Chapter 8, Problem 8SP

1)

To determine

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 for March 2016

Answer to Problem 8SP

Solution:

Particulars	Amount
Balance as per books	$ 68,057.00
Add: Items that increase cash balances
Checks issued but not presented	$ 128.00
Interest Earned	$ 33.00
Less: Items that decrease cash balances
Bank Charges debited by Bank Directly	$ 50.00
Bank Charges debited by Bank for Checks	$ 102.00
Rectification of Error	$ 500.00
Balance as per Bank Statements	$ 67,566.00

Particulars	Amount
Balance as per Bank Statements	$ 67,566.00
Add: Rectification of error	$ 500.00
Less: Checks issued but not presented	$ 128.00
Adjusted Bank Balance	$ 67,938.00
Add: Items that decrease Bank balances
Bank Charges debited by Bank Directly	$ 50.00
Bank Charges debited by Bank for Checks	$ 102.00
Less: Items that increase Bank balances
Interest Earned	$ 33.00
Balance as per books	$ 68,057.00

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 Balance of the Cash and Bank as per books. 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.

• Checks issued but not presented reduce the Balance of the Cash and Bank and are hence added to the Balance as per the books.

• Interest Earned by Company directly credited by the bank increases cash balances as per books and is hence added to the balance as per the books.

• Bank Charges debited by Bank Directly has not been reflected in the Balance as per the books and since it reduces the Balance as per the books, it is deducted.

• Rectification of Error results in decrease of cash balances since a higher amount was credited to the Balance of the Bank erroneously and the effect is reversed and is hence reduced to the Balance as per the books.

• Balance as per Bank Statements is arrived at after giving effect to all the financial transactions that have a timing difference.

• When the Balance as per bank is the starting point, 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 adjusted balance of the bank statements.

• The effect and impact of these entries on the balances as per the statement are considered and appropriate opposite effect is given. For instance, Checks issued but not cleared would lower the bank balances and are hence deducted from the balance as per the bank Statements.

• Another instance of this reconciliation is cash deposited but not reflecting in the account. In this case the bank balances would be higher and this is hence added to the balance as per the bank statements.

• Effect of items given to prepare bank reconciliation statements using cash balance as a starting point are opposite to the effect given to items to prepare the reconciliation statements using bank balance as a starting point.

• If the cash balances and adjusted bank balance tally, the bank reconciliation can be said to be completed. The reason adjusted bank balance is considered, is because the actual effect of the items alters the bank balances and reduces the gap between the balance as per the bank statements and balance as per books.

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.

Adjusting Journal Entries in Bank Reconciliation Statements:

• 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 / credited to reflect the effect of business transactions and events.

• In order to prepare the Bank Reconciliation Statements, effect of those items that directly affect the balances as per the bank statements, are journalized and the Cash and Bank Account, being an asset is appropriately debited or credited to give effect to these items.

• Examples of such items include: Interest directly credited to Bank Account, Bank Charges debited directly etc.

To Prepare:

Journal Entries to record effect to items in the Bank Statements

Answer to Problem 8SP

Solution:

Date	Account Titles	Debit	Credit
March
31	Miscellaneous Expenses	$ 50
	Bank		$ 50
	(Being bank charges recorded)
31	Miscellaneous Expenses	$ 102
	Bank		$ 102
	(Being bank charges for checks recorded)
31	Bank	$ 33
	Interest Revenue		$ 33
	(Being effect of error of utility expenses rectified.)

Explanation of Solution

Following is the bank reconciliation statement:

Particulars	Amount
Balance as per books	$ 68,057.00
Add: Items that increase cash balances
Checks issued but not presented	$ 128.00
Interest Earned	$ 33.00
Less: Items that decrease cash balances
Bank Charges debited by Bank Directly	$ 50.00
Bank Charges debited by Bank for Checks	$ 102.00
Rectification of Error	$ 500.00
Balance as per Bank Statements	$ 67,566.00

• 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.

• 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.

• Bank Charges debited by Bank Directly has not been reflected in the Balance as per the books and since it reduces the Balance as per the books, it is deducted.

• In order to give effect to this transaction in the books of accounts, Bank charges are debited and Bank is credited by $50. Bank Charges are expenses and must be debited in order to indicate increase in expense.

• Bank Charges debited by Bank Directly for checks has not been reflected in the Balance as per the books and since it reduces the Balance as per the books, it is deducted.

• In order to give effect to this transaction in the books of accounts, Bank charges are debited and Bank is credited by $102. Bank Charges are expenses and must be debited in order to indicate increase in expense.

• Bank Interest credited by Bank Directly has not been reflected in the Balance as per the books and since it increases the Balance as per the books, it is added.

• In order to give effect to this transaction in the books of accounts, Bank is debited and Bank Interest is credited by $50. Bank Interest are a source of Income and must be credited in order to indicate increase in income.

Conclusion

Hence the transactions are journalized to give effect to the Bank reconciliation statements.