TRIAL BALANCE, ERRORS AND CORRECTION

CONTROL ACCOUNTS AND BANK RECONCILIATION

RECONCILIATION

WHY PREPARE A BANK RECONCILIATION STATEMENT

 To provide a means of internal control which the auditors can rely on.
 To reveal the volume of transactions that the bank have not processed in their accounting
system by the end of the period under review, eg a month.
 To correct the errors that may have been made in the accounting records.
 To provide a verifiable balance at the bank that is to be included in the balance sheet
without any undue delay to the preparation of financial statements at the year-end.

CAUSES OF DISAGREEMENTS

 Direct debits:

Amounts debited on the bank statement but are not on the cashbook bank account.
Consequently if we are to update our cashbook the amounts should be recorded on the credit
side as they represent payments made directly by the bank on our behalf.

 Direct credits:

Amounts credited on the bank statement but are not on the cashbook bank account. When
updating the cashbook the amounts will have to be recorded on the debit side as they represent
receipt of cash directly through the bank.

 Standing order:

The name is derived from the activity that creates it. The business issues a standing order to the
bank by letter. The letter contains an instruction to the bank to pay a specified fixed amount on
a stated date at regular interval (eg quarterly). When the time is due for the matter the bank
acts on the standing order and pay the amount. The amount is shown on the debit side of the
bank statement and so it will be recorded on the credit side of the updated cashbook.

 Deposits not yet credited by the bank:

Such deposits are usually made on the last day of the month or year. The processing of the
deposit slips by the bank takes place the following day. So the bank statement for the month or
year under review does not show entries for such deposits, even though they have already been
recorded in the cash book.

 Unpresented cheques:
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These are cheques we issued to pay for goods or services but the cheques have not been taken to
the bank for cashing by the suppliers we paid. The cheques are already recorded in our cash
book but have not been reflected on the bank statement.

 Dishonoured cheques:

Cheques that once were received, recorded in the cash book but the bank refuses to honour
them for one reason or the other. Such cheques are returned to the customer (trade receivable)
who paid the amount, and the earlier receipt is reversed.

PREPARING A BANK RECONCILIATION STATEMENT

The following exercise will illustrate how to prepare a bank reconciliation statement.

EXERCISE

The bank columns in the cashbook for May 2018 and the bank statement for that month for G
LORD are as follows:

CASH BOOK
Debit side Credit side
$000 $000
May 1 Balance b/d 3 250 May 6 Kundananji 165
May 8 R Mbewe 720 May 13K Mwila 454
May 17B Jere 685 May 17P Muma 38
May 29F Banda 372 May 30Daka Bowling 44
May 31D Phiri 582 May 31Balance c/d 4 908
5 609 5 609
BANK STATEMENT

2005 DEBIT CREDIT BALANCE

$000 $000 M$000
may 1 Balance b/d 3 250
May 8 Cheque 720 3 970
May 9 Suwilanji 220 3 750
May 17 Cheque 685 4 435
May 18 K Mwila 454 3 981
May 19` P Muma 38 3 943
May 29 Cheque 372 4 315
May 30 GYM:Standing order 63 4 252
May 31 Akazipo: Trader’s credit 85 4 337
May 31 Bank charges 52 4 285

You are required to:

a) Write the cashbook up to date to take the above into account, and then
b) Draw up a bank reconciliation statement as at 31 May 2018
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SOLUTIONS MANUAL
1. Identify entries appearing on both the cash book and the bank statement. The matching field
is either the date or the description. The amount should be matched last. These entries
represent transactions that have been processed in both sets of accounts correctly.
2. Starting with the closing balance on the cash book, prepare an updated cashbook by
debiting amounts that appear in the credit column of the bank statement, and vice versa.
3. Starting with the revised cashbook balance in step 2, prepare a bank reconciliation
statement. The amounts recorded in the cashbook but not processed by the bank are
reversed accordingly.

In practice more rigorous verification is done since a lump sum shown on the bank statement
may have to be broken down into several transactions and matching entries identified
separately. Extensive schedules of unmatched entries are prepared, and totals used for
preparation of bank reconciliation statements.

SOLUTION

UPDATED CASHBOOK

$000 $ 000
May 31Balance b/d 4 908 May 31Suwilanji 220
May 31Akazipo 85 May 31GYM Club 63
May 31Bank Charges 52
May 31Balance c/d 4 658
5 609 5 609

June 1 Balance b/d 4 658

The rationale of how entries are treated in the bank reconciliation statement is that cashbook
entries not processed by the bank are reversed. Thus payments made are added to the
cashbook-revised balance as if they were not made, and receipts are deducted accordingly:

BANK RECONCILIATION STATEMENT as at 31 May 2005

$000
Balance per updated Cashbook 4 658
Add: Unpresented cheques
Kundananji 165
Daka Bowling 44
209
4 867
Less: Deposits not yet credited
D Phiri 582
Balance per bank statement 4 285
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The double entry for dishonoured cheques is similar to that done for bank charges when
updating the cashbook with entries that appeared on the bank statement but not in the
cashbook:

DR CR

Bank charges 52
Bank account (in CB) 52

GYN Club 63
Bank account (in CB) 63

Trade receivables (Dishonoured cheque) 337

Bank account (assumed fig) 337

EXERCISES

1. Your firm’s cash book shows a credit balance of $12 400 at 30 June 2005. Upon comparison
with the bank statement you determine that there are unpresented cheques totalling $4 500,
and a receipt of $1 400 which has not been passed through the bank. The bank statement
shows bank charges of $740 which have not been entered in the cash book.

What is the balance on the bank statement?

2. Your firm’s cash book at 30 September 2005 shows a balance at the bank of $24 900. A
comparison with the bank statement at the same date reveals the following differences:

 Unpresented cheques 8 400

 Dishonoured cheques 1 400
 Receipts not credited 4 700
 Bank charges 500

Find the correct balance on the cash book at 30 September 2005

3. Trotters Grotto Ltd prepared the following summary of receipts and payments account for
the month of April 2006:
$000 $000
Receipts 1 478 Balance b/d 770
Balance c/d 662 Payments 1370
2140 2140

Trotters Grotto Ltd make all payments by cheques and all monies received are banked
immediately.

Before preparing bank reconciliation an investigation revealed the following:

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a) The balance brought forward from March 2006 in the cash book should be $750 000
and not $770 000
b) A cheque drawn for 128 000 for advertising had been incorrectly entered in the cash book as
125 000.
c) Dividends received in the month of April of 89 000 were credited by the bank but no entries
were made in the cash book.
d) Business rates are paid directly by the bank under a standing order arrangement. An
amount of 120 000 was paid on 30 April 2006 and no entries have been made in the cash
book.
e) A cheque received from Kebby for 207 000 had been returned by the bank and marked
‘insuffficient funds’. No adjustment has been made in the cashbook.
f) A cheque for 35 000 for miscellaneous consumables was entered in the cashbook as a receipt
instead of as a payment.
g) Cheques received totalling 807 000 had been entered in the cashbook and paid into the bank,
but had not been credited by the bank until 3 May.
h) Cheques drawn amounting to 345 000 had not been presented to the bank for payment.
i) Bank service charges of 67 000 appearing on the bank statement have not been entered in the
cashbook.

REQUIRED:

i) Calculate the closing balance that should appear on the cashbook, taking into account the
appropriate information from the investigation.

ii) Prepare a bank reconciliation statement as at 30 April 2006.

BAD DEBTS, PROVISION FOR BAD DEBTS AND PROVISION FOR DISCOUNTS
ALLOWED

BAD DEBTS
credit sales increase business but customers might fail to pay

When a business fails to recover its money from credit customers, after making all efforts, the
amount is written off as a bad debt.

Bad debts are a loss to the business.

When a business sells goods to a customer on credit, double entry is

DR. – Customers account

CR. – Sales account

The customers account will appear in the receivables ledger as an asset.

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Example: Sale of goods on credit.

Beatle is in business as a wholesaler merchant.

During the year 2016, on 1 November it sold goods on credit to one of its regular customer Mr.
Fix, for $276,000.

In sales or receivable ledger.

Date details amount date details amount

Date details amount date details amount

ACCOUNTING FOR BAD DEBTS

Double entry:

DR. – Bad debts account (in general ledger)

CR. – Mr. Fix account (in receivable ledger)

At year end when preparing financial statements, the bad debts account is transferred to income
statement as a charge against profits.
Double entry is:

Dr. – Income statement (with total amount of bad debts)

Cr. – Bad debts account

When trial balance is extracted bad debts appear on debit side as an expense.

PROVISION FOR BAD AND DOUBTFUL DEBTS

Because of past experiences where some debts become bad, some organizations find it more
prudent to provide for future bad debts.

An allowance for doubtful debts is a general estimate of the percentage of debts which are not
expected to be repaid.
An aged schedule of receivables may help in estimating the allowance. It is well known that the
longer a debt is owing, the more likely that it will become bad debt.
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CONTROL ACCOUNTS AND BANK RECONCILIATION

Accounting for increase inprovision for doubtful debts

Dr. – Income statement
Cr. – provision for bad doubtful debts account

Example
In 20X8, receivables in Mafuso amounts to 54,000 after deducting 3,000 bad debts. It is decided
to maintain the 3% allowance for bad debts on receivables.
Example:

provision FOR CASH DISCOUNTS ON RECEIVABLES.

This is an allowance created to accommodate future cash discounts on receivables. It is treated

exactly like allowance for doubtful debts in terms of how it is accounted for.

The estimate of discounts to be allowed should be based on the net figure of receivables after
deducting allowances for doubtful debts.

Example: Allowance for cash discounts

The following information is available in the books of Home Made Furnishers Ltd as at 30 June,
end of each financial year.

Year ended 30 Receivables Allowance for Allowance for

June doubtful debts cash discounts
%

2016 20,000 1,000 3

2017 25,000 1,250 3
2018 23,000 1,200 3

2016 $20,000 - 1,000 = 19,000 X 3% = 570

2017 $25,000 - 1,250 = 23,750 X 3% = 713
2018 $23,000 - 1,200 = 21,800 X 3% = 654Dr.
Allowance for cash discounts on receivables account Cr.

2016
Balance c/d 570 Income statement 570
570 570
2017
Balance c/d 713 Balance b/d 570
___ Income statement 143
713 713
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20x8
Income statement 59 Balance b/d 713
Balance c/d 654 ___
713 713
Balance b/d 654

Income Statement
$ $
Gross profit for (2016, 2017, 2018) XX

Expenses:

2016 Allowance for discounts allowed (570)

2017 Increase in allowance for discounts allowed (143)
(2018) Add decrease in allowanced for discounts 59

In Balance Sheet

Current Assets $
2016 Receivables (20,000 – 1,000 - 570) 18,430

2017 Receivables (25,000 – 1,250 – 713) 23,037

2018 Receivables (23,000 – 1,200 – 654) 21,146

25.6A
On 1 January 20X8 there was a balance of £500 in the Provision for Doubtful Debts Account,
and it was decided to maintain the provision at 5% of the debtors at each year end.The debtors
on 31 December each year were:
2028 2029 2030
Trade receivables 12000 8000 8300

on 31 december 2030
Show the necessary entries for the three years ended 31 December 20X8 to 31 December 20X0
inclusive in the following:
(i ) the Provision for Doubtful Debts Account;
(ii ) the Profit and Loss Accounts.
(c) What is the difference between bad debts and provision for doubtful debts?
(d) On 1 January 20X0 Warren Mair owed Jason Dalgleish £130. On 25 August 20X0 Mair was
declared bankrupt. A payment of 30p in the £ was received in full settlement. The remaining
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balance was written off as a bad debt. Write up the account of Warren Mair in Jason
Dalgleish’s ledger.
(Northern Examinations and Assessment Board: GCSE) ‘
Part 4 l Adjustments for financial statements
282
25.7 The balance sheet as at 31 May 20X7 of Forest Traders Limited included a provision for
doubtful debts of £2,300. The company’s accounts for the year ended 31 May 20X8 are now
being
prepared. The company’s policy now is to relate the provision for doubtful debts to the age of
debts outstanding. The debts outstanding at 31 May 20X8 and the required provisions for
doubtful
debts are as follows:
Provision for
Debts outstanding Amount doubtful debts
£%
Up to 1 month 24,000 1
More than 1 month and up to 2 months 10,000 2
More than 2 months and up to 3 months 8,000 4
More than 3 months 3,000 5
Customers are allowed a cash discount of 21/2% for settlement of debts within one month. It is
now
proposed to make a provision for discounts to be allowed in the company’s accounts for the
year
ended 31 May 20X8.
Required:
Prepare the following accounts for the year ended 31 May 20X8 in the books of Forest Traders
Limited to record the above transactions:
(a) Provision for doubtful debts;
(b) Provision for discounts to be allowed on debtors.
(Association of Accounting Technicians)
25.8A A business makes a provision for doubtful debts of 3% of debtors, also a provision of 1%
for discount on debtors.
On 1 January 20X8 the balances brought forward on the relevant accounts were provision for
doubtful debts £930 and provision for discounts on debtors £301.
You are required to:
(a) Enter the balances in the appropriate accounts, using a separate Provision for Doubtful Debts
Account.
(b) During 20X8 the business incurred bad debts £1,110 and allowed discounts £362. On
31 December 20X8 debtors amounted to £42,800. Show the entries in the appropriate accounts
for the year 20X8, assuming that the business’s accounting year ends on 31 December 20X8,
also balance sheet extracts at 31 December 20X8.
25.9 J Blane commenced business on 1 January 20X6 and prepares her financial statements to 31
December every year. For the year ended 31 December 20X6, bad debts written off amounted to
£1,400. It was also found necessary to create a provision for doubtful debts of £2,600.
In 20X7, debts amounting to £2,200 proved bad and were written off. J Sweeny, whose debt of
£210 was written off as bad in 20X6, settled her account in full on 30 November 20X7. As at
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CONTROL ACCOUNTS AND BANK RECONCILIATION
31 December 20X7 total debts outstanding were £92,000. It was decided to bring the provision
up
to 4% of this figure on that date.
In 20X8, £3,800 debts were written off during the year, and another recovery of £320 was made
in respect of debts written off in 20X6. As at 31 December 20X8, total debts outstanding were
£72,000. The provision for doubtful debts is to be increased to 5% of this figure.
You are required to show for the years 20X6, 20X7 and 20X8, the
(a) Bad Debts Account.
(b) Bad Debts Recovered Account.
(c) Provision for Doubtful Debts Account.
(d) Extract from the Profit and Loss Account.
‘
25.10
(A) Explain why a provision may be made for doubtful debts.
(B) Explain the procedure to be followed when a customer whose debt has been written off as
bad subsequently pays the amount originally owing.
(C) On 1 January 20X7 D Watson had debtors of £25,000 on which he had made a provision for
doubtful debts of 3%.
During 20X7,
(i ) A Stewart who owed D Watson £1,200 was declared bankrupt and a settlement of 25p in the
£ was made, the balance being treated as a bad debt.
(ii ) Other bad debts written off during the year amounted to £2,300.
On 31 December 20X7 total debtors amounted to £24,300 but this requires to be adjusted as
follows:
(a) J Smith, a debtor owing £600, was known to be unable to pay and this amount was to be
written off.
(b) A cheque for £200 from S McIntosh was returned from the bank unpaid.
D Watson maintained his provision for doubtful debts at 3% debtors.
Required:
(1) For the financial year ended 31 December 20X7, show the entries in the following accounts:
(i ) Provision for doubtful debts
(ii ) Bad debts
(2) What is the effect on net profit of the change in the provision for doubtful debts?
(Scottish Qualifications Authority)
25.11A D Faculti started in business buying and selling law text books, on 1 January 20X3. At
the end of each of the next three years, his figures for debtors, before writing off any bad debts,
were as follows:
31 December 20X3 £30,000
31 December 20X4 £38,100
31 December 20X5 £4,750
Bad debts to be written off are as follows:
31 December 20X4 £2,100
31 December 20X5 £750
The provision for doubtful debts in each year is 5% of outstanding debtors.
Required:
(a) Prepare Faculti’s bad debts expense account and provision for doubtful debts account for
20X3 and 20X4.
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(b) The amounts due from debtors, B Roke, £70, and HA Ditt, £42 became irrecoverable in 20X6
and were written off. Prepare the ledger account entries to record these
write-offs.