Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.
BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.
Sometimes, BRS is also prepared by auditors during the audit of financial statements.
The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:
The credit of bank interest,
Auto-debit of bank charges,
Delay in the clearing of cheques deposited, for which debit is already given by the accountant.
Late presentment of cheque issued by enterprise, for credit is already given by the account.
Differences also occur due to accounting errors like posting wrong amounts in the cashbook.
To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.
When a business deposits its money into a bank account, it receives a percentage of the amount deposited as bank interest. The journal entry for interest received from a bank is as follows: Since the Bank account is a current asset, it gets debited. This is in accordance with the modern rules of accRead more
When a business deposits its money into a bank account, it receives a percentage of the amount deposited as bank interest. The journal entry for interest received from a bank is as follows:
Since the Bank account is a current asset, it gets debited. This is in accordance with the modern rules of accounting where an increase in assets is debited while a decrease in assets is credited. According to the traditional rules (golden rules) of accounting, a bank account is classified under Personal account with the rule of “debit the receiver” and “credit the giver”. In the given journal entry bank account is receiving money and is hence debited.
Meanwhile, Bank interest is the income received by the business and according to the modern rule of accounting, an increase in incomes is credited and a decrease in incomes is debited. Whereas, considering the traditional rules (golden rules), bank interest comes under Nominal account where “all incomes are credited” and “all expenses are debited”. Therefore, considering these rules, bank interest is credited.
EXAMPLE
If Gregor Ltd has a bank account with HSBC, having an opening balance of Rs 10,000 earning an interest of 5% per annum, then the journal entry for interest received from the bank is recorded as
The interest amount is taken on the amount deposited in the bank (10,000 * 5%).
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received. The journal entry is: An entity may receive cash in the following evRead more
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received.
The journal entry is:
An entity may receive cash in the following events:
Sales of goods or provision of services
Payment from account receivables
Sale of assets.
Withdrawal of cash from the bank
Introduction of additional capital in the business
Subscription or donation received in case of non-profit oriented concerns.
Other income in cash
This list is not exhaustive. There may be many such events. However, the cash account will be always debited.
Rules of accounting applicable on the cash account
As per the golden rules of accounting, the cash account is a real account as represents an asset. For real accounts, the rule, “Debit the receiver and credit the giver” applies.
Hence, when cash is received, cash is debited and the source (giver) is credited.
As per modern rules of accounting, the cash account is an asset account. Assets accounts are debited when increased and credited when decreased.
Hence, at receipt of cash, cash is debited as cash is increased.
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
Raw Material
Work-in-Progress
Finished Goods
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
Closing Stock A/c (Dr.)
Amt
To Trading and Profit & Loss A/c
Amt
Trading and Profit & Loss A/c is credited because it is of profit to the company and hence will be shown on the credit side.
Closing Stock is debited as an asset for the company and it will be recorded for the first time in accounting books, hence, will be debited.
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement. It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by theRead more
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement.
It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by the customer or any other manufacturing default.
Sales allowances arise when any customer accepts the product at a lower price than the original price or, in other words, a reduction in the price charged by a seller, due to any problem related to the sold product like a quality issue, an incorrect price charged or shipment issue.
Sales allowances are created before the final billing is paid by the buyer.
Journal entry for sales return and allowances:
Dr.
Sales return and allowances
Amt
Cr.
Accounts receivable
Amt
Sales Return Account is debited because it is reverse of Sales Account which is credited at the time of sale.
Account Receivable Account is credited to reverse the debtors debited at the time of sale.
Hence Sales Return entry is just reverse of the entry recorded at the time of sale.
No, Goodwill cannot be called a fictitious asset. A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realRead more
No, Goodwill cannot be called a fictitious asset.
A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realized for extended periods. This is why they are recorded as assets. They are recorded in a single year and are amortized over the years. A fictitious asset is neither tangible nor intangible.
Examples of Fictitious Assets
Preliminary expenses
Promotional expenses
Discount on issue of shares/debentures etc.
Now, goodwill is an intangible asset that relates to the purchase of a company. It is the amount that a company pays over the net worth of the company being purchased. This can be because of its brand value, good customer base, etc. As a company’s reputation improves, its goodwill increases accordingly. Therefore, It does not have a tangible existence but it does have a monetary value. They are also recorded on the asset side of the balance sheet under the head “Intangible assets”.
