Financial Accounting

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Financial Accounting (Mgt-101)
VU
EXAMPLE # 2
From the following data ascertain the balance as per bank statement of Rashid & Co on March 31, 20--
·  Balance as per bank book Rs. 79,000
·  Cheques issued but not presented for payment Rs. 24,000.
·  Cheques deposited but not cleared Rs. 35,000
·  Interest on deposit was credited by bank but not debited in bank book Rs. 1,000.
·  A customer paid into bank directly Rs. 13,000 but the same was not recorded in bank book.
·  Other receipts in bank that were not recorded in bank book Rs. 20,000.
SOLUTION
In such an example, where bank reconciliation statement is not required the answer will show only what is
required i.e. the balance that should appear in Bank Statement. Whereas, the reconciliation statement is
prepared in WORKING / Rough Work
Let's see the solution now:
Rashid & Co.
Balance As per Bank Statement Rs. 80,000
WORKING
Balance as per Bank Book
79,000
1
24,000
2
Less Un credited cheques
(35,000)
3
1,000
4
13,000
5
20,000
Balance as per bank statement
102,000
As this is a working, therefore, we have put all the items in the statement. If the question had required the
adjusted bank book balance, then, we would have adjusted items 3,4 and 5 first and then prepared the
reconciliation statement.
Similarly the question could have given us the balance as per bank statement and required us to calculate
bank book balance.
Let's see how we will work out the balance of bank book:
Rashid & Co.
Balance as per Bank Statement
102,000
1
Less Un presented cheques
(24,000)
2
35,000
3
(1,000)
4
Less amount deposited by customer
(13,000)
5
Less other receipts in bank
(20,000)
Balance as per bank book
79,000
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Financial Accounting (Mgt-101)
VU
RECTIFICATION OF ERROR
In the beginning of this lecture, we also said that one reason for a difference between balance of bank book
and bank statement could be a mistake made by us in recording transactions. Such differences are removed
by making an adjusting entry through Journal Voucher, which is also called rectification of error.
Any other error when rectified / corrected would also be termed as Rectification of Error.
For Example, assume that we received cash Rs. 50,000 from a debtor and instead of Debiting the Cash Book
/ Cash Account, we debited the Bank Book. Whereas, the credit was given to the correct account. Now we
have overstated bank book by Rs. 50,000 and understated the cash book by the same amount. To correct
this, we will have to reduce / credit bank and increase / debit cash by Rs. 50,000.
So the entry will be:
Debit
Cash Account
50,000
Credit
Bank Account
50,000
After posting this transaction, our bank book will be reconciled if all other items have been taken into
account.
We can prepare a general procedure for rectification of errors.
Step 1
Note down the correct entry
Debit:
Cash
50,000
Credit:
Creditors
50,000
Step 2
Note down the incorrect entry
Debit:
Bank
50,000
Credit:
Creditors
50,000
Step 3
See that Credit effect is correct. In case of Debit, effect has been given to Bank, instead of
cash. Therefore, we will give the due effect to Cash by debiting it and Remove the incorrect
effect from bank by crediting it.
Debit:
Cash Account
50,000
Credit:
Bank Account
50,000
This is one type of error where entry has been posted in incorrect account but with the correct amount.
Other errors that may occur while recording are as follows:
·  A transaction is completely omitted. For example, in our above examples, we had not recorded the
bank charges or the payment made by our customers directly in our bank.
·  This type of errors is simple to rectify. The entry that was required at the time of event is recorded
when it comes to our knowledge.
·
The entry is recorded in correct account but with incorrect amount. For example, Electricity bill of
Rs. 1000 paid in cash is recorded as Rs. 100 in correct head. In this case, rectification will be done by
following entry:
Debit
Electricity
900
Credit
Cash
900
(This will increase the expense to Rs. 1000 and decrease the cash to the correct amount.)
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Financial Accounting (Mgt-101)
VU
·
On the other hand, if the entry was recorded at 10,000. Then a reversal entry will be posted to
correct the effect.
Debit:
Cash
9000
Credit:
Electricity
9000
·
Another type of error could be Wrong Head of Account with wrong amount. For example,
Purchase of vehicle worth Rs. 500,000 through cheque is recorded as vehicle repair Rs. 50,000.
·  The Correct Entry would have been:
Debit:
Vehicle
500,000
Credit:
Bank
500,000
·  The wrong entry that we posted is:
Debit:
Vehicle repair
50,000
Credit:
Bank
50,000
·  Rectification will be as follows:
Debit:
Vehicle
500,000
Credit:
Bank
450,000
Credit:
Vehicle Repair
50,000
We can, therefore, use this method to rectify any mistake.
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