Вы находитесь на странице: 1из 38
Preparatory steps for final accounts
Preparatory steps for final accounts

Study Note - 3

Preparatory steps for final accounts

This Study Note includes

Introduction

Closing Stock

Depreciation

Accrued Expenses

Prepaid Expenses

Accrued Income

Income Received in Advance

Bad and Doubtful Debtors

Opening Entries

Closing Entries

Rectification Entries

Depreciation Methods

Bank Reconciliation

Conclusion

3.0 Introduction

At the end of the last study note, it was said that Trial Balance forms the basis for preparing financial statements. However, there are certain other tasks that have to be completed before these final accounts are prepared. You know that accounting entries are made on the basis of actual transactions carried out during an accounting period. These are all included in the trial balance. However, there could be certain other business realities which are to be recognized as either asset, liability, income, gain, expense, loss or a combination thereof. As we know the matching concept necessitates the consideration of all aspects which may affect the financial result of the business. Technically these are called as adjustments for which entries need to be passed, without which the financial statements will not give a true and fair view of business activity. We discuss some of these entries and adjustments in the following sections. Before discussing these, let us understand the meaning of income statement and balance sheet.

Trial Balance based on ledger balances Income statement shows in- come & gains and expenses
Trial Balance based on ledger balances
Income statement shows in-
come & gains and expenses &
losses for an accounting period.
The net result is profit or loss.
Balance Sheet shows assets and
Liabilities & owner’s equity.
Profit or loss from income state-
ment is added or deducted
from owner’s capital or equity.

A 62

Depending on the nature of business, the income statement is prepared in different forms like:

Depending on the nature of business, the income statement is prepared in different forms like:

a) In case of manufacturing concern, a manufacturing, trading and P & L a/c is prepared

b) In case of a trading or service organization, a trading and P & L a/c is prepared

The manufacturing or trading accounts show Gross margins (or gross losses) and the P & L a/ c shows Net Profit or net loss. This is explained in depth at a later stage in the next chapter.

The balance sheet exhibits the list of assets (which indicate resources owned) and the liabili- ties & owners’ capital and equity (which shows how the resources are funded).

For company type of organizations, standard formats for P & L and Balance sheet are given in the Companies Act that is to be adhered to. The accounting should be as per the accounting standards prescribed by the ICAI.

3.1 Closing Stock

We know when goods are purchased for resale we include them in Purchases a/c, while goods sold are shown in sales a/c. At the end of accounting period, some of these goods may remain unsold. If we show the entire cost of purchases in income statement, it will not be as per the matching concept. We should only show the cost of those goods that are sold during the period. The balance cost should be carried forward to the next accounting period through the balance sheet. How should the closing stock be valued? According to the conservative prin- ciple, the stock is valued at lower of cost or market price. If cost of stock is Rs 125000 and its realizable market price is only Rs 115000, then the value considered is Rs 115000 only. What it means is the difference of Rs 10000 is charged off to the current periods profits.

Students are advised to refer to Accounting Standard 2 issued by ICAI to get thorough knowledge on valuation of inventories.

Please remember the closing stock figure does not appear in the trial balance, but is valued and directly taken to the P & L a/c. The entry passed for this is:

Closing Stock a/c

To Trading and P & L a/c

Dr

In solving the examination problem, this entry is not actually passed, but the effect of its outcome is given. Here, one effect is “show closing stock as asset in balance sheet” and second effect is “show it on the credit side of trading a/c”.

3.2 Depreciation

When the business uses its assets to earn income, there is wear and tear of the asset life. Assets will have limited life and as we go on using it, the value diminishes. Again the question to be asked is – at what value should the asset be shown in the balance sheet? Consider a machine was bought on 1 st April 2005 for Rs 200000. It’s used for production activity throughout the year. When the final accounts are being prepared, at what value should it be shown in balance sheet as on 31 st March 2006?

Preparatory steps for final accounts
Preparatory steps for final accounts

Well, according to cost principle initial entry for purchase of machine is shown at cost paid for it e.g. Rs 200000 in this case. But the fact that the machine is used must be recognized in financials. Hence the value in the balance sheet must be brought down to the extent of its use. This is called as Depreciation. How is it calculated? While there are different methods of calculating depreciation (explained in subsequently), the simple idea is to spread it over the useful life of the asset, so that at the end of its life the value is zero! In our example, if useful life of the machine is taken as 10 years, the depreciation will be simply Rs 200000 ÷ 10 i.e. Rs 20000 every year. So a depreciation of Rs 20000 will be charged to the profit of every year and value of asset will be brought down by the same value.

Students are advised to refer to Accounting Standard 6 issued by ICAI to get thorough knowledge on Depreciation accounting.

The entry passed for this is:

Depreciation a/c

To Fixed Asset

Dr

The effect given is one – include in the P & L a/c as expense for the period and two – reduce from asset value in the balance sheet.

Please see section 3.10 describing various methods of depreciation included later in this chapter which may please be studied.

3.3 Accrued Expenses or Outstanding Expenses

There may be expenses incurred for the current accounting period, but not actually paid for. The matching concept, however, necessitates that this expense must be recognized as expense for the current year and should not be deferred till its actual payment. Typically, we know salary for the month is normally paid in the 1 st week of the next month. Imagine the accounting period close is on 31 st March. The salary for the month of March is not paid till 31 st March. But is it is related to this month, it must be booked as expense for the current month and also as a liability payable in the next month (which is in next accounting period). This can be shown as follows:

March salary paid in April Apr 2006 Mar 2006
March salary paid in April
Apr 2006
Mar 2006

The entry for this is:

Expense a/c

Dr

To outstanding Expense a/c or Expense payable a/c

The two effects when preparing the final accounts are:

One – add in respective expense in P & L a/c and two – show as a liability in the balance sheet.

A 64

3.4 Prepaid Expenses At times we may pay for certain expenses which are period related.

3.4 Prepaid Expenses

At times we may pay for certain expenses which are period related. For example, the business has taken an insurance policy against fire on which the annual premium payable is Rs 75000. The policy is taken on 1 st January 2006 valid till 31 st December 2006. But the company’s ac- counting period ends on 31 st March 2006. When considering the insurance expense for the accounting year, what amount should be considered? See the following.

31 st Mar 9 months 3 months 31 st Dec 2006 1 st Jan 12
31 st Mar
9 months
3 months
31 st Dec 2006
1 st Jan
12 months

As can be seen, out of the total premium period of 12 months, only 3 months are related to the current accounting period and the remaining 9 months’ premium is related to the next ac- counting period. Hence only 3 months’ premium is to be considered as expense for the current year i.e. Rs 18750 (75000 ÷ 4).