Reason for not being a fictitious asset
Since goodwill is an asset and not an expense, it cannot be called a fictitious asset. Moreover, goodwill has a realizable value. Unlike fictitious assets, goodwill can be purchased or sold. Therefore, goodwill is termed as an intangible asset but not a fictitious asset. The major difference between an intangible asset and a fictitious asset is:
Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
Positive (Current assets > Current liabilities)
Zero (Current assets = Current liabilities)
Negative (Current assets < Current liabilities)
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.
Who is bank reconciliation statement prepared by?
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook. BRS is usuallRead more
Bank Reconciliation Statement or BRS is a statement prepared to reconcile the bank account balance as per the cashbook with the bank balance as per the passbook. This is done so because often the bank balance as per the cashbook does not match with the bank balance as per the passbook.
BRS is usually prepared by the accountant of an entity to find out the causes of the difference between the bank balance as per cashbook and the bank balance as reported in the passbook. The frequency of preparation of BRS is usually monthly. Nowadays, many enterprises have computerised accounting systems which help in automatic bank reconciliation.
Sometimes, BRS is also prepared by auditors during the audit of financial statements.
The balance of the bank account column of the cashbook does not match the bank balance as per the passbook. This is due to many transactions like the following that go unnoticed by the accountant:
Differences also occur due to accounting errors like posting wrong amounts in the cashbook.
To prepare the BRS, we have to start either with the bank balance as per cashbook, then add or subtract amounts to arrive at the bank balance as per passbook. Or we can do the vice verse. Here, the amounts we add or subtract are the amounts of items that are causes for the difference between the two balances.
See lessWhat is the journal entry for interest received from bank?
When a business deposits its money into a bank account, it receives a percentage of the amount deposited as bank interest. The journal entry for interest received from a bank is as follows: Since the Bank account is a current asset, it gets debited. This is in accordance with the modern rules of accRead more
When a business deposits its money into a bank account, it receives a percentage of the amount deposited as bank interest. The journal entry for interest received from a bank is as follows:
Since the Bank account is a current asset, it gets debited. This is in accordance with the modern rules of accounting where an increase in assets is debited while a decrease in assets is credited. According to the traditional rules (golden rules) of accounting, a bank account is classified under Personal account with the rule of “debit the receiver” and “credit the giver”. In the given journal entry bank account is receiving money and is hence debited.
Meanwhile, Bank interest is the income received by the business and according to the modern rule of accounting, an increase in incomes is credited and a decrease in incomes is debited. Whereas, considering the traditional rules (golden rules), bank interest comes under Nominal account where “all incomes are credited” and “all expenses are debited”. Therefore, considering these rules, bank interest is credited.
EXAMPLE
If Gregor Ltd has a bank account with HSBC, having an opening balance of Rs 10,000 earning an interest of 5% per annum, then the journal entry for interest received from the bank is recorded as
The interest amount is taken on the amount deposited in the bank (10,000 * 5%).
See lessWhat is the journal entry for received cash?
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received. The journal entry is: An entity may receive cash in the following evRead more
The receipt of cash is recorded by debiting the cash account to the account from which the cash is received. This source account may be the sales account, account receivable account or any other account from which cash is received.
The journal entry is:
An entity may receive cash in the following events:
This list is not exhaustive. There may be many such events. However, the cash account will be always debited.
Rules of accounting applicable on the cash account
As per the golden rules of accounting, the cash account is a real account as represents an asset. For real accounts, the rule, “Debit the receiver and credit the giver” applies.
Hence, when cash is received, cash is debited and the source (giver) is credited.
As per modern rules of accounting, the cash account is an asset account. Assets accounts are debited when increased and credited when decreased.
Hence, at receipt of cash, cash is debited as cash is increased.
See lessHow to do adjustment entry for closing stock?
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes: Raw Material Work-in-Progress Finished Goods Example: If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then valueRead more
The value of inventory at the end of the financial year or balance sheet date is called closing stock. Closing stock includes:
Example:
If the value of raw material is Rs 10,000, value of WIP is Rs 5,000 and value of Finished Goods is Rs 15,000 then value of Closing Stock will be Rs (10,000 + 5,000 + 15,000) = Rs 30,000
Adjustment entries are done on the accrual basis of accounting, that is, income is recorded when earned and not received and expenses are recorded when incurred and not paid. Adjustment entries are usually made before or after the preparation of the trial balance at the end of the accounting period.
