Chapter 8, Problem 4APSA

1)

To determine

Introduction:

Bank Reconciliation Statements

• Bank reconciliation statements are statements prepared to reconcile the balances of bank balances as per the company’s records and as per the balances of the bank statements, as they may not always match owing to timing differences of financial transactions.

• For example, when a check is issued today by a company to a vendor for past purchases, it records a cash outflow in its statements today and lowers the balance of the bank in its books. However the actual balance of the bank account may not reduce till the check actually clears and hence there is a timing difference.

• These timing differences lead to difference between the balances of bank balances as per the company’s records and as per the balances of the bank statements and bank reconciliation statements help in reconciling these balances.

To Prepare:

Bank Reconciliation Statements

Answer to Problem 4APSA

Solution:

Particulars	Amount
Balance as per Bank Statements	$27,233.00
Add: Cash Deposited but not credited	$11,514.00
Less: Cheques issued but cancelled
No 3031	$1,482.00
No 3065	$382.00
No 3069	$2,281.00
Adjusted Bank Balance	$34,602.00

Particulars	Amount
Balance as per books	$27,497.00
Add: Cash from Notes	$8,000.00
Less: Rectification of error	$20.00
Less: Bank Charges debited directly	$45.00
Less: Bank Charges debited directly	$10.00
Less: Bank Charges debited directly	$25.00
Less: NSF Check	$795.00
Adjusted Book Balance	$34,602.00

Explanation of Solution

• In order to reconcile the balances of bank balances as per the company’s records and as per the balances of the bank statements, which may not always match owing to timing differences of financial transactions, Bank Reconciliation Statements are prepared.

• They help in identifying items that form part of the bank statements and company’s bank book, the effect of which has not yet been given in either the bank statements or the company’s bank book. Bank Reconciliation Statements ensures that there are no discrepancies in the effect of the financial transactions that affect cash and bank balances.

• The starting point of preparation of Bank Reconciliation Statements is the Adjusted Balance of the Cash and Bank as per books.

• Adjusted Balance as per books is calculated after giving the balance as per books the effect of adjusting entries that affect the balances as per books such as charges directly debited by the bank for services or effect of rectification of errors. Adjusted cash balances as per books enable

• The objective of the Bank Reconciliation Statements is to eliminate the effect of items that reduce or increase balances of cash and bank in the company’s books as well as per the balance of the bank statements.

• Balance as per Bank Statements is $27,233.00. Cash Deposited but not credited
  of $11,514.00 is added since the bank balance does not reflect this transaction.

• Cheque No 3031 of $1,482.00, No 3065 of $382.00 and No 3069 of $2,281.00 are issued but cancelled and not recorded and hence reduced from the bank balance to arrive at the adjusted bank balance.

• Balance as per books is $27,497.00. Cash from Notes is $8,000.00 collected by the bank and is added since the cash balance does not reflect this transaction.

• Rectification of error of $20.00 ($1,270 - $1,250), Bank Charges debited directly
  of $45.00 on Notes, $10.00 for NSF Check and $25.00 for bank services are reduced from cash balances to bring it at par with bank balances. NSF Check of $795.00 ($805 - $10) is also reduced from cash balances to bring it at par with bank balances.

• The adjusted balance as per books and adjusted balance as per bank statements is $34,602.

Conclusion

Hence the bank reconciliation statements have been prepared.

2)

To determine

Introduction:

Bank Reconciliation Statements

• Bank reconciliation statements are statements prepared to reconcile the balances of bank balances as per the company’s records and as per the balances of the bank statements, as they may not always match owing to timing differences of financial transactions.

• For example, when a check is issued today by a company to a vendor for past purchases, it records a cash outflow in its statements today and lowers the balance of the bank in its books. However the actual balance of the bank account may not reduce till the check actually clears and hence there is a timing difference.

• These timing differences lead to difference between the balances of bank balances as per the company’s records and as per the balances of the bank statements and bank reconciliation statements help in reconciling these balances.

Journal Entries

• Journal entries are the first step in recording financial transactions and preparation of financial statements.

• These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

• Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.

To Prepare:

Record journal entries to Reconcile Balance of Cash with Bank Balances

Answer to Problem 4APSA

Solution:

Date	Particulars	Debit ($)	Credit ($)
2015
July 31	Cash	$ 8,000
	Notes Receivable		$8,000
	(Being receipt of Notes recorded)
July 31	Bank Charges	$80
	Cash		$80
	(Being bank charges debited directly recorded)

Explanation of Solution

• Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

• Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.

• On July 31 Cash will be debited by $ 8,000 and Notes Receivable will be credited by $8,000 since receipt of Notes collected directly recorded

• On July 31Bank Charges will be debited by $80 and Cash will be credited by $80 since bank charges debited directly of $45.00 on Notes, $10.00 for NSF Check and $25.00 for bank services are recorded.

• Bank, Notes Receivable and Cash are assets and Bank charges are expenses. Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

Conclusion

Hence the transactions have been journalized.

3)

To determine

Introduction:

Bank Reconciliation Statements

• Bank reconciliation statements are statements prepared to reconcile the balances of bank balances as per the company’s records and as per the balances of the bank statements, as they may not always match owing to timing differences of financial transactions.

• For example, when a check is issued today by a company to a vendor for past purchases, it records a cash outflow in its statements today and lowers the balance of the bank in its books. However the actual balance of the bank account may not reduce till the check actually clears and hence there is a timing difference.

• These timing differences lead to difference between the balances of bank balances as per the company’s records and as per the balances of the bank statements and bank reconciliation statements help in reconciling these balances.

To Determine:

Effect of transactions on Adjusted bank and cash balances.

Answer to Problem 4APSA

Solution:

• If the cash balance is recorded as $27,947 instead of $27,497 then the bank balance would be over stated by $450.

• If the notes of $8,000 net of charges of $45 are recorded in the bank statement balance, the bank balance would be over stated by $7,955.

Explanation of Solution

• In order to reconcile the balances of bank balances as per the company’s records and as per the balances of the bank statements, which may not always match owing to timing differences of financial transactions, Bank Reconciliation Statements are prepared.

• They help in identifying items that form part of the bank statements and company’s bank book, the effect of which has not yet been given in either the bank statements or the company’s bank book. Bank Reconciliation Statements ensures that there are no discrepancies in the effect of the financial transactions that affect cash and bank balances.

• The starting point of preparation of Bank Reconciliation Statements is the Adjusted Balance of the Cash and Bank as per books.

• Adjusted Balance as per books is calculated after giving the balance as per books the effect of adjusting entries that affect the balances as per books such as charges directly debited by the bank for services or effect of rectification of errors.

• The objective of the Bank Reconciliation Statements is to eliminate the effect of items that reduce or increase balances of cash and bank in the company’s books as well as per the balance of the bank statements.

• If the starting cash balances are recorded incorrectly, i.e. as $27,947 instead of $27,497, the rest of bank reconciliation statement would be incorrect and overstated by $ 450. This is because, the starting point of preparation of Bank Reconciliation Statements is the Adjusted Balance of the Cash and Bank as per books.

• If this amount is recorded incorrectly, the entire bank reconciliation statement would be incorrect.

• If the notes receivable of $8,000 net of $45 are recorded in the bank statement balance, the bank balance would be over stated by $7,955. This is because, there would be a double entry of notes receivable since the amount is already recorded in the bank statements and recording it again, would lead to recording the entry twice.

Conclusion

Hence the effect of the incorrect transactions has been explained.