Rs. 300

49
x)Interest on Capital:

Often, interest at a normal rate is allowed on the capital of the proprietor employed in the
business. This is necessary in order to assess the efficiency of the business. Otherwise the
profits would include the interest and appear at a higher rate.

The interest so charged is a loss to the business and gain to the proprietor. So it is debited
to the Profit and Loss a/c and added to the capital in the Balance Sheet.

Adjusting Entries:

Interest on Capital a/c Dr.

To Capital a/c

Profit and Loss a/c Dr.

To Interest on Capital a/c

xii) Interest on Drawings:

Drawings are money withdrawn by the proprietor from his capital. Just as the business
allows interest on capital, it charges interest on drawings. It is a gain to the business and a
loss to the proprietor. So, it is credited to the Profit and Loss a/c and deducted from the
capital in the Balance Sheet.

50
FINAL ACCOUNTS WITH ADJUSTMENT

Example 3.5A

MDAR Retailer

Trial Balance as at 31 December 2011

Dr. Cr.

$ $

Discount Allowed 410

Discount Received 506

Carriage Inwards 309

Carriage Outwards 218

Return Inwards 1,384

Return Outwards 810

Sales 120,320

Purchases 84,290

Stock 31 December 2010 30,816

Motor expenses 4,917

Repairs to premises 1,383

Pay 16,184

Sundry expenses 807

Rates and insurance 2,896

Premises at cost 40,000

Motor Vehicle at cost 11,160

51
Provision for depreciation motors as at 31 December 3,860
2010

Debtors 31,640

Creditors 24,320

Cash at bank 4,956

Cash in hand 48

Drawings 8,736

Capital 50,994

Loan from P. Holland 40,000

Bad Debts 1,314

Provision for bad debts as at 31 December 2010 658

241,468 241,468

The following should be considered on 31 December 2011

1) Stock $36,420
a) Expenses owing
b) Sundry expenses $62
2) Motor expenses $33
3) prepayments
a) Rates $166
4) Provision for bad debts to be reduced to $580
5) Depreciation for motors to be $2,100 for the year
6) Part of the premises were let to a tenant who owed $250 at 31 December 2011
7) Loan interest owing to P. Holland, $4,000

Prepare the Income Statement and Balance Sheet as at 31 December 2011.

MDAR Retailer

Income Statement

for the year ended 31 December 2011

52
 $ $ $

Sales 120,320

Less Sales Returns 1,384

Net Sales 118,936

Opening Stock 30,816

Add Purchases 84,290

Less Purchases Return 810 83,480

Add Carriage Inwards 309

COGAFS 114,605

Less Closing Stock 36,420

COGS 78,185

Gross Profit 40,751

Add Revenue

Discount Received 506

Rent Receivable 250

Reduction in Provision for Bad 78 834

Debts

41,585

Less Expenses

Motor Expenses 4,917

Add Motor expenses owing 33 4,950

Pay 16,184

Carriage Outwards 218

53
Discount Allowed 410

Repairs to Premises 1,383

Sundry Expenses 807

Add sundry expenses owing 62 869

Bad Debts 1,314

Rates and Insurance 2,896

Less prepaid rates and insurance 166 2,730

Loan Interest 4,000

Depreciation: Motor vehicles 2,100 34,158

Net Profit 7,427

MDAR Retailer

Balance Sheet

as at 31 December 2011

Non-Current Assets $ $ $

Premises at cost 40,000

Motor Vehicle at cost 11,160

Less Depreciation to date 5,960 5,200

45,200

Current Assets

Stock 36,420

Debtors 31,64
0

54
Less Provision for Bad Debts 580 31,060

Prepaid Expense 166

Revenue owing 250

Cash at bank 4,956

Cash in hand 48

72,900

Current Liabilities

Creditors 24,32
0

Expenses owing 4,095 28,415

Working Capital 44,485

89,685

Financed by

Balance as at 1 January 2011 50,994

Add Net Profit 7,427

58,421

Less Drawings 8,736

49,685

Non-Current Liability

Loan from P. Holland 40,000

89,685

55
Bank Reconciliation

A bank reconciliation statement is a document that matches the cash balance on a company’s
balance sheet to the corresponding amount on its bank statement. Reconciling the two accounts
helps determine if accounting changes are needed. Bank reconciliations are completed at regular
intervals to ensure that the company’s cash records are correct. They also help detect fraud and
any cash manipulations.

