unit 2 cash and cash equivalents

Bank Reconciliation Statement (BRS)

A Bank Reconciliation Statement is a statement reconciling the balance as shown by the balance per bank statement and balance per book.
The main objectives of preparing such a statement is to known the causes of difference between the two balances. Difference between the two accounts are investigated and, if necessary journal entries are passed.

Some important term that used in BRS

Outstanding check /canceled check: Check issued but not presented for payment
Deposit in transit: - Check paid in to bank but not credited by bank.
NSF check: Not Sufficient Fund

Service charge: Service Charged by Bank

Notes and interest collected by bank on
behalf of customers directly credited in
account

Interest earned: Interest earned in bank

Bank Reconciliation Statement

Balance per Bank statement Balance per the book
# If bank a/c is debited than Balance is decrease
# If bank a/c is credited than Balance is increase

• If company's cash book is debited than balance increase
• If company's cash book is credited than balance decrease





• Some time, payment by check is non-practical.
• So payment is made in the form of currency.
• Hence a small amount of fund set aside for this purpose is called petty cash Book.


*When petty cash fund is established: -

Petty cash a/c Dr.
To Cash
(To established a petty cash fund)

*When expenses are disbursed and cash over and short
All expenses a/c Dr.
Cash over or short a/c Dr.
To Cash a/c
(To replenish a petty cash fund, record expenses and Rs. ……, Cash shortage or over)



Example:












Assignment
Page no. 344,7-3
Page no.348, 7-2





Account Receivable

The current asset resulting from a sale on credit with an oral promise from the customer to pay within a specified period of time is called an account receivable.

Or Amount owed to the business by its customers for goods and services sold to them on credit, that is called account receivable. It is also called debtors. In other word we can say assets created by selling goods and services on credit. Generally there is no charge interest in A/c receivable and often gives the customers a discount for early payment.

Example: 2/10net30

Valuation of Accounts Receivable: -

1 Direct write-off method: - (or Direct method)

-When credit sales are made: -
Account Receivable- (Name of the person)Dr.
To Sales revenue
(To record sales on credit)

- When credit sales amount is not collected and write off: -
Bad debt expenses Dr.
To Account receivable- (Name of the person or ` company)
(To write off- - - -Account.)






2 Allowance Method: - According to this method, it is estimated amount of bad debts before they actually occur.

Bad debts expense Dr.
To Allowance for doubtful Accounts
(To record estimated bad debts for the year.)


Account receivable - - - - - -
Less, allowance for doubtful account – - - - - -
Net account receivable --------

Methods to account for uncollectible amount or Estimating Bad debt

1) Percentage of net credit sales method: -

In this method uncollectible amount is estimated as % of the credit sales of an accounting period

At the end of accounting period the following journal entry has been passed.

Bad debts expenses Dr.
To Allowance for doubtful account
(To record estimated bad debts)

2 Percentage of account receivable method:-

According this method uncollectible account are estimated as a percentage of debts appearing on a firms balance sheet


Bad debts expenses ……*
Allowance for doubtful account …….*
(To record estimated bad debts)

*Amount for bad debts expense =
Calculated estimated bad debt – credit balance in allowance for doubtful a/c

Balance sheet presentation

Total account receivable ……….
Less, Allowance for doubtful account ……….
(Estimated bad debts)
Net realizable value ………



Aging of account receivable: -
It is an alternative method of % of account receivable method. According to this method it categorizes the various accounts by length of time outstanding.

See, page no. 331






Note Receivable

A note (also called a promissory note) is a written promise to repay a definite sum of money on demand or at a fixed or determinable date in the future.

Promissory notes normally require the payment of interest for the use of someone else's money.

The bill/ note is addressed to the buyer (debtor), who is known as the drawee or maker. And the person to whom the bill is payable is the payee.

Some important terms under promissory notes

Principal: - The amount of cash received by the maker when a promissory note is issued.

Maturity date: - The date that the promissory note is due.

Term:- The period of time between the date is issued and the date is matures.

Maturity Value: - The total amount of cash the maker is to pay the payee on the maturity date of the note.

Interest: - Difference value between principal and maturity value.


Interest bearing notes

Notes in which an interest rate is explicit stated are called interest-bearing notes.
Journals

#When promissory notes is signed or received; -
Notes receivable a/c Dr…
To sales revenue

#When interest is earned before at the end of accounting period:-
Interest receivable A/c Dr…
To Interest revenue…

#When principal and interest are collected; -
Cash a/c Dr…………….
To Notes receivable …
Interest revenue..
Interest receivable..
(To record collection of promissory note)

Non-interest bearing notes (Discounted note)
Notes in which interest is implicit in the agreement are called non- interest bearing notes or discounted note.
Journals:-
#When notes is signed;-
Cash a/c Dr…
Notes receivable a/c Dr………..
To discounted on notes receivable..
To sales revenue ……
(To record sales in exchange for note)

# When interest is earned before maturity date and fiscal year.
Discount on notes receivable a/c Dr..
To interest revenue….
(To record interest earned for …months)

#When maturity value and interest earned is collected:-
Cash a/c Dr…
Discount on notes receivable a/c Dr..
To Notes Receivable..
To interest revenue ……
(To record collection of note)