unit1 coas

8/18/2019 Unit1 Coas

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BINAYAK ACADEMY,Gandhi Nagar 1st Line, Near NCC Ofce,

BerhampurBan !ec"nci#iati"n $tatement

The balance of the bank column in the double or triple column cash book represents thecustomer’s cash balance at bank. It should be the same as shown by his bank pass book

on any particular day. For every entry made in the cash book if there is a correspondingentry in the pass book(maintained by the banker) or vice versa, the bank balance will bethe same in both the books.

owever, it must be noted that the cash book and the pass book are maintained by twodi!erent parties and hence it is not certain that entry in one book will always have acorresponding entry in the other.

"ormally entries in the cash book should tally (agree) with those in the pass book and thebalances shown by both the books should be the same. #ut in practice, the balancesgenerally di!er. In case of disagreement in the balance of the cash book and the passbook, the need for preparing #ank $econciliation %tatement arises.

De%niti"n

&Ban rec"nci#iati"n statement is a list in which the various items that cause adi!erence between bank balance as per cash book and pass book on any given date areindicated’.

Need and Imp"rtance

'fter tracing the various items of di!erence, a bank reconciliation statement is prepared. The following are its advantages in which lies its importance.

i. The errors that might have taken place in the cash book in connection with banktransactions can be easily found.

ii. $egular preparation of bank reconciliation statement prevents frauds.

iii. It indirectly imposes moral check on the accounting sta!.

iv. #y the preparation of bank reconciliation statement, uncredited cheue can bedetected and steps can be taken for their collection.

Causes "& disagreement 'et(een the 'a#ance sh"(n ') the cash '"" and the'a#ance sh"(n ') the pass '""

1* Che+ues paid int" 'an 'ut n"t )et c"##ected

The cheues paid into bank for collection but not credited into the account of thecustomer, because the cheue is

i. "ot collected and credited till that date.

ii. ollected but the bank sta! has forgotten to make entry.

iii. ollected but credited to wrong account.

iv. *ishonoured.v. ollected for "o.I account but credited to "o.II account of the same customer.

's soon as the cheues are sent to the bank, entries are made in the debit side of thecash book (bank column). #ut, usually bank credit the customer’s account only when theyhave received payment from the bank concerned, in other words, when the cheues havebeen collected.

ence, there will be a time gap between the depositing of the cheues and the collectionby the bank.

For e+ample, #harat ompany imited deposited a cheue on -arch /, 001 for a sum of $s.1,000. The cheue was collected on 'pril 2, 001. In case the bank sends a statementof account upto -arch 13, 001, there will be a di!erence of $s 1,000 between thebalance shown by the cash book and the pass book.

* Che+ues issued 'ut n"t )et presented &"r pa)ment

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Berhampur The cheues issued but not debited customers account may be because the cheue is

i. not cashed till date.

ii. not presented till date.

iii. presented but dishonoured for some reasons or other.iv. lost by the party to whom the cheue was issued.

v. cashed out of "o.I account but wrongly debited to "o.II account of the samecustomer.

In all of the above cases, the entry in the cash book is made immediately on the issue of cheue but naturally the entry will be made by bank only when the cheue is presentedfor payment. Thus there will be a gap of some days between the entry for issue of cheuein the cash book and the entry for payment made in the pass book.

For e+ample, #harat ompany imited issued a cheue in favour of -r.4rishna on -arch/, 001 for a sum of $s.5,000. The cheue is presented for payment at the bank on 'pril2, 001. In case, bank sends a statement of account upto -arch 13, 001, there will be a

di!erence of $s.5,000 between the balance as shown by the cash book and the balance asshown by the pass book.

-* Am"unt credited ') the 'aner in the pass '"" (ith"ut the immediaten"(#edge "& the cust"mer

The following are some of the e+amples for the above statement

i. The bank might have collected rent, dividend, bills of e+change, interest etc., due for thecustomer as per standing instructions.

ii. %ome debtors might have directly paid into bank.

iii. #ank credits interest on the credit balance of the customer’s account.

iv. The banker has wrongly credited this account instead of some other account.

In all the above cases, the entry will be 6rst entered in the pass book. The customer willknow this only after he veri6es the entries in the pass book. %o there may be a time gap of some days before the customer includes entries made in the pass book.

For e+ample, the bank has credited #harat ompany imited’s account for interestamounting to $s.500 on -arch 13, 001. The bank prepares and sends a statement of account on -arch 13, 001.

If the customer receives the statement of account on 'pril 2, 001, there will be adi!erence of $s 500 bewteen the balance shown by the cash book and the balance shownby the pass book.