Reasons for Difference Between Bank Statement and Company’s Accounting Record

When banks send companies a bank statement that contains the company’s beginning cash
balance, transactions during the period, and ending cash balance, almost always, the bank’s
ending cash balance and the company’s ending cash balance will never be the same. Some
reasons for the difference are:

i) Deposits in transit: Cash and checks that have been received and recorded but have not yet
been recorded on the bank statement.

ii) Outstanding checks: Checks that have been issued by the company to creditors but the
payments have not yet been processed/ presented for payments

56
iii) Bank service fees: Banks deduct charges for services they provide to customers but these
amounts are usually not noticeable.

iv) Interest income: Banks pay interest on some bank accounts.

v) Not sufficient funds (NSF) checks: When a customer deposits a check into an account but
the account of the issuer of the check has insufficient amount to pay the check, the bank reduces
from the customer’s account the check that was previously credited. The check is then returned
to the depositor as an NSF check.

Bank Reconciliation Procedure

1. On the bank statement, compare the company’s list of issued checks and deposits to the checks
shown on the statement to identify uncleared checks and deposits in transit.

2. using the cash balance shown on the bank statement, add back any deposits in transit.

3. Deduct any outstanding checks /presented for payments

4. This will provide the adjusted bank cash balance.

5. Next, use the company’s ending cash balance, add any interest earned and notes receivable
amount.

6. Deduct any bank service fees, penalties, and NSF checks. This will arrive at the adjusted
company cash balance.

7. After reconciliation, the adjusted bank balance should match with the company’s ending
adjusted cash balance. or commit errors while recording and posting transactions. These are
called the depositor by mailed notices.

Bank Reconciliation Missing Approach

In missing method first of all we dig out missing or error items (Find Missing or Error
Items). After that find the it is missing of cash book or bank statement (Find Missing
Book). Finally, analyze that it is missing of debit or credit (Find Missing Side).

i) Unpresented / Outstanding / Not Cashed or Uncashed Cheques

57
Cheque issued (for payments) by business but not presented for payment. A cashier may send
cheques out to suppliers, some of whom may present cheque at the bank immediately while
others may keep the cheque for several days. Cashier will have recorded all the payments in the
cash book immediately when issue the cheques. However, the bank records will only show the
cheques that have actually been presented by the suppliers.

ii) Uncredited / Uncollected / Uncleared or Outstation Cheques

Check deposited (for receipts) but not collected by bank. The firm’s cashier records a receipt in
the cash book as he or she prepares the bank paying-in slip. However, the receipt may not be
recorded by the bank on the bank statement for a day or so.

iii) Bank Charges

The bank charges some amount from each customer by way of incidental charges, collection
charges or interest on overdraft etc. Bank debited the amount in pass book. But customer comes
to know about it only at the end of month.

iv) Interest Credit by Bank

When the bank allows interest to a customer, it credits the customer’s account. But customer
comes to know about it only at the end of month than he would pass appropriate entry.

v) Direct Deposits to Bank

When the bank has received a direct amount on the behalf of the business. Bank will have
recorded the receipt in the business’s account at the bank but the business will be unaware.

vi) Direct payment by Bank

Bank may have deducted items from the customer’s account, but the customer may not be aware
of the deduction until the bank statement arrives. Examples of these deductions include are
standing order and direct debit payments.

vii)Check Dishonored

58
Cheque may be dishonored due to so many reasons. It is missing of cash book reverse impact as
recorded before dishonored.

viiiErrors and Omissions

Sometimes the difference between the two balances may be accounted for by an error or
omission on the part of the bank statement or in the cash book of the business. Find the missing
in order to rectify error or record omission

How to prepare a Bank Reconciliation Statement

1. The first step is to compare opening balances of both the bank column of the cash book
as well as bank statement; these could be different due to un-credited or un-presented
cheques from a previous period.

