BANK RECONCILIATION STATEMENT

Definition:
a statement to find out the reasons for disagreement between the bank statement balance and the cash book balance of the bank is called bank reconciliation statement.


Purpose:
The purpose of the bank reconciliation statement is to know whether we have sufficient funds in the bank account to issue the cheques.

Causes of Disagreement Between Bank statement and Cash book:

Deposit in Transit:

The cheques which we have deposited in the bank but not yet have recorded by the bank is a cause of difference between the balance of cash book and bank statement.

Outstanding cheques:

The cheques we have issued but not yet have been presented to bank are also a cause of disagreement between the two balances.

Bank Adjustments:

If the bank have credited or debited the customer account erroneously then it is also a cause of disagreement of balances between cash book and bank statement.

Book Adjustments:

If the customer makes a mistake in cash book while writing the amount or omitting to record the amount then there is a need of bank reconciliation statement.

NSF Cheques:

If there is no amount in the bank account the cheque returns dishonor and these cheques are called NSF cheques. These cheques lead to difference between cash book and bank statement.

Amount Collected by Bank:

If the cash or cheque is directly collected by the bank and customer has no information about it then it is also a reason of disagreement of balances  between cash book and bank statement.

Inventory in IAS 2:

Inventory:

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that is ready or will be ready for sale.

Objectives of IAS 2:

Provide guidance about the accounting treatment for inventories. It provides guidance about inventories in following ways

When inventory is purchased, how it should be recorded

When inventory should be recorded as an expense

Scope:

The following 3 types of inventories are included in IAS 2

o   Finished goods

o   Work in process

o   Raw material

The following inventories are not included in IAS 2

o   Work in process arising under construction contracts

o   Financial instruments e.g. shares and bonds

o   Biological assets related to agricultural activity and agricultural produce at the point of harvest e.g. cattle and crops

Fundamental Principle of IAS 2:

Inventories are required to be stated at the lower of cost and net realizable value (NRV).

Measurement of Inventories:

Cost should include all:

• costs of purchase (including taxes, transport, and handling)
• costs of conversion i.e. labour and overhead
• other costs incurred in bringing the inventories to their present location and condition

Note:

In some circumstances borrowing cost is also included in cost of inventory

The following cost is not included in the inventory cost;

·         Abnormal waste

·         Storage costs

·         Administrative FOH unrelated to production

·         Selling costs

·         Foreign exchange differences

·         Interest cost when inventories are purchased with deferred settlement terms

Cost Formulas:

·         Items which are not ordinarily interchangeable should be valued at individual cost basis.

·         For interchangeable items FIFO and Weighted Average Cost methods are used.

Write-Down to Net Realizable Value:

·         NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated costs necessary to make the sale.

·         Any write-down to NRV should be recognized as an expense in the period in which the write-down occurs.

·         Any reversal should be recognized in the income statement in the period in which the reversal occurs.

Expense Recognition:

IAS 18 Revenue:

When inventories are sold and revenue is recognized, the carrying amount of those inventories is recognized as an expense.

[IAS 2.34]

Any write-down to NRV and any inventory losses are also recognized as an expense when they occur.

Disclosure

• accounting policy for inventories
• Carrying amount, of merchandise, supplies, materials, work in progress, and finished goods.
• carrying amount of any inventories carried at fair value less costs to sell 

Accounting Cycle:

The sequence of accounting procedures used to record, classify and summarize accounting information in financial reports at regular intervals is often termed as "accounting cycle". It includes the following 8 steps;
1. Journal
2. Ledgers
3. Unadjusted Trial Balance
4. Adjusting Entries
5. Adjusted Trial Balance
6. Financial statements
7. Closing Entries
8. After Closing Trial Balance

1. Journal:
Transactions are recorded in chronological order in the journal as both a debit and a credit. Journals may include sales journal, purchases journal and general journal etc.

2. Ledger:
The journal entries are transferred to the appropriate accounts in the ledger. The ledger accounts may be in the form of T-account method or running balance method.

3. Unadjusted Trial Balance:
Unadjusted trial balance is a calculation to verify the sum of the debits is equal to the sum of the credits.

4. Adjusting Entries:
In this step, adjusting entries are passed to match the proper revenue with expense in that period because under accrual accounting system, revenue is recorded when earned and expenses are recorded when incurred.

5. Adjusted Trial Balance:
After making necessary adjustments adjusted trial balance is prepared. Adjusted trial balance is the listing of balances of accounts in order of assets, liabilities, owner's equity, revenue and expenses.

6. Financial Statements:
Financial statements are prepared using the corrected balances from the adjusted trial balance. The financial statements are;
  i.   Income Statement
  ii.  Statement of Retained Earning
  iii.  Balance Sheet
  iv. Cash Flow Statement
  v.  Statement of Changes in Equity

7. Closing Entries:
In this step closing entries are passed to close the balances of temporary accounts e.g. revenue and expenses.

8. After Closing Trial Balance:
After closing trial balance will show only permanent accounts e.g. assets, liabilities, and owner's equity.