Financial Accounting and Bank Reconciliation

This report explains how to record, summarize, and analyze financial data, as well as rectify errors through correcting entries and matching bank statements with Bank Reconciliation Statements. The assignment provides a comprehensive overview of financial statement analysis, including determining optimum financial mix, returns to shareholders, debt repaying capacity, working capital management, and revenue generating efficiency.

FINANCIAL ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
a. Journal entries..........................................................................................................................1
2. Ledger account.........................................................................................................................2
3. Trial balance............................................................................................................................5
QUESTION 2..................................................................................................................................6
QUESTION 1................................................................................................................................10
a. Preparing updated cash book as at 28th February 2017..........................................................10
a. Stating differences between direct debit and standing order, bank charges, and dishonor of
cheque........................................................................................................................................10
QUESTION 2................................................................................................................................11
A. Passing journal entries for rectifying each error...................................................................11
b. Preparing suspense account which shows the rectification of difference amount................13
CONCLUSION .............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial Accounting is a process of accounting where recording, summarizing,
analyzing, reporting of financial transactions over a period of time. Financial statements which
consists of Balance Sheet, Income Statement etc. are prepared through the accounting process
through which concern understands their financial viability and helps in making sound economic
decisions. They assist in making decisions to all stakeholders which includes investors, lenders,
creditors to invest in entity. These Statements can be means of communication through which
they can disclose the information regarding its financial performance. The goal of reporting is for
enhancing ability in sound judgment about company regarding its economic strength and about
future prospects. So, Investors can have better understanding and can make investment decisions
aptly.
QUESTION 1
a. Journal entries
These are recording of transactions in books of accounts of the business. It is first step in
accounting cycle. This starts from accounting period and continues during fiscal year (Henderson
and et.al., 2015). These entries are recorded in general ledger that helps in creating the financial
statements of business.
Particulars Debit Credit
Bank Ac Dr 65000
To Capital A/c 65000
(Being Capital Introduced)
Purchases A/c Dr 8000
To Creditors 8000
(Being Purchases made On Credit)
Cash A/c Dr 4000
To Sales 4000
(Being 1/4 Cash sales Made)
Creditors A/c Dr 4000
To Bank a/c 4000
(Being Half Payment Made to the creditors)
Insurance a/c Dr 75

To Bank a/c 75
(Being Insurance Premium paid)
Cash A/c Dr 12000
To Sales 12000
(Being Cash sales)
Purchases A/c Dr 10000
To Creditors 10000
(Being Purchases made On Credit)
Computer and Equipment’s a/c Dr 3000
To Cash 3000
(Being Assets Purchase by cash)
Rent a/c Dr 150
To Bank a/c 150
(Being Rent Paid)
Cash A/c Dr 10000
To Sales 10000
(Being 1/2 Sales has been made)
Petty Cash A/c Dr 100
To Bank a/c 100
(Being cash withdraw for Petty Cash Account)
Stationery a/c Dr 30
To Petty Cash A/c 30
(Being Stationery Purchased from petty cash)
116355 116355
2. Ledger account
Ledgers-: These are books which classify and summarize financial information from
journals as debits and credits and show their current balances. These are permanent summary of
amounts entered in supporting journals which lists individual transactions by date (Minnis and
Sutherland, 2017). The Ledger is made of each and every single item such as:
1. Sales
2. Purchase

3. Debtors
4. Creditors
5. Expenses
DR CR
Particulars Amount Particulars Amount
Opening Balance 0 By Cash 65000
Bal C/F 65000
65000 65000
Purchases A/c
DR CR
Particulars Amount Particulars Amount
To Creditors 8000
To Creditors 10000 Bal C/f 18000
18000 18000
Sales A/c
DR CR
Particulars Amount Particulars Amount
By Cash 4000
By Cash 12000
To Bal c/f 26000 By Cash 10000
26000 26000
Creditors A/c
DR CR
Particulars Amount Particulars Amount
To Bank 4000
By
Purchases 8000
By bal C/f 14000
By
Purchases 10000
18000 18000
Cash A/c
DR CR
Particulars Amount Particulars Amount
To sales 4000
By
Computer 3000
To sales 12000
To sales 10000 By Bal C/f 23000