.* Am"unts de'ited ') the 'aner in the pass '"" (ith"ut the immediaten"(#edge "& the cust"mer

The following are some of the e+amples for this.

i. The banker has recorded bank charges, interest on overdraft etc.

ii. The banker has paid insurance premium, subscription for periodicals, etc. on behalf of the customer as per the standing instructions.

iii. The banker has wrongly debited this account instead of some other account.

iv. The banker has paid the bills payable of the customer as per standing instructions.

v. *ishonour of a cheue deposited and discounted bills receivable

In all the above cases, the entry will be 6rst entered in the pass book of the customer. 'ndthe customer will know only after he veri6es the entries in the pass book or statement of account. %o there may be a time gap of some days before the customer includes theentries made in the pass book.

For e+ample, the bank has debited #harat ompany imited’s account for its chargesamounting to $s. 50 on -arch 13, 001. In case, the bank sends a statement of account


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Berhampurupto -arch 13, 001, there will be a di!erence of $s.50 between the balance as per thecash book and the balance as per the pass book.

For e+ample, ' cheue for $s.5,000 dishonoured on -arch /, 001. In case, the banksends a statement of account upto -arch 13, 001 there will be a di!erence of $s.5,000between the balance as shown by the cash book and the balance as shown by the passbook.

'fter tracing the various items of di!erences, a #ank reconciliation statement is preparedby starting with the balance shown by any of the two books. #ut in actual practice, a #ankreconciliation statement is prepared by the customer starting with the balance as per cashbook and will ensure that the balance as per pass book is arrived at.

Ban "/erdra&t is an amount drawn over and above the actual balance kept in the bankaccount. This facility is available only to the current account holders. Interest will becharged for the amount overdrawn i.e., overdraft. The ash book will show a creditbalance i.e., unfavourable balance. The pass book will show a debit balance.

!eas"ns "& di0erence 'et(een cash '"" pass '"" 'a#ance2• Che+ue issued 'ut n"t presented &"r pa)ment2 7hen cheue are issued then

immediately make entry in the cash book. The cheue issued can be presented for

payment to the bank within si+ month from the date of cheue as per banking law. The

cheues are presented for payment after the e+pensesiry of the above period then

payment is refused by the bank. 3his che+ue is a#s" n"(n as sta#e che+ue. It is

possible at the time when the balances of the two books are being compared, thus more

chances of causing a disagreement b8w the two balances.

• Che+ue paid int" the 'an 'ut n"t )et c#eared2 's soon as the cheues are

deposited into the bank, the immediately entry is passed in the cash book. This will makeentry in pass book only when cheues are cleared. It is possible at the time when the

balances of the two books are being compared, thus more chances of causing a

disagreement b8w the two balances.

• Interest a##"(ed ') the 'an2 #ank might have credited the account of the

customer with the interest and may have made the entry in the pass book. It is possible

that the entry of such interest may not have been made by the customer in the cash book,

thus causing a disagreement b8w the two balances.

• Interest and Ban charges de'ited ') 'an2 %ometime bank charges interest

from the customer then immediately entry in the pass book but not in cash book. %o, inthis case when check the balance b8w cash and bank book then disagreement b8w the two

balances. %o, it is the main reason to create di!erence b8w two books.

• Interest, di/idend c"##ected ') the 'an2 sometime interest on government

security or dividend on share is collected by the bank and is credited to customer account.

If the entry does not appear in the cash book then balance will di!er.

• Direct pa)ment ') 'an2 %ometimes, understanding instruction from the clients

certain payment like insurance premium, club fees instalment etc. are made by the

bank. Then this entry is recorded only in the pass book. This entry is made in the cash

book only when the necessary intimation to that e!ect is received from the bank by theclient. The entries in the cash and pass book may be on di!erent dates.

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Berhampur• Direct pa)ment int" the 'an ') a cust"mer2 %ometimes, our customer

deposit money direct into the account in the bank. It is only recorded in the pass book not

in the cash book. It is possible at the time when the balances of the two books are being

compared, thus more chances of causing a disagreement b8w the two balances.

• Dish"n"ur "& 'i## disc"unted (ith the 'an2 %ometimes, customer gets their

bills discounted with the bank. If the bank is not able to get payment of these bills on the

due date. It will debit the customer account with the amount of the bills together with the

nothing charges if any. The customer will pass the entry in the cash book only. 7hen

balances of the two books are being compared, thus more chances of causing a

disagreement b8w the two balances.

• Dish"n"ur "& che+ue2 7hen the received cheues are deposited into bank, these

are immediately recorded in the cash book. 's a result cash book balance is increased. #ut

the deposited cheue is dishonoured due to lack of funds or due to other reasons. #ank

does not credit the amount of the depositor9 as a result disagreement b8w the two

balances.

• Err"r and "missi"ns2 If any error is committed either by the bank or by a

customer in the cash book while recording a transaction in their respective books, it

causing a disagreement b8w the two balances. the err"r ma) 'e2

3. :ndercast8overcast of receipt side or payment side.

