Bank Reconciliation Statement

BANK RECONCILIATION STATEMENT:
                                    A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation's Bank statement, as supplied by the bank, and the corresponding amount shown in the organisation's accounting records at a particular point in time. 

RECORDING:

                                            A transaction relating to bank has to be recorded in both the books i.e.  Cash Book and Pass Book but sometimes it happens that a  bank transaction is recorded only in one book and not recorded simultaneously in other book causing difference in the two balances.

EXAMPLE:

                   We operate a bank account in which we deposit money and withdraw money from time to time. We maintain a record with ourselves of these deposits and withdrawals. One day we get our pass-book (statement issued by the bank) updated but are surprised to find that the balance shown by the pass book was different from what it should have been as per our records.

                                                                              Then it is obvious that we will compare the two sets of records and find out items which are recorded in one but not in the other. Similar situation may arise in case of a business concern which operates a bank account. These business concerns maintain record of all of their banking transactions in their bank column of the cash book.

DIFFERENCES BETWEEN BANK STATEMENT AND 

CASH BOOK BALANCES:

                                                                        On any particular date the bank balance shown by the bank column cash book and that shown by the pass book should be the same. But if there is difference between the two, the business concern will find out the reasons to reconcile the balance.

Following Points are considered;

• Compare transactions that appear on both Cash Book and Bank Statement
• Update Cash Book from details of transactions appearing on Bank Statement
• Balance the bank columns of the Cash Book to calculate the revised balance
• Enter correct date of the statement
• Enter the balance at bank as per the Cash Book
• Enter details of unpresented cheques
• Enter sub-total on reconciliation statement
• Enter details of bank lodgements
• Calculate balance as per Bank Statement

Summary of IAS 2 Inventories

INTRODUCTION:
                                                International accounting standards 2 inventories ( IAS 2 ) revised in 1993, should be applied for annual periods beginning on or after 1 january 2005. The early application was encouraged.

REASONS FOR REVISING IAS 2:
                                                                                     The International Accounting Standards Board developed this revised IAS 2 as a part of its project on improvements to International Accounting Standards. Project was taken in the light of queries & criticisms raised by securities regulators, professional accountants & other interested parties.
The objectives of the project were:

• To reduce or eliminate alternatives
• Redundancies & conflicts within the Standards
• To deal with some convergence issues
• To make other improvement

SCOPE:
               Inventories includes:

• Assets held for sale in the ordinary course of business (finished goods)
• Assets in the production process for sale in the ordinary course of business (work in process) 
• Materials & supplies that are consumed in production (raw material)

IAS excludes certain inventories from its scope: (IAS 2.2)

• Work in process arising under construction contracts (IAS 11)
• Financial instruments (IAS 39)
• Biological assets related to agricultural activity & agricultural produce at the point of harvest (IAS 41)

The standard clarifies that some types of inventories are outside its scope while certain other types of inventories are exempted only from the measurement requirements in the Standard.


FUNDAMENTAL PRINCIPLE OF IAS 2:

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

                                 NRV = Estimated selling price - cost to sell in company

MEASUREMENT OF INVENTORIES:

                                                                    Cost should include all:

• Costs of purchase (including taxes, transports and handling) net of trade discounts received
• Costs of conversion (including fixed and variable manufacturing overheads)
• Other costs incurred in bringing the inventories to their present location and condition 

    IAS 23 Borrowing costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of inventories that meet the definition of a qualifying asset.

Inventory cost should not include:

• Abnormal waste
• Storage costs
• Administrative overheads unrelated to production 
• Selling costs
• Foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
• Interest cost when inventories are purchased with deferred settlements terms

Cost formulas allowed: 
IAS 2 allows the FIFO or Weighted average cost formulas.
Cost formulas not allowed:
The LIFO formula, which had been allowed prior to 2003 revision of IAS 2 is no longer allowed.

                                                           The same cost formula should be used for all inventories with similar characteristics as to their nature & use to the entity. For groups of inventories that have different characteristics, different cost formulas may be justified (IAS 2.25)

WRITE-DOWN TO NET REALISABLE 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 (IAS 2.6). Any write-down to NRV should be recognised as an expense in the period in which the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs.