If the entries are made after the preparation of the trial balance, then two adjustment entries are recorded while preparing Trading and Profit & Loss A/c.
Since closing stock is an item outside the trial balance, the double-entry would be:
The journal entry
The second adjustment would be to show closing stock on the balance sheet and since the closing stock is an asset it is shown under the head Current Assets.
In case where adjustment for Closing Stock is to be done before preparation of Trial Balance, then it will be shown on the credit side of the Trial Balance, since it is an asset for the company and will have a credit brought down balance as shown in the image.
Later, while preparing Balance Sheet, Closing Stock will be shown on the Asset side of the Balance Sheet.
See lessWhat are sales returns and allowances?
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement. It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by theRead more
Sales return shows the sale price of goods returned by customers. It is deducted from sales or gross sales in the income statement.
It is a contra revenue account that represents returns from the customers and deductions to the original selling price, in case of any defective product received by the customer or any other manufacturing default.
Sales allowances arise when any customer accepts the product at a lower price than the original price or, in other words, a reduction in the price charged by a seller, due to any problem related to the sold product like a quality issue, an incorrect price charged or shipment issue.
Sales allowances are created before the final billing is paid by the buyer.
Journal entry for sales return and allowances:
See lessIs goodwill fictitious asset?
No, Goodwill cannot be called a fictitious asset. A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realRead more
No, Goodwill cannot be called a fictitious asset.
A fictitious asset does not have any physical existence or realizable value. Although it is recorded in the assets column, it is not really an asset, rather it is an expense that is incurred during the accounting period. Its benefit, however, is realized for extended periods. This is why they are recorded as assets. They are recorded in a single year and are amortized over the years. A fictitious asset is neither tangible nor intangible.
Examples of Fictitious Assets
Now, goodwill is an intangible asset that relates to the purchase of a company. It is the amount that a company pays over the net worth of the company being purchased. This can be because of its brand value, good customer base, etc. As a company’s reputation improves, its goodwill increases accordingly. Therefore, It does not have a tangible existence but it does have a monetary value. They are also recorded on the asset side of the balance sheet under the head “Intangible assets”.
Reason for not being a fictitious asset
Since goodwill is an asset and not an expense, it cannot be called a fictitious asset. Moreover, goodwill has a realizable value. Unlike fictitious assets, goodwill can be purchased or sold. Therefore, goodwill is termed as an intangible asset but not a fictitious asset. The major difference between an intangible asset and a fictitious asset is:
See lessWhat is the meaning of negative working capital?
Negative working capital means the excess of current liabilities over current assets in an enterprise. Let’s understand what working capital is to get more clarity about negative working capital. Meaning of Working Capital Working Capital refers to the difference between current assets and current lRead more
Negative working capital means the excess of current liabilities over current assets in an enterprise.
Let’s understand what working capital is to get more clarity about negative working capital.
Meaning of Working Capital
Working Capital refers to the difference between current assets and current liabilities of a business.
Working Capital = Current Assets – Current Liabilities
It is the capital that an enterprise employs to run its daily operations. It indicates the short term liquidity or the capacity to pay off the current liabilities and pay for the daily operations.
Items under Current Assets and Current Liabilities
It is important to know about the items under current assets and current liabilities to understand the significance of working capital.
Current assets include cash and bank balance, accounts receivables, inventories, short term investments, prepaid expenses etc.
Current liabilities include accounts payable, short term loans, bank overdraft, interest on short term investment, outstanding salaries and wages etc.
Types of working capital
Since the working capital is just the difference between current assets and liabilities, the working capital can be one of the following:
Hence, negative working capital exists when current liabilities are more than current assets.
Implications of having negative working capital
Having negative working capital is not an ideal situation for an enterprise. Having negative working capital indicates that the enterprise is not in a position to pay off its current liabilities and there may be a cash crunch in the business.
An enterprise may have to finance its working capital requirements through long term finance sources if its working capital remains negative for quite a long time.
The ideal situation is to have current assets two times the current liabilities to maintain a good short term liquidity of the business i.e.
Current Assets = 2(Current Liabilities)
See less