CORPORATE ACCOUNTING 3 rd Semester DBA Aman Ullah Khan MBA-Finance CA-Foundation Kardan Institute of Higher Education K

Bank Reconciliation statement

Definition Bank reconciliation statement is a statement which is prepared to reconcile the balances of cash ledger and bank statement.

Following are the causes of difference between our cash ledger balance and bank statement balance

1.Checks paid into bank but not collected and credited by the bank (Uncollected checks) 2. Checks issued but not presented for payment. (Un presented checks)

3.Direct payment by the customers 4.Interest or dividend on investment 5.Bank charges (service charges) 6.Dishonor of a check (NSF) 7.Checks omitted to be paid into bank.

Procedure For Preparing a Bank Reconciliation Statement

Bank Reconciliation Per Cash Books (Depositor Ledger)  Add increases in cash already recorded by bank but not in books.  Deduct decreases in cash already recorded by bank but not in books.  Add or deduct errors on books.

Bank Reconciliation Per Bank Books (Bank Statement)  Deposits in transit Increases in cash recorded on cash book but not in bank book.  Checks outstanding Decreases in cash already recorded on cash books but not bank Book.  Add or deduct errors by bank

Reconciling the Bank Statement Balance per Bank + Deposits in Transit - Outstanding Checks ± Bank Errors = Adjusted Balance Balance per Depositor + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance

Reconciling the Bank Statement All reconciling items on the book side require an adjusting entry to the cash account. Balance per Depositor + Deposits by Bank (credit memos) - Service Charge - NSF Checks ± Book Errors = Adjusted Balance

BANK Bank’s books Beginning balance$3, Depositor’s records Beginning balance$2, Power Network prepares to reconcile the monthly bank statement as of July 31, 2006

A deposit of $ did not appear on the bank statement. BANK Bank’s books Beginning balance$3, Add deposit not recorded by bank $4, Depositor’s records Beginning balance$2,549.99

BANK Bank’s books Beginning balance$3, Add deposit not recorded by bank $4, Depositor’s records Beginning balance$2, Add note and interest collected by bank $2, The bank collected a note in the amount of $400 and the related interest of $8 for Power Networking

A deposit of $ did not appear on the bank statement. Three checks that were written during the period did not appear on the bank statement: #812, $1,061; #878, $435.39, #883, $ BANK Bank’s books Beginning balance$3, Add deposit not recorded by bank Deduct outstanding checks: No. 812$1, No No , $4, Depositor’s records Beginning balance$2, Add note and interest collected by bank $2,957.99

BANK Bank’s books Deduct outstanding checks: No. 812$1, No No , Depositor’s records Deduct check returned because of insufficient funds$ Beginning balance$3, Add deposit not recorded by bank $4, Beginning balance$2, Add note and interest collected by bank $2, The bank returned an NSF check from one of the firm’s customers, Thomas Ivey, in the amount of $300. This was a payment on account.

Deduct outstanding checks: No. 812$1, No No , Deduct check return because of insufficient funds$ Bank service charges18.00 BANK Bank’s books Beginning balance$3, Add deposit not recorded by bank $4, Depositor’s records Beginning balance$2, Add note and interest collected by bank $2, The bank service charges totaled $18.00.

BANK Bank’s books Depositor’s records Beginning balance$3, Add deposit not recorded by bank Deduct outstanding checks: No. 812$1, No No , $4, Beginning balance$2, Add note and interest collected by bank Deduct check return because of insufficient funds$ Bank service charges18.00 $2, Error recording Check No Check No. 879 for $ to Taylor Co. on account, erroneously recorded in journal as $

BANK Bank’s books Beginning balance$3, Add deposit not recorded by bank Deduct outstanding checks: No. 812$1, No No , $4, Adjusted balance$2, Depositor’s records Beginning balance$2, Add note and interest collected by bank Deduct check return because of insufficient funds$ Bank service charges18.00 $2, Adjusted balance$2, Error recording Check No

Now, if desired, we can prepare a formal statement for Power Networking.

Balance per bank statement$3, Add: Deposit not recorded by bank $4, Deduct: Outstanding checks No. 812$1, No No , Adjusted balance$2, Balance per depositor’s records$2, Add: Note and interest collected by bank $2, Deduct: NSF check (Thomas Ivey) returned$ Bank service charges Error in recording Check No Adjusted balance$2, Power Networking Bank Reconciliation July 31, 2006

Reconciling the Bank Statement Example Question No 1 Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Simmons Company. The July 31 bank statement indicated a cash balance of $9,610, while the cash ledger account on that date shows a balance of $7,430. Additional information necessary for the reconciliation is shown on the next page.

Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank. Outstanding checks totaled $2,417. A $500 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $225 received as payment of an account receivable. The bank statement showed $30 interest earned on the bank balance for the month of July. Check 781 for supplies cleared the bank for $268 but was erroneously recorded in our books as $240. A $486 deposit by Acme Company was erroneously credited to our account by the bank.

SIMON COMPANY Bank Reconciliation July 31,2001

Reconciling the Bank Statement Example

Question No 2 Prepare a December 31 bank reconciliation statement and the resulting journal entries for the Data Flow Inc. The Dec 31 bank statement indicated a cash balance of $15,981, while the cash ledger account on that date shows a balance of $17,445. Additional information necessary for the reconciliation is shown on the next page.

Outstanding checks totaled $3513. A $4353 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $600 received as payment of an account receivable. The bank statement showed $24 Service Charges for the month of dec. Outstanding checks totaled $3513. A $4353 check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $600 received as payment of an account receivable. The bank statement showed $24 Service Charges for the month of dec.

DATA FLOW INC Bank Reconciliation December 31,2006 Balance per Bank statement $15,981 Addition: Deposits in Transit 4,353 Deduction: Outstanding Checks (3,513) Adjusted Cash Balance $16,821 Balance per Depositor’s Record $17,445 Deductions: Service Charges $24 NSF Check $600 $(624) Adjusted Cash Balance $16,821

GENERAL JOURNAL DateAccount Titles and ExplanationDebit $ Credit $ 2006 Dec 31 Bank Service Charges A/R Cash

Reconciling the Bank Statement Example Question No 3 Prepare a July 31 bank reconciliation statement and the resulting journal entries for the Norfleet Farm. The July bank statement indicated a cash balance of $18,928.12, while the cash ledger account on that date shows a balance of $16, Additional information necessary for the reconciliation is shown on the next page.

Outstanding checks totaled $1, A $4, check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $180 received as payment of an account receivable. The bank statement showed $4,545 Note Receivable collected by the bank for the business. Check 821 for Office Equipment cleared the bank for $ but was erroneously recorded in our books as $ The bank statement showed $7.65 Service Charges for the month of July. Outstanding checks totaled $1, A $4, check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $180 received as payment of an account receivable. The bank statement showed $4,545 Note Receivable collected by the bank for the business. Check 821 for Office Equipment cleared the bank for $ but was erroneously recorded in our books as $ The bank statement showed $7.65 Service Charges for the month of July.

NORFLEET FORM Bank Reconciliation July 31,2001 Balance per Bank statement, July 31 $18, Addition: Deposits in Transit Deduction: Outstanding Checks (1,802.97) Adjusted Cash Balance $21, Balance per Depositor’s Record $16, Additions: Note Receivable by bank $4, Book error Deductions: Service Charges $7.65 NSF Check $(187.65) Adjusted Cash Balance $21,142.30

GENERAL JOURNAL DateAccount Titles and Explanation Debit $ Credit $ 2001 July 31 Cash N/R Office Equipment To record collection by bank of N/R, and correct recorded cost of office equipment July 31Bank Service Charges A/R Cash To adjust accounting record for bank service charges and customer check charge back as NSF

Reconciling the Bank Statement Example Question No 4 Prepare an October 31, 2006 bank reconciliation statement and the resulting journal entries for the Parkview Company. The October bank statement indicated a cash balance of $5,000.17, while the cash ledger account on that date shows a balance of $4, Additional information necessary for the reconciliation is shown on the next page.

Outstanding checks totaled $ A $ check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $50.25 received as payment of an account receivable. The bank statement showed $ Note Receivable collected by the bank for the business. Check 875 for Telephone Expense cleared the bank for $85.00 but was erroneously recorded in our books as $ The bank statement showed $17.00 Service Charges for the month of July. The bank statement showed $24.74 interest earned on the bank balance for the month of October. Outstanding checks totaled $ A $ check mailed to the bank for deposit had not reached the bank at the statement date. The bank returned a customer’s NSF check for $50.25 received as payment of an account receivable. The bank statement showed $ Note Receivable collected by the bank for the business. Check 875 for Telephone Expense cleared the bank for $85.00 but was erroneously recorded in our books as $ The bank statement showed $17.00 Service Charges for the month of July. The bank statement showed $24.74 interest earned on the bank balance for the month of October.