2. Now, compare credit side of the bank statement with debit side of the bank column of
cash book and debit side of the bank statement with the credit side of the bank column of
the cash book. Place a tick against all the items appearing in both the records.

3. Analyze the entries both in the bank column of the cash book as well as pass book and
look for entries which have been missed to be posted in the bank column of the cash
book. Make a list of such entries and make the necessary adjustments in the cash book.

4. Correct if any mistakes or errors appear in cash book.

5. Calculate the corrected and revised balance of cash book’s bank column.

6. Now, start bank reconciliation statement with updated cash book balance.

7. Add the un-presented cheques (cheques which are issued by the business firm to its
creditors or suppliers but not presented for payment – Expense) and deduct un-credited
cheques (Cheques paid into the bank but not yet collected – Income).

8. Make all the necessary adjustments for the bank errors. In case the bank reconciliation
statement begins with the debit balance as per bank column of the cash book, add all the
amounts erroneously credited by the bank and deduct all the amounts erroneously
credited by the bank. Do vice-versa in case its start with the credit balance.

59
The resultant figure must be equal to the balance as per the bank statement

Format of bank reconciliation statement

If, however, the cash book shows an overdraft (Cr. Balance per cash book but Dr. Balance per
bank statement), the bank reconciliation takes the following format:

Needs and importance of bank reconciliation statement

The need and importance of Bank Reconciliation Statement can be imagined after reading the
following points:

i) It provides a mechanism of internal control over cash.

ii) It brings into focus errors and irregularities while dealing with the cash.

iii) It reflects the actual bank balance position.

iv) It prevents frauds in recording banking transactions.

v) It helps to detect any mistake in Cash Book and Bank Statement.

vi) It explains any delay in the collection of cheques.

vii) It identifies valid transactions recorded by one party but not by the other.

Example

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The following is the bank column of cash book prepared by Sara Loren for May 2017:

She received the following bank statement for May 2017:

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A careful comparison of the above two documents would disclose the following:

(a). Deposits made by Sara Loren on 30 May, $1,810 and on 31 May, $2,220 have not been
credited to the bank statement.

(b). Cheque No. 789 and 791 for $5,890 and $920 respectively do not appear on the bank
statement, meaning these had not been presented for payment to the bank by 31 May.

(c). A deposit of $5,000 received by the bank (and entered in the bank statement) on 28 May
doesn’t appear in the cash book. This must be a direct deposit received by the bank.

(d). Cheque deposited on 14 May ($2,540) was .returned unpaid on 17 May. The cash book does
not have a record of dishonor.

(e). Standing order payment of $1,500 (for rent) also fails to appear in the cash book.

(f). The Cash Book doesn’t have a record of bank charges, $70, raised on 31 May.

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It is apparent that the cash book should be updated by recording therein items (c) to (f) listed
above. The completed Cash Book should then be balanced. It would appear as follows:

The Dr. balance shown in the completed cash book is $7,090 while the bank statement shows a
Cr. balance of $9,870. A bank reconciliation statement must, therefore, be prepared as follows:

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Introduction to Bank Reconciliation Examples

Bank Reconciliation is a process that gives the reasons for differences between the bank
statement and Cash Book maintained by a business. Not only is the process used to find out the
differences, but also to bring about changes in relevant accounting records to keep the records up
to date. Bank reconciliations examples are carried out at regular intervalsamples of Bank

Let’s take an example to understand the calculation of Bank Reconciliation in a better manner.

Examples of Bank Reconciliation are as follows:

Bank Reconciliation Example – 1

Markson’s & Co. has a balance as per pass book of $1,000 as on 31 st March 2019. It has a
balance as per Cash Book as on 31st March 2019 of $1050. Further details are as follows:

1. A cheque of $300 was deposited, but not collected by the bank.

2. Bank charges of $50 were recorded in Passbook, but not in Cash Book.

3. Cheques worth $200 were issued, but not presented for payment.

4. Bank interest of $100 was recorded in Passbook, but not in Cash Book.

Solution:

Bank Reconciliation Statement of Markson’s & Co. as on 31st March 2019

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Bank Reconciliation Example – 2

Wright Inc. has a balance in a Passbook of $10,000 as on 31 st December 2018. These are the
other details:

1. Three cheques of $2,000, $1,500 and $2,500 were deposited in the bank on
30th December 2018 but were recorded in the bank statement in January 2019.