The entry for this is:

Prepaid Insurance a/c

Dr

To Insurance a/c The two effects while preparing final accounts are:

One – Reduce from respective expense in P & L a/c and two – show as an asset in the balance sheet

3.5 Accrued Incomes

Just as expenses accrue, there are instances of income getting accrued at the end of accounting period. The extent to which it accrues, it must be booked as income for the current accounting period. Consider, the business has put a One year fixed deposit of Rs 100000 with Citi Bank at a fixed interest of 9 % p.a. on 1 st February 2006 and the interest is credited by the bank on a semi-annual basis. Also, consider that the accounting period ends on 31 st March 2006. The Citi bank will credit the 1 st semi-annual interest on 31 st July 2006 and the next on 31 st January 2007. Now, consider the following:

Preparatory steps for final accounts
Preparatory steps for final accounts
31 st Mar 10 months 2 months 31 st Jan 2007 1 st Feb 2006
31 st Mar
10 months
2 months
31 st Jan 2007
1 st Feb 2006
12 months

It can be noticed that interest for the 2 months will be considered as accrued as on 31 st of March 2006 and must be taken as income for the current accounting year.

The entry for this is:

Accrued Interest a/c To Interest a/c

Dr

The two effects while preparing final accounts are:

One – Show as income in the P & L a/c and two – show as an asset in the balance sheet

3.6 Income received in advance

If an income is received which is not related to the current accounting period, it cannot be included in the current year’s P & L a/c. So, if it’s already included as income it must be re- duced. The entry for this is:

Respective Income a/c

To Income received in advance a/c

Dr

The effects while preparing final account are:

One – Reduce from respective income and two – show it as liability in balance sheet

3.7 Bad and doubtful debtors

When goods are sold on credit, the money is generally received after some days. Customers from whom money is not received till balance sheet date are called as Debtors or Receivables. The question is what is likelihood of the recoverability of this money? The management has to analyse all the outstanding cases and form its opinion regarding the recoverability. In case, management feels that some money is not recoverable at all or if it has doubt over some cases, it must factor this while making financial statements. When it is clear that the debtors are not going to pay at all (may be the party has vanished & not

A 66

traceable!), it is considered as ‘Bad Debt’. In case there is only a doubt about

traceable!), it is considered as ‘Bad Debt’. In case there is only a doubt about likelihood of getting payment, it is considered as ‘Doubtful Debt’. In case of Bad Debt, the balance due from customer has to be written off from the books. The entry for this is:

Bad Debts a/c Dr

To Debtors a/c (in sub-ledger the specific customer a/c is credited) The effects while preparing the final accounts are:

One – Show as expense in P & L a/c and two – reduce from debtors in the balance sheet In case of a Doubtful Debt, no write off is done, but a provision is created to recognise the expense. The entry for this is:

P and L account Dr

To Provision for Doubtful debts A/c The effects while preparing the final accounts are:

One – Show as expense in P & L a/c and two – reduce from debtors in the balance sheet

It may happen that the business has made a provision for a doubtful debt last year, and during

the current year, it becomes certain that the customer is never going to pay. Then during cur- rent year, the entry for complete write off of this debt has to be passed. The entry for this is:

Provision for doubtful debts Dr To BAD debts a/c The effects while preparing the final accounts are:

One –Reduce from the provision amount in the balance sheet and two – reduce from debtors.

Illustration 1

Indicate what effects for the following adjustments when preparing the final accounts for the year ended 31 st March 2006. Show journal entries as well.

1)

The value of unsold goods lying as on 31-3-2006 was Rs 35000. The market price of these goods was Rs 50000.

2)

Depreciation is to be provided as 10 % on Furniture (original cost Rs 50000) and ma- chinery at 33 % (original cost Rs 90000).

3)

The expenses for the month of March 2006 not yet paid are – Telephone Rs 1500, and travel bills Rs 12000.

4)

Prepaid Insurance was Rs 12500

5)

Included in sales were Rs 25000 received as advance, but the goods are not yet sup- plied. The cost of these goods was included in closing stock.

6)

Write off Rs 3000 as bad debts and make a provision of 2% on debtors of Rs 100000.

7)

The salesmen were entitled to commission of 2% on total sales. During the year the sales were Rs 525000 before considering the item number (5) above.

Preparatory steps for final accounts
Preparatory steps for final accounts

Answer to Illustration 1 The journal entries and the effects in final accounts are shown in the following table:

Sl.

Journal Entry

Effect in final accounts

No.

1.

Closing Stock a/c To trading a/c

Dr

35000

Show in trading a/c on credit side and show as asset in balance sheet. The value should be taken as Rs 35000 & not Rs 50000.

35000

2.

Depreciation of Furniture a/c Depreciation on Machinery a/c To Furniture a/c To Machinery a/c

Dr

5000

Show both debits as expense in P &

Dr

30000

L

a/c and reduce from values of

5000

respective asset in the balance sheet

30000

3.

Telephone expenses a/c Travel a/c To outstanding expenses a/c

Dr

1500

Telephone and travel expenses will be shown in P & L and outstanding expenses will be shown as liability in balance sheet.

Dr

12000

13500

4.

Prepaid Insurance a/c To Insurance a/c

Dr

12500

Reduce from the Insurance in P & L a/c and prepaid insurance will be shown as asset in balance sheet.

12500

5.

Sales a/c To sales in advance a/c

Dr

25000

Reduce from sales in trading a/c and show the sales in advance as a liability in the balance sheet.

25000

6.

Bad Debts a/c Doubtful debts provision a/c To Debtors a/c

Dr

3000

Show both debits as expenses in P

Dr

1940

&

L a/c and reduce from Debtors

4940

in the balance sheet.

7.

Salesmen commission a/c To commission payable a/c Calculation: ( 525000-25000) * 2%

Dr

10000

Show as expense in the P & L a/c and as a liability in the balance sheet.

10000

Please note that the students must practice this in order to improve understanding. Actually, there are two ways in which these adjusting entries can be treated:

1) After making trial balance based on transactions captured, these entries are treated outside books and adjusted directly in P & L a/c or balance sheet and then passed in journal proper.

2)

In practical life however, these entries are passed and then final trial balance is pre- pared based on which final accounts are made.