PARKVIEW COMPANY Bank Reconciliation October 31,2006 Balance per Bank statement, July 31 $5, Addition: Deposits in Transit Deduction: Outstanding Checks (717.75) Adjusted Cash Balance $4, Balance per Depositor’s Record $4, Additions: Note Receivable by bank $ Interest Revenue Deductions: Service Charges $17.00 Book Error NSF Check $(94.25) Adjusted Cash Balance $4,693.32

GENERAL JOURNAL DateAccount Titles and ExplanationDebit $ Credit $ 2006 Oct 31 Cash N/R Interest Revenue To record collections by bank of N/R and Interest Revenue Oct 31Bank Service Charges A/R Telephone Expense Cash To adjust accounting record for bank service charges, customer check charge back as NSF and understatement of cash payment for telephone expense

a) Balance per Depositor’s record $ b) Balance per Bank Statement $ c) Checks outstanding $ d) Deposit in transit $ e) A check for payment of $57 was recorded as $75 in deposit ledger. f) Bank debit memorandum for service charges $7.15. Prepare Bank Reconciliation Statement For DUBAI ENTERPRISES CLASS ACTIVITY-1

a) Balance per Depositor’s record $5780 b) Balance per Bank Statement $4675 c) Checks outstanding $ 1800 d) Deposit in transit $ 2000 e) Interest on investment collected by the bank $800 f)Bank service charges $30 g)Interest on Notes Payables $175 h)Checks issued and paid by bank omitted to be recorded $ 1500 Prepare Bank Reconciliation Statement For DUBAI ENTERPRISES CLASS ACTIVITY-2

Cash Short-term Investments Receivables Financial Assets

Cash Coins and paper money Checks Money orders Travelers’ checks Bank credit card Cash is Defined as any deposit banks will accept.

Accountant define cash as any item that banks will accept for deposits. These items include not only coins and paper money, but also checks, money orders and travelers checks. Banks also accept drafts signed by customers using bank credit cards.

Reporting of Cash Cash is listed first in the balance sheet because it is the most liquid of all current assets. For the purpose of Balance Sheet presentation Reporting cash needs special attention of the following: 1.Cash equivalents 2. Restricted cash 3. Lines of credit

Cash Equivalents Some short term investments are so liquid that they are termed cash equivalents. To qualify as a cash equivalent,an investment must be 1. Very safe 2. Have a very stable value 1.3. Mature within 90 days of acquision. Examples: Treasury bills, money-market funds, commercial paper

 These assets are considered so similar to cash that they are combined with the amount of cash in Balance Sheet. Therefore the first asset listed in balance sheet often is called Cash and Cash Equivalents.  To qualify as a cash equivalent, an investment must be very safe, have a very stable market value and mature within 90 days of the date of acquisition.

Short term investments that do not qualify as cash equivalents are listed in the balance sheet as marketable securities, which appear second among the current assets.

Combined with cash on balance sheet Reporting Cash in the Balance Sheet Liquid short- term investments Stable market values Matures within 90 days of acquisition Cash Equivalents

Restricted Cash Some banks accounts are restricted as to their use, so they are not available to meet the normal operating needs of the company. For example, a bank account may contain cash specifically kept for the acquisition of Fixed assets. Bank account in some foreign countries are restricted by laws that prohibit transferring the money another country.

Cash that is not available for paying current liabilities should not be viewed as a current asset. Therefore restricted cash should be listed just below the current asset section of the balance sheet in the section entitled “Investment and Funds.

Not available for paying current liabilities Reporting Cash in the Balance Sheet Not a current asset Listed as an investment “Restricted” Cash

Line of Credit Many businesses arrange line of credit with their bank. “A line of credit means that the bank has agreed in advance to lend the company any amount of money up to a specified limit”. The company can borrow this money at any time simply by drawing checks on a special bank account.

 A liability to the bank arises as soon as money is borrowed that is as soon as a portion of the line of credit is used.  The unused portion of the line credit is not an asset nor a liability, it represents only the ability to borrow money quickly and easily and increases the company solvency.

Bank agrees in advance to lend money. Reporting Cash in the Balance Sheet Liability is incurred when line of credit is used. Unused line of credit is disclosed in notes. Lines of Credit