2. Cheque of $500 issued on 31st December 2018 was not presented for payment.

3. A dividend of $1,000 on stocks was credited in Bank Account, but not recorded in Cash
Book.

4. A direct deposit of $400 was made in Bank Account by a customer, which was not
recorded in Cash Book.

5. Bank charges of $100 were entered only in Bank Passbook

6. Balance as per Cash Book on 31st December 2018 was $14,200.

Solution:

Bank Reconciliation Statement of Wright Inc. as on 31 st December 2018

Bank Reconciliation Example – 3

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Rutherford Inc. has a difference in the balance as per Cash Book and bank statement as on
31st March 2019. You are advised to prepare a Bank Reconciliation statement as on that date
with the following information:

1. Balance as per Bank Statement as on 31st March 2019 is $4,000. Balance as per Cash
Book is $1,400.

2. Cheque of $1,000 and $500 issued as on 30th March 2019, but not yet cleared

3. An insurance premium paid by bank $200. It is not yet recorded in Cash Book.

4. An outgoing cheque of $2,000 recorded twice in the Cash Book. It is properly recorded in
the bank statement.

5. Payment of a cheque of $400 recorded twice in PassBook.

6. Dividends received $500 recorded only in the bank statements and not Cash Book.

7. Cheque of $700 deposited on 29th March 2019. But, it is not yet collected.

8. Bank charges of $100 debited only in Bank PassBook.

Solution:

Bank Reconciliation Statement of Rutherford Inc. as on 31st March 2019

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Bank Reconciliation Example – 4

You are an Accountant in Jeffries Inc. You have prepared a Cash Book for March 2019. There is
a difference in the balance as on 31st March 2019 between the bank statement and Cash Book.
You are required to prepare a Bank Reconciliation Statement as on 31 st March 2019. Below is
the extract for Cash Book and Bank statement for the month of March 2019.

Cash Book (March 2019) for Jeffries Inc

Bank statement (March 2019) for Jeffries Inc

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Solution:

We first find the common items in the Cash Book and the Bank statement. The common
items are:

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The balance items would appear in the Bank Reconciliation Statement

Bank Reconciliation Statement is a valuable tool to identify differences between the balance as
per Cash Book and bank statement. Bank reconciliation also helps in detecting some frauds and
manipulations. It is a good practice to carry out this exercise at regular intervals, which helps in
maintaining controls in the organization. This also keeps the Cash Book up to date as those
transactions which are rightly recorded in the bank statement can be recorded in the Cash
Book.mmended Articles

This has been a guide to the Bank Reconciliation Example. Here we discuss the Definition and
top 4 practical Bank Reconciliation examples along with detailed explanation and downloadable
excel template. You can also go through our other suggested articles to learn more –

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ACCOUNTING ERRORS.

So accounting errors are the errors committed by persons responsible for recording and
maintaining accounts of a business firm in the course of accounting process. These errors may be
in the form of omitting the transactions to record, recording in wrong books, or wrong account or
wrong totaling and so on.

Accounting errors can take the following forms:

i) Omission of recording a business transaction in the Journal or Special purpose Books

ii) Not posting the recorded transactions in various books of accounts to the respective accounts
in ledger

iii) Mistakes in totaling or in carrying forward the totals to the next page

iv) Mistake in recording amount wrongly, writing it in a wrong account or on the wrong side of
the account.

Again there may be two types of accounting errors

(i) That causes the disagreement of trial balance,

(ii) That does not affect the agreement of Trial Balance.

Locating Errors

It is obvious that if there are errors they must be located at the earliest. After locating the errors,
they are to be rectified. In accounting also once it is established there are some accounting errors
these need to be located and detected as early as possible. How to locate the errors?

Steps to be taken to locate the accounting errors can be stated as follows:

(A) When the Trial Balance does not agree

(i) Check the columnar totals of Trial Balance

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(ii) Check that the balances of all accounts (including cash and bank balances) in the ledger have
been written and are written in the correct column of trial balance i.e. debit balance in the debit
column and credit balance in the credit column.