A 68

In examination problems, trial balance is given and adjustments are given separately. Students are expected

In examination problems, trial balance is given and adjustments are given separately. Students are expected to pass the adjustments directly in the final accounts. See the illustrations for clear understanding.

3.8 Opening Entries

At the end of each accounting period, the books of accounts need to be closed for preparation of final accounts. Also, in the beginning of the new accounting period, new books of accounts are to be opened. For this purpose, opening and closing entries need to be passed. These entries are passed in journal proper.

The opening entries are passed only for those ledger a/c balances which are carried forward from earlier period to the current accounting period. In other words, the balances of assets, liabilities and owners’ capital and equity accounts are only considered for such opening en- tries. The opening entry is passed with the closing balances of assets and liabilities & capital accounts in the last year’s balance sheet.

The entry can be given as:

All Asset a/cs

To all liabilities a/c

To Owners’ capital a/cs

Dr

Illustration 2

Consider the following balances in the balance sheet as on 31 st March 2006. Pass the opening entry on 1 st April 2007.

Subodh’s Capital a/c

275000

Loan from HDFC bank

425000

Plant and machinery

330000

Cash in hand

20000

Balance at Citi bank

175000

Trade Debtors

355000

Closing stock

135000

Trade Payables

295000

Outstanding Expenses

40000

Prepaid Insurance

20000

Preparatory steps for final accounts
Preparatory steps for final accounts

Answer

Plant and machinery

Dr

330000

Cash in hand

Dr

20000

Balance at Citi bank

Dr

175000

Trade Debtors

Dr

355000

Closing stock

Dr

135000

Prepaid Insurance

Dr

20000

To Subodh’s Capital a/c

275000

To Loan from HDFC bank

425000

To Trade Payables

295000

To Outstanding Expenses

40000

3.9 Closing Entries

The Closing Entries are passed on the basis of trial balance for transferring the balances to Trading and profit and loss a/c. These entries are mainly for:

a)

For transferring purchases and direct expenses (goods related) to trading a/c

Trading a/c

Dr

To Opening stock a/c

To Purchases a/c

To factory expenses a/c

To freight & carriage inward a/c

b)

For transferring sales and closing stocks

Sales a/c

Dr

Closing Stock a/c

Dr

To Trading a/c

A 70

 

c) For transferring gross profit or gross loss to P & L a/c For gross

c) For transferring gross profit or gross loss to P & L a/c

For gross Profit

 

Trading a/c

 

Dr

To P & L a/c

For Gross Loss

P

& L a/c

Dr

To Trading a/c

d) For transferring expenses

P

& L a/c

Dr

To Respective expense

a/cs

e) For transferring Incomes Respective income a/cs To P & L a/c

Dr

f) For transferring Net profit or Net loss For Net Profit

P

& L a/c

Dr

To Capital a/c

For Net Loss Capital a/c To P & L a/c

 

Dr

3.10 Rectification Entries

In the section 2.5 of the study note two, you were introduced to the reasons why errors could occur and to the fact that while some errors affect trial balance and some errors do not affect it. In this section, we will see in depth how the corrections are made to the wrong entries. When the errors affecting the TB are made, the normal practice is to put the difference to an a/ c called as ‘suspense a/c’ till the time errors are located. On identification of errors, the one effect goes to the correct a/c and the other effect to the suspense a/c. This is done for one sided errors e.g. if sales book total is wrongly taken, but individual customers are correctly debited. Such error will cause difference in trial balance as only sales a/c is wrongly credited. In such cases the rectification entry will be passed through suspense a/c. In all other cases the rectification is done by debiting or crediting the correct a/c head and by crediting or debiting the wrong a/c head. Let us recapitulate the types of errors and the ways to rectify them in the following table.

Preparatory steps for final accounts
Preparatory steps for final accounts

Type of error

Rectification

 

a) Error of principle – entering revenue expense as capital expense or vice versa or entering revenue receipt as capital receipt or vice versa.

b) – transaction forgotten to be entered in books of accounts.

Error of

Omission

A

journal entry is passed to give

correct effect.

 

Simply, the correct entry is passed.

c) Errors

of

commission

Debit or credit wrong a/c head and post it to correct head.

entering

to

wrong

head

of

account.

 

d) Compensating errors – more than one error that could compensate effect of each other.

Pass correcting entry

 

e) Wrong totaling of subsidiary books

As

it

affects

TB,

pass

through

suspense a/c

 

f) Posting on wrong side of an a/c

Pass an entry with double effect – one to cancel wrong side and other

to

give effect on correct side

g) Posting of wrong amount

Pass

entry

with

differential

amount

 

Let us see some illustrations on rectification of entries.

Illustration 3

A merchant, while balancing his books of accounts notices that the TB did not tally. It showed excess credit of Rs 1700. He placed the difference to Suspense a/c. Subsequently he noticed the following errors:

a)

Goods brought from Narayan for Rs 5000 were posted to the credit of Narayan’s a/c as Rs 5500

b)

An item of Rs 750 entered in Sales returns book was posted to the debit of Pandey who had returned the goods.

A 72

c) Sundry items of furniture sold for Rs 26000 were entered in the sales book.

c) Sundry items of furniture sold for Rs 26000 were entered in the sales book.

d) Discount of Rs 300 from creditors had been duly entered in creditor’s a/c but was not posted to discount a/c.

Pass necessary journal entries to rectify these errors. Also show the Suspense a/c.

Answer:

1)

Goods bought from Narayan are posted to credit of his a/c as Rs 5500 instead of Rs 5000. Here, it is correct to credit Narayan’s a/c. But the mistake is extra credit of Rs 500. This is one sided error, as posting to purchases a/c is correctly made. So the rectifica- tion entry will affect the suspense a/c .This needs to be reversed by the rectification entry:

Narayan’s a/c DR 500

 

To Suspense a/c

500

2)

Goods supplied by business to Pandey were returned back by him. It should have ap- peared on the credit side of his a/c. For rectifying we will need to credit his a/c with double the amount i.e. Rs 1500 (Rs 750 to cancel the wrong debit and another Rs 750 to give effect for correct credit) and the second effect will go to suspense a/c. The correc- tion entry is:

Suspense a/c Dr 1500

 

To Pandey a/c

1500

3)

Sale of furniture was recorded in sales book. What’s wrong here? Remember that sales book records sale of goods only and nothing else. Sale of furniture will appear in either cash book (if sold for cash) or journal proper (if sold on credit). Hence, wrong credit to sales a/c must be removed and credit should be given to Furniture a/c. It’s important to note that this rectification entry will not affect the suspense a/c. The correction entry is:

Sales a/c

Dr

26000

To Furniture a/c 26000

4)

The discount received from creditor is not entered in discount a/c but was correctly recorded in creditors’ a/c. This is one sided error and will therefore be routed through suspense for correction. A discount is received; it must be credited being an income.

