Bài giảng anh văn chuyên ngành 2 ac11 Đại học mở hà nội

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<b>LESSON 1 ACCRUALS AND PREPAYMENTS </b>

<b>CONTENTS </b>

<b>The objectives</b>: After studying this unit, students are expected to - Understand: + Expense accruals

+ Expense prepayments + Income accrual

+ Income prepayment

- Know how to make necessary adjustments in each case Introduction

I Accrual of expenses II Prepayment of expenses

III Accruals and prepayments in final accounts IV Income accrual

V Income prepayment Summary

Exercises Glossary

2 2 4 5 7 9 10 11 12

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In preparing ‘final accounts’ so far, you have included income and expense items as they appear in the trial balance. In reality, at the end of the financial year, some expenses will be outstanding and others will have been paid in advance for the next year. In the same way, some income might have been received in advance of the next year, while other income is yet to be received. To give a ‘truer’ picture of the affairs of the business, you need to make adjustments. In other words, you need to include the expenditure and income items that relate to the accounting year, whether or not you have paid or received cash for them.

The rent account will show the following payments for the year ending 31 December Year 4

<b>Rent </b>

Mar 28 Bank 1,000 Jun 29 Bank 1,000 Oct 3 Bank 1,000

The payment for the fourth quarter Year 4 will not appear in the books of John Turner until 7 January Year 5. Meanwhile he has occupied and had the benefit of the premises for 12 months: clearly it would be wrong to charge the rental payment for the last quarter of Year 4 against the income of Year 5. It is clear that the true charge for rent for Year 4 is

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4 quarters at £ 1,000 per quarter = £4,000

Therefore, £4,000 should be shown in the profit and loss account for Year 4. At the same time, at 31 December Year 4 £1,000 remains as a liability.

<b>Rent </b>

Mar 28 Bank 1,000 Jun 29 Bank 1,000 Oct 3 Bank 1,000 Dec 31 Balance c/d 1,000 4,000

Year 4 £ Dec31P/L 4,000

4,000 Year 5

Jan1 Balance b/d 1,000

The £4,000 credited to rent account will be matched by a debit entry for £4,000 in the profit and loss account. The ‘balance c/d £1,000’ entry at 31 December Year 4 is matched by a credit balance b/d £1,000 entry at 1 January Year 5. This £1,000 credit balance will appear in John Turner’s balance sheet at 31 December Year 4 as ‘an amount due within 12 months’.In the early stages of Year 5, John

Turner’s rent account would appear like this:

<b>Rent </b>

Jan7 Bank 1,000

Year 4 £ Jan1 Balance c/d 1,000

The liability is cleared by the payment on 7 January.

<b> In conclusion: </b>

- An accrual of expenses is added to the amount of that expense shown in the trial balance before including in the profit and loss account.

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<b>II. PREPAYMENT OF EXPENSES </b>

Definition: A prepayment of expenses is a payment made in advance of the accounting period to which it refers.

<b>Example: We will suppose that the trial balance of John Turner at 31 December Year 4 shows the </b>

insurance account to have a debit balance of 560. This includes 120 paid in advance for Year 5. The insurance account at 31 December Year 4 will appear as follows:

- A prepayment of expenses is included in the balance sheet as a current asset.

<b>III. ACCRUALS AND PREPAYMENTS IN FINAL ACCOUNTS </b>

In this part, we will see the effect of both types of adjustment upon the final accounts of W Trent

<b>W Trent </b>

<b>Trial Balance at 31 December Year 8 </b>

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Purchases Sales

Carriage inwards Debtors

Creditors Rent payable Office expenses Lighting and heating Advertising

Rent receivable Returns inwards Returns outwards Carriage outwards Furniture and fittings Motor vehicle

Cash at bank Cash in office

Stock at 1 Jan Year 8 Capital

Drawings

Dr £ 6,430 230 1,080 500 390 580 610 310 270 600 1,300 1,100 50 1,200 900 15,550

Cr £ 9,620 1,630

300 180

3,820 . 15,550

You are now told that we are required to note the following points concerning the balances shown in the trial balance at 31 December Year 8:

 Lighting and heating accrued £70  Advertising prepaid £110

<i><b>Trading and profit and loss account </b></i>

There is no effect on the gross profit so you do not need to include here the trading account.

<b>W Trent </b>

<b>Profit and Loss Account For year ended 31 December Year 8 </b>

Office expenses 390 Rent receivable 300

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(580 + 70) 650 Advertising(610-110) 500 Carriage outwards 270

The effect in this instance is to increase the net profit:

Net profit before adjustment (£1,880) + advertising prepaid (£110) – lighting and heating accrued (£70) = £1,920

<i>Less amounts due within 1 year </i>

Creditors Accrual Net current assets

<i>Financed by </i>

Capital – balance at 1 January Year 7

<i> Add net profit Less drawings </i>

£1,630 £70

£

2,300 1,080 110 1,100 50 4,640 1,700

1,920 900

£ 600 1,300 1,900

2,940 4,840

3,820 1,020 4,840

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<b>IV. INCOME ACCRUAL </b>

<b>Definition: Accrual of income means that income due for the financial year has not been received by the </b>

end of the year.

The income you are now concerned with is such as rent receivable or commission receivable.

As the income has been earned in a given year, it should be included as income for that year, even though payment has not yet been received.

<b>Example: John Turner sub-lets part of his business premises for an annual rental of £1,200 (payable </b>

quarterly). He has received payment as follows:

Year 4 payment for quarter ending £ April 10 31 March Year 4 300 July 8 30 June Year 4 300 Oct 12 30 September Year 4 300

The amount due for the last quarter of the year was received on 9 January Year 5. The account for year 4 appears as follows:

<b>Rent Receivable </b>

Year 4 £

Dec 31 P/L 1,200

1,200 Year 5

Jan1 Balance b/d 320

Year 4 £ April 10 Bank 300 July 8 Bank 300 Oct 12 Bank 300 Dec 31Balance c/d 300 1,200

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In Conclusion, an income accrual should be:

- added to the amount of that income shown in the trial balance before including in the profit and loss account.

- included in the balance sheet as a current asset.

<b>V. INCOME PREPAYMENT </b>

<b>Definition: An income prepayment has been received in advance of the next financial year. </b>

<b>Example: in Year 3, AB receives payment on sub-let premises as follows: </b>

Year 3 payment for quarter ending £ Jan 9 31 March Year 3 100

Jun 28 30 September Year 3 100 Sep 25 31 December Year 3 100

The unadjusted income for Year 3 is 5 x 100 = 500. The true income is 4 x 100 = 400. The fifth quarterly payment correctly relates to Year 4 and should be carried down for that year.

The rent receivable account for year 3 appears as follows:

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Jan 1 Balance b/d 100

In conclusion, an income prepayment should be:

- deducted from the amount of income for the year before being included in the profit and loss account. - carried down as ‘amount due within 1 year’ in the balance sheet.

<b>SUMMARY </b>

Important points to remember from this chapter:

1. Expenses and incomes need to be matched to the correct accounting period. 2. Expenses and incomes may be accrued or prepaid at the end of accounting period.

3. To adjust for an expense accrual, the accrued amount is added to the figure shown in the trial balance when including the item in the profit and loss account. The amount is then shown as a current liability in the balance sheet.

4. To adjust for an expense prepayment, the prepaid amount is subtracted from the figure shown in the trial balance when including the item in the profit and loss account. The amount is then shown as a current asset in the balance sheet.

5. To adjust for an income accrual, the accrued amount is added to the figure shown in the trial balance when including the item in the profit and loss account. The amount is then shown as a current asset in the balance sheet.

6. To adjust for an income prepayment, the prepaid amount is subtracted from the figure shown in the trial balance when including the item in the profit and loss account. The amount is then shown as a current liability in the balance sheet.

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2. From the following information prepare T Swinton’s office stationery account for the two years ended 31 December Yearr 3 and 31 December Year 4 respectively.

<b>Year 3 </b>

Jan 1 Jan 1- Dec 31 Dec 31

<b>Year 4 </b>

Jan 1- Dec 31 Dec 31

Balance of stationery in stock 615

Office stationery purchased by cheque during the year 2,020.

Stock of office stationery valued at 490.

Office stationery purchased by cheque during the year 1,960. Stock of office stationery valued at 580.

<b>GLOSSARY </b>

Accrual (n) Annual (n) Adjustment (n) Deduct (v)

<i>Khoản dồn lại, tích lại Hàng năm </i>

<i>Sự điều chỉnh Trừ </i>

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Final accounts (n) Insurance (n) Overstate (v) Prepayment (n) Represent (v)

Expense accrual (n) Expense Prepayment (n) Income accrual (n) Income prepayment (n) Outstanding (adj)

<i>Tài khoản quyết tốn Bảo hiểm </i>

<i>Nói q, phóng đại </i>

<i>Sự trả trước, tiền trả trước Đại diện </i>

<i>Chi phí tích lại Chi phí trả trước </i>

<i>Thu nhập tích lại (chưa nhận khi đến hạn) Thu nhập trả trước (nhận được trước hạn) Chưa chi trả (nợ) </i>

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<b>LESSON 2 DEPRECIATION OF FIXED ASSETS </b>

<b>CONTENTS </b>

Introduction

I Methods of calculating depreciation of fixed assets I.1 Straight line method

I.2 Reducing balance method

II Book-keeping entries for depreciation III Depreciation and final accounts

III.1 Profit and Loss account III.2 Balance sheet

IV Sale of fixed assets Summary

Exercises Glossary

2 3 3 3 4 6 6 6 7 11 12 13

<b>The objectives</b>: After studying this unit, students are expected to - understand the need to allow for fixed asset depreciation;

- calculate depreciation and show accounts by each of the two methods: the straight line method and the reducing balance method.

- show accounts for the disposal of a depreciation fixed asset.

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<b>INTRODUCTION </b>

Most fixed assets wear out and have to be replaced. Even if they do not wear out physically, they may become unsuitable for the needs of the business and therefore, need to be replaced. In either way, there is likely to be a fall in value. You could either scrap the asset or find a buyer for it at a price probably much less than you paid for it.

If you take no account year-by-year of the fall in value of fixed assets, the accounts are presenting a false picture:

 The value of assets in the balance sheet is over-stated.  The annual profit figures are over-stated.

The problem is how you take account of this fall in asset value. Depreciation is the estimate of the fall in value of fixed assets over a period of time.

Original cost of asset - estimated disposal amount = amount of depreciation

<b> £10,000 – £1,000 = £ 9,000 </b>

A key word here is estimate.

 First, you are estimating the working life of the asset, e.g. the number of years of use.  Secondly, you are estimating the amount to be received on disposal.

Only by disposing of the asset do you know the actual amount of the fall in value. So allowing for depreciation is an approximation. In the example above, it is supposed that the asset will have a working life of 4 years. So annual depreciation may be calculated as:

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(ii) The eventual disposal value is estimated

(iii) Original cost less disposal value = total amount to be written down

(iv) Total amount to be written down ÷ number of years = annual depreciation charge

<b>Example: a machine which is bought for 40,000 is reckoned to have a life of 4 years and a disposal value </b>

at the end of that time of 4,000. The annual depreciation charge would be: (£40,000 – £4,000) ÷ 4 = £9,000

If the asset were reckoned to have zero scrap value, then the original cost becomes the total amount to be written down, ie using the above figures.

£40,000 ÷ 4 = £10,000

<b>I.2. Reducing balance method </b>

This is also termed the diminishing balance method. With this method, a fixed percentage is written off the reduced balance each year. The reduced balance is the cost of the asset less depreciation to date.

<b>Example: a machine is bought for £20,000 and depreciation is to be provided for, at 40%. This </b>

calculation for the first four years would be as follows:

Cost

Year 1 depreciation (40%)

Year 2 depreciation: 40% of £12,000 Year 3 depreciation: 40% of £7,200

Year 4 depreciation: 40% of £4,320

£ 20,000 8,000 12,000 4,800 7,200 2,880 4,320 1,728 2,592

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<b>II. BOOK-KEEPING ENTRIES FOR DEPRECIATION </b>

A number of years ago, it was usual to show the depreciation in the fixed asset account. You will concentrate on the method now widely in use which:

 Shows the fixed asset account at cost price, without any adjustment for depreciation.

 Has a separate provision for depreciation account, which accumulates year-by-year the amount of the depreciation.

<b>Example: the vehicle was purchased by cheque on 1 January Year 1. The financial year in this case ends </b>

<b>Example: a vehicle, purchased for 40,000 is expected to have a working life of 4 years and then to be </b>

disposed of for 2,500. Using the straight line method, annual depreciation is calculated as follows: (£40,000 – £ 2,500) ÷ 4 = £9,375 per year

<b>Provision for Depreciation on Vehicle </b>

Year 2 £ Dec 31 Balance c/d 18,750

18,750

Dec 31 Balance c/d 28,125

Year 3

Jan 1 Balance b/d 18,750

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28,125

Dec 31 P/L 9,375

28,125 Year 4

Jan 1 Balance b/d 28,125 Dec 31 P/L 9,375

It is only necessary to bring down the credit balance once two entries have been made, it is at the end of Year 2.

Note that

 The provision for depreciation account builds up the amounts of depreciation year by year.  The asset account has a debit balance (unchanged in amount)

 Provision for depreciation has a credit balance

 The difference between the two balances represents the ‘book value’ or ‘net book value’ of the asset.

<b>III. DEPRECIATION AND FINAL ACCOUNTS III.1. Profit and loss account </b>

As shown in the provision for depreciation accounts above, the matching debit entry is in the profit and loss account. So, the double entry for depreciation is:

 Debit profit and loss account

 Credit provision for depreciation account

<b>III.2. Balance sheet </b>

Normally each fixed asset is shown at cost less total depreciation to date, resulting in a net book value. The following is a typical layout:

depreciation

Net

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Buildings Machinery Motor vehicles

£ 80,000 30,000 15,000 125,000

£

16,000 7,000 23,000

£ 80,000 14,000 8,000 102,000

The 102,000 would be added to the remainder of the assets in the balance sheet.

<b>IV. SALE OF FIXED ASSETS </b>

When a fixed asset is sold, there are three elements to take account of:  The original cost of the asset

 The depreciation provided to date  The sale proceeds

It is worth bearing in mind that the amount actually received for the asset may well be different from that assumed at the time when the depreciation was decided. Depreciation, remember, is necessarily an estimate. Moreover, the asset may be sold or disposed of earlier than was originally reckoned. Consequently there is likely to be either a ‘loss’ of ‘a profit’ arising out of the sale.

The book-keeping method used here for dealing with the sale of a fixed asset is that required to be used in LCCIEB exams. It involves the use of a disposals account.

The book-keeping entries are:  The original cost of the asset

- debit disposals account - credit fixed asset account

 The depreciation provided to date

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- debit provision for depreciation account - credit disposals account

 The sale proceeds

- debit bank/ cash account - credit disposals account  Loss on sale

- debit profit and loss account - credit disposals account  Profit on sale

- debit disposals account - credit profit and loss account

<b>Example: </b>

<i><b>Asset sold at a profit: </b></i>

Using the last set of data, and assuming that the straight line method of depreciation has been used, we will suppose that the vehicle is sold on 31 December Year 3 for £13,500. The provision for depreciation account at that stage will have a credit balance of £28,125.

<i>Calculation of profit/loss: </i>

Cost of vehicle

<i>Less provision for depreciation </i>

to 31 Dec Year 3 Sale price

Profit on sale

£ 40,000 28,125 11,875 13,500 1,625

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The book-keeping entries, excluding bank account, are:

<b>Vehicle Account </b>

Year 1 £

Year 3 £

Dec 31 Disposal of vehicles 40,000

<b>Provision for Depreciation on Vehicle </b>

Dec 31 Balance c/d 28,125

28,125

Jan 1 Balance b/d 18,750 Dec 31 P/L 9,375

28,125

<b>Disposal of Vehicle </b>

Dec 31 Vehicle 28,125 “ 31 P/L-profit on sale 1,625 41,625

Dec 31 Provision for Depreciation 28,125

Dec 31 Bank 13,500 41,625

<b>Profit and Loss account: year ended 31 December Year 3 </b>

£ Profit on sale of vehicle 1,625

<i><b>Asset at a loss: </b></i>

Using the same data, we will suppose that the vehicle is sold for 11,200.

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<i>Calculation of profit/loss: </i>

Cost of vehicle

<i>Less provision for depreciation </i>

to 31 Dec Year 3 Sale price

Loss on sale

£ 40,000 28,125 11,875 13,200 (675)

Dec 31 Disposal of vehicles 40,000

<b>Provision for Depreciation on Vehicle </b>

Dec 31 Balance c/d 28,125

28,125

Jan 1 Balance b/d 18,750 Dec 31 P/L 9,375

28,125

<b>Disposal of Vehicle </b>

Dec 31 Vehicle 40,000 . 40,000

Dec 31 Provision for Depreciation 28,125

“ 31 Bank 11,200 “ 31 P/L (loss on sale) 675 40,000

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<b>Profit and Loss account: year ended 31 December Year 3 </b>

£ Loss on sale of vehicle 675

<b>SUMMARY </b>

Important points to remember from this chapter:

1. Depreciation is an estimate fall in value of fixed assets over a period of time.

2. The main causes of depreciation are physical deterioration, economic factors and time factors.

3. The depreciation charge is an estimate of the value consumed each financial year, it is not a cash expense.

4. In the straight line method (also called the fixed instalment method), the estimated disposal value is subtracted from the cost to find the written down value, which is then divided by the estimated number of years in use. This gives the depreciation charge for each year.

5. In the reducing balance method or diminishing balance method a fixed percentage is written off the reduced balance each year.

6. Depreciation is accumulated over the years of the asset’s life in a provision for depreciation account. 7. To record depreciation in the books the provision for depreciation account is credited while the profit and loss accounts is debited.

8. In the balance sheet, the aggregate depreciation to date is subtracted from the cost of the fixed asset to show its net book value.

<b>EXERCISES </b>

T Swift is a sole trader whose financial year ends on 31 December. On 1 January Year 4 he bought a delivery vehicle for £7,500 for use in the business. He is considering which method of depreciation to apply: the straight line method or the reducing balance method.

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If Swift uses the straight line method, he would allow for 4 years use of the vehicle in the business, followed by a disposal value of £500. For the reducing balance method, he would write off 50% per annum of the balance of the vehicle at each year end.

(i) the delivery vehicle account.

(ii) the provision for depreciation on delivery vehicle account.

<b>GLOSSARY </b>

Calculate (v) Current assets (n) Depreciation (n) Disposal value (n) Fixed assets (n) Loss on sale (n) Original cost (n) Ownership (n)

Provision for depreciation (n) Profit on sale (n)

Reducing balance method (n) Sale proceeds (n)

Straightline method (n) Worthless (adj)

<i>Tính tốn </i>

<i>Tái sản lưu động Khấu hao </i>

<i>Giá trị thanh lý Tài sản cố định </i>

<i>Lỗ do thanh lý tài sản cố định Nguyên giá </i>

<i>Sự sở hữu </i>

<i>Quỹ dự phòng khấu hao </i>

<i>Lãi do thanh lý tài sản cố định Phương pháp số dư giảm dần Tiền bán hàng (bán tài sản cố định) Phương pháp trực tuyến </i>

<i>Khơng có giá trị </i>

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<b>LESSON 3 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS </b>

<b>CONTENTS </b>

Introduction I Bad debts

II Provision for doubtful debts II.1. Increase in the provision II.2. Decrease in the provision III Bad debts recovered

Summary Exercises Glossary

2 2 4 5 7 8 9 10 12

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<b>LESSON 3 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS </b>

<b>The objectives</b>

: After studying this unit, students should be able to:

- record the accounting entries for writing off individual debtor balances, in whole or in part, using a Bad Debts account;

- record the end-of-period transfer of total debts written off as bad debts to the Profit and Loss Account; - record the recovery of debts previously written off.

<b>INTRODUCTION </b>

It is, unfortunately, likely that some of the customers who have bought goods (or services) on credit will never pay their accounts, despite efforts to recover the amounts from them. Such debts become ‘bad debts’ and a decision has to be made to write off such debts. In some cases customers will pay part of the amount due, the remainder being written off. Any debts written off are effectively an expense of the business and accordingly must be charged against current profits by means of a debit entry in the profit and loss account. This will be achieved through the use of a bad debts account.

<b>I. BAD DEBTS </b>

<b>Example: two customers, L Mellon and T Swanson are overdue debtors for goods bought from us during </b>

Year 4. The following accounts appear in the sales ledger:

Year 4 £ Oct 8 Bank 120

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T Swanson has managed to pay part of the amount due but at the end of Year 4 the decision is taken to write off the whole of L Mellon’s debt and the remainder of that of T Swanson

420 Year 4 £ Oct 8 Bank 120 Dec 31 Bad debts 300

420

<b>Bad debts </b>

Year 4 £

Dec31 LMellon 360

“ 31 T Swanson 300

600

Dec 31 P/L 660

660

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<b>Profit and loss account: Year ended 31 December Year 4 </b>

£

Bad debts 660

You will appreciate that the book-keeping rule for bad debts is to (1) Debit bad debts account

Credit individual debtor accounts  with the amount written off.

(2) Debit profit and loss account Credit bad debts account

 with the total figure at the end of the accounting period.

<b>II. PROVISION FOR DOUBTFUL DEBTS </b>

It is common for business to allow for a certain level of debts becoming bad during the course of the year. This would be from experience, and might be set a percentage of debtors. A provision for doubtful debts then created and maintained, the term ‘doubtful’ meaning that his allowing for debtors who may not pay.

The provision for doubtful debts needs to be distinguished from the writing off of bad debts. Two distinct stages are involved.

<b>Example: a gross debtors is calculated, say 18,620 at 31 December Year 6, obtained by totaling the </b>

balances on debtor accounts in the sales ledger.

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 Of this, some individual debtor accounts have yet to be written off bad debts.

 The provision for doubtful debts (4%) is then calculated on the total of the remaining debtors. The calculation may be shown thus:

Gross debtors’ figure

<i>Less bad debts written off </i>

<i>Less provision for doubtful debts at 4% </i>

Net debtors

£ 18,620 620 18,000 720 17,280

The provision having been calculated, the book-keeping entries are then made. On the initial creation of the provision, this is as follows:

<b>Profit and loss account: Year ended 31 December Year 6 </b>

£ Provision for doubtful debts 720

<b>Provision for doubtful debts </b>

£ Year 6

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Dec 31 P/L 720

<b>II.1. Increase in the provision </b>

Let it be assumed that at 31 December Year 7, the amount of debtors after writing off bad debts is £20,000. The 4% rate is unchanged. The calculation then becomes:

The book-keeping entries will then be:

<b>Profit and loss account: Year ended 31 December Year 7 </b>

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£ Year 7

Dec 31 Balance c/d 800

800

£ Year 6

Dec 31 P/L 720 Year 7

Dec 31 P/L 80 800 Year 8

Jan 1 Balance b/d 800

<b>II.2. Decrease in the provision </b>

Suppose that at 31 December Year 8, the amount of debtors after writing off bad debts is 19,000. The business has been more careful in granting credit to potential customers and so believes it can reduce the rate of the provision to 3%. The calculation is then:

3% of £19,000

Less amount of existing provision Decrease in the provision

£ 570 800 (230)

The book-keeping entries will be:

<b>Profit and loss account: Year ended 31 December Year 8 </b>

£

<small>Reduction in provision for doubtful debts </small>230

<b>Provision for doubtful debts </b>

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£ Year 7

Dec 31 Balance c/d 800

800

Year 8

Dec 31 P/L 230

“ 31 Balance c/d 570

800

£ Year 6

Dec 31 P/L 720 Year 7

Dec 31 P/L 80 800 Year 8

Jan 1 Balance b/d 800

800 Year 9

Jan 1 Balance b/d 570

<b>III. BAD DEBTS RECOVERED </b>

Occasionally debts previously written off are recovered. If recovered within the same financial year as the debt was written off, the book-keeping entries would be:

Dr debtor Cr bad debts Dr cash/bank Cr debtor

If recovered after the year of write-off, the entries would be: Dr debtor Cr bad debts recovered

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<b> SUMMARY </b>

Important point to remember from this chapter:

1. Bad debts are debts that the business is unable to collect.

2. Bad debts are an expense to the business and are charged against the current profit for the year. 3. Once a debt has been declared as ‘bad’, it must be written out of the accounts by crediting the debtor’s account and debiting the bad debt account.

4. A part of a debt may be written off as a bad debt if the debtor is not able to pay all of what is owed. 5. A bad debt recovered account is used to record the recovery of bad debts after the financial year in which they were written off.

<b>EXERCISES </b>

1. On 31 December Year 4, the end of the financial year, G Thorpe balanced his accounts and found that his total debtors amounted to <small>£</small>24,000. Included in this amount were irrecoverable debts of <small>£</small>1,600 which de decided to write off as bad debts. There was no provision for doubtful debts. Therefore, he decided to make a provision for doubtful debts amounting to 5% of his debtors.

At 31 December Year 5, his debtors totaled <small>£</small>29,000 and included in this amount were irrecoverable debts amounting to <small>£</small>1,900. He again decided to write off the irrecoverable debts and adjust the provision for doubtful debts to 5% of his debtors.

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On 31 December Year 6, his debtors totaled <small>£</small>23,000 but there were no irrecoverable debts. He again decided to adjust the provision for doubtful debts to 5% of his debtors.

<b>REQUIRED </b>

Prepare the following accounts for the years ended 31 December Years 4, 5 and 6. : (i) Bad debts

(ii) Provision for doubtful debts.

2. The following data is available in relation to Thermogen Suppliers:

<small>Balance of debtors at 31 December Year 6 – before writing off bad debts Bad debts written off in Year 6 </small>

<small>A provision of 2% of debtors for doubtful debts exists at 31 December Year 6 </small>

<small>Bad debts written off in Year 7 </small>

<small>Balance of debtors at 31 December Year 7 – before writing off bad debts The provision for doubtful debts is increased to 4% as at 31 December Year 7 </small>

<small>Bad debts written off in Year 8 </small>

<small>Balance of debtors at 31 December Year 8-after writing off bad debts The provision for doubtful debts is reduced to 3% as at 31 December Year 8 </small>

<small> £ 81,600 1,200 </small>

<small> 1,800 122,700 </small>

<small> 2,100 103,500 </small>

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<i>Nợ xấu </i>

<i>Nợ xấu được hoàn trả lại Sự giảm </i>

<i>Phụ thuộc vào Tổng nợ Sự tăng Cá nhân Duy trì Hoàn lại </i>

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Remainder (n) Percentage (n)

Provision for doubtful debts(n) Writing off (n)

<i>Số còn lại Tỷ lệ phần trăm </i>

<i>Quỹ dự phịng nợ khó địi Sự xóa sổ </i>

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<b>LESSON 4 BANK RECONCILATION STATEMENTS </b>

<b>CONTENTS </b>

<b>The objectives</b>: After studying this chapter, students should be able to: - understand the need for reconciling the cash book with the bank statement; - update the cash book from the bank statement;

- prepare a bank reconciliation statement. Introduction

I. Reconciling the bank statement with the cash book I.1. Timing differences

I.2. Updating the cash book II. Dishonored cheques

III. Bank overdraft Summary

Exercises Glossary

2 2 2 3 6 8 9 11 13

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<b>INTRODUCTION </b>

You have already learned the cash book in the previous credit of book-keeping. At intervals, e.g. weekly or monthly, a statement will be received from the bank – the bank statement – setting out the account as recorded by the bank.

There are likely to be differences between the two, arising from:

 Timing differences, e.g. a cheque paid into the account which the bank has not yet recorded.  The cash book not yet showing items which appear on the bank statement, ie the bank statement

is the means by which the customer (the holder of the account) ‘pick up’ such items in order to update the cash book.

<b>I. RECONCILING THE BANK STATEMENT WITH THE CASH BOOK </b>

The bank statement needs to be reconciled with the cash book and it is the timing differences which will appear in the bank reconciliation statement.

<b>I.1. Timing differences </b>

The two main timing differences between the cash book (bank columns) and the bank statement are:  Cheques drawn and not yet shown on the bank statement.

 Amounts paid into the bank but not yet included in the bank statement.

On writing out a cheque, the customer may enter it immediately in the cash book but there may be a delay of 2-3 days at least before the creditor (the payee) pays it into his bank account and it is then cleared and credited to the customer’s own account. Meanwhile, it is known as ‘unpresented cheque’.

Amounts paid in and not yet credited arise through delay in the bank updating the account: the cheque may be paid into the bank near closing time or it may be paid into a different branch of the bank. Until the bank updates the account the bank statement balance will be less than that in the cash book.

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<b>I.2. Updating the cash book </b>

The items which are ‘picked up’ from the bank statement should be entered in the cash book before it is balanced. They have already taken place and so should no longer be a cause of difference between the two records.

Such items include:

 The various direct transfer methods, eg direct debits, standing order – for either the payment or receipt of money.

 Bank charges for operating the account or interest charged in respect of a bank overdraft.  Interest paid by the bank to the account holder.

<b>Example: </b>

<b>CASH BOOK (Bank columns) </b>

Mar 1 Balance 560 “ 4 Ogden 150 “ 10 A Lancaster 215 “ 20 N Wells 86 “ 30 T Malone 54

“ 14 R Brown 180 “ 24 T Brentmore 95 “ 28 F Wragg 120

The balance at this stage, shown as a separate note, is a debit balance of 350. Sandra receives the following bank statement:

Year 3 Mar 1 “ 6 “ 8

Balance b/f J Ogden

Standing Order:

Dr £

Cr £ 150

Balance £

560 Cr 710 Cr

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“ 10 “ 12 “ 14 “ 19 “ 21 “ 26

(Block & Trent) T Lyle

A Lancaster Credit transfer: A Zimm

R Brown N Wells Direct debit: B Traders Association

80 320

180

90

215 110

86

630 Cr 310 Cr 525 Cr 635 Cr 455 Cr 541 Cr

 The cash book ‘re-balanced’ to obtain the up-to-date balance.

 The remaining (unticked) items from the cash book are used to prepare the bank reconciliation statement.

The up-to-date cash book will appear like this:

<b>CASH BOOK (Bank columns) </b>

Mar 1 Balance 560 “ 4 Ogden 150 “ 10 A Lancaster 215 “ 20 N Wells 86 “ 30 T Malone 54

“ 14 R Brown 180 “ 24 T Brentmore 95 “ 28 F Wragg 120 “ 31 Standing order

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“ 31 Credit transfer – A Zimm 110

1,175

- Block&Trent 80 “ 31 Direct debit

- B Traders Association 90 “ 31 Balance c/d 290 1,175

The reconciliation will appear as follows:

<b>Sandra Renton </b>

<b>Bank reconciliation statement at 31 March Year 3 </b>

Balance as per cash book

<i>Add unpresented cheques </i>

- T Brentmore - F Wragg

<i>Less cheque paid in, not yet credited </i>

- T Molone

Balance as per bank statement

£

95 120

£ 290

215 505

54 451

Sometimes, the reconciliation statement will start with the balance as per bank statement. If so, the items will be the reverse to that already shown. The bank reconciliation statement for Sandra Renton would then appear as follows:

<b>II. DISHONOURED CHEQUES </b>

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<b><small>E-learning training center </small></b> <small> Learning opportunity for All </small>

When a cheque is received and paid into the bank, it is recorded in the cash book (debit) and soon afterwards is recorded by the bank on the bank statement. Later it may be known that the cheque has not gone through the account of the drawer; the drawer’s bank have not ‘honored’ the cheque, it is dishonored.

The obligation on a cheque may fail to be met, i.e. it may be dishonored for a number of possible reasons:

 There may be something incorrect in the way the cheque has been written which was not previously noticed.

 It may be that the cheque has become ‘stale’, i.e. too old to be accepted by the paying bank.  The drawer has not sufficient funds in his bank account.

<b>Example: on 3 November Year 6 you receive a cheque for £2,000 from D Tomkins. Sandra Renton </b>

<b>Bank reconciliation statement at 31 March Year 3 </b>

Balance as per bank statement

<i>Add cheque paid in, not yet credited </i>

- T Molone

<i>Less unpresented cheques </i>

- T Brentmore - F Wragg

Balance as per cash book

£

95 120

£ 451

54 505

215

290

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