Bank reconciliation statement

                         BANK RECONCILIATION STATEMENT

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation's Bank statement, as supplied by the bank, and the corresponding amount shown in the organisation's accounting records at a particular point in time.

A transaction relating to bank has to be recorded in both the books i.e.  Cash Book and Pass Book but sometimes it happens that a  bank transaction is recorded only in one book and not recorded simultaneously in other book causing difference in the two balances.

We operate a bank account in which we deposit money and withdraw money from time to time. We maintain a record with ourselves of these deposits and withdrawals. One day we get our pass-book (statement
issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per our records.
Then it is obvious that we will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book.
On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance.
Following Points are considered;


(a) Compare transactions that appear on both Cash Book and Bank Statement
(b) Update Cash Book from details of transactions appearing on Bank Statement
(c)  Balance the bank columns of the Cash Book to calculate the revised balance

(d) Enter correct date of the statement
(e) Enter the balance at bank as per the Cash Book
(f) Enter details of unpresented cheques
(g) Enter sub-total on reconciliation statement
(h) Enter details of bank lodgements
(i) Calculate balance as per Bank Statement

Inventories

ACCOUNTING FOR INVENTORIES:

International Accounting Standard (IAS) 2

This standard is established for providing proper guidence for determining the cost of inventories involved in a business. It provides the information for treating inventories basically at two levels.

1. when the inventory is purchased by the business and its treatment and recording when it is entered in the business.
2. when the inventory is recorded and treated as an expense for the business.

Inventories:

The raw material, work in progress goods and finished goods are treated as inventory for a business. As these are ready for sale or will be ready for sale in future and treated as asset of a business.

---> Work in progress which is under construction, biological instruments and shares and bonds are not included in inventory of business entity.

Objectives:

The main objectives of IAS 2 are as follows;

• guidence for cost evaluation.
• accounting treatment for the inventories of business.
• circumstances for written down and net realizable values.
• cost which is to be recognized
• how to carry forward cost till the revenues are generated 

Measurement of Inventories:

There are basically two approaches for inventories:

1. Perpetual inventory system.

2. Periodic iunventory system.

-->Both systems were widely used.The use of computerized accounting system has made perpetual inventory system easy and cost-effective.

-->Periodic approach is used primarily by very small businesses with manual accounting systems.

--> When an  inventory is purchased, it is recorded as an asset in the balance sheet. When it is sold to customers, the asset is converted into an expense, that is the cost of goods sold.

PERPETUAL  INVENTORY SYSTEM:

In a perpetual inventory system, transactions involving costs of inventory are recorded immediately as they occur.

--> This system is known as perpetual accounting system because of the fact that the accounting records are kept perpetually up-to-date.

--> Purchases of inventory are recorded as debit in an asset account named inventory.

-->When merchandize is sold, two entries are recorded:

• one to recognize the revenue earned.
• second to recognize the related cost of goods sold.The second entry also reduces the balance of inventory account to show that the sale of some of the inventory.

--> A Perpetual inventory system uses an inventory subsidiary ledger. This ledger provides up-to-date record about every product that the company is  buying and selling, it also ioncludes the per unit cost and the number of units purchased, sold, and on hand.

PERIODIC INVENTORY SYSTEM:

A periodic inventory system is opposite to a perpetual inventory system.

--> In a periodic inventory system, no effort is made to keep up-to-date records of the inventory and the cost of goods sold.

--> These amounts are determined only periodically usually at the end of each year.

accounting cycle.

ACCOUNTING CYCLE:
                         "It is the procedure for recording, classifying and summarizing the accounting information in different financial reports".
There are various steps include in accounting cycle. These steps are to be followed for recording the business transactions and for the preparation of complete Financial Statement. As it is a cycle , so this procedure to be repeated again and again for keeping up to date records of business transactions.
Steps Included:
                     Following steps are included in an Accounting Cycle ;
1. Journal
2. Ledger
3. Trial Balance
4. Adjustments at the end
5. Adjusted Trial Balance
6. Financial Statements
7. Closing Entries
8. After Closing Trial Balance

JOURNAL:
               "It is a day to day record of business transactions".
The basic type of journals are known as General Journals. Analysing the business transactions and recording them in the form of Journal entries. Analysing business transaction means whether the particular event effect the assets, liabilities and owner's Equity. Two accounts are involved in it.One is debited and other is credited.Journal is made in proper format. As soon as an event is happen it is recorded in the form of journal entries.