RECOGNITION AS AN EXPENSE:
                                                                                           IAS 18 Revenue, addresses revenue recognition for the sale of goods. When inventories are sold & revenue is recognised, the carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV & any inventory losses are also recognised as an expense when they occur (IAS 2.34).

DISCLOSURE:
                                         The Standard requires the following disclosures:

1. Accounting policy for inventories
2. Carrying amount, generally classified as merchandise, supplies, materials, work in progress & finished goods. The classification depends on what is appropriate for the entity.
3. Carrying amount of any inventories carried at fair value less costs to sell 
4. Amount of any write-down of inventories recognised as an expense in the period
5. Amount of any reversal of a write-down to NRV and the circumstances that led to such reversal
6. Carrying amount of inventories pledged as security for liabilities
7. Cost of inventories recognised as expense (cost of goods sold).

APPROVAL OF IAS 2 BY THE BOARD:
                                                                                                          International Accounting Standard 2 Inventories was approved for issue by the fourteen members of the International Accounting Standards Board.

Accounting cycle

ACCOUNTING CYCLE:
                                          ''Accounting cycle is a sequence of accounting procedures which are used to record, classify and summarize accounting information''...

STEPS INCLUDED IN ACCOUNTING CYCLE:
                Following steps are included in accounting cycle:

• Journal
• Ledger
• Trial balance
• Adjusting entries
• Adjusted trial balance
• Financial statements
• Closing entries
• After closing trial balance

JOURNAL: 

                             ''Day to day recording of business transactions is done in journal''

                            The first step of accounting cycle is recording of transactions in the journal. As any type of business transaction occured; they are entered in the journal. This procedure completes the recording step in the accounting cycle. Two accounts are involved in it. One a/c is debited and the other is credited.

LEDGER:

                          ''It is a book in which the entries from journal is transferred''

                          The debit and credit entries in account balances are posted from journal to ledger. This procedure classifies the effects of the business transactions on terms of specific assets, liabilities, owner's equity, revenue and expense account.

TRIAL BALANCE:

                                              ''A statement of all debit and credit items in double entry ledger, made to test their equality''

                             A trial balance proves and authenticates the equality of debit and credit entries in the ledger. The purpose of this procedure is to verify the accuracy of posting process and the computation of the ledger account balances. In the nutt shell debit and credit sides are balanced at the end in the trial balance. It is made under the instructions provided by the IAS.

ADJUSTING ENTRIES:

                                      '' An accounting entry made at the end of accounting period to allocate items between accounting periods''

                                 Adjusting entries are recorded at the end of accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not yet been recorded. The main purpose of adjusting entries is to match revenues and expenses to the current accounting period which is a requirement of the matching principle of accounting.

ADJUSTED TRIAL BALANCE:

                                        An adjusted trial balance is a list of the balances of ledgers which is made after the adjusting entries are done. Adjusted trial balance contains balances of revenues and expenses along with of assets, liabilities and equities after the changes occur due to adjusting entries.

FINANCIAL STATEMENTS:

                                             It is the step of accounting cycle in which exact figures from trial balance are summarized up to prepare the financial statements. These financial statements demonstrate the position of the business at the specific date.

It includes:

• Income statement
• Balance sheet 
• Statement of cash flow
• Statement of changes in equity
• Notes & other disclosures

CLOSING ENTRIES:

                                             It is necessary to close the temporary accounts in order to make their balances zero at the end of accounting period. Closing entries are based on the balances of accounts in the adjusted trial balance.

Temporary accounts include:

• Revenues
• Expenses
• Dividends
• Income summary

AFTER CLOSING TRIAL BALANCE:

                                             Post closing trial balance is a list of balances of ledgers prepared after passing adjusting entries and their postings to the ledgers. Post closing trial balance is prepared in the last step of the accounting cycle and its purpose is to assure that sum of debits equal the sum of credits before the new accounting period starts.