26000 26000
Bank A/c
DR CR
Particulars Amount Particulars Amount
TO Capital 65000
By
Creditors 4000
By
Insurance 75
By Rent 150
By Petty
Cash 100
By Bal C/f 60675
65000 65000
Insurance A/c
DR CR
Particulars Amount Particulars Amount
To Bank 75 By Bal C/f 75
75 75
Computer and Equipment a/c
DR CR
Particulars Amount Particulars Amount
To Cash 3000 By Bal C/f 3000
3000 3000
Petty Cash A/c
DR CR
Particulars Amount Particulars Amount
To Bank 100
By
stationery 30
By Bal C/d 70
100 100
Stationery A/c
DR CR
Particulars Amount Particulars Amount
Particulars Amount By Bal C/d 30
To Petty Cash 30 30
30
Rent a/c
DR CR

Particulars Amount Particulars Amount
Particulars Amount By Bal C/d 150
To Bank 150 150
150
3. Trial balance
It is a statement where in balances of all ledgers are compiled into debit and credit columns.
The General purpose of trial balance is to ensure that entries recorded in bookkeeping system are
mathematically correct and further presented for preparation of financial statements (Sedláček,
2016). But there are different limitations to trial balance as its checks only mathematical
accuracy.
They can be-
1. Error in Original Entry- This states that both sides of transaction are properly
recorded but with wrong amount. Ex-: Purchase of $31 is recorded as $13.
2. Error of Omission- Transaction will be completely excluded from books of
accounts.
3. Error of Reversal- Entries are made for correct amounts but wrongly posted to
credits instead of debits. Ex-: Sales are recorded in credit side but has been debited.
Trial balance for
the year ended
31/12/2017
Particulars Debit Credit
Capital 65000
Purchases 18000
Sales 26000
Creditors 14000
Cash 23000
Bank 60675
Insurance 75
Computer and
Equipment’s 3000
Petty Cash 70
Stationery 30
Rent 150

Total 105000 105000
QUESTION 2
Financial Statements-: There are reports by any company to present the financial
performance at a point of time. These are written records which projects economic viability and
business conditions of entity. It is the main source of monetary information for decision makers,
where high emphasis on accuracy and reliability through internal control will be implemented
(Sedláček, 2016). The data which are presented in structured manner are easy to understand.
Financial Statements for business includes-:
1. Balance Sheet
2. Income Statements
3. Cash Flow Statements
Income Statements-: These statements are also referred as Profit and Loss account. It is one
of the financial statements which shows revenue and expenses of any company for which they
are prepared for a particular period. It shows financial performance for a specific period of time.
It can also be said as a summary of how the business manages its revenue and expenses of both
operating and non-operating activities (Robson, Young and Power, 2017). An important thing
which must be remembered that P&L accounts represent period of time which means for a whole
fiscal year. The income statements are divided into two parts such as operating and non-
operating activities.
1. Operating Activities: Communicates information regarding revenue and expenses that
are directly related to regular business operations. For eg If a profession is for
manufacturing then all expenses related to it will be recorded here.
2. Non-Operating Activities: It discloses revenue and expenses information regarding
activities which are not directly related to regular business operations (Drake and et.al.,
2017). For eg- A manufacturing business selling an insurance policy and commission
received from that will be recorded here.