(iii) Find the exact figure of difference with trial balance and see that:

Errors and their Rectification

(a) No account of a similar balance has been omitted to be shown in the Trial Balance or

(b) A balance amount which is half of the amount of difference amount but is written on the
wrong side of the trial Balance.

(iv) Recheck the totals of Special Purpose Books.

(v) Check the balancing of the various accounts in the ledger.

(vi) If difference is still not traced, check each and every posting from the Journal and various
Special Purpose Books, one by one in the ledger. (B) When the Trial Balance agrees.

You have already learnt that if the totals of the two amount columns of trial balance tally it is no
conclusive proof of the accuracy of accounts. There may still be some accounting errors. These
errors may not be immediately traced but may be detected at much later stage. These are rectified
as and when detected.

Following are the errors which don’t affect the trial balance:

i) Error of omission: A transaction has been completely omitted from the accounting records,
e.g. a cash sale of $100 was not recorded.

ii) Error of commission: A transaction has been recorded in the wrong account, e.g. rates
expense of $500 has been debited to the rent account in error.

iii) Error of principle: A transaction has conceptually been recorded incorrectly, e.g. a non-
current asset purchase of $1,000 has been debited to the repair expense account rather than an
asset account.

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iv) Compensating error: Two different errors have been made which cancel each other out, e.g.
a rent bill of $1,200 has been debited to the rent account as $1,400 and a casting error on the
sales account has resulted in sales being overstated by $200.

v) Error of original entry: The correct double entry has been made but with the wrong amount,
e.g. a cash sale of $76 has been recorded as $67.

vi) Reversal of entries: The correct amount has been posted to the correct accounts but on the
wrong side, e.g. a cash sale of $200 has been debited to sales and credited to bank.

Correcting errors:

Correcting errors are normal accounting tasks and are carried out using the double entry system.

The basic steps to follow are:

Step 1: Identify the transaction and state the entries that should have been made.

Step 2: State the entries actually made

Step 3: State the entries to be made to cancel wrong entries

Step 4: State the entries to complete missing entries

Step 5: Complete double entry through suspense account, if needed

Step 6: Combine entries in steps 3, 4 and 5

Errors affecting trial balance:

These errors are corrected through the suspense account.

Suspense Account:

The suspense account is a temporary account opened when the trial balance does not agree. Its
balance represents the difference between the Dr total and the Cr total of the trial balance.

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If the Dr total of the trial balance is greater than the Cr total, then the suspense account will have
a Dr balance and vice versa. After all errors have been corrected, the suspense account will no
longer have a balance.

Example

Trial Balance of M/s Shinde Enterprises did not agree. It puts the difference to the Suspense A/c.
Rectify the following errors and prepare the Suspense A/c to ascertain the original difference in
the trial balance.

1. Amount paid for the installation of the machinery 10000 was posted to the Repairs and
maintenance A/c.

2. Total of Purchases book 50000 was not posted to the ledger.

3. Goods returned to John 3000 were recorded in Sales Book.

4. Salary paid to Ram 6000 was debited to his personal account.

5. Depreciation written-off on furniture 500 was not posted to the furniture account.

Ans: In the books of M/s Shinde Enterprises

Date Particulars Amount (Dr.) Amount (Cr.)

1. Machinery A/c Dr. 10000

To Repairs and Maintenance A/c 10000

(Being rectification of the wrong journal entry

in the Repairs and maintenance A/c)

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2. Purchases A/c Dr. 50000

To Suspense A/c 50000

(Being rectification of the omission to post the

total of purchases book in the ledger)

3. Sales A/c Dr. 3000

To Purchases Return A/c 3000

(Being rectification of wrong recording of the

purchases return in the sales book)

4. Salary A/c Dr. 6000

To Ram’s A/c 6000

(Being rectification of wrong debit to the

personal account of an employee)

5. Suspense A/c Dr. 500

To Furniture A/c 500

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 (Being rectification of omission of posting in
the furniture account)

Suspense A/c

Date Particulars Amount Date Particulars Amount

Difference as per
49500 2. By Purchases A/c 50000
Trial balance

5. To Furniture A/c 500

50000 50000

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