BANK RECONCILIATION STATEMENT

Bank Reconciliation statement

Definition:-

                     A form that allows individuals to compare their personal bank account records to the bank's records of the individual's account balance in order to uncover any possible discrepancies.

Causes of Disagreement Between Bank statement and Cash book:

Usually the reasons for the disagreement are:

1.         That our banker might have allowed interests which have not yet been entered in our cash book.

2.        That our banker might have debited our account for any such item as interest on overdraft, commission for collecting cheque, incidental charges etc., which we have not entered in the cash book.

3.        That some of the cheque which we drew and for which we credited our bank account prior to the date of closing, were not presented at the bank and therefore, not debited in the bank statement.

4.       That some cheques or drafts which we have paid into bank for collection and for which we debited our bank account, were not realized within the due date of closing and therefore, not credited by the bank

5.       That cheques dishonored might have been debited in the bank statement but have not been given effect to in our books.

Our approach to the bank reconciliation is to prepare two schedules. The first schedule begins with the ending balance on the bank statement. We refer to this schedule as Step 1. The second schedule begins with the ending Cash account balance in the general ledger. We call this schedule Step 2.

Step 1.  Balance per Bank Statement on Aug. 31, 2010 $  3,490 Adjustments: 0      Deposits in transit +  1,450      Outstanding checks –  3,221      Bank errors 0  Adjusted/Corrected Balance per Bank $  1,719

Step 2.	Balance per Books on Aug. 31, 2010		$     967
	Adjustments:
	Bank service charges		–       35
	NSF checks & fees		–     110
	Check printing charges		–       80
	Interest earned		+        8
	Note Receivable collected by bank		+     960
	Errors in company's Cash account		+        9
	Adjusted/Corrected Balance per Books		$  1,719

IAS 2-Inventories

Techniques for estimating the cost of goods sold

 & ending inventory

Taking a physical inventory every month would be expensive and time consuming. Therefore if a business using a periodic inventory system prepared monthly or quarterly financial statements is may estimate the amount of its inventory and cost of goods sold except at the end of its annual period. One approach to making these estimates is called the gross profit method, another –used primarily by retails stores- is the retail method

The Gross Profit Method:

It is a simple and quick technique for estimating the cost of goods sold and the amount of inventory on hand. It is assume that the rate of gross profit earned in the preceding year will remain  the same for the current year when we know the rate of gross profit, we can the amount of net sales into two elements first is the gross profit and other cost of goods sold.

We view net sales as 100%. If the gross profit rate, for example, is 40% of net sales, the cost of goods sold must be 60%. The cost of goods sold is determined by deducting the gross profit rate from 100%.

When the gross profit rate is known, the ending inventory can be estimated by the following procedures:

1. Determine cost of goods available for sale.
2. Estimate cost of goods sold by multiplying the net sales by the cost ratio.
3. Deduct cost of goods sold from cost of goods available for sale to determine ending inventory.

Example:

In March of 2009, Matrix’s inventory was destroyed by fire.  Past history shows that Matrix’s normal Gross Profit ratio is 30% of Net Sales.  Here are some other balances in Matrix’s accounting records: Sales were $31,500; Sales Returns were $1,500; Beginning Inventory was $12,000, and the Net Cost of Goods Purchased was $20,500. Let’s estimate the amount of the inventory lost in the fire.

First, determine the Cost of Goods Available for Sale. This is calculated by adding Beginning Inventory and the Net Cost of Goods Purchased.  The Cost of Goods Available for Sale is $32,500.

Second, estimate Cost of Goods Sold by multiplying Net Sales by the cost ratio.  To accomplish this, remember that Net Sales minus Cost of Goods Sold equals Gross Profit.  Since the Gross Profit ratio is 30%, then the Cost of Goods Sold Ratio has to be 70%.  Net Sales is calculated as Sales minus Sales Returns and Sales Discounts.  In this problem, there are only Sales Returns. Seventy percent of $30,000 is $21,000, which is the estimate of the Cost of Goods Sold. 

Third, deduct the Cost of Goods Sold estimate from the Cost of Goods Available for Sale to determine Ending Inventory, which in this case is $11,500.

The Retail Method

The Retail Method of estimating inventory and cost of goods sold id similar to the gross profit method. The basic difference is that the retail method requires that management determine the value of ending inventory at retail prices. The retail value of ending inventory is then converted to its approximate cost using a coat ratio. To determine the cost ratio, , a business must keep track of goods available for sale at both coat and at retail prices.

Example:

Now, let’s use the information provided for Matrix with the Retail Method to estimate Matrix’s inventory and cost of goods sold.

First, we need to determine the cost ratio. This is calculated by dividing Goods Available for Sale at Cost by Goods Available for Sale at Retail.  Matrix’s cost ratio is 65%.

Next, take Matrix’s ending inventory at retail of $22,000 and multiply it by the cost ratio to arrive at Estimated Ending Inventory at cost. For Matrix, this is $14,300.

CLOSING ENTRIES

                         Closing Entries

Introduction:-

                             A journal entry made at the end of the accounting period. The closing entry is used to transfer data in the temporary accounts to the permanent balance sheet. The purpose of the closing entry is to bring the temporary journal account balances to zero for the next accounting period, which aids in keeping the accounts reconciled.

The sequence of the closing process and the associated closing entries is:

1. Close revenue accounts to income summary, by debiting revenue and crediting income summary.
2. Close expense accounts to income summary, by debiting income summary and crediting expense.
3. Close income summary to retained earnings, by debiting income summary and crediting retained earnings.
4. Close dividends to retained earnings, by debiting retained earnings and crediting dividends.

 1. Close revenue to Income summary:-

                                                                                                      Revenue accounts are closed by transferring their balance to the income summary account. If revenue account balance is $1100 then closing entry would be:

Closing Entry:-

Date	Particulars	Debit	Credit
	Revenue A/c	1100
	Income Summary A/c		1100

2. Close expenses to Income summary:-

                                                                                                        Expenses accounts are closed by transferring their balances to the income summary account. If the expenses account balance is $1200 then the closing entry would be:

Closing Entry:-

Date	Particulars	Debit	Credit
	Income Summary A/c	1200
	Expense A/c		1200

3. Close income summary to retained earnings:-

                                                                                                                                  The income summary account is closed to retained earnings. If the net balance of the income summary account is $800, then the closing entry would be:

Closing Entry:-

Date	Particulars	Debit	Credit
	Retained Earnings A/c	800
	Income Summary A/c		800

4. Close dividends to retained earnings:-

                                                                                                               The dividend account is closed to retained earnings. If $500 in dividend were paid during the period, the closing entry would be:

Closing Entry:-

Date	Particulars	Debit	Credit
	Retained Earnings A/c	500
	Dividend A/c		500