Balance Sheet- It is summary of all financial balances of any individual or company. It
reports all assets, and liabilities at a specific point of time (Financial accounting, 2018). Balance
Sheet has two parts such as assets and liabilities which in turn provides profound insights about
liquidity as well as solvency aspects of firm.
Accounting Equation for the Balance Sheet is
Assets= Liabilities + Shareholders Equity
1. Assets: It is an economic resource for any company which are owned and controlled with
expectations as it will provide future benefits.
The Assets can be as follows
1. Current Asset: These assets are liquid assets which can easily be convertible in
cash in an operating cycle
1. Cash and Cash Equivalents
2. Short term Investments
3. Accounts Receivables
4. Inventory
2. Long Term Investments-: These are held for many years and are not intended to
be disposed in near future.
3. Fixed Assets-: These can also be referred as Property Plant and Equipment’ that
are purchased for long term in generating profits in business (Wang, 2014)
2. Liabilities: These are financial debts or obligations that arises in the ordinary course of
business.
These can be classified as follows:
1. Current Liabilities: These are expected to be disposed of within an operating cycle.
These includes
a) Accounts Payable
a) Taxes

2. Long Term Liabilities: These are not to be liquidated within an operating cycle. These
includes
a) Long Term Bonds
a) Leases
3. Shareholders’ Equity: These are owners fund, which are left after all the payments of
debts. It is also known as capital of the company. It consists of-:
a) Issued Authorized Capital
b) Reserves and Surplus
c) Non-Controlling Interest
4. Cash Flow Statements-: These are statements which summarizes cash and cash
equivalents of company. These measures how well they manage their liquidity position
and generates cash to pay its obligations (Vanauken and et.al., 2016). The following is
structure of cash flow statement.
1. Cash from Operating Activities
2. Cash from Investing Activities
3. Cash from Financing Activities
Trading and P&L for the year ended on 31/12/2017
Particulars Amount Amount
Opening Stock 9500
Purchases 75000
Less Purchase Returns 1500 73500
83000
Sales 125000
Less Sales Returns 1000 124000
Closing Stock 1000
125000
Gross Profit 42000
Wages and Salaries 13200
Depreciation On
Motor van 5000
Rent and rates 1500

Add outstanding Rates 340 1840
Postage 900
Insurance 7500
Less Prepaid
Insurance 411 7089
Bad Debts 1200
12771
Interest On Loan 10000
Add Rent Received 4850
Less Advance Rent 490 4360
Net Profit 27131
Statement of financial position for the year ended on 31/12/2017
Assets Amount
Motor Van 25000
Closing Stock 1000
Loan @ 10% 100000
Debtors 12500
Less Bad debts written
off 650
11850
Bank 10594
Prepaid insurance 411
Cash 340
Outstanding Interest on
Loan 10000
Less Received 1000 9000
158195
Liabilities
Capital 120800
Add Net Profit 27131
Less Drawings 5150 142781
Advance rent Received 490
Outstanding Rates 340
Creditors 3900
Accumulated
Depreciation 5400
Depreciation 5000 10400
Provision of Bad Debts 934

Written Off 650 284
158195
QUESTION 1
a. Preparing updated cash book as at 28th February 2017
Bank Reconciliation Statements-: It is statement which provides differences on a specific
date of bank balance shown in cash book with the bank statements supplied by bank. It can be a
useful internal control tool for controlling frauds (Bank Reconciliation, 2018). The differences
occur in balances because-:
1. Cheque issued but not yet presented
2. Direct deposit in the bank
3. Bank charges
4. Expenses Directly paid by bank
5. Errors by the bank or the company
Revised Cash Book As per Bank Column 28/02/2017
DR CR
Dat
e Particulars
Amou
nt
Dat
e Particulars
Amou
nt
To Bal B/d 1760 Insurance paid direct by bank 170
Cheque issued but not
deposited 270
Talk talk Bill Paid directly by
bank 56
Direct Transfer to Bank by
Akram 1070
Cheque deposited but not
credited 186
Drawings not reflected by
bank 105 Bank charges 25
Dividend directly collected 325 By bal c/f as per bank book 3093
3530 3530
a. Stating differences between direct debit and standing order, bank charges, and dishonor of
cheque
Standing Order Direct Debit