. #ank charges omitted from the banks or recorded twice in the books.

1. 7rong carry forward of cash book balance.4"rmat

The format of #ank $econciliation %tatement when bank balance as per cash book is takenas the starting point.

#ank $econciliation %tatement as on ;;;;;;;..

heues issued but not presented for payment

Interest credited by bank but not recorded in cash book

*ebtors directly paid into bank but not recorded in cash

book

7rong credit by banker

ollections by banker as per customer standing

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Berhampur*

@

instructions

Total (#)

(Total ' A #)

ess> heues deposited but not credited by the bank

*ishonoured cheues appeared in the pass book but not

entered in the cash book

#ank charges as per pass book

7rong debit by banker


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Berhampurrecorded in the books of accounts. For e+ample, health condition of the chairman of thecompany, working conditions of the workers, sale policy ect. do not 6nd place inaccounting because it is not measured in terms of money.

1) C"st C"ncept27 #y this concept, the value of assets is to be determined on thebasic of historical cost. Transactions are entered in the books of accounts at the amountactually involved. For e+ample a machine purchased for $s. /0000 and may consider itworth $s. 300000, #ut the entry in the books of account will be made with $s. /0000 orthe amount actually paid. The cost concept does not mean that the assets will always beshown at cost. The assets may be recorded at the time of purchase but it may be reducedits value be charging depreciation.

-any assets de not have acuisition cost. uman assets of an enterprise are ane+ample. The cost concept fails to recogniCe such assets although it is a very importantasset of any organiCation.

2) G"ing C"ncern C"ncept27 'ccording to this concept the 6nancial statements arenormally prepared on the assumption that an enterprises is a going concern and willcontinue in operation for the foreseeable future. Transaction are therefore recorded insuch a manner that the bene6ts likely to accrue in future from money spent. It is becauseof this concept that 6+ed assets are recorded at their original cost and depreciation in asystematic manner without reference to their current realiCable value.

5) Dua# aspect C"ncept27 This concept is the care of double entry bookBkeeping.@very transaction or event has two aspect. If any event occurs, it is bound to have twoe!ect. For $s.50000, on the other hand stock will increase by $s.50000 and other liabilitywill increase by $s.50000. similarly is D starts a business with a capital of $s. 50000, whileon the other hand the business has to pay $s. 50000 to the proprietor which is taken asproprietor’s apital.

E) !ea#i8ati"n C"ncept2 7 It closely follows the cost concept any change in value of

assets is to be recorded only when the business realiCe it. i.e. either cash has beenreceived or a legal obligation to pay has been assumed by the customer. "o %ale can besaid to have taken place and no pro6t can be said to have arisen. It prevents business 6rmfrom inating their pro6t by recording sale and income that are likely to accrue, i.e.e+pensesected income or gain are not recorded.

G) Accrua# C"ncept27 :nder accrual concept the e!ect of transaction and otherevents are recogniCed on mercantile basic. 7hen they accrue and not as cash or a casheuivalent is received or paid and they are recorded in the accounting record and reportedin the 6nancial statements of the periods to which they relate 6nancial statementprepared on the accrual basic inform users not only of past events involving the paymentand receipt of cash but also of obligation to pay cash in the future and of resources that

represent cash to be received in the future. For @+ample>B -r. $aH buy clothing of $s.50000,a paying cash $s. 0000 and sells at $s. E0000 of which customer paid only $s.20000. %o his revenue is $s. E0000, not $s. 20000 cash received. @+penses. r ash is $s.50000, not $s. 0000 cash paid. %o the accrual concept based pro6t is $s. 30000($evenueB @+penses.)

/) Acc"unting 6eri"d C"ncept27 This is also called the concept of de6nite periodicityconcept as per going concept on inde6nite life of the entity is assumed for a businessentity it causes inconvenience to measure performance achieved by the entity in theordinary causes of business. Therefore, a small but workable fraction of time is chosen outof in6nite life cycle of the business entity for measure the performance and loading at the6nancial position 3 months period is normally adopted for this purpose accounting to thisconcept accounts should be prepared after every period J not t the end of the life of theentity. :sually this period is one calendar year. In India we follow from 3 st 'pril of a year to13st -arch of the immediately following years. "ow a day because of the need of

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Berhampurmanagement, 6nal accounts are prepared at shorter intervals of uarter year or in somecases a month such accounts are know an interim account.

K) Matching C"ncept27 In this concept, all e+penses. -atched with the revenue of that period should only be taken into consideration. In the 6nancial statements of theorganiCation. If any revenue is recogniCed that e+penses. $elated to earn that revenueshould also be recogniCed. This concept as it considers the occurrence of e+penses. 'ndincome and do not concentrate on actual inow or outow of cash. This leads toadHustment of certain items like prepaid and outstanding e+penses, unearned or accruedincome.

It is not necessary that every e+penses. Identity every income. %ome e+penses aredirectly related to the revenue and some are directly related to sale but rent, salaries etc.are recorded on accrual basis for a particular accounting period. In other words periodicityconcept has also been followed while applying matching concept.

30) O'9ecti/e C"ncept27 's per this concept, all accounting must be based onobHective evidence. In other words, the transactions recorded should be supported byveri6able documents. nly than auditors can verify information record as true orotherwise. The evidence should not be biased. It is for this reasons that assets arerecorded at historical cost and shown thereafter at historical lass depreciation. If theassets are shown on replacement cost basis, the obHectivity is lost and it become diLcultfor auditors to verify such value, however, in resent year replacement cost are used forspeci6c purpose as only they represent relevant costs. For e+ample, to 6nd out intrinsicvalue of share, we need replacement cost of assets and not the historical cost of theassets.

ACCO5N3ING CON:EN3ION$

The term M'ccounting onventionsN refers to the customs or traditions which areused as a guide in the preparation of accounting reports and statements. The conventions

are derived by usage and practice. The accountancy bodies of the world may charge anyof the convention to improve the uality of accounting information accounting conventionsneed not have universal application. Following are important accounting conventions inuse>

3) C"n/enti"n "& c"nsistenc)27 'ccording to this convention the accountingpractices should remain unchanged from one period to another. It reuires that workingrules once chosen should not be changed arbitrarily and without notice of the e!ect of change to those who use the accounts. For e+ample, stock should be valued in the samemanner every year. %imilarly depreciation is charged on 6+ed assets on the same methodyear after year. If this assumption is not followed, the fact should be disclosed togetherwith reasons.

The principle of consistency plays its role particularly when alternative accountingmethods is eually acceptable. 'ny change from one method to another method wouldresult in inconsistency9 they may seem to be inconsistent apparently. In case of valuationof stocks if the company applies the principle Mat cost or market price whichever is lessNand if this principle accordingly result in the valuation of stock in one year at cost and themarket price in the other year, there is no inconsistency here. It is only an application of the principle.

'n @nterprise should change its accounting policy in any of the following circumstancesonly.

(i) To bring the books of accounts in accordance with the issued accountingstandard.

(ii) To compliance with the provision of law.(iii) 7hen under changed circumstances it is felt that new method will reect moretrue and fair picture in the 6nancial statement.

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Berhampur) C"n/enti"n "& C"nser/atism27 This is the policy of playing sale game. It takesinto consideration all prospective losses but leaves all prospective pro6ts 6nancialstatements are usually drawn up on a conservative basis anticipated pro6t are ignored butanticipated losses are taken into account while drawing the statements following are the

e+amples of the application of the convention of conservatism. (i) -aking the provision for doubtful debts and discount on debtors.

(ii) Oaluation of the stock at cost price or market price whichever is less.

(iii) harging of small capital items, like crockery to revenue.

(iv) %howing Hoint life policy at surrender value as against the actual amount paid.

(v) "ot providing for discount on creditors.

1) C"n/enti"n "& Disc#"sure27 'part from statutory reuirement, good accountingpractice also demands that signi6cant information should be disclosed in 6nancialstatements. %uch disclosures can also be made through footnotes. The purpose of thisconvention is to communicate all material and relevant facts concerning 6nancial position

and results of operations to the users. The contents of balance sheet and pro6t and lossaccount are prescribed by law. These are designed to make disclosures of all materialsfacts compulsory. The practice of appending notes relative to various facts and itemswhich do not 6nd place in accounting statements is in pursuance to the convention of fulldisclosure of material facts. For e+ample9

(a) ontingent liability appearing as a note.

(b) -arket value of investments appearing as a note.

The convention of disclosure also applies to events occurring after the balancesheet date and the date on which the 6nancial statement are authoriCed for issue. %uchevents include bad debts, destruction of plant and euipment due to natural calamities’,maHor acuisition of another enterprises, etc. such events are likely to have a substantial

inuence on the earnings and 6nancial position of the enterprises. Their notBdisclosurewould a!ect the ability of the users for evaluations and decisions.

2) C"n/enti"n "& Materia#it)27 'ccording to this conventions, the accountant shouldattach importance to material detail and ignore insigni6cant details in the 6nancialstatement. In materiality principle, all the items having signi6cant economics e!ect on thebusiness of the enterprises should be disclosed in the 6nancial statement.

The term materiality is the subHective term. It is on the Hudgment, common senseand discretion of the accountant that which item is material and which is not. For e+amplestationery purchased by the organiCation though not used fully in the concept. %imilarlydepreciation small items like books, calculator is taken as 300P in the year if purchasethrough used by company for more than one year. This is because the amount of books or

calculator is very small to be shown in the balance sheet. It is the assets of the company.

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unit1 coas

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