Suspense a/c Dr 300

To Discount received a/c 300

Let us now see how suspense a/c will look like. Excess credit of Rs 1700 in Trial Balance will be shown on the debit side of suspense a/c. This will bring in total debit equal to total credit.

Preparatory steps for final accounts
Preparatory steps for final accounts

Let us see some illustrations on rectification of entries.

Dr

Suspense a/c

Cr

   

J.

Amount

   

J.

Amount

Date

Particulars

F.

Rs

Date

Particulars

F.

Rs

 

To balance b/d To discount received

 

1700

 

By Narayan

 

500

300

By Pandey

1500

 

2000

2000

Please observe that after correcting passing all rectification entries, the suspense a/c tallies automatically.

Illustration 4

Pass necessary journal entries to rectify the following errors:

a)

An amount of Rs 200 withdrawn by owner for personal use was debited to trade ex- penses.

b)

Purchase of goods of Rs 300 from Nathan was wrongly entered in sales book.

c)

A credit sale of Rs 100 to Santhanam was wrongly passed through purchase book.

d)

Rs. 150 received from Malhotra was credited to Mehrotra.

e)

Rs 375 paid as salary to cashier Dhawan was debited to his personal a/c.

f)

A bill of Rs 2750 for extension of building was debited to building repairs a/c

g)

Goods of Rs 500 returned by Akashdeep were taken into stock, but returns were not posted.

h)

Old furniture sold for Rs 200 to Sethi was recorded in sales book.

i)

The period end total of sales book was under cast by Rs 100

j)

Amount of Rs 80 received as interest was credited to commission.

A 74

Sr       Rs Rs no Particulars Debit Credit a) Wrong Entry Trade Expenses

Sr

     

Rs

Rs

no

Particulars

Debit

Credit

a)

Wrong Entry

Trade Expenses

Dr

200

 

To Cash

200

Correct entry

Drawings

Dr

200

To cash

200

Rectification

entry

Drawings To Trade expenses

Dr

200

200

b)

Wrong Entry

Nathan

Dr

300

To Sales

300

Correct entry

Purchases

Dr

300

To Nathan

300

Rectification

entry

Purchases

Dr

300

Sales

Dr

300

To Nathan

600

c)

Wrong Entry

Purchases

Dr

100

To Santhanam

100

Correct entry

Santhanam

Dr

100

To Sales

100

Rectification

entry

Santhanam

Dr

200

To Sales

100

To Purchases

100

d)

Wrong Entry

Cash

Dr

150

To Mehrotra

150

Correct entry

Cash

Dr

150

To Malhotra

150

Rectification

entry

Mehrotra

Dr

150

To Malhotra

150

e)

Wrong Entry

Dhawan

Dr

375

To cash

375

Correct entry

Salary

Dr

375

To cash

375

Rectification

entry

Salary

Dr

375

To Dhawan

375

Preparatory steps for final accounts
Preparatory steps for final accounts

f) Wrong Entry

Building Repairs To Cash Buildings To Cash

Dr

2750

 

2750

Correct entry

Dr

2750

2750

Rectification

 

entry

Buildings ToBuilding Repairs

Dr

2750

2750

g) Wrong Entry

No entry passed

Correct entry

Sales Returns

Dr

500

To Akashdeep

500

Rectification

entry

Sales Returns

Dr

500

To Akashdeep

500

h) Wrong Entry

Sethi

Dr

200

To Sales

200

Correct entry

Sethi

Dr

200

To Furniture

200

Rectification

entry

Sales

Dr

200

To Furniture

200

i) Wrong Entry

No entry passed

Correct entry

Suspense

Dr

100

To Sales

100

Rectification

entry

Suspense

Dr

100

To Sales

100

j) Wrong Entry

Cash

Dr

80

To commission

80

Correct entry

Cash

Dr

80

To Interest

80

Rectification

entry

Commission

Dr

80

To Interest

80

A 76

3.10.1 Effect of errors on Profit or loss Some errors may affect the profit or

3.10.1 Effect of errors on Profit or loss

Some errors may affect the profit or loss for the period while other won’t. How to find it out? Remember, the P & L a/c reflects items of incomes, gains, expenses and losses. All these ac- counts are nominal accounts. When an error occurs which affects a nominal account, it will affect profit or loss otherwise not. So, errors that affect real and personal accounts will not affect profit or loss.

3.10.2 Correction of errors in subsequent accounting period:

At times when the errors are not located, the difference in the TB is transferred to suspense a/ c and the books are closed. If errors are located in subsequent accounting period, corrections should be done in such way that the subsequent year’s profit is not affected. Therefore a sepa- rate a/c by the name of P & l Adjustment a/c is opened and all errors which affect profit or loss are adjusted through this a/c. The balance in the profit and loss a/c is transferred to the owner’s capital a/c.

Illustration 5

The books of M/s Shakti trading for the year ended 31 st march 2006 were closed with a difference that was posted to suspense a/c. The following errors were found subsequently:

a) Goods of Rs 12500 returned to Thick & Fast Corporation were recorded in Return In- ward book as Rs 21500 and from there it was posted to the debit of Thick & fast Corpo- ration.

b) A credit sale of Rs 7600 was wrongly posted as Rs 6700 to customer’s a/c in sales ledger.

c) Closing stock was overstated by Rs 5000 being totaling error in the schedule of inven- tory.

d) Rs 8900 paid to Bala was posted to the debit of Sethu as Rs 9800

e) Goods purchased from Evan traders for Rs 3250 was entered in sales book as Rs 3520

f) Rs 1500, being the total of discount column on the payment side of the cash book was not posted.

Rectify the errors and pass necessary entries giving effects to suspense a/c and P & L adjustment a/c.

Answer

a) There are 2 errors: one – return outward is wrongly recorded as return inward and two – amount is also recorded wrongly. First, we need to remove extra debit to Thick & Fast corporation i.e. Rs 9000 (21500-12500) by crediting it. Also we need to remove wrong credit of Rs 21500 in sales return by debiting it and credit Rs 12500 to Purchase returns a/c.