It is an instruction to the bank to pay an agreed
amount from holder of account to account of
any person at regular interval of time, may be
weekly, monthly etc.
It can be a type of standing order in which
other person can withdraw amount as agreed
by the account holder and person withdrawing
it. These payments are recurring payments
such as utility payments like electricity, credit
cards etc.
In standing order, the amount is fixed which is
agreed by the account holder.
Here the amount may vary depending upon
how much is owed to other person. (Robson,
Young and Power, 2017)
The amount can be changed or cancelled at any
time when they need.
It can only be done with consent of the
company which is collecting direct debit.
Bank Charges-: It covers all charges and expenses which are imposed on the customers;
this can be annual maintenance cost, overdraft renewal etc. for providing services. For instance:
While providing facilities pertaining to make any payment of loan, insurance, demand draft etc.,
bank credited some amount from the existing account, which in turn considered as charges.
Dishonor of Cheque-: The cheque which is issued and presented to bank has been returned
or they have refused to pay amount because of any of following reasons mentioned below is
known a dishonor of cheque. Ex-: Cheque issue of $1000 but account has $900 so it will get
dishonored because of insufficient funds.
1. Insufficient Funds- This issue occurs because account does not have adequate funds to
satisfy the demanded payment.
2. Signature Mismatch- Signature of the cheque issuer doesn't match with the bank records.
3. Alterations- Usually either amount or name of payee of cheque is changed leads to
alterations.

QUESTION 2
A. Passing journal entries for rectifying each error
As every single monetary event which is occurring are entered in books of accounts so
there may sometime happens that some entries are not recorded or recorded in wrong head.
There may be chances of error in the books of accounts. So the entries which are needed to
rectify those mistakes are known as rectifying entries.
The types of errors which appear in the books of accounts are as follows:
1. Error of Omission: This implies whole transaction which has occurred is not recorded in
the books of account.
2. Error of Commission: The transaction is recorded appropriately with also correct
amount but wrongly classified. For e.g. A postage expenses are recorded as entertainment
expenses so there is mathematical error but entertainment expenses will be shown excess
as it should be recorded as postage.
3. Error of Principles: It is same as error of commission but difference is it has been
recorded in the different class of account i.e. its nature has been changed an asset is
charged to expense. For e.g. purchase of fixed assets is recorded in expenses account
4. Error of Original Entry: Event is correctly recorded but with the incorrect amount. For
E.g.- Sales of $21 is recorded as $12.
So there is need of rectification i.e. why rectifying entries are needed. The errors made are
needed to be reversed so, reversal entry is done.
Particulars Debit Credit
Purchase a/c Dr 2000
To A Musa 2000
(Being Credit purchases)
Bank a/c Dr 670
To Suspense 670
(Being twicely recorded entry in cash book)
Suspense a/c Dr 650

To G Tahir 650
(Being sales not posted in G Tahir A/c)
Electricity A/c Dr 790
To Suspense 790
(Being Electricity not recorded in General Ledger)
Motor Vehicles expenses A/c Dr 500
To Motor Vehicle 500
(Being repairs of machinery debited to Machinery A/c)
Sales a/c Dr 270
To Suspense 270
Being posted as 1300 instead of 1030(1300-270)
Discount allowed a/c dr 190
To Discount Received 190
(Being discount received has recorded as discount
allowed)
Sales a/c Dr 384
To D jones 384
(being cheque received wrongly posted to sales)
b. Preparing suspense account which shows the rectification of difference amount
Suspense a/c
It is an account which is created temporarily for discrepancies or errors which are
recorded before posting to their original ledger (Drake and et.al., 2017). They are mostly created
for internal accounting practices. Any errors occurred are recorded through suspense account
before properly allocation to their designated accounts.
Particulars Amount Particulars Amount
To G Tahir 650 By bank 670
To Bal C/f 1080
by
electricity 790
by sales 270
1730 1730

CONCLUSION
This report concluded here that all statements of financial accounts about how to record,
summarize, analyze financial data was explained. The errors which occurred were also rectified
by correcting entries and bank statements of cash book were also matched with help of Bank
Reconciliation Statements. All questions of shareholders regarding optimum financial mix,
returns to shareholders, debt repaying capacity, working capital management, revenue generating
efficiency etc. This determined proper understanding about conductance of business. Hence, it
can be summarized that financial statement is only a tool by which some investment decisions
can be made for easy understanding of investors.

REFERENCES
Books and Journals