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Financial Accounting

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Financial Accounting (Mgt-101)
VU
Lesson-23
RECAP
In the last lecture we studied, what is Bank Statement and how does it differ from our Bank Book. We told
you that money lying in our bank account is our asset. Therefore, it usually has a DEBIT BALANCE. Also,
when we deposit cash in our Bank, we DEBIT the Bank Book / Bank Account. Whereas, for Bank, the
money lying in our Bank Account is a liability that bank has to return to us. Therefore, in Bank Statement
which is a ledger account for bank normally has a CREDIT BALANCE. When we deposit cash in our bank
account the liability of the bank to pay us increases. Therefore, our account in Books of Bank is
CREDITED. Bank Statement is, therefore, a MIRROR IMAGE of our bank book.
Then, we studied about the reasons that create differences between our bank book and bank statement. Such
as:
 Bank Charges debited to our bank account by the bank without our knowledge.
 Profit credited to our bank account.
 Payments made on our behalf by the bank, through our standing instructions, that we did not record
in our books.
 Money paid in our account by our customers, dealers, agents, etc. without our knowledge.
 Un-presented cheques.
 Un-cleared cheques.
The last two arise because we record payment or receipt in our books when we receive / issue a cheque. But
the bank records the transaction in our account at the time of actual receipt or payment. These differences
are included in the bank reconciliation statement. The first four items are either adjusted in the bank book or
shown in the reconciliation statement, depending upon whether we have closed our books for the period or
not. If we have closed our books of accounts, these differences will be presented in the bank reconciliation
statement. If our books of accounts are not closed as yet, we will adjust our bank book and give effect of all
these adjustments in the bank book.
The main idea behind bank reconciliation is that we adjust our bank book for the transactions, that remain
untraced, either through a Voucher (charges, profit, standing instruction) or through a Reconciliation
Statement (un-presented, un-credited cheques).
EXAMPLE # 1
From the following particulars, prepare Bank reconciliation statement of Mr. Naveed as on June 30, 2002.
Balance as per bank book
Dr.
32,000
Cheques deposited but not yet collected by bank
20,200
Cheques issued but not yet paid by bank
13,000
Dividend credited by bank on June 30, but the intimation
was received later.
2,000
 Interest credited by bank
250
 Bank charges debited by bank
50
It is assumed that books of accounts are not closed as yet.
SOLUTION
As books of accounts are not closed, we will find out the adjusted balance first:
Rs.
Balance as per bank book
Dr.
32,000
Add/Debit Dividend credited by bank
Dr.
2,000
160
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Financial Accounting (Mgt-101)
VU
Add/Debit Interest credited by bank
Dr.
250
Less/Credit Bank charges
Cr.
(50)
Adjusted balance as per bank book
Dr.
34,200
These adjustments in the ledger account of bank will look like as follows:
Mr. Naveed
Bank Book (Bank Account Number)
Account Code --
Date
Vr.
Chq.
Narration /
Ledger Receipt
Payment Balance
20--
#
No.
Particulars
Code  Amount
Amount Dr/(Cr)
Jun30
Balance B/f
32,000
32,000
Jun30
Dividend received
2,000
34,000
Jun30
Interest received
250
34,250
Jun30
Bank charges
50
34,200
BANK RECONCILIATION STATEMENT
Rs.
Balance as per bank book
Dr.
34,200
Add: Un-presented cheques
Dr.
13,000
Less: Un-credited cheques
(Cr.)
(20,200)
Balance as per bank statement
Cr.
27,000
In this example, books of accounts are not closed, all other transactions except un-presented cheques and
un-credited cheques, will be recorded in the bank book by passing journal entries and adjusted balance of
bank book will be presented in the bank reconciliation statement.
To this point, we have considered a favourable balance i.e. Debit in bank book and Credit in bank statement.
But there is a possibility that we may have an unfavourable balance. This can happen if we have taken a loan
from our bank.We can also call it an overdraft i.e. we have drawn more money from our bank than we had
deposited in it. The reconciliation procedure would be the same as before.
161
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Financial Accounting (Mgt-101)
VU
The solution of above example will show the following picture:
SOLUTION
As books of accounts are not closed, we will find out the adjusted balance first:
Rs.
Balance as per bank book
Cr.
(32,000)
Add/Debit Dividend credited by bank
Dr.
2,000
Add/Debit Interest credited by bank
Dr.
250
Less/Credit Bank charges
Cr.
(50)
Adjusted balance as per bank book
Dr.
(34,200)
These adjustments in the ledger account of bank will look like as follows:
Mr. Naveed
Bank Book (Bank Account Number)
Account Code --
Date
Vr.
Chq.
Narration /
Ledger Receipt
Payment Balance
20--
#
No.
Particulars
Code  Amount
Amount Dr/(Cr)
Jun30
Balance B/f
32,000
(32,000)
Jun30
Dividend received
2,000
(34,000)
Jun30
Interest received
250
(34,250)
Jun30
Bank charges
50
(34,200)
BANK RECONCILIATION STATEMENT
Rs.
Balance as per bank book
Cr.
(34,200)
Add: Un-presented cheques
Dr.
13,000
Less: Un-credited cheques
(Cr.)
(20,200)
Balance as per bank statement
Dr.
(41,400)
In this case the balance of bank statement is debit because this amount is receivable by bank; it is an asset of
the bank. On the other hand, this balance is a credit balance in bank book, it is payable to bank by the
business. So, it is a liability of the business. Balance of bank statement in the first case does not match with
the balance calculated above. The reason being, the balance in the first solution was debit, i-e. balance was
our asset and drawing more money from bank reduced our asset. On the other hand, balance in this case is
credit, i-e. we have already drawn more than what we have deposited in the bank. So, it is our liability. This
balance is shown with negative sign. So, when we add/debit any amount, it will reduce our liability and when
we less/credit any amount from bank, it will enhance our liability. This difference in treatment will result in a
different balance of bank statement.
162
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES