SlideShare a Scribd company logo
1 of 20
Download to read offline
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 1
UNIT – II
Trial Balance – Errors – Types of Errors – Rectification of Errors – Problems
– Bank Reconciliation Statement - Problems.
TRIAL BALANCE
Trial balance is a statement, prepared with the debit and credit balances of ledger
accounts to test the arithmetical accuracy of the books. If the totals of the debit and
credit amount columns of the trial balance are equal, it is presumed that the posting to
the ledger in terms of debit and credit amounts is accurate.
Features of Trial Balance
1. The Trial balance is prepared on a specific date. This is why, one use the word „as
on ...…‟ with its heading.
2. Trial balance contains the list of all ledger accounts including cash account.
3. Trial balance may be prepared with the balances or totals or balances and totals of
ledger accounts.
4. The total of the debit and credit column of the amount must be equal.
5. In case the debit and credit side of the trial balance are equal, it is presumed that
the posting to the ledger is accurate.
6. The difference between the debit and credit side of the trial balance points out that
certain mistakes have been committed somewhere.
7. If both the debit and credit sides have the same total, it does not mean that there is
no mistake in accounting.
Objectives and Functions of Trial Balance
 Test of Arithmetical Accuracy: Trial balance tests the accuracy of arithmetical
calculation. If the correct posting is made from subsidiary books to ledger accounts
(i.e. correct amount and figures have been recorded), the debit and credit total of
the trial balance must tally.
 Summarized Information of Ledger Accounts: Trial balance contains a list of all
ledger accounts. It presents the name of ledger accounts and the amount of their
debit and credit balance.
 Basis of Preparing Final Accounts: The main purpose of maintaining books of
accounts is to ascertain the result of the business in terms of profit or loss and the
value of different assets and liabilities.
 Useful for Making Adjustments: While preparing final accounts certain adjustments
regarding closing stock, outstanding and prepaid expenses, accrued an unearned
income are to be made.
Limitations of Trial Balance
It should be noted that the agreement of trial balance is not a conclusive proof of
accuracy. In other words, in spite of the agreement of the trial balance some errors
may remain. These may be of the following types:
a) Transaction has not been entered in the journal.
b) A wrong amount has been written in both columns of the journal.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 2
c) A wrong account has been mentioned in the journal.
d) An entry has not been posted in the ledger.
e) An entry has posted twice in the ledger.
Specimen of Trial Balance
Trial Balance of M/s …..……………….
As on ………………
S.No. Name of the Account L.F.
Amount
₹
(Total or
Balance)
Dr.
Amount
₹
(Total or
Balance)
Cr.
The under mentioned points may be noted while preparing trial balance:
1) A trial balance is prepared as on a particular date which should be mentioned at
the top.
2) In the first column, serial number is written.
3) In the second column, the name of the ledger account is written.
4) In the third column, ledger folio is written.
5) In the fourth column, the total of the debit side of the account concerned or the
debit balance is entered.
6) In the fifth column, the total of the credit side of the account concerned or the
credit balance is entered.
ERRORS – TYPES OF ERRORS
In common, the agreement of trial balance shows the accuracy of the books of
accounts. Though trial balance is tallied, but there may be certain errors which are not
disclosed by the trial balance. That is why it is also said that trial balance is not a
conclusive proof of the accuracy of the books of accounts.
Sometimes, the disagreement of the trial balance will disclose certain errors which are
to be rectified accordingly. If trial balance is not prepared correctly then the final
accounts prepared will not reflect the true and fair view of the state of affairs of the
business.
Types of Errors
There are few errors which can be disclosed and some of the errors cannot be
disclosed. Both the types of errors should be rectified to have a perfect accuracy of
accounts. All these errors can be brought under the two types as follows:
1. Errors which are disclosed by a Trial Balance.
2. Errors which are not disclosed by a Trial Balance
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 3
(1) Errors which are Disclosed by a Trial Balance: If any error, whether clerical or
otherwise, exists in the books of account, the same will cause disagreement of a
trial balance. The disagreement of the trial balance will disclose the following
classes of errors:
(a) Wrong Posting: Posting on the wrong side of an account and posting of a wrong
amount in a ledger account will cause disagreement of trial balance.
(b) Omission of Posting: Omission of posting of an entry from the subsidiary book
will cause disagreement.
(c) Errors in Casting or Totaling: Errors in casting or totaling of subsidiary books or
accounts will cause disagreement.
(d) Errors in Balancing: If any error arises as a result of balancing of an account,
the same will cause disagreement.
(e) Double Posting: if any item is posted twice in a ledger account from a
subsidiary book, the same will create disagreement.
(f) Incomplete Double Entry: If the double entry principle is not completed i.e.
either in debit or credit side of an account, the same will invite disagreement.
(g) Balance Carried Forward Wrongly: If the debit balance of an account is shown
or posted by credit balance in the trial balance it would fail to agree. E.g. rent
account shows a debit balance as per ledger but posted on the credit side of the
trial balance.
(h) Variation in Amount: If different amounts are entered in the two different
accounts they will cause disagreement. E.g. rent account is debited by ₹500
whereas Cash account is credit by ₹50.
(i) Wrong Total in Trial Balance: If the total of both the columns of the trial
balance are not correctly added up, they will cause disagreement.
(2) Errors which are Not Disclosed by a Trial Balance: The agreement of a trial balance
is not a conclusive proof as to the absolute accuracy of the books. In spite of
agreement of trial balance, yet there may be some errors which are not disclosed
by a trial balance.
(a) Errors of Omission: When a transaction is completely omitted from being
recorded in the books of accounts then the resultant error is called error of
complete omission. For example, not recording a transaction in a subsidiary
book. This will not neither affect the debit nor credit balance.
(b) Errors of Commission: These errors are the result of some commission. They
take place during the course of recording of transactions in the books of
accounts because of the carelessness, ignorance, lack of knowledge, etc. For
example, instead of ₹800 either ₹80 or ₹8000 is recorded, in both sides of
ledger accounts.
(c) Errors of Principle: When an accounting transaction is recorded in the books of
accounts violating an accounting principle, such an error is called error of
principle. For example, ₹6550 spent on extension of building wrongly debit to
Repairs Account instead of Building Account will not affect the agreement of
the trial balance.
(d) Errors of Wrong Posting: When wrong posting is made to a wrong account
instead of current one, although amount is correctly recorded. For example,
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 4
sold goods to B but wrongly debited to D‟s account, wherein trial balance
agrees and will not disclose this error.
(e) Compensating Errors: When an error offsets the wrong effect of an already
committed error, it is called a compensating error. The amount involved in such
errors in the same. For example, over-casting or under-casting with the similar
amount.
Location and Correction of Errors for Tallying the Trial Balance
If the trial balance does not tally, following methods should be adopted to tally it:
1. Make totals of debit and credit balances of trial balance once again.
2. If the totals of debit and credit are correct, then write the differences of these
totals separately.
3. Try to see that some balance of ledger may be equal to this difference and it
might not have been posting.
4. Divide the difference of the trial balance by two and see this amount is not
recorded in the wrong side of trial balance.
5. Make 1/9 of the total as it may be possible that zero is added or zero is left out
in some balance by mistake. If zero is added the amount will become ten times
and if zero is left out the amount will become 1/10. In such cases difference
will definitely be divisible by 9.
6. Count all the accounts ledger and see that balances of all of them have been
recorded in trial balance.
7. Check the totals and balances of all the accounts of the ledger.
8. See the balances of all accounts have included in the trial balance.
9. Check the totals of subsidiary books and have been recorded in ledger.
10.See that correct posting has been made from journal to ledger.
Problem
The following trial balance has been prepared incorrectly. You are asked to prepare
the trial balance correctly.
Heads of Accounts Dr.
Balance (₹)
Cr.
Balance (₹)
Bank overdraft
Cash in hand
Purchase returns
Sundry expenses
Sales returns
Salaries
Purchases
Sales
Creditors
Debtors
Stock (1.1.2008)
Plant
Capital account
280
--
80
240
--
160
560
--
--
160
--
--
440
--
40
--
--
160
--
--
880
240
--
200
400
--
1,920 1,920
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 5
Solution Corrected Trial Balance
Heads of Accounts Dr.
Balance (₹)
Cr.
Balance (₹)
Bank overdraft
Cash in hand
Purchase returns
Sundry expenses
Sales returns
Salaries
Purchases
Sales
Creditors
Debtors
Stock (1.1.2008)
Plant
Capital account
--
40
--
240
160
160
560
--
--
160
200
400
--
280
--
80
--
--
--
--
880
240
--
--
--
440
1,920 1,920
Problem
A book-keeper drew-up the following Trial Balance for the year ended 31st
December
2015:
Heads of Accounts L.F Dr.
Balance (₹)
Cr.
Balance (₹)
Capital A/c
Drawings A/c
Purchases A/c
Sales A/c
Returns Inwards A/c
Returns Outwards A/c
Carriage Inwards A/c
Carriage Outwards A/c
Bank Overdraft A/c
Provision for Bad Debts A/c
Discount Allowed A/c
Discount Received A/c
General Expenses A/c
Plant and Machinery A/c
Sundry Debtors A/c
Sundry Creditors A/c
Opening Stock A/c
Cash in hand A/c
Dividend Received A/c
Goodwill A/c
--
5,000
16,000
--
--
2,000
1,000
--
6,000
3,000
--
2,000
5,000
10,000
8,000
--
4,000
8,000
--
17,000
30,000
--
--
45,000
3,000
--
--
2,000
--
--
1,000
--
--
--
--
5,000
--
--
4,000
--
87,000 90,000
You are required to draw-up a corrected Trial Balance after transferring the errors to
Suspense Account.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 6
Solution Corrected Trial Balance
Heads of Accounts L.F Dr.
Balance (₹)
Cr.
Balance (₹)
Capital A/c
Drawings A/c
Purchases A/c
Sales A/c
Returns Inwards A/c
Returns Outwards A/c
Carriage Inwards A/c
Carriage Outwards A/c
Bank Overdraft A/c
Provision for Bad Debts A/c
Discount Allowed A/c
Discount Received A/c
General Expenses A/c
Plant and Machinery A/c
Sundry Debtors A/c
Sundry Creditors A/c
Opening Stock A/c
Cash in hand A/c
Dividend Received A/c
Goodwill A/c
Suspense A/c
--
5,000
16,000
--
3,000
--
1,000
2,000
--
--
1,000
--
5,000
10,000
8,000
--
4,000
8,000
--
17,000
17,000
30,000
--
--
45,000
--
2,000
--
--
6,000
3,000
--
2,000
--
--
--
5,000
--
--
4,000
--
--
97,000 97,000
RECTIFICATION OF ERRORS – PROBLEMS
Correction of errors in the books of accounts is not done by erasing, re-writing or
striking the figures which are incorrect. Correcting the errors that has occurred is
called „Rectification‟. Appropriate entry is passed or suitable explanatory note is
written in the respective account to neutralize the effect of errors. From the point of
rectification, errors may be classified as follows:
1. Single-sided errors are errors which affect one side of an account.
2. Double-sided errors are errors which affect both the accounts in a transaction.
Basic Principles for Rectification of Errors
All errors, whatever may be their kind or nature, result in one of the following four
positions in one or more accounts:
i. Excess Debit in One or More Accounts: This must be rectified by „crediting‟ the
excess amount to the respective account or accounts.
ii. Short Debit in One or More Accounts: This must be rectified by a „further debit‟
to the respective account or accounts involved.
iii. Excess Credit in One or More Accounts: This must be rectified by „debiting‟ the
respective account with the excess amount involved.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 7
iv. Short Credit in One or More Accounts: This must be rectified by a „further
credit‟ to the respective account or accounts involved.
Stages of Rectification
The stage in which rectification is done depends on identification or locating the error.
Rectification of errors may be explained in two stages:
 Rectification Before the Preparation of Trial Balance: In this stage errors are located
before transferring the difference in the trial balance to Suspense Account.
 Rectification After the Preparation of Trial Balance: In this stage, the difference in
the trial balance would have been transferred to Suspense Account. So wherever
applicable suspense account is used while passing rectification entries.
Stage at which the Errors are
Rectified
Manner at which the Errors are
Rectified
1) When the errors are rectified
before transferring the difference
in the trial balance to the suspense
account.
By debiting or crediting the respective
account with the required amount by
giving explanatory note in the particular
column.
2) When the errors are rectified after
transferring the difference in the
trial balance to the suspense A/c.
By writing a journal entry with
respective account or accounts affected
by the errors and suspense account.
Rectification through Suspense Account
When the trial balance disagrees, efforts are made to locate the errors and to rectify
them. When the errors cannot be located and the preparation of final accounts is
urgent, the difference in the trial balance is made by writing it temporarily in the
smaller side of the trial balance, under the name of „Suspense Account‟.
The suspense account is only a temporary device which should not be allowed to
remain in the books for long time. In the next accounting period, attempts must be
made to discover the errors which caused the difference in the trial balance. Again, if
the credit side of the trial balance is shorter, the suspense account is credited and if the
debit side of the trial balance is shorter, the suspense account is debited.
Problem
Pass rectification entries for the following transactions:
1. A builder‟s bill for ₹4,600 for erection of small shed was debited to repairs
account.
2. A cheque for ₹750 received from Padma was credited to the account of
Parvathi.
3. Goods to the value of ₹700 returned by Williams were included in closing
stock, but not entry was in the book.
4. The Sales Day Book was overcast by ₹3000.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 8
Solution
Journal Entries
Particulars L.F Dr.
(₹)
Cr.
(₹)
Building A/c Dr.
To Repairs Account
(Being the erection of small shed wrongly
debited to Repair A/c, now rectified)
4,600
4,600
Parvathi A/c Dr.
To Padma A/c
(Being the cheque received from Padma
wrongly credited to Parvathi A/c, now
rectified)
750
750
Sales Return A/c Dr.
To Williams A/c
(Being the omitted entry for goods returned by
Williams, now recorded)
700
700
Sales A/c Dr.
To Suspense A/c
(Being the error in totaling of sales book (i.e.
overcast by ₹3000, now rectified)
3,000
3,000
Problem
The following errors were located in the books of a concern after its books were
closed and a Suspense Account was created in order to get the Trial Balance agreed.
Rectify the errors.
1. Sales Day Book was overcast by ₹200.
2. A sale of ₹500 to Xavier was wrongly debited to the Account of John.
3. Repair Expenses of ₹180 was posted as ₹810.
4. A Bill Receivable received from Poppy for ₹300 was passed through Bills
Payable Books.
5. Legal expenses of ₹900 paid to advocate Mohan was debited to his personal
account.
6. Cash received from Dhass was debited to Dasan Account for ₹150.
7. While carrying forward the total of one page of the Purchase Book to the next,
the amount of ₹2,345 was written as ₹3245.
Solution
Journal Entries
Particulars L.F Dr.
(₹)
Cr.
(₹)
Sales A/c Dr.
To Suspense Account
(Being overcast in Sales Day Book, now
rectified)
200
200
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 9
Xavier Account Dr.
To John Account
(Being sales made to Xavier wrongly debited
to John, now rectified)
500
500
Suspense Account Dr.
To Repairs Account
(Being Repairs Account debit of ₹810 in place
of ₹180, now rectified)
630
630
Bill Payable A/c Dr.
Bills Receivable A/c Dr.
To Poppy A/c
(Being Bills Receivable passed through Bills
Payable Book, now rectified)
300
300
600
Legal Expenses A/c Dr.
To Mohan A/c
(Being legal expenses paid, wrongly debited to
Mohan account, now rectified)
900
900
Suspense Account Dr.
To Dasan Account
To Dhass Account
(Being the sales wrongly credited to Debtors
Account, now rectified)
300
150
150
Suspense Account Dr.
To Purchase Account
(Being excess amount of ₹900 (₹3245 –
₹2345) debited in Purchase Account, now
rectified)
900
900
Dr. Suspense Account Cr.
Particulars ₹ Particulars ₹
To Repairs A/c
To Dasan A/c
To Dhass A/c
To Purchase A/c
630
150
150
900
By Difference in Trial
Balance (balance figure)
By Sales Account
1,630
200
1,830 1,830
Problem
The Trial Balance of M/s. Sethi Brothers extracted on March 31, 2015, was ₹935 short
on the Debit side. The Book-keeper opened Suspense A/c and squared-up the Trial
Balance. An examination of the books however revealed the following errors:
1. The Dr. Discount Column in the Cash Book posted to the Rent A/c ₹15.
2. ₹150 paid to Dinesh posted to Ramesh
3. A cash purchase of ₹105 not posted in the leger.
4. A credit purchase of ₹300 from Ranjit posted as ₹30 in the ledger.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 10
5. A credit sale of ₹500 to Wahid entered in the Returns Outward Book.
6. Payment of Rent ₹140 debited to Landlord‟s Personal A/c.
7. Payment of ₹1,000 to Jagdish posted to his credit as ₹100.
You are required to pass the necessary rectifying journal entries. Prepare the Suspense
Account.
Solution
Rectifying Journal Entries
Particulars L.F Dr.
(₹)
Cr.
(₹)
Discount A/c Dr.
To Rent Account
(Rectification of posting the Discount column
to Rent Acount)
15
15
Dinesh Account Dr.
To Ramesh Account
(Rectification of payment to Dinesh posted to
Ramesh)
150
150
Purchase Account Dr.
To Suspense Account
(Rectification of Cash purchase not posted)
105
105
Suspense A/c Dr.
To Ranjeet A/c
(Rectification of wrong posting)
270
270
Returns Outward A/c Dr.
To Sales A/c
(Rectification of sale recorded in Returns
Outward Book)
500
500
Rent Account Dr.
To Landlord‟s Personal Account
(Rectification of payment of rent posted to
Landlord‟s Personal Account)
140
140
Jagdish Account Dr.
To Suspense Account
(Rectification of wrong posting of amount as
well as side)
1,100
1,100
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 11
Dr. Suspense Account Cr.
Particulars ₹ Particulars ₹
To Difference in Books
To Ranjeet
935
270
By Purchases A/c
By Jagdish
105
1,100
1,205 1,205
BANK RECONCILIATION STATEMENT - PROBLEMS
Business concern maintains the cash book for recording cash and bank transactions.
The cash book serves the purpose of both the cash account and the bank account. It
shows the balance of both at the end of a period. Bank also maintains an account for
each customer in its book.
All deposits by the customer are recorded on the credit side of his/her account and all
withdrawals are recorded on the debit side of his/her account. A copy of this account
is regularly sent to the customer by the bank. This is called Pass Book or Bank
Statement.
To reconcile the balance of cash book and pass book a statement is prepared. This
statement is called the „Bank Reconciliation Statement‟. It can be said that, “bank
reconciliation statement is a statement prepared to reconcile the difference between
the balances as per the bank column of the cash book and pass book on any given
date”.
Features of Bank Reconciliation Statement
a. It is merely a statement not an account.
b. This is a periodical statement.
c. It is prepared on a particular day or this statement is valid for the day it is
prepared.
d. The preparation of bank reconciliation statement is not a part of the double
entry book-keeping.
e. The causes which are responsible for the disagreement of the two balances can
easily be found-out.
Importance of Bank Reconciliation Statement
Bank reconciliation statement is the basic document of the accounting needed by
every business enterprise for having check and control on its dealing with the bank. It
has got the following importance:
 Pin-Pointing Mistakes in Cash Book and Pass Book
 Identifying Delay in the Clearance of Cheques
 Check on Embezzlement
 Checking the Accuracy of Cash Book
 Techniques of Control
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 12
In the View of Bank Pass Book: The following transactions in Bank’s Pass Book of
Mr.Sethu
1. Mr.Sethu deposited ₹8,000 with the bank to open his current account.
2. A cheque of ₹2,500 received from Shailesh was paid into bank and was duly
credited by the bank.
3. Insurance premium of ₹500 was paid by the bank on behalf of Mr.Sethu.
4. Withdrew ₹5,000 from the bank for office use.
5. A cheque of ₹1,000 was issued in favor of Surendar and the same was
presented for payment.
6. Interest on investment amounting to ₹600 was collected by the bank on behalf
of Mr.Sethu.
MR.SETHU‟S CURRENT ACCOUNT WITH BANK
Date Particulars
Dr.
(₹)
Cr.
(₹)
Balance
Account
ant’s
Initials
Dr.
or
Cr.
Amount
(₹)
By Cash
By Cheque (of Shailesh)
To Insurance premium
To Self
To Cheque (to Surendar)
By Interest on Investmnt
500
5,000
1,000
8,000
2,500
600
Cr.
Cr.
Cr.
Cr.
Cr.
Cr.
8,000
10,500
10,000
5,000
4,000
4,600
In the above example, Mr.Sethu becomes a creditor of the bank when he deposits
money in the bank and he becomes a debtor of the bank when he withdraws money.
Similarly, he become creditor of the bank for depositing cheque in the bank and
interest on investments collected on his behalf and he becomes a debtor for drawing a
cheque on the bank and insurance premium paid by the bank on his behalf.
In the View of Cash Book: The transactions given above will be recorded in the Bank
Column of the Three Columnar Cash Book (maintained by Mr.Sethu).
IN THE BOOKS OF MR.SETHU – THREE-COLUMN CASH BOOK
Dr. RECEIPTS PAYMENTS Cr.
Date Particulars L
F
Discount
Allowed
Cash
(₹)
Bank
(₹)
Date Particulars L
F
Discount
Received
Cash
(₹)
Bank
(₹)
To Cash
To Shailsh
(cheque)
To Bank
To Interest
on Invt.
C
C 5000
8000
2500
600
By Bank
By
Insurance
By Cash
By Surndr
(cheque)
By Bal c/d
C
C
8000
500
5000
1000
4600
11100 11100
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 13
From the above Pass book and the Cash book, we see the same balance of ₹4,600 in
the bank with a difference that in Cash book it is a debit balance whereas the same is a
credit balance in the Pass book. It is because,
 From the point of view of the Bank, Mr.Sethu is a creditor, so Pass book shows a
credit balance.
 From the point of view of Mr.Sethu, Bank is a debtor, so Cash book shows a debit
balance.
Therefore, balance as per Cash book is always reverse balance as per Pass book and
amount of the balance will be the same if all entries have been correctly recorded in
both the books.
A statement known as „Bank Reconciliation Statement‟ is, therefore, prepared usually
every month with a view to reconciling the two balances shown by the Cash book and
the Pass book on a particular date. The other important purpose of the preparation of
this statement (BRS) is to know the exact balance with the bank so that cheese might
be drawn-up to that amount if there be a need of withdrawal.
The following may be the reasons for the differences in two balances:
a) Cheques issued but not yet presented for payment.
b) Cheques paid into bank but not yet collected by the bank.
c) The bank usually makes charges for the collection of outstanding cheese and
for the various services rendered by it to the trader or account holder.
d) Interest or dividend on investments and rent on property collected by the bank
on behalf of the client.
e) Insurance premium, subscriptions to periodicals and other payments made by
the bank on behalf of the client.
f) Cheese or cash omitted to be banked.
g) Errors in totaling of the cash book, either under-casting or overcasting.
h) Cheques or Bills of Exchange dishonored
i) Payment by customers directly to the bank into businessman‟s account.
j) Wrong debit or credit given in the Pass book or in the Cash book.
k) Bills collected by the bank on behalf of the customers.
Reasons /Causes for Differences
The relationship between the customer and the banker is that of a creditor and a
debtor. So, if the bank column of the cash book shows a debit balance on a specified
date, the pass book should show an equal amount of credit balances as on that date
and vice versa. However, the balances shown by the two independent records may not
agree due to the following reasons:
1) Cheques Issued but not yet Presented for Payment
2) Cheques Presented into Bank but not yet Collected by the Bank
3) Bank Charge
4) Interest Credited by Bank but not entered in Cash Book
5) Interest or Dividend Collected by the Bank
6) Amount Directly Deposited into the Bank by Customers
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 14
7) Payments made by the Bank on behalf of Clients
8) Bills Collected by the Bank on behalf of Customer
9) Dishonor of Bills or Cheque
10) Rebate on Retiring of Bills
Preparation of Bank Reconciliation Statement
The bank reconciliation statement is prepared usually at the end of period, i.e. a
month, a quarter, a half year or year as may be found convenient and necessary by the
business man taking into account the number of transactions involved.
FORMAT OF BANK RECONCILIATION STATEMENT
Particulars Dr. Balance as per
Cash Book
(or)
Overdraft as per
Pass Book
Cr. Balance as
per Pass Book
(or)
Overdraft as per
Cash Book
1) Those items which affect the debit
side of cash book:
i) Cheque deposited but not
collected back.
ii) Cheque though entered in
Cash book but omitted to be
sent to the Bank.
2) Those items which affect the credit
side of cash book:
i) Cheque issued but not
presented for payment.
3) Those items which affect the credit
side of pass book:
i) Interest/Dividend credited by
bank.
ii) Amount deposited directly by
a customer into bank account.
iii) Cheques sent to the bank but
omitted to be entered into the
Cash book.
4) Those items which affect the debit
side of pass book:
i) Bank charges charged by bnk
ii) Interest on Overdraft.
iii) Payment made by bank on
standing instruments of
customer.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 15
Problem (Starting with Debit balance as per Cash book)
On 31st
December 2015, the Cash book of a firm showed a bank balance of ₹3,000.
From the following information, prepare Bank Reconciliation Statement, showing the
balance as per Pass book:
1. Cheques have been issued for ₹2,500 out of which cheques worth ₹2,000 only
were presented for payment.
2. Cheques worth ₹700 were paid on 28th
December but had not been credited by
the bank. One cheque for ₹250 was entered in the Cash book on 30th
December
but was banked on 3rd
January 2016.
3. A cheque from Mohan for ₹200 was paid in on 26th
December but was
dishonored and the advice was received on 2nd
January 2016.
4. Pass book showed bank charges ₹10 debited by the bank. It also showed ₹400
collected by the bank as interest.
5. One of the debtors deposited a sum of ₹250 in the account of the firm on 20th
December. Intimation in this respect was received from the bank on 2nd
January, 2016.
Solution
Bank Reconciliation Statement
As on 31st
December 2015
Particulars Plus
(₹)
Minus
(₹)
Dr. Balance as per Cash book
1. Cheque issued but not yet presented for payment
(₹2,500 – ₹2,000)
2. Cheque paid into bank but not yet credited by bank
3. Cheque entered in the cash book but was omitted
to be banked upto 31st
December.
4. Cheque from Mohan paid into bank dishonored but
not yet recorded in the cash book.
5. Bank charges as per pass book.
6. Interest collected by bank not recorded in cash
book.
7. Amount deposited by the customer directly in the
bank not recorded in cash book.
Cr. Balance as per Pass book
3,000
500
400
250
4,150
2,990
700
250
200
10
1,160
Problem (Starting with Credit balance as per Pass book)
On 31st
December 2014 the Pass book of Mr.Balaji‟s Current Account showed a credit
balance of ₹10,000. Prepare a Bank Reconciliation Statement with the following
information.
1. Mr.Balaji issued a cheque of ₹300 on 25th
December, but this was not
presented for payment whereas this was twice in the Cash book.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 16
2. A cheque of ₹200 drawn on his Savings deposit account has been shown as
drawn on Current account in Cash book.
3. A cheque of ₹285 issued on his Savings deposit account has been shown as
drawn on Current account in Pass book.
4. In the Pass book, a bank charge of ₹25 was recorded twice while another bank
charge of ₹17 was also not recorded in the Cash book.
Solution
Bank Reconciliation Statement
As on 31st
December 2014
Particulars Plus
(₹)
Minus
(₹)
Credit Balance as per Pass book
1. Cheques issued but not presented and recorded
twice (₹300+₹300)
2. Cheque drawn on Savings bank A/c but recorded
in Current A/c
3. Cheque issued but recorded in cash column
4. Bank charges not recorded in cash book (₹25+₹25
+₹17)
Debit Balance as per Cash book
10,000
285
67
10,352
9,552
600
200
800
Problem
On comparing the Cash book of Mr.X Ltd. with the bank Pass book, the following
discrepancies were noted:
1. Out of ₹20,500 paid in cash and by cheese into the bank on 27th
March, cheque
amounting to ₹7,500 was collected on 7th
April.
2. Cheque and cash amounting to ₹4,800 were deposited in bank on 26th
March
but credit was given for ₹3,800 only.
3. Out of cheques amounting to ₹7,800 drawn on 26th
March a cheque for ₹2,500
was encashed on 3rd
April.
4. Cheques issued to creditor amounting to ₹20,000 on 25th
March of which
cheese worth ₹3,000 were presented to bank up to 31st
March.
5. A cheque for ₹1,000 entered in cash book but omitted to be banked on 31st
March.
6. A cheque for ₹600 deposited into bank but omitted to be recorded in cash book.
7. A bill receivable for ₹520 previously discounted (discount ₹20) with the bank
had been dishonored but advice was received on 1st
April.
8. A bill for ₹10,000 was retired by the bank under a rebate of ₹150 but the full
amount of the bill was credited in the bank column on the cash book.
9. A cheque of ₹1,080 credited in the pass book on 28th
March being dishonored
is debited again in the pass book on 1st
April. There was no entry in the cash
book about dishonor of the cheque until 15th
April.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 17
Prepare a Bank Reconciliation Statement as at 31st
March, if the balance as per Cash
book was ₹39,770.
Solution
Bank Reconciliation Statement
As on 31st
March 2015
Particulars Plus
(₹)
Minus
(₹)
Balance as per Cash book
1. Cheque deposited on 27th
March but not yet
collected till 31st
March.
2. Cheque deposited on 26th
March but not yet
collected till 31st
March.
3. Cheques issued on 26th
March but not yet
presented for payment till 31st
March.
4. Cheques issued on 25th
March but not yet
presented for payment till 31st
March.
5. A cheque entered in cash book but yet banked.
6. A cheque deposited into bank but not yet entered
in cash book.
7. Discounted B/R dishonored, not yet entered in cash
book.
8. Rebate on bill not entered in cash book.
Balance as per Pass book
39,770
2,500
17,000
600
150
60,020
50,000
7,500
1,000
1,000
520
10,020
Note:
A cheque of ₹1,080 credited in Pass book on March 28, later debited in Pass book on
1st
April has no effect on Bank Reconciliation Statement as at 31.03.2015
Bank Overdraft
Until now we are assuming that Cash book shows a debit balance or Pass book a
credit balance, i.e. bank owes amount to the trader. But sometimes Cash book may
show a credit balance or Pass book a debit balance. What does it mean? By this we
mean that the trader owes this amount to the bank, i.e. he has drawn more amount than
his balance in the bank. Such a balance is technically known as „Bank Overdraft’.
Therefore, two separate columns are prepared; one for recording plus items and the
other for minus items. If the total of minus items exceeds the total of plus items, the
result is minus and is bank Overdraft as per Cash book or Pass book as the case may
be.
On the other hand, if the total of plus items, exceeds that of minus items, the result is
plus and is a balance in favor of the trader.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 18
Illustration
The cash book of a Trader showed a credit balance of ₹875 on 31st
December 2016.
On verification with the Bank pass book it was found that:
1. A cheque for ₹300 dishonored was not entered in the cash book.
2. Bank charges amounting to ₹10 were not recorded through the cash book.
3. There was a wrong credit of ₹750 in the cash book.
4. Cheque for ₹850 paid into a bank on 31st
December had not been entered in the
pass book.
5. Interest amounting to ₹970 was recorded by the bank and entered only in the
pass book.
6. A cheque for ₹250 was paid into the bank for collection but the cash book
showed no entry for it.
Prepare a Bank Reconciliation Statement as on 31st
December 2016.
Solution Bank Reconciliation Statement
As on 31st
December 2016
Particulars Plus (₹) Minus (₹)
Credit Balance as per Cash Book/ Overdraft as per Cash
Book
1. Cheque dishonored was not entered in the Cash
book
2. Bank charges not recorded in Cash book
3. Wrong credit in the Cash book
4. Cheque paid into the bank had not been entered in
the Pass book.
5. Interest was recorded by the bank and entered only
in the Pass book.
6. Cheque paid into the bank had not been entered in
the Cash book.
Debit Balance / Overdraft as per Pass book
750
970
250
1,970
875
300
10
1,185
785
Problem
On checking Ram‟s Cash book with the Bank statement of his Overdraft Current
account for the month of November, 2015, you find the following:
1. Cash book showed an overdraft of ₹4,500.
2. The payment side of the Cash book had been under-cast by ₹150.
3. A cheque for ₹750 drawn on his Savings account has been shown as drawn on
Current account.
4. Cheques amounting to ₹7,000 drawn and entered in the Cash book had not yet
been presented.
5. Cheques amounting to ₹6,000 sent to the bank for collection, though entered in
the Cash book, had not been credited by the bank.
6. Bank charges of ₹75 as per Bank statement had not been taken into the Cash
book.
7. Dividends of the amount of ₹2,500 had been paid direct into the bank and not
entered in the Cash book.
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 19
You are required to prepare a Bank Reconciliation Statement as on 30th
Nov, 2014.
Solution Bank Reconciliation Statement
As on 30th
November 2014
Particulars Plus
(₹)
Minus
(₹)
Overdraft as per Cash book
1. Payment side of cash book is under-casted
2. Cheque drawn on Savings account wrongly shown
as drawn on Current account.
3. Cheque issued but not yet presented for payment.
4. Cheese paid into bank but not yet credited
5. Bank charges not entered in cash book.
6. Direct payment of Dividend into bank
750
7,000
2,500
4,500
150
6,000
75
10,250 10,725
Overdraft as per Pass book 475
Problem
From the following information supplied by Gokul, prepare his Bank Reconciliation
Statement as on 31st
March 2015. ₹
1. Bank overdraft as per Pass book 16,500
2. Cheques issued but not presented for payment 8,750
3. Cheques deposited with bank but not collected 10,500
4. Cheques recorded in the Cash book but not sent to bank for colln. 2,000
5. Payments received from customers directly by bank 3,500
6. Bank charges debited in Pass book 20
7. Premium on life policy of Gokul paid by the bank on standing advice 180
8. A bill for ₹3,000 (discounted with the bank in November) dishonored
on 31-03-2015, and noting charges paid by the bank 10
Solution Bank Reconciliation Statement
As on 31st
March 2015
Particulars Plus Items
(₹)
Minus Items
(₹)
Bank Overdraft as per Pass Book
1. Cheques issued but not presented for payment.
2. Cheques deposited but not yet collected.
3. Cheques recorded in the Cash book but omitted
to be banked.
4. Direct payment by the customers into bank.
5. Bank charges
6. Life policy premium paid by bank
7. Dishonored bill, including noting charges.
10,500
2,000
20
180
3,010
16,500
8,750
3,500
15,710 28,750
Overdraft as per Cash Book 13,040
Financial Accounting
S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 20
Text Book and References
1. S.P.Jain and K.L.Narang, Financial Accounting, Kalyani Publishers, New
Delhi, 3rd
Revised Edition, 2008.
2. Grewal T.S, 2009. Double Entry Book Keeping. Sultan Chand and Sons, New
Delhi, 6th
Edition.
3. Shukla and Grewal, 1997. Advanced Accountancy. Sultan Chand and Sons,
New Delhi, 13th
Edition.

More Related Content

What's hot

Double Entry System & Accountin Equation
Double Entry System & Accountin EquationDouble Entry System & Accountin Equation
Double Entry System & Accountin EquationGurkirat Singh
 
Introduction to Accounting
Introduction to AccountingIntroduction to Accounting
Introduction to AccountingDr. Bhavik Shah
 
Bank Reconciliation Statement
Bank Reconciliation StatementBank Reconciliation Statement
Bank Reconciliation StatementRamila Anwar
 
Ledger in financial accounting (11th commerce)
Ledger in financial accounting (11th commerce)Ledger in financial accounting (11th commerce)
Ledger in financial accounting (11th commerce)Yamini Kahaliya
 
Accounting concepts and principles - Made Easy
Accounting concepts and principles - Made EasyAccounting concepts and principles - Made Easy
Accounting concepts and principles - Made EasyBhavita Bhatt
 
Accounting Presentation
Accounting PresentationAccounting Presentation
Accounting PresentationSvtuition
 
Basic accounting terminology
Basic accounting terminologyBasic accounting terminology
Basic accounting terminologyAnkit Sand
 
Basic accounting ppt
Basic accounting pptBasic accounting ppt
Basic accounting pptPreet Gill
 
Accounting Cycle - Trial Balance - Easy Accounting
Accounting Cycle - Trial Balance - Easy AccountingAccounting Cycle - Trial Balance - Easy Accounting
Accounting Cycle - Trial Balance - Easy AccountingFaHaD .H. NooR
 
Chapter 1 Nature and Purpose of Business
Chapter 1 Nature and Purpose of BusinessChapter 1 Nature and Purpose of Business
Chapter 1 Nature and Purpose of BusinessRitvik Tolumbia
 
Trial balance ppt
Trial balance pptTrial balance ppt
Trial balance pptharshika5
 
Rectification of errors for class XI
Rectification of errors for class XIRectification of errors for class XI
Rectification of errors for class XINagendra Verma
 
Accounting concept and convention
Accounting concept and conventionAccounting concept and convention
Accounting concept and conventionpoojanmantri
 

What's hot (20)

Topic 8 trial balance
Topic 8 trial balanceTopic 8 trial balance
Topic 8 trial balance
 
Double Entry System & Accountin Equation
Double Entry System & Accountin EquationDouble Entry System & Accountin Equation
Double Entry System & Accountin Equation
 
Journal entries
Journal entriesJournal entries
Journal entries
 
Introduction to Accounting
Introduction to AccountingIntroduction to Accounting
Introduction to Accounting
 
Bank Reconciliation Statement
Bank Reconciliation StatementBank Reconciliation Statement
Bank Reconciliation Statement
 
Ledger in financial accounting (11th commerce)
Ledger in financial accounting (11th commerce)Ledger in financial accounting (11th commerce)
Ledger in financial accounting (11th commerce)
 
Accounting concepts and principles - Made Easy
Accounting concepts and principles - Made EasyAccounting concepts and principles - Made Easy
Accounting concepts and principles - Made Easy
 
Accounting Presentation
Accounting PresentationAccounting Presentation
Accounting Presentation
 
Journal entries (ppt)
Journal entries (ppt)Journal entries (ppt)
Journal entries (ppt)
 
Basic accounting terminology
Basic accounting terminologyBasic accounting terminology
Basic accounting terminology
 
Basic accounting ppt
Basic accounting pptBasic accounting ppt
Basic accounting ppt
 
Suspense ac
Suspense acSuspense ac
Suspense ac
 
Accounting Cycle - Trial Balance - Easy Accounting
Accounting Cycle - Trial Balance - Easy AccountingAccounting Cycle - Trial Balance - Easy Accounting
Accounting Cycle - Trial Balance - Easy Accounting
 
Trial balance
Trial balanceTrial balance
Trial balance
 
Rectification of errors
Rectification of errorsRectification of errors
Rectification of errors
 
Rectification of Error
Rectification of ErrorRectification of Error
Rectification of Error
 
Chapter 1 Nature and Purpose of Business
Chapter 1 Nature and Purpose of BusinessChapter 1 Nature and Purpose of Business
Chapter 1 Nature and Purpose of Business
 
Trial balance ppt
Trial balance pptTrial balance ppt
Trial balance ppt
 
Rectification of errors for class XI
Rectification of errors for class XIRectification of errors for class XI
Rectification of errors for class XI
 
Accounting concept and convention
Accounting concept and conventionAccounting concept and convention
Accounting concept and convention
 

Viewers also liked (7)

Strategic management unit iv
Strategic management unit ivStrategic management unit iv
Strategic management unit iv
 
Strategic management unit v
Strategic management unit vStrategic management unit v
Strategic management unit v
 
Introduction to information technology (2015 16) unit 1
Introduction to information technology  (2015 16) unit 1Introduction to information technology  (2015 16) unit 1
Introduction to information technology (2015 16) unit 1
 
Strategic management unit i
Strategic management unit iStrategic management unit i
Strategic management unit i
 
Strategic management unit iii
Strategic management unit iiiStrategic management unit iii
Strategic management unit iii
 
Strategic management unit ii
Strategic management unit iiStrategic management unit ii
Strategic management unit ii
 
Strategic management full notes
Strategic management full notesStrategic management full notes
Strategic management full notes
 

Similar to Financial Accounting (unit 2)

Accounting chapter-9
Accounting chapter-9Accounting chapter-9
Accounting chapter-9Gyanbikash
 
Project on trial balance, p & l account, balance sheet.
Project on trial balance, p & l account, balance sheet.Project on trial balance, p & l account, balance sheet.
Project on trial balance, p & l account, balance sheet.rgarude
 
Trial balance and rectification of errors
Trial balance and rectification of errorsTrial balance and rectification of errors
Trial balance and rectification of errorsMD SALMAN ANJUM
 
Trial balance in accountancy
Trial balance in accountancyTrial balance in accountancy
Trial balance in accountancyInnoclazz Academy
 
Topic 8 rectification of errors n
Topic 8 rectification of errors nTopic 8 rectification of errors n
Topic 8 rectification of errors nSrinivas Methuku
 
Trail balance grade 10 ppt
Trail balance grade 10 pptTrail balance grade 10 ppt
Trail balance grade 10 pptZinhle Ngubeni
 
Chapter 7 posting journal entries to general ledger accounts
Chapter 7 posting journal entries to general ledger accountsChapter 7 posting journal entries to general ledger accounts
Chapter 7 posting journal entries to general ledger accountsIva Walton
 
Bca i fma u 1.5 trial balance & rectification of errors
Bca i fma u 1.5 trial balance & rectification of errorsBca i fma u 1.5 trial balance & rectification of errors
Bca i fma u 1.5 trial balance & rectification of errorsRai University
 
The balancing of accounts ppt @ bec doms bagalkot mba finance
The balancing of accounts ppt @ bec doms bagalkot mba financeThe balancing of accounts ppt @ bec doms bagalkot mba finance
The balancing of accounts ppt @ bec doms bagalkot mba financeBabasab Patil
 
Bba i ita u 2.2 rectification of errors
Bba i ita u 2.2 rectification of errorsBba i ita u 2.2 rectification of errors
Bba i ita u 2.2 rectification of errorsRai University
 
Mca i fma u 1.5 trial balance & rectification of errors
Mca i fma u 1.5 trial balance & rectification of errorsMca i fma u 1.5 trial balance & rectification of errors
Mca i fma u 1.5 trial balance & rectification of errorsRai University
 

Similar to Financial Accounting (unit 2) (20)

Accounting chapter-9
Accounting chapter-9Accounting chapter-9
Accounting chapter-9
 
Project on trial balance, p & l account, balance sheet.
Project on trial balance, p & l account, balance sheet.Project on trial balance, p & l account, balance sheet.
Project on trial balance, p & l account, balance sheet.
 
Trialbalance.pptx
Trialbalance.pptxTrialbalance.pptx
Trialbalance.pptx
 
Trial balance and rectification of errors
Trial balance and rectification of errorsTrial balance and rectification of errors
Trial balance and rectification of errors
 
Keac106
Keac106Keac106
Keac106
 
Trial balance in accountancy
Trial balance in accountancyTrial balance in accountancy
Trial balance in accountancy
 
Accounts 6.pdf
Accounts 6.pdfAccounts 6.pdf
Accounts 6.pdf
 
Accounts 6.pdf
Accounts 6.pdfAccounts 6.pdf
Accounts 6.pdf
 
Accounting presentation
Accounting presentationAccounting presentation
Accounting presentation
 
Topic 8 rectification of errors n
Topic 8 rectification of errors nTopic 8 rectification of errors n
Topic 8 rectification of errors n
 
Chap 6-final
Chap 6-finalChap 6-final
Chap 6-final
 
Kilcoyne Accountants
Kilcoyne AccountantsKilcoyne Accountants
Kilcoyne Accountants
 
LEDGER.pptx
LEDGER.pptxLEDGER.pptx
LEDGER.pptx
 
12 trial balance
12 trial balance12 trial balance
12 trial balance
 
Trail balance grade 10 ppt
Trail balance grade 10 pptTrail balance grade 10 ppt
Trail balance grade 10 ppt
 
Chapter 7 posting journal entries to general ledger accounts
Chapter 7 posting journal entries to general ledger accountsChapter 7 posting journal entries to general ledger accounts
Chapter 7 posting journal entries to general ledger accounts
 
Bca i fma u 1.5 trial balance & rectification of errors
Bca i fma u 1.5 trial balance & rectification of errorsBca i fma u 1.5 trial balance & rectification of errors
Bca i fma u 1.5 trial balance & rectification of errors
 
The balancing of accounts ppt @ bec doms bagalkot mba finance
The balancing of accounts ppt @ bec doms bagalkot mba financeThe balancing of accounts ppt @ bec doms bagalkot mba finance
The balancing of accounts ppt @ bec doms bagalkot mba finance
 
Bba i ita u 2.2 rectification of errors
Bba i ita u 2.2 rectification of errorsBba i ita u 2.2 rectification of errors
Bba i ita u 2.2 rectification of errors
 
Mca i fma u 1.5 trial balance & rectification of errors
Mca i fma u 1.5 trial balance & rectification of errorsMca i fma u 1.5 trial balance & rectification of errors
Mca i fma u 1.5 trial balance & rectification of errors
 

More from Dr.N.G.P.Arts and Science College, Coimbatore, India

More from Dr.N.G.P.Arts and Science College, Coimbatore, India (16)

Services marketing (ppt slides)
Services marketing (ppt slides)Services marketing (ppt slides)
Services marketing (ppt slides)
 
Management Process
Management Process Management Process
Management Process
 
Management Process unit 1
Management Process unit 1Management Process unit 1
Management Process unit 1
 
Financial Management unit 1
Financial Management unit 1Financial Management unit 1
Financial Management unit 1
 
Evolution of micro and small enterprises in india
Evolution of micro and small enterprises in indiaEvolution of micro and small enterprises in india
Evolution of micro and small enterprises in india
 
E commerce (2015-16) unit i
E commerce (2015-16) unit iE commerce (2015-16) unit i
E commerce (2015-16) unit i
 
Cost and management accounting (2015 16) unit 1
Cost and management accounting  (2015 16) unit 1Cost and management accounting  (2015 16) unit 1
Cost and management accounting (2015 16) unit 1
 
Ba7202 financial management (unit5) notes
Ba7202 financial management (unit5) notesBa7202 financial management (unit5) notes
Ba7202 financial management (unit5) notes
 
Ba7202 financial management (unit4) notes
Ba7202 financial management (unit4) notesBa7202 financial management (unit4) notes
Ba7202 financial management (unit4) notes
 
Ba7202 financial management (unit3) notes
Ba7202 financial management (unit3) notesBa7202 financial management (unit3) notes
Ba7202 financial management (unit3) notes
 
Ba7202 financial management (unit2) notes
Ba7202 financial management (unit2) notesBa7202 financial management (unit2) notes
Ba7202 financial management (unit2) notes
 
Ba7202 financial management (unit1) notes
Ba7202 financial management (unit1) notesBa7202 financial management (unit1) notes
Ba7202 financial management (unit1) notes
 
Merchant banking and financial services unit 5 notes for mba
Merchant banking and financial services unit 5 notes for mbaMerchant banking and financial services unit 5 notes for mba
Merchant banking and financial services unit 5 notes for mba
 
Merchant banking and financial services unit 4 notes for mba
Merchant banking and financial services unit 4 notes for mbaMerchant banking and financial services unit 4 notes for mba
Merchant banking and financial services unit 4 notes for mba
 
Merchant banking and financial services unit 2 notes for mba
Merchant banking and financial services unit 2 notes for mbaMerchant banking and financial services unit 2 notes for mba
Merchant banking and financial services unit 2 notes for mba
 
Merchant banking and financial services unit i notes for mba
Merchant banking and financial services unit i notes for mbaMerchant banking and financial services unit i notes for mba
Merchant banking and financial services unit i notes for mba
 

Recently uploaded

Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.raviapr7
 
General views of Histopathology and step
General views of Histopathology and stepGeneral views of Histopathology and step
General views of Histopathology and stepobaje godwin sunday
 
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfMaximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfTechSoup
 
M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxDr. Santhosh Kumar. N
 
Prescribed medication order and communication skills.pptx
Prescribed medication order and communication skills.pptxPrescribed medication order and communication skills.pptx
Prescribed medication order and communication skills.pptxraviapr7
 
CapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapitolTechU
 
Philosophy of Education and Educational Philosophy
Philosophy of Education  and Educational PhilosophyPhilosophy of Education  and Educational Philosophy
Philosophy of Education and Educational PhilosophyShuvankar Madhu
 
Ultra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxUltra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxDr. Asif Anas
 
The basics of sentences session 10pptx.pptx
The basics of sentences session 10pptx.pptxThe basics of sentences session 10pptx.pptx
The basics of sentences session 10pptx.pptxheathfieldcps1
 
UKCGE Parental Leave Discussion March 2024
UKCGE Parental Leave Discussion March 2024UKCGE Parental Leave Discussion March 2024
UKCGE Parental Leave Discussion March 2024UKCGE
 
CAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxCAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxSaurabhParmar42
 
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxPISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxEduSkills OECD
 
How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17Celine George
 
How to Use api.constrains ( ) in Odoo 17
How to Use api.constrains ( ) in Odoo 17How to Use api.constrains ( ) in Odoo 17
How to Use api.constrains ( ) in Odoo 17Celine George
 
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptxClinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptxraviapr7
 
Patterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxPatterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxMYDA ANGELICA SUAN
 
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdf
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdfP4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdf
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdfYu Kanazawa / Osaka University
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice documentXsasf Sfdfasd
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptxSandy Millin
 

Recently uploaded (20)

Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.Drug Information Services- DIC and Sources.
Drug Information Services- DIC and Sources.
 
General views of Histopathology and step
General views of Histopathology and stepGeneral views of Histopathology and step
General views of Histopathology and step
 
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdfMaximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
Maximizing Impact_ Nonprofit Website Planning, Budgeting, and Design.pdf
 
M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptx
 
Prescribed medication order and communication skills.pptx
Prescribed medication order and communication skills.pptxPrescribed medication order and communication skills.pptx
Prescribed medication order and communication skills.pptx
 
CapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptxCapTechU Doctoral Presentation -March 2024 slides.pptx
CapTechU Doctoral Presentation -March 2024 slides.pptx
 
Philosophy of Education and Educational Philosophy
Philosophy of Education  and Educational PhilosophyPhilosophy of Education  and Educational Philosophy
Philosophy of Education and Educational Philosophy
 
Ultra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptxUltra structure and life cycle of Plasmodium.pptx
Ultra structure and life cycle of Plasmodium.pptx
 
The basics of sentences session 10pptx.pptx
The basics of sentences session 10pptx.pptxThe basics of sentences session 10pptx.pptx
The basics of sentences session 10pptx.pptx
 
UKCGE Parental Leave Discussion March 2024
UKCGE Parental Leave Discussion March 2024UKCGE Parental Leave Discussion March 2024
UKCGE Parental Leave Discussion March 2024
 
CAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptxCAULIFLOWER BREEDING 1 Parmar pptx
CAULIFLOWER BREEDING 1 Parmar pptx
 
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxPISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
 
How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17How to Add Existing Field in One2Many Tree View in Odoo 17
How to Add Existing Field in One2Many Tree View in Odoo 17
 
Finals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quizFinals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quiz
 
How to Use api.constrains ( ) in Odoo 17
How to Use api.constrains ( ) in Odoo 17How to Use api.constrains ( ) in Odoo 17
How to Use api.constrains ( ) in Odoo 17
 
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptxClinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
 
Patterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptxPatterns of Written Texts Across Disciplines.pptx
Patterns of Written Texts Across Disciplines.pptx
 
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdf
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdfP4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdf
P4C x ELT = P4ELT: Its Theoretical Background (Kanazawa, 2024 March).pdf
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice document
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
 

Financial Accounting (unit 2)

  • 1. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 1 UNIT – II Trial Balance – Errors – Types of Errors – Rectification of Errors – Problems – Bank Reconciliation Statement - Problems. TRIAL BALANCE Trial balance is a statement, prepared with the debit and credit balances of ledger accounts to test the arithmetical accuracy of the books. If the totals of the debit and credit amount columns of the trial balance are equal, it is presumed that the posting to the ledger in terms of debit and credit amounts is accurate. Features of Trial Balance 1. The Trial balance is prepared on a specific date. This is why, one use the word „as on ...…‟ with its heading. 2. Trial balance contains the list of all ledger accounts including cash account. 3. Trial balance may be prepared with the balances or totals or balances and totals of ledger accounts. 4. The total of the debit and credit column of the amount must be equal. 5. In case the debit and credit side of the trial balance are equal, it is presumed that the posting to the ledger is accurate. 6. The difference between the debit and credit side of the trial balance points out that certain mistakes have been committed somewhere. 7. If both the debit and credit sides have the same total, it does not mean that there is no mistake in accounting. Objectives and Functions of Trial Balance  Test of Arithmetical Accuracy: Trial balance tests the accuracy of arithmetical calculation. If the correct posting is made from subsidiary books to ledger accounts (i.e. correct amount and figures have been recorded), the debit and credit total of the trial balance must tally.  Summarized Information of Ledger Accounts: Trial balance contains a list of all ledger accounts. It presents the name of ledger accounts and the amount of their debit and credit balance.  Basis of Preparing Final Accounts: The main purpose of maintaining books of accounts is to ascertain the result of the business in terms of profit or loss and the value of different assets and liabilities.  Useful for Making Adjustments: While preparing final accounts certain adjustments regarding closing stock, outstanding and prepaid expenses, accrued an unearned income are to be made. Limitations of Trial Balance It should be noted that the agreement of trial balance is not a conclusive proof of accuracy. In other words, in spite of the agreement of the trial balance some errors may remain. These may be of the following types: a) Transaction has not been entered in the journal. b) A wrong amount has been written in both columns of the journal.
  • 2. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 2 c) A wrong account has been mentioned in the journal. d) An entry has not been posted in the ledger. e) An entry has posted twice in the ledger. Specimen of Trial Balance Trial Balance of M/s …..………………. As on ……………… S.No. Name of the Account L.F. Amount ₹ (Total or Balance) Dr. Amount ₹ (Total or Balance) Cr. The under mentioned points may be noted while preparing trial balance: 1) A trial balance is prepared as on a particular date which should be mentioned at the top. 2) In the first column, serial number is written. 3) In the second column, the name of the ledger account is written. 4) In the third column, ledger folio is written. 5) In the fourth column, the total of the debit side of the account concerned or the debit balance is entered. 6) In the fifth column, the total of the credit side of the account concerned or the credit balance is entered. ERRORS – TYPES OF ERRORS In common, the agreement of trial balance shows the accuracy of the books of accounts. Though trial balance is tallied, but there may be certain errors which are not disclosed by the trial balance. That is why it is also said that trial balance is not a conclusive proof of the accuracy of the books of accounts. Sometimes, the disagreement of the trial balance will disclose certain errors which are to be rectified accordingly. If trial balance is not prepared correctly then the final accounts prepared will not reflect the true and fair view of the state of affairs of the business. Types of Errors There are few errors which can be disclosed and some of the errors cannot be disclosed. Both the types of errors should be rectified to have a perfect accuracy of accounts. All these errors can be brought under the two types as follows: 1. Errors which are disclosed by a Trial Balance. 2. Errors which are not disclosed by a Trial Balance
  • 3. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 3 (1) Errors which are Disclosed by a Trial Balance: If any error, whether clerical or otherwise, exists in the books of account, the same will cause disagreement of a trial balance. The disagreement of the trial balance will disclose the following classes of errors: (a) Wrong Posting: Posting on the wrong side of an account and posting of a wrong amount in a ledger account will cause disagreement of trial balance. (b) Omission of Posting: Omission of posting of an entry from the subsidiary book will cause disagreement. (c) Errors in Casting or Totaling: Errors in casting or totaling of subsidiary books or accounts will cause disagreement. (d) Errors in Balancing: If any error arises as a result of balancing of an account, the same will cause disagreement. (e) Double Posting: if any item is posted twice in a ledger account from a subsidiary book, the same will create disagreement. (f) Incomplete Double Entry: If the double entry principle is not completed i.e. either in debit or credit side of an account, the same will invite disagreement. (g) Balance Carried Forward Wrongly: If the debit balance of an account is shown or posted by credit balance in the trial balance it would fail to agree. E.g. rent account shows a debit balance as per ledger but posted on the credit side of the trial balance. (h) Variation in Amount: If different amounts are entered in the two different accounts they will cause disagreement. E.g. rent account is debited by ₹500 whereas Cash account is credit by ₹50. (i) Wrong Total in Trial Balance: If the total of both the columns of the trial balance are not correctly added up, they will cause disagreement. (2) Errors which are Not Disclosed by a Trial Balance: The agreement of a trial balance is not a conclusive proof as to the absolute accuracy of the books. In spite of agreement of trial balance, yet there may be some errors which are not disclosed by a trial balance. (a) Errors of Omission: When a transaction is completely omitted from being recorded in the books of accounts then the resultant error is called error of complete omission. For example, not recording a transaction in a subsidiary book. This will not neither affect the debit nor credit balance. (b) Errors of Commission: These errors are the result of some commission. They take place during the course of recording of transactions in the books of accounts because of the carelessness, ignorance, lack of knowledge, etc. For example, instead of ₹800 either ₹80 or ₹8000 is recorded, in both sides of ledger accounts. (c) Errors of Principle: When an accounting transaction is recorded in the books of accounts violating an accounting principle, such an error is called error of principle. For example, ₹6550 spent on extension of building wrongly debit to Repairs Account instead of Building Account will not affect the agreement of the trial balance. (d) Errors of Wrong Posting: When wrong posting is made to a wrong account instead of current one, although amount is correctly recorded. For example,
  • 4. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 4 sold goods to B but wrongly debited to D‟s account, wherein trial balance agrees and will not disclose this error. (e) Compensating Errors: When an error offsets the wrong effect of an already committed error, it is called a compensating error. The amount involved in such errors in the same. For example, over-casting or under-casting with the similar amount. Location and Correction of Errors for Tallying the Trial Balance If the trial balance does not tally, following methods should be adopted to tally it: 1. Make totals of debit and credit balances of trial balance once again. 2. If the totals of debit and credit are correct, then write the differences of these totals separately. 3. Try to see that some balance of ledger may be equal to this difference and it might not have been posting. 4. Divide the difference of the trial balance by two and see this amount is not recorded in the wrong side of trial balance. 5. Make 1/9 of the total as it may be possible that zero is added or zero is left out in some balance by mistake. If zero is added the amount will become ten times and if zero is left out the amount will become 1/10. In such cases difference will definitely be divisible by 9. 6. Count all the accounts ledger and see that balances of all of them have been recorded in trial balance. 7. Check the totals and balances of all the accounts of the ledger. 8. See the balances of all accounts have included in the trial balance. 9. Check the totals of subsidiary books and have been recorded in ledger. 10.See that correct posting has been made from journal to ledger. Problem The following trial balance has been prepared incorrectly. You are asked to prepare the trial balance correctly. Heads of Accounts Dr. Balance (₹) Cr. Balance (₹) Bank overdraft Cash in hand Purchase returns Sundry expenses Sales returns Salaries Purchases Sales Creditors Debtors Stock (1.1.2008) Plant Capital account 280 -- 80 240 -- 160 560 -- -- 160 -- -- 440 -- 40 -- -- 160 -- -- 880 240 -- 200 400 -- 1,920 1,920
  • 5. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 5 Solution Corrected Trial Balance Heads of Accounts Dr. Balance (₹) Cr. Balance (₹) Bank overdraft Cash in hand Purchase returns Sundry expenses Sales returns Salaries Purchases Sales Creditors Debtors Stock (1.1.2008) Plant Capital account -- 40 -- 240 160 160 560 -- -- 160 200 400 -- 280 -- 80 -- -- -- -- 880 240 -- -- -- 440 1,920 1,920 Problem A book-keeper drew-up the following Trial Balance for the year ended 31st December 2015: Heads of Accounts L.F Dr. Balance (₹) Cr. Balance (₹) Capital A/c Drawings A/c Purchases A/c Sales A/c Returns Inwards A/c Returns Outwards A/c Carriage Inwards A/c Carriage Outwards A/c Bank Overdraft A/c Provision for Bad Debts A/c Discount Allowed A/c Discount Received A/c General Expenses A/c Plant and Machinery A/c Sundry Debtors A/c Sundry Creditors A/c Opening Stock A/c Cash in hand A/c Dividend Received A/c Goodwill A/c -- 5,000 16,000 -- -- 2,000 1,000 -- 6,000 3,000 -- 2,000 5,000 10,000 8,000 -- 4,000 8,000 -- 17,000 30,000 -- -- 45,000 3,000 -- -- 2,000 -- -- 1,000 -- -- -- -- 5,000 -- -- 4,000 -- 87,000 90,000 You are required to draw-up a corrected Trial Balance after transferring the errors to Suspense Account.
  • 6. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 6 Solution Corrected Trial Balance Heads of Accounts L.F Dr. Balance (₹) Cr. Balance (₹) Capital A/c Drawings A/c Purchases A/c Sales A/c Returns Inwards A/c Returns Outwards A/c Carriage Inwards A/c Carriage Outwards A/c Bank Overdraft A/c Provision for Bad Debts A/c Discount Allowed A/c Discount Received A/c General Expenses A/c Plant and Machinery A/c Sundry Debtors A/c Sundry Creditors A/c Opening Stock A/c Cash in hand A/c Dividend Received A/c Goodwill A/c Suspense A/c -- 5,000 16,000 -- 3,000 -- 1,000 2,000 -- -- 1,000 -- 5,000 10,000 8,000 -- 4,000 8,000 -- 17,000 17,000 30,000 -- -- 45,000 -- 2,000 -- -- 6,000 3,000 -- 2,000 -- -- -- 5,000 -- -- 4,000 -- -- 97,000 97,000 RECTIFICATION OF ERRORS – PROBLEMS Correction of errors in the books of accounts is not done by erasing, re-writing or striking the figures which are incorrect. Correcting the errors that has occurred is called „Rectification‟. Appropriate entry is passed or suitable explanatory note is written in the respective account to neutralize the effect of errors. From the point of rectification, errors may be classified as follows: 1. Single-sided errors are errors which affect one side of an account. 2. Double-sided errors are errors which affect both the accounts in a transaction. Basic Principles for Rectification of Errors All errors, whatever may be their kind or nature, result in one of the following four positions in one or more accounts: i. Excess Debit in One or More Accounts: This must be rectified by „crediting‟ the excess amount to the respective account or accounts. ii. Short Debit in One or More Accounts: This must be rectified by a „further debit‟ to the respective account or accounts involved. iii. Excess Credit in One or More Accounts: This must be rectified by „debiting‟ the respective account with the excess amount involved.
  • 7. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 7 iv. Short Credit in One or More Accounts: This must be rectified by a „further credit‟ to the respective account or accounts involved. Stages of Rectification The stage in which rectification is done depends on identification or locating the error. Rectification of errors may be explained in two stages:  Rectification Before the Preparation of Trial Balance: In this stage errors are located before transferring the difference in the trial balance to Suspense Account.  Rectification After the Preparation of Trial Balance: In this stage, the difference in the trial balance would have been transferred to Suspense Account. So wherever applicable suspense account is used while passing rectification entries. Stage at which the Errors are Rectified Manner at which the Errors are Rectified 1) When the errors are rectified before transferring the difference in the trial balance to the suspense account. By debiting or crediting the respective account with the required amount by giving explanatory note in the particular column. 2) When the errors are rectified after transferring the difference in the trial balance to the suspense A/c. By writing a journal entry with respective account or accounts affected by the errors and suspense account. Rectification through Suspense Account When the trial balance disagrees, efforts are made to locate the errors and to rectify them. When the errors cannot be located and the preparation of final accounts is urgent, the difference in the trial balance is made by writing it temporarily in the smaller side of the trial balance, under the name of „Suspense Account‟. The suspense account is only a temporary device which should not be allowed to remain in the books for long time. In the next accounting period, attempts must be made to discover the errors which caused the difference in the trial balance. Again, if the credit side of the trial balance is shorter, the suspense account is credited and if the debit side of the trial balance is shorter, the suspense account is debited. Problem Pass rectification entries for the following transactions: 1. A builder‟s bill for ₹4,600 for erection of small shed was debited to repairs account. 2. A cheque for ₹750 received from Padma was credited to the account of Parvathi. 3. Goods to the value of ₹700 returned by Williams were included in closing stock, but not entry was in the book. 4. The Sales Day Book was overcast by ₹3000.
  • 8. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 8 Solution Journal Entries Particulars L.F Dr. (₹) Cr. (₹) Building A/c Dr. To Repairs Account (Being the erection of small shed wrongly debited to Repair A/c, now rectified) 4,600 4,600 Parvathi A/c Dr. To Padma A/c (Being the cheque received from Padma wrongly credited to Parvathi A/c, now rectified) 750 750 Sales Return A/c Dr. To Williams A/c (Being the omitted entry for goods returned by Williams, now recorded) 700 700 Sales A/c Dr. To Suspense A/c (Being the error in totaling of sales book (i.e. overcast by ₹3000, now rectified) 3,000 3,000 Problem The following errors were located in the books of a concern after its books were closed and a Suspense Account was created in order to get the Trial Balance agreed. Rectify the errors. 1. Sales Day Book was overcast by ₹200. 2. A sale of ₹500 to Xavier was wrongly debited to the Account of John. 3. Repair Expenses of ₹180 was posted as ₹810. 4. A Bill Receivable received from Poppy for ₹300 was passed through Bills Payable Books. 5. Legal expenses of ₹900 paid to advocate Mohan was debited to his personal account. 6. Cash received from Dhass was debited to Dasan Account for ₹150. 7. While carrying forward the total of one page of the Purchase Book to the next, the amount of ₹2,345 was written as ₹3245. Solution Journal Entries Particulars L.F Dr. (₹) Cr. (₹) Sales A/c Dr. To Suspense Account (Being overcast in Sales Day Book, now rectified) 200 200
  • 9. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 9 Xavier Account Dr. To John Account (Being sales made to Xavier wrongly debited to John, now rectified) 500 500 Suspense Account Dr. To Repairs Account (Being Repairs Account debit of ₹810 in place of ₹180, now rectified) 630 630 Bill Payable A/c Dr. Bills Receivable A/c Dr. To Poppy A/c (Being Bills Receivable passed through Bills Payable Book, now rectified) 300 300 600 Legal Expenses A/c Dr. To Mohan A/c (Being legal expenses paid, wrongly debited to Mohan account, now rectified) 900 900 Suspense Account Dr. To Dasan Account To Dhass Account (Being the sales wrongly credited to Debtors Account, now rectified) 300 150 150 Suspense Account Dr. To Purchase Account (Being excess amount of ₹900 (₹3245 – ₹2345) debited in Purchase Account, now rectified) 900 900 Dr. Suspense Account Cr. Particulars ₹ Particulars ₹ To Repairs A/c To Dasan A/c To Dhass A/c To Purchase A/c 630 150 150 900 By Difference in Trial Balance (balance figure) By Sales Account 1,630 200 1,830 1,830 Problem The Trial Balance of M/s. Sethi Brothers extracted on March 31, 2015, was ₹935 short on the Debit side. The Book-keeper opened Suspense A/c and squared-up the Trial Balance. An examination of the books however revealed the following errors: 1. The Dr. Discount Column in the Cash Book posted to the Rent A/c ₹15. 2. ₹150 paid to Dinesh posted to Ramesh 3. A cash purchase of ₹105 not posted in the leger. 4. A credit purchase of ₹300 from Ranjit posted as ₹30 in the ledger.
  • 10. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 10 5. A credit sale of ₹500 to Wahid entered in the Returns Outward Book. 6. Payment of Rent ₹140 debited to Landlord‟s Personal A/c. 7. Payment of ₹1,000 to Jagdish posted to his credit as ₹100. You are required to pass the necessary rectifying journal entries. Prepare the Suspense Account. Solution Rectifying Journal Entries Particulars L.F Dr. (₹) Cr. (₹) Discount A/c Dr. To Rent Account (Rectification of posting the Discount column to Rent Acount) 15 15 Dinesh Account Dr. To Ramesh Account (Rectification of payment to Dinesh posted to Ramesh) 150 150 Purchase Account Dr. To Suspense Account (Rectification of Cash purchase not posted) 105 105 Suspense A/c Dr. To Ranjeet A/c (Rectification of wrong posting) 270 270 Returns Outward A/c Dr. To Sales A/c (Rectification of sale recorded in Returns Outward Book) 500 500 Rent Account Dr. To Landlord‟s Personal Account (Rectification of payment of rent posted to Landlord‟s Personal Account) 140 140 Jagdish Account Dr. To Suspense Account (Rectification of wrong posting of amount as well as side) 1,100 1,100
  • 11. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 11 Dr. Suspense Account Cr. Particulars ₹ Particulars ₹ To Difference in Books To Ranjeet 935 270 By Purchases A/c By Jagdish 105 1,100 1,205 1,205 BANK RECONCILIATION STATEMENT - PROBLEMS Business concern maintains the cash book for recording cash and bank transactions. The cash book serves the purpose of both the cash account and the bank account. It shows the balance of both at the end of a period. Bank also maintains an account for each customer in its book. All deposits by the customer are recorded on the credit side of his/her account and all withdrawals are recorded on the debit side of his/her account. A copy of this account is regularly sent to the customer by the bank. This is called Pass Book or Bank Statement. To reconcile the balance of cash book and pass book a statement is prepared. This statement is called the „Bank Reconciliation Statement‟. It can be said that, “bank reconciliation statement is a statement prepared to reconcile the difference between the balances as per the bank column of the cash book and pass book on any given date”. Features of Bank Reconciliation Statement a. It is merely a statement not an account. b. This is a periodical statement. c. It is prepared on a particular day or this statement is valid for the day it is prepared. d. The preparation of bank reconciliation statement is not a part of the double entry book-keeping. e. The causes which are responsible for the disagreement of the two balances can easily be found-out. Importance of Bank Reconciliation Statement Bank reconciliation statement is the basic document of the accounting needed by every business enterprise for having check and control on its dealing with the bank. It has got the following importance:  Pin-Pointing Mistakes in Cash Book and Pass Book  Identifying Delay in the Clearance of Cheques  Check on Embezzlement  Checking the Accuracy of Cash Book  Techniques of Control
  • 12. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 12 In the View of Bank Pass Book: The following transactions in Bank’s Pass Book of Mr.Sethu 1. Mr.Sethu deposited ₹8,000 with the bank to open his current account. 2. A cheque of ₹2,500 received from Shailesh was paid into bank and was duly credited by the bank. 3. Insurance premium of ₹500 was paid by the bank on behalf of Mr.Sethu. 4. Withdrew ₹5,000 from the bank for office use. 5. A cheque of ₹1,000 was issued in favor of Surendar and the same was presented for payment. 6. Interest on investment amounting to ₹600 was collected by the bank on behalf of Mr.Sethu. MR.SETHU‟S CURRENT ACCOUNT WITH BANK Date Particulars Dr. (₹) Cr. (₹) Balance Account ant’s Initials Dr. or Cr. Amount (₹) By Cash By Cheque (of Shailesh) To Insurance premium To Self To Cheque (to Surendar) By Interest on Investmnt 500 5,000 1,000 8,000 2,500 600 Cr. Cr. Cr. Cr. Cr. Cr. 8,000 10,500 10,000 5,000 4,000 4,600 In the above example, Mr.Sethu becomes a creditor of the bank when he deposits money in the bank and he becomes a debtor of the bank when he withdraws money. Similarly, he become creditor of the bank for depositing cheque in the bank and interest on investments collected on his behalf and he becomes a debtor for drawing a cheque on the bank and insurance premium paid by the bank on his behalf. In the View of Cash Book: The transactions given above will be recorded in the Bank Column of the Three Columnar Cash Book (maintained by Mr.Sethu). IN THE BOOKS OF MR.SETHU – THREE-COLUMN CASH BOOK Dr. RECEIPTS PAYMENTS Cr. Date Particulars L F Discount Allowed Cash (₹) Bank (₹) Date Particulars L F Discount Received Cash (₹) Bank (₹) To Cash To Shailsh (cheque) To Bank To Interest on Invt. C C 5000 8000 2500 600 By Bank By Insurance By Cash By Surndr (cheque) By Bal c/d C C 8000 500 5000 1000 4600 11100 11100
  • 13. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 13 From the above Pass book and the Cash book, we see the same balance of ₹4,600 in the bank with a difference that in Cash book it is a debit balance whereas the same is a credit balance in the Pass book. It is because,  From the point of view of the Bank, Mr.Sethu is a creditor, so Pass book shows a credit balance.  From the point of view of Mr.Sethu, Bank is a debtor, so Cash book shows a debit balance. Therefore, balance as per Cash book is always reverse balance as per Pass book and amount of the balance will be the same if all entries have been correctly recorded in both the books. A statement known as „Bank Reconciliation Statement‟ is, therefore, prepared usually every month with a view to reconciling the two balances shown by the Cash book and the Pass book on a particular date. The other important purpose of the preparation of this statement (BRS) is to know the exact balance with the bank so that cheese might be drawn-up to that amount if there be a need of withdrawal. The following may be the reasons for the differences in two balances: a) Cheques issued but not yet presented for payment. b) Cheques paid into bank but not yet collected by the bank. c) The bank usually makes charges for the collection of outstanding cheese and for the various services rendered by it to the trader or account holder. d) Interest or dividend on investments and rent on property collected by the bank on behalf of the client. e) Insurance premium, subscriptions to periodicals and other payments made by the bank on behalf of the client. f) Cheese or cash omitted to be banked. g) Errors in totaling of the cash book, either under-casting or overcasting. h) Cheques or Bills of Exchange dishonored i) Payment by customers directly to the bank into businessman‟s account. j) Wrong debit or credit given in the Pass book or in the Cash book. k) Bills collected by the bank on behalf of the customers. Reasons /Causes for Differences The relationship between the customer and the banker is that of a creditor and a debtor. So, if the bank column of the cash book shows a debit balance on a specified date, the pass book should show an equal amount of credit balances as on that date and vice versa. However, the balances shown by the two independent records may not agree due to the following reasons: 1) Cheques Issued but not yet Presented for Payment 2) Cheques Presented into Bank but not yet Collected by the Bank 3) Bank Charge 4) Interest Credited by Bank but not entered in Cash Book 5) Interest or Dividend Collected by the Bank 6) Amount Directly Deposited into the Bank by Customers
  • 14. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 14 7) Payments made by the Bank on behalf of Clients 8) Bills Collected by the Bank on behalf of Customer 9) Dishonor of Bills or Cheque 10) Rebate on Retiring of Bills Preparation of Bank Reconciliation Statement The bank reconciliation statement is prepared usually at the end of period, i.e. a month, a quarter, a half year or year as may be found convenient and necessary by the business man taking into account the number of transactions involved. FORMAT OF BANK RECONCILIATION STATEMENT Particulars Dr. Balance as per Cash Book (or) Overdraft as per Pass Book Cr. Balance as per Pass Book (or) Overdraft as per Cash Book 1) Those items which affect the debit side of cash book: i) Cheque deposited but not collected back. ii) Cheque though entered in Cash book but omitted to be sent to the Bank. 2) Those items which affect the credit side of cash book: i) Cheque issued but not presented for payment. 3) Those items which affect the credit side of pass book: i) Interest/Dividend credited by bank. ii) Amount deposited directly by a customer into bank account. iii) Cheques sent to the bank but omitted to be entered into the Cash book. 4) Those items which affect the debit side of pass book: i) Bank charges charged by bnk ii) Interest on Overdraft. iii) Payment made by bank on standing instruments of customer.
  • 15. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 15 Problem (Starting with Debit balance as per Cash book) On 31st December 2015, the Cash book of a firm showed a bank balance of ₹3,000. From the following information, prepare Bank Reconciliation Statement, showing the balance as per Pass book: 1. Cheques have been issued for ₹2,500 out of which cheques worth ₹2,000 only were presented for payment. 2. Cheques worth ₹700 were paid on 28th December but had not been credited by the bank. One cheque for ₹250 was entered in the Cash book on 30th December but was banked on 3rd January 2016. 3. A cheque from Mohan for ₹200 was paid in on 26th December but was dishonored and the advice was received on 2nd January 2016. 4. Pass book showed bank charges ₹10 debited by the bank. It also showed ₹400 collected by the bank as interest. 5. One of the debtors deposited a sum of ₹250 in the account of the firm on 20th December. Intimation in this respect was received from the bank on 2nd January, 2016. Solution Bank Reconciliation Statement As on 31st December 2015 Particulars Plus (₹) Minus (₹) Dr. Balance as per Cash book 1. Cheque issued but not yet presented for payment (₹2,500 – ₹2,000) 2. Cheque paid into bank but not yet credited by bank 3. Cheque entered in the cash book but was omitted to be banked upto 31st December. 4. Cheque from Mohan paid into bank dishonored but not yet recorded in the cash book. 5. Bank charges as per pass book. 6. Interest collected by bank not recorded in cash book. 7. Amount deposited by the customer directly in the bank not recorded in cash book. Cr. Balance as per Pass book 3,000 500 400 250 4,150 2,990 700 250 200 10 1,160 Problem (Starting with Credit balance as per Pass book) On 31st December 2014 the Pass book of Mr.Balaji‟s Current Account showed a credit balance of ₹10,000. Prepare a Bank Reconciliation Statement with the following information. 1. Mr.Balaji issued a cheque of ₹300 on 25th December, but this was not presented for payment whereas this was twice in the Cash book.
  • 16. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 16 2. A cheque of ₹200 drawn on his Savings deposit account has been shown as drawn on Current account in Cash book. 3. A cheque of ₹285 issued on his Savings deposit account has been shown as drawn on Current account in Pass book. 4. In the Pass book, a bank charge of ₹25 was recorded twice while another bank charge of ₹17 was also not recorded in the Cash book. Solution Bank Reconciliation Statement As on 31st December 2014 Particulars Plus (₹) Minus (₹) Credit Balance as per Pass book 1. Cheques issued but not presented and recorded twice (₹300+₹300) 2. Cheque drawn on Savings bank A/c but recorded in Current A/c 3. Cheque issued but recorded in cash column 4. Bank charges not recorded in cash book (₹25+₹25 +₹17) Debit Balance as per Cash book 10,000 285 67 10,352 9,552 600 200 800 Problem On comparing the Cash book of Mr.X Ltd. with the bank Pass book, the following discrepancies were noted: 1. Out of ₹20,500 paid in cash and by cheese into the bank on 27th March, cheque amounting to ₹7,500 was collected on 7th April. 2. Cheque and cash amounting to ₹4,800 were deposited in bank on 26th March but credit was given for ₹3,800 only. 3. Out of cheques amounting to ₹7,800 drawn on 26th March a cheque for ₹2,500 was encashed on 3rd April. 4. Cheques issued to creditor amounting to ₹20,000 on 25th March of which cheese worth ₹3,000 were presented to bank up to 31st March. 5. A cheque for ₹1,000 entered in cash book but omitted to be banked on 31st March. 6. A cheque for ₹600 deposited into bank but omitted to be recorded in cash book. 7. A bill receivable for ₹520 previously discounted (discount ₹20) with the bank had been dishonored but advice was received on 1st April. 8. A bill for ₹10,000 was retired by the bank under a rebate of ₹150 but the full amount of the bill was credited in the bank column on the cash book. 9. A cheque of ₹1,080 credited in the pass book on 28th March being dishonored is debited again in the pass book on 1st April. There was no entry in the cash book about dishonor of the cheque until 15th April.
  • 17. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 17 Prepare a Bank Reconciliation Statement as at 31st March, if the balance as per Cash book was ₹39,770. Solution Bank Reconciliation Statement As on 31st March 2015 Particulars Plus (₹) Minus (₹) Balance as per Cash book 1. Cheque deposited on 27th March but not yet collected till 31st March. 2. Cheque deposited on 26th March but not yet collected till 31st March. 3. Cheques issued on 26th March but not yet presented for payment till 31st March. 4. Cheques issued on 25th March but not yet presented for payment till 31st March. 5. A cheque entered in cash book but yet banked. 6. A cheque deposited into bank but not yet entered in cash book. 7. Discounted B/R dishonored, not yet entered in cash book. 8. Rebate on bill not entered in cash book. Balance as per Pass book 39,770 2,500 17,000 600 150 60,020 50,000 7,500 1,000 1,000 520 10,020 Note: A cheque of ₹1,080 credited in Pass book on March 28, later debited in Pass book on 1st April has no effect on Bank Reconciliation Statement as at 31.03.2015 Bank Overdraft Until now we are assuming that Cash book shows a debit balance or Pass book a credit balance, i.e. bank owes amount to the trader. But sometimes Cash book may show a credit balance or Pass book a debit balance. What does it mean? By this we mean that the trader owes this amount to the bank, i.e. he has drawn more amount than his balance in the bank. Such a balance is technically known as „Bank Overdraft’. Therefore, two separate columns are prepared; one for recording plus items and the other for minus items. If the total of minus items exceeds the total of plus items, the result is minus and is bank Overdraft as per Cash book or Pass book as the case may be. On the other hand, if the total of plus items, exceeds that of minus items, the result is plus and is a balance in favor of the trader.
  • 18. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 18 Illustration The cash book of a Trader showed a credit balance of ₹875 on 31st December 2016. On verification with the Bank pass book it was found that: 1. A cheque for ₹300 dishonored was not entered in the cash book. 2. Bank charges amounting to ₹10 were not recorded through the cash book. 3. There was a wrong credit of ₹750 in the cash book. 4. Cheque for ₹850 paid into a bank on 31st December had not been entered in the pass book. 5. Interest amounting to ₹970 was recorded by the bank and entered only in the pass book. 6. A cheque for ₹250 was paid into the bank for collection but the cash book showed no entry for it. Prepare a Bank Reconciliation Statement as on 31st December 2016. Solution Bank Reconciliation Statement As on 31st December 2016 Particulars Plus (₹) Minus (₹) Credit Balance as per Cash Book/ Overdraft as per Cash Book 1. Cheque dishonored was not entered in the Cash book 2. Bank charges not recorded in Cash book 3. Wrong credit in the Cash book 4. Cheque paid into the bank had not been entered in the Pass book. 5. Interest was recorded by the bank and entered only in the Pass book. 6. Cheque paid into the bank had not been entered in the Cash book. Debit Balance / Overdraft as per Pass book 750 970 250 1,970 875 300 10 1,185 785 Problem On checking Ram‟s Cash book with the Bank statement of his Overdraft Current account for the month of November, 2015, you find the following: 1. Cash book showed an overdraft of ₹4,500. 2. The payment side of the Cash book had been under-cast by ₹150. 3. A cheque for ₹750 drawn on his Savings account has been shown as drawn on Current account. 4. Cheques amounting to ₹7,000 drawn and entered in the Cash book had not yet been presented. 5. Cheques amounting to ₹6,000 sent to the bank for collection, though entered in the Cash book, had not been credited by the bank. 6. Bank charges of ₹75 as per Bank statement had not been taken into the Cash book. 7. Dividends of the amount of ₹2,500 had been paid direct into the bank and not entered in the Cash book.
  • 19. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 19 You are required to prepare a Bank Reconciliation Statement as on 30th Nov, 2014. Solution Bank Reconciliation Statement As on 30th November 2014 Particulars Plus (₹) Minus (₹) Overdraft as per Cash book 1. Payment side of cash book is under-casted 2. Cheque drawn on Savings account wrongly shown as drawn on Current account. 3. Cheque issued but not yet presented for payment. 4. Cheese paid into bank but not yet credited 5. Bank charges not entered in cash book. 6. Direct payment of Dividend into bank 750 7,000 2,500 4,500 150 6,000 75 10,250 10,725 Overdraft as per Pass book 475 Problem From the following information supplied by Gokul, prepare his Bank Reconciliation Statement as on 31st March 2015. ₹ 1. Bank overdraft as per Pass book 16,500 2. Cheques issued but not presented for payment 8,750 3. Cheques deposited with bank but not collected 10,500 4. Cheques recorded in the Cash book but not sent to bank for colln. 2,000 5. Payments received from customers directly by bank 3,500 6. Bank charges debited in Pass book 20 7. Premium on life policy of Gokul paid by the bank on standing advice 180 8. A bill for ₹3,000 (discounted with the bank in November) dishonored on 31-03-2015, and noting charges paid by the bank 10 Solution Bank Reconciliation Statement As on 31st March 2015 Particulars Plus Items (₹) Minus Items (₹) Bank Overdraft as per Pass Book 1. Cheques issued but not presented for payment. 2. Cheques deposited but not yet collected. 3. Cheques recorded in the Cash book but omitted to be banked. 4. Direct payment by the customers into bank. 5. Bank charges 6. Life policy premium paid by bank 7. Dishonored bill, including noting charges. 10,500 2,000 20 180 3,010 16,500 8,750 3,500 15,710 28,750 Overdraft as per Cash Book 13,040
  • 20. Financial Accounting S.N.Selvaraj, M.B.A., M.Phil., Assistant Professor, Email: snselvaraj66@gmail.com Page 20 Text Book and References 1. S.P.Jain and K.L.Narang, Financial Accounting, Kalyani Publishers, New Delhi, 3rd Revised Edition, 2008. 2. Grewal T.S, 2009. Double Entry Book Keeping. Sultan Chand and Sons, New Delhi, 6th Edition. 3. Shukla and Grewal, 1997. Advanced Accountancy. Sultan Chand and Sons, New Delhi, 13th Edition.