LEDGERS:
               "A book to which the record of accounts is transferred from original postings".
Next step after journalizing the transactions is the formation of the accounts in the form of ledgers. Every account in the journal entry has its own ledger account. The format of ledgers are according International Accounting Standards. Ledgers have a debit or credit balance. All the transactions from the journal are posted tto ledgers after each entry is done in such a way that debit amount of a journal entry is transferred to the debit side of the particular ledger and the credit amount is transferred to the credit side of the particular ledger.

TRIAL BALANCE:
              "A statement of all the open debit and credit items in a double entry ledger, made to test their equality".
In trial balance there is a list of the balances of ledgers of a business at a specific time,at the end of a specific period. An unadjusted trial balance is made before any adjustment is made in the ledger. All what is done in the trial balance is to list the balances of the ledgers of a business. A Trial balance has a format in which all the ledger accounts are posted to get an equal of a debit and a credit of posted accounts. It is made under the instructions provided by the IAS.

ADJUSTING ENTRIES:
          " An accounting entry made at the end of accounting period to allocate items between accounting periods".
Adjusting entries are recorded at the end of accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not yet been recorded. A common characteristic of all adjusting entries is that they involve at least one revenue or expense account. Not all journal entries recorded at the end of a period are adjusting entries. The main purpose of adjusting entries is to match revenues and expenses to the current accounting period which is a requirement of the matching principle of accounting.

ADJUSTED TRIAL BALANCE:
         An Adjusted Trial Balance is a list of the balances of ledgers which is made after the adjusting entries are done. Adjusted trial balance contains balances of revenues and expenses along with those of assets, liabilities and equities after the changes occur due to adjusting entries.

FINANCIAL STATEMENTS:
         Financial statements are structured presentation of a business's financial performance, financial position and changes in financial position over time. It is the final output of an accounting information.
 Following are the types of financial statements ;
1. Income Statement.
2. Balance Sheet.
3. Statement of Cash Flow.
4. Statement of Changes in Equity.
5. Notes and Other Disclosures.

CLOSING ENTRIES:
         It is necessary to close the temporary accounts in order to make their balances zero at the end of accounting period. The temporary accounts are closed when their balances are transferred to permanent accounts.Closing entries are based on the balances of accounts in the adjusted trial balance.
Temporary accounts include:
1. Revenues
2. Expenses
3. Dividends
4. Income Summary

AFTER CLOSING TRIAL BALANCE:
            Post closing trial balance is a list of balances of ledgers prepared after passing adjusting entries and their postings to the ledgers. Post closing trial balance is prepared in  the last step of the accounting cycle and its purpose is to assure that sum of debits equal the sum of credits before the new accounting period starts.

Adjusting Entries - Case 4.1 - Financial and Managerial Accounting by Williams et all 15e

c. As the customers are billed after the services are rendered. So, an adjusting entry is needed in order to recognise the amount of services rendered in December 2009. The effect of this adjusting entry would be to increase the assets,increasing the revenue earned during this period and in return increasing the owner's equity.

d. No adjusting entry is required in this case because the policy will be in effect from Jan 2nd 2010. No benefit is derived from it in Dec 2009. So, no insurance expense will be recorded for Dec 2009.

e. An adjusting entry is required. Depriciation is required to be recorded on the equipment purchased for the month ending Dec 2009. It will increase the expense,decrease assets and decrease owner's equity.

f. Salaries for the month of Dec 2009 are due on 2nd Jan 2010. So, an adjusting entry is required here for the amount of salaries for Dec 2009. The effect of this adjusting entry would be to increase the expense, increasing the liability and reducing the owner's equity.