The rectification entry will be:

Suspense a/c Dr 21500

To Thick & Fast Corp

To P & L Adjustment a/c 12500

9000

Preparatory steps for final accounts
Preparatory steps for final accounts

b) In this case, error has occurred only in customer’s a/c. hence, profit or loss won’t be affected and the P & L Adjustment a/c will not be in picture. As customer’s a/c is debited for Rs 6700 instead of Rs 7600, it needs to be corrected.

The rectification entry will be:

Sundry Debtors a/c Dr 900

To Suspense a/c

900

c) Over casting of closing stock had affected profit which must be reduced through P & L Adjustment a/c. The rectification entry is:

P & L adjustment a/c

To Suspense a/c

Dr

5000

5000

d) As only personal accounts are affected, there won’t be an effect on Profits. So rectifica- tion will be done through suspense a/c only. The rectification entry is:

Bala a/c

Dr

8900

Suspense a/c

Dr

900

To Sethu a/c

9800

e) This transaction involves correction of purchase as well as sales, and hence will affect profit. As the purchases were booked as sales, we will need to cancel sales by debiting and freshly debit purchase. So overall effect on profit will be 3250 + 3520 i.e. 6770. The rectification enry will be:

P & L Adjustment a/c

To Evan Traders

Dr

6770

6770

f) If discount is appearing on payment side of cash book, it indicates discount received while making payment and is an item of income. Hence, it will affect profit. The ac- counting entry will be:

Suspense a/c

To P & L Adjustment a/c

Dr

1500

1500

Illustration 6

The trial balance of M/s G & Co did not match as on 31 st March 2006.The balance was trans- ferred to suspense a/c and carried forward the same to the next accounting period. The follow- ing errors were detected in the next year:

Answer:

a) Vehicle purchase should not have gone through purchase book. Purchases were overstated thereby reducing profit, which needs to be corrected. Vehicle a/c should be debited.

Vehicle a/c To P & L Adjustment a/c

Dr

250000

250000

A 78

b) The error has occurred in personal a/c only. It will not affect the profit.

b) The error has occurred in personal a/c only. It will not affect the profit.

Customer’s a/c To Suspense a/c

Dr

17600

17600

c) Discount allowed is expense. Non-recording of the same would affect profit.

P & L Adjustment a/c To Suspense a/c

Dr

500

500

d) As error has occurred in purchase a/c, it will affect profit. The personal a/c of supplier also needs to be corrected.

P

& L Adjustment a/c

 

Dr

10000

Suspense a/c To Supplier’s a/c

 

Dr

8800

18800

e) As error occurred in sales, it would affect Profit.

 

& L adjustment a/c To Suspense a/c

P

 

Dr

10000

10000

 

Dr

Suspense a/c

 

Cr

   

J.

Amount

   

J.

Amount

Date

Particulars

F.

Rs

Date

Particulars

F.

Rs

 

To balance b/d (Balancing figure) To supplier

 

19300

 

By Customer

 

17600

8800

By P & L Adj By P & L Adj

500

 

10000

28100

 

28100

Dr

P & L Adjustment a/c

 

Cr

   

J.

Amount

   

J.

Amount

Date

Particulars

F.

Rs

Date

Particulars

F.

Rs

 

To suspense

 

500

 

By Vehicle

 

250000

To supplier

10000

To suspense

10000

To

Owner's

capital

229500

250000

250000

In suspense a/c, please note the carried forward balance as the balancing figure. This was not given in the problem. It is a derived figure.

Preparatory steps for final accounts
Preparatory steps for final accounts

3.11 Depreciation Methods

In section 3.2 we discussed briefly the concept of depreciation and accounting entry thereof. Depreciation is defined as diminution in the value of asset due to use, wear and tear and pas- sage of time. This diminution is the asset value must be charged to the profits earned over the useful life of the asset. This is a non-cash expense. Consider a machine acquired for Rs 200000 on 1 st April 2005. The useful life of the machine is taken as 5 years. See the following:

Years

0

1

2

3

4

5

Charge to profit

 

40000

40000

40000

40000

40000

Value of asset

200000

160000

120000

80000

40000

Nil

In its simplest form depreciation charge will be done on equal basis over the useful life of the asset. In above example, see the charge to P & L and the value of asset as will be shown in the balance sheet.

Is it always correct to charge depreciation on an equal basis? Is it possible that the asset is used in the same way and extent every year? In practice, the method of charging depreciation will depend on the nature of asset, technological obsolescence, nature of business, number of shifts the asset is used etc. There are dimensions of time, use, time & use, time & maintenance, time & interest. In India, generally the stipulations of the Companies’ Act are followed for provid- ing depreciation.

Let us discuss some of the methods of depreciation generally followed:

3.11.1 Straight line method

This method goes with the time dimension. It assumes the charge should be related to time. As such, the value of asset is reduced by periodic charges over its useful life. The formula applied is:

Original cost of asset – estimated salvage value Estimated useful life

For example, if value of asset is Rs 100000, estimated salvage value is Rs 10000 and estimated useful life is 5 years, the depreciation charge for every year will be (100000 – 10000)/5 i.e. Rs 18000.

This would mean that depreciation will be charged @ 18% every year on the original cost. When the asset has an estimated salvage value at the end of its life, the depreciation over its life will reduce the value of the asset to the level of its salvage value.

Here the schedule of depreciation and the asset value at the end of each year will be

Year

Opening Asset

Depreciation

Closing Asset

Balance

@18%

balance

1

100000

18000

82000

2

82000

18000

64000

3

64000

18000

46000

4

46000

18000

28000

5

28000

18000

10000

A 80

This simple method is used in case of assets that have definite life like patents,

This simple method is used in case of assets that have definite life like patents, leasehold assets. However, it does not take into account other dimensions discussed above.

3.11.2 Reducing Balance or Written Down value method

In this method, the periodic charge is calculated on the reduced value of the asset. Here, the rate of depreciation is applied to the reduced value of the asset every year. The calculation is:

This simple method is used in case of assets that have definite life like patents, leasehold assets. However, it does not take into account other dimensions discussed above.

n R C
n
R
C

D = 1-

Where D is depreciation %, R = Residual value or salvage value, C is cost of asset and n is life of asset in years. In above example, D = 100000, R is 10000 and n is 5. Hence,

5 10000 100000
5
10000
100000

D = 1-

= 1 – 0.630957 = 0.369043 i.e. 36.90%

This % is applied on balance asset value as reduced year by year. The schedule of depreciation is given below:

 

Opening

Depreciation

Closing

Year

balance

@ 36.9%

balance

1

100,000

36,904

63,096

2

63,096

23,285

39,811

3

39,811

14,692

25,119

4

25,119

9,270

15,849

5

15,849

5,849

10,000

It can be observed that the depreciation amount is higher in the initial years and goes on reduc- ing as time progresses. We know maintenance costs are lower when the machine is new and it increases with usage of asset. This is exactly what this method recognises. This method is stipu- lated for taxation purposes.

3.11.3 Production unit method

This method recognises the fact that certain machines have their useful life mentioned in terms of number of units produced by the machine over its useful life. This method cannot be used for assets that are non-production assets e.g. building, vehicles, office equipments etc.

The depreciation rate is expressed in terms of Rs per unit produced’ and is computed as:

Preparatory steps for final accounts
Preparatory steps for final accounts

D =

C - R

N

In above example we have C = 100000, R = 10000. Assume the machine can produce 45000 units

over its estimated life.

The depreciation will be (100000-10000)/45000 i.e. Rs 2 per unit

This method ignores time factor totally. The amount of depreciation charged will vary with the production volumes and will not be spread evenly over its life. Further, if machine is capable of producing non-standard units, it’s difficult to adopt this method.

3.11.4 Production hour method

Here all considerations in the production unit method apply except for the fact that the pro-

duction hours are taken in place of production units. If in above example, the machine can work for 30000 hours over its life, the depreciation amount will be (100000-10000)/30000 i.e. Rs 3 per hour. The limitations of this method are more or less same as the unit method. However,

in this case it can be applied even if machine produces different types of products.

There are other methods as well like annuity method, revaluation method, and sum of digits methods. However, these are very rarely used and hence not discussed at this level.

Students must be aware that the rates of depreciation for company form of organization are given in the Companies Act 1956 under schedule XIV. It says that the straight line or written down method could be used. Whichever method is selected must be applied consistently. Un- less there is a valid reason, the method should not be changed. If in case of computer systems, the technology changes, the rate of depreciation may be tuned to reflect that fact. The financial statements should disclose this fact and also disclose the effect of such change on the profitabil- ity of the period.

Illustration 7

A company purchased furniture of Rs 40000 on 1 st April 2003. It charges depreciation @ 10% on

reducing balance method every year. On 1 st July 2005, a part of furniture was sold for Rs 4000, the original cost of which was Rs 8000 purchased on 1 st April ‘03. The accounting years of the

company ends on 31 st march every year. Show Furniture a/c from 1 st April 2003 to 31 st March 2006. Also, calculate profit or loss on sale of furniture.

A 82

Answer: In books of company Dr. Furniture a/c   Cr.     Amount    

Answer:

In books of company

Dr.

Furniture a/c

 

Cr.

   

Amount

     

Date

Particulars

Rs

Date

Particulars

Amount Rs

       

By

 

1-Apr-03

To Bank

40000

31-Mar-04

Depreciation

4000

By Balance

31-Mar-04

c/d

36000

40000

40000

To Balance

 

By

 

1-Apr-04

b/d

36000

31-Mar-05

Depreciation

3600

By Balance

31-Mar-05

c/d

32400

36000

36000

To Balance

   

1-Apr-05

b/d

32400

1-Jul-05

By bank By Depreciation on sold machine P & L (loss on sale) By depreciation By Balance c/d

4000

1-Jul-05

162

1-Jul-05

2318

31-Mar-06

2592

31-Mar-06

23328

   

32400

   

32400

1-Apr-06

23328

 

Notes :

Calculation of Profit or loss on sale of furniture

Preparatory steps for final accounts
Preparatory steps for final accounts
 

Original cost on 1st April 03

8000

Less:

depreciation 10% for 2003-04 on 8000

-800

W.

D. V. as on 31-3-2004

7200

Less:

depreciation 10% for 2004-05 on 7200

-720

W.

D. V. as on 31-3-2005

6480

Less:

depreciation 10% till 30-06-2005 on 6480 for 3 months

-162

W.

D. V. as on 1-7-2005

6318

Sale price Loss on sale

4000

2318

Depreciation on 31-03-2005 for remaining furniture

 

Original cost of the balance furniture Depreciation @ 10% for 2003-04 on 32000

32000

Less:

-3200

W.

D. V. as on 31-3-2004

28800

Less:

depreciation 10% for 2004-05 on 28800

-2880

W.

D. V. as on 31-3-2005

25920

Less:

depreciation 10% for 2005-06 on 25920

-2592

W. D. V. as on 31-3-2006

23328

Illustration 8

A fabrication shop has been charging depreciation @ 10% on reducing balance method on

opening balance of the asset for the years 1998 to 2001. The balance in the Machinery a/c showed a balance of Rs 54000. Machines worth 16800 were added in Sept 1998 and worth Rs 11400 were added in December 2000. The management decided to charge depreciation @ 20% on the same method but calculated on closing balance of each year with retrospective effect from 1998.

Prepare machinery a/c for the years 1998 to 2001. Also show the effect on the profit due to change in the method of calculation.

Answer:

In this case, the depreciation is calculated on reducing balance. The summary of changes made

by management is:

 

Rate of Depreciation

Calculated on

Old method

10% on reducing balance

Opening balance of the year

New method

20% on reducing balance

Closing balance of the year

Please note here, the balance as on 1 st Jan 1998 is not given. It will have to be calculated by working back as shown in following table. The balance on 31-12-01 is given as Rs 54000 which

is closing, but as depreciation is calculated on the opening @ 10%, it will be 1/9 th on closing

balance.

A 84

Depreciation as per current practice of 10% on Opening balance Date   Purchase Clo Balanc

Depreciation as per current practice of 10% on Opening balance

Date

 

Purchase

Clo Balance

Dep @ 10% on op bal

Op balance

31-Dec-01

 

54,000

6,000

60,000

31-Dec-00

 

Total

60,000

31-Dec-00

New

11,400

31-Dec-00

Old

48,600

5,400

54,000

31-Dec-99

 

54,000

6,000

60,000

31-Dec-98

 

Total

60,000

30-Sep-98

New

16,800

31-Dec-98

Old

43,200

4,800

48,000

 

Total

Depreciation

till

2001

22,200

Now that we have arrived at the balance as on 1 st Jan 1998, it will be easy for us to prepare a schedule of depreciation as per the new method. The retrospective effect is shown below.

Depreciation as per new method of 20% on Closing balance

 

Date

Purchase

Op Balance

Dep @ 20% on cl bal

Cl balance

31-Dec-98

Old

 

48,000

   

30-Sep-98

New

16,800

31-Dec-98

Total

64,800

12,960

51,840

31-Dec-99

51,840

10,368

41,472

31-Dec-00

Old

41,472

31-Dec-00

New

11,400

31-Dec-00

Total

52,872

10,574

42,298

31-Dec-01

42,298

8,460

33,838

 

Total Depreciation till 2001

 

42,362

Extra cumulative charge due to change in method

20,162

Preparatory steps for final accounts
Preparatory steps for final accounts

The machinery a/c will be prepared as per the old method only till 2001 as this was the actual method in vogue. But at the end of 2001, an adjustment will to be passed for the extra deprecia- tion due to change in method. This is shown below.

In books of company

Dr.

Machinery a/c

Cr

Date

Particulars

Amount Rs

Date

Particulars

Amount Rs

1-Jan-98

To balance b/d To Bank

48000

31-Dec-98

By depreciation

4800

30-Sep-98

16800

31-Dec-98

By balance c/d

60000

 

64800

64800

1-Jan-99

To balance b/d

60000

31-Dec-99

By depreciation By balance c/d

6000

31-Dec-99

54000

60000

 

60000

1-Jan-00

To balance b/d To Bank

54000

31-Dec-00

By depreciation

5400

31-Dec-00

11400

31-Dec-00

By balance c/d

60000

 

65400

65400

1-Jan-01

To balance b/d

60000

31-Dec-01

By depreciation (old method) By depreciation (extra as revised) By balance c/d

 

6000

31-Dec-01

20162

31-Dec-01

33838

60000

 

60000

1-Jan-02

To balance b/d

33838

   

Illustration 9

Suvin runs an engineering machine shop. He procured a second hand lathe machine on 1 st April 2000 for Rs 80000. He spent Rs 10000 for carriage & installation. He further spent Rs 10000 on overhauling it to put in proper working condition. On 1 st October 2002, the old machine was sold for Rs 45000 and on the same day he procured another new versatile machine for Rs 150000. He used to provide for depreciation @ 10 % on original cost. In 2005, it was decided that the method should be changed to 15% on diminishing value. Show Machinery a/c in the books of Mr. Suvin till 31 st March 2005.

Answer:

Here the cost of the first machine that will be capitalized is:

Basic cost of machine

80000

Freight & Installation

10000

Overhauling

10000

Total

100000

A 86

Please note that overhauling charges have been capitalized i.e. considered as cost of machine and

Please note that overhauling charges have been capitalized i.e. considered as cost of machine and not as repairs & maintenance cost. This is because the cost incurred is to put the machine in working condition initially. Please remember, routine expenses on repairs like servicing and oiling will be considered as revenue expenses for a period and charged to the profit immedi- ately on incurring. But expenses like enhancement to capacity of an asset, initial installation and overhauling will be treated as capital expenditure and will be included in the cost of asset. Depreciation will be calculated thereon. In this case, therefore, the depreciation will be calcu- lated on Rs 100000.

Secondly, the change in method of depreciation is made in 2005. Still, the effect of such change in method has to be calculated with retrospective effect even if it is not stated so in the problem. This is as per Accounting Standard 6 issued by ICAI. The shortfall or excess resulting out of change in method will be accounted in P & L a/c of the year of change.

The schedule of depreciation is shown below:

Depreciation as per 10% and 15% on Diminishing balance

 
     

sale

Profit /

Dep @

 

Dep @

 

Date

Cost

price

loss

10%

WDV

15%

WDV

2000-

               

2001

Purchase

100,000

10,000

90,000

2001-

               

2002

Depreciation

9,000

81,000

2002-

               

2003

Sold on 1st Oct 2002

45,000

 

Depreciation till 30-

             

09-02

(31,950)

4,050

76,950

2002-

new purchased 1st

             

2003

Oct

150,000

7,500

142,500

11,250

138,750

2003-

               

2004

Depreciation

14,250

128,250

20813

117937

         

21,750

 

32063

 
 

Extra depreciation to be charged in 04-05

         

10313

 

2004-

               

2005

Depreciation

17691

 

Total depreciation

         

28004

100246

Preparatory steps for final accounts
Preparatory steps for final accounts

In books of Mr. Suvin Dr.

Machinery A/c

Cr.

   

Amount

     

Date

Particulars

Rs

Date

Particulars

Amount Rs

1-Apr-00

To Bank

100000

31-Mar-01

By depreciation By balance c/d

10000

31-Mar-01

90000

100000

 

100000

1-Apr-01

To Balance b/d

90000

31-Mar-02

By depreciation By balance c/d

9000

31-Mar-02

81000

90000

 

90000

1-Apr-02

To Balance b/d To Bank

81000

30-Sep-02

By depreciation

4050

1-Oct-02

150000

1-Oct-02

By Bank By P & L By depreciation By balance c/d

45000

 

1-Oct-02

31950

31-Mar-03

7500

31-Mar-03

142500

231000

 

231000

1-Apr-03

To Balance b/d

142500

31-Mar-04

By depreciation By balance c/d

14250

31-Mar-04

128250

142500

 

142500

1-Apr-04

To Balance b/d

128250

31-Mar-05

By depreciation* By balance c/d

28004

31-Mar-05

100246

128250

 

128250

1-Apr-05

To Balance b/d

100246

 

* Depreciation includes the difference between change in method (10313) and depreciation for the Year

3.12 Bank Reconciliation

We have studied the cash book which has two columns viz. cash and bank. The majority of transactions get settled through cash or bank. For cash received or paid, the effect in the cash box is instant. The transactions settled through the medium of bank (i.e. by way of cheque, pay order, draft etc) take a little longer time. If customer pays by cheque, it is deposited in the bank who will sent it for clearance and then only it will be credited by the bank into the a/c of business entity. This may take about a week. Similarly, when a cheque is issued to supplier, he will deposit in his bank which in turn will clear it. Because of such time lag, there would be difference in the records.

The records here would mean Cash book (in books of business entity) and Pass book (main- tained by the bank). The contents of bank passbook (or bank statement) are exactly the same as that of cash book with a mirror image effect. When cheques is received the entry in books of accounts of business is

A 88

Bank a/c Dr To customer a/c For the bank, this amount is collected through the

Bank a/c Dr

To customer a/c

For the bank, this amount is collected through the clearing system and payable to the business entity’s a/c. The entry in their books will be

Clearing a/c Dr

To business Entity’s a/c

Hence they will show it as payable i.e. as a credit. Thus all debits in the bank column of the cash book will correspond to the credit entries in the bank passbook and all credits in the bank column of the cash book will correspond to the debit entries in the bank passbook. Due to the time differences, these entries may not exactly match at a given point of time. This necessitates that these two statements are reconciled regularly:

1)

To identify differences

2)

To know reasons for differences

3)

To ensure the required entries are made in the books of accounts

4)

To ensure that entries are made by the bank in time.

It may be noted that before the final accounts are prepared, bank reconciliation is a must. It is a very important preparatory step. If an entity has a/c with more than one bank, all such a/cs must be reconciled regularly i.e. weekly or monthly. In these days of internet banking where the bank statements are available online, the reconciliation also can be an online activity. In fact, modern accounting packages are equipped with automatic reconciliations. A bank state- ment is entered in the computer system (or a soft copy is uploaded) and then a programme is run which will throw up the transactions leading to the differences. It is necessary for a begin- ner to understand the mechanism of how to prepare the bank reconciliation statement. The first milestone on this journey is to understand the various reasons for differences between the two records.

3.12.1 Reasons for differences between cash book and pass book

The differences are basically of two types:

a) Items appear in cash book but not appearing in passbook and

b) Items appear in passbook but not appearing the cash book

Let us understand these reasons:

A) Items not appearing in bank passbook

1) Cheques issued by business entity not debited by the bank – This may be because they might not have been banked by the payee or it may still be under clearance. The entry in cash book will be made immediately when the cheque is issued thereby reduc- ing the bank balance in the books of entity’s books of a/cs. Here, bank balance as per cash book will be less, but as per bank passbook it will be more. This is also termed as unpresented cheques.

Preparatory steps for final accounts
Preparatory steps for final accounts

2)

Cheques deposited but not credited by the bank – The business entity may receive cheques or draft which is deposited into the bank for collecting the payment. Again entry in cash book will be instant thereby increasing the balance. Here, bank balance as per cash book will be more that the balance as per bank passbook. This is also called as outstanding cheques.

3)

Errors The bank may by mistake miss out entering the debit or credit which results in the difference.

4)

Standing Instructions The entity may give standing instruction to the bank for cer- tain regular payments like loan repayment installment, transfer of funds etc. This may get entered in the cash book immediately, but passbook entry may be delayed.

B) Items not appearing in the cash book

1) Bank Interest, bank charges etc. - The bank will charge interest on overdraft or also charges for services, issue of demand draft, pay orders etc. Here, being the source of transaction, the bank will record in the passbook immediately and send the debit ad- vice slips to the business entity. The entry in the cash book may be delayed. Similarly the bank could credit interest on fixed deposits, which may get entered in business books at a later date.

Direct deposits in bank account – Sometimes customers or others may directly deposit an amount in the bank for goods or services rendered. The bank will enter it immedi- ately, but entry in cash book will appear later.

3) Bills for collection – The business entity may send bills of exchange for collection. The bank will collect the payment and credit the same in the passbook. The entry in cash book will be made only after receipt of information from the bank.

2)

4)

Errors – The records may be missed out by the bookkeeper of the business entity.

3.12.2

Steps in preparing Bank Reconciliation statement

One has to have a systematic approach towards preparation of the reconciliation. To avoid a lengthy reconciliation, one must ensure that the entries in the cash book are absolutely online. One also must obtain the bank statements at regular intervals. Once this checking is done, bank reconciliation could be done by following these steps:

a)

Identify the balances and the character thereof. Remember, a debit balance in cash book means asset where as a credit balance means a bank overdraft. In bank passbook, it’s reverse. A debit balance in passbook means overdraft and a credit balance is a favourable balance. This must be carefully understood.

b)

Based on the above, start with the balance (or overdraft) as per one book and arrive at the balance (or overdraft) as per the other book. The items of differences will be added to or deducted from the balance (or overdraft) with which the reconciliation is started.

c)

The end result should be the balance (or overdraft) as per the other book e. g. if you start with balance as per cash book, then after adding or deducting items of differences, you should arrive at the balance (or overdraft) as per the passbook.

A 90

d) One has to make sure that all the items of differences from cash book

d) One has to make sure that all the items of differences from cash book as well as bank book are taken into account in the reconciliation statement.

e) Whether the items of differences should be added or deducted will depend on the se- quence you follow. This is shown in following table:

When reconciliation is started with

When reconciliation is started with

Bal. as per CB

O/D as

Bal as

OD as per PB

per CB

per PB

Cheques deposited in bank, but not cleared

Less

Add

Add

Less

Cheques issued, but not presented in bank

Add

Less

Less

Add

Bank charges debited in PB only

Less

Add

Add

Less

Interest credited in PB only

Add

Less

Less

Add

Interest debited in PB only

Less

Add

Add

Less

Payments by bank debited in PB only

Less

Add

Add

Less

Direct payment by customer in PB only

Add

Less

Less

Add

Bills discounted & dishonoured in PB only

Less

Add

Add

Less

Cheques deposited, dishonoured in PB only

Less

Add

Add

Less

Please note the abbreviations CB – cash book, PB – pass book, OD – overdraft

Illustration 10

The bank column of the cash book showed an overdraft of Rs 5000 on 31-03-2005, whereas as per bank statement the overdraft is Rs 4200. The following differences were noticed between the two records:

1)

Cheques of Rs 2400 issued but not encashed by customers

2)

Cheques deposited but not cleared Rs 1200

3)

Collection charges debited by bank not recorded in CB Rs 100

4)

Bank interest charged by the bank not recorded in CB Rs 300

5)

Cheques dishonoured debited by bank not in CB Rs 400

6)

Interest directly received by bank not entered in CB Rs 400

Prepare bank reconciliation statement after amending the CB.

Preparatory steps for final accounts
Preparatory steps for final accounts

Answer:

Here, please note that amended CB is asked. What it actually means is to record all revenue (expense or income) items of differences and those items that are recorded in PB only must first be recorded in the CB and then the reconciliation statement should be prepared by taking the revised balance as per CB. Here is the amended CB.

Dr.

Cash Book (bank column only)

Cr.

Particulars

Amount Rs

Particulars

Amount Rs

To Interest

     

received

400

By balance b/d (OD) By collection charges By bank interest By customer (chq

5000

100

To Balance c/d (OD)

300

5400

dishonoured)

400

 

5800

5800

Bank reconciliation statement as on 31-03-2005

Bank OD as per CB

5400

Add: Cheques deposited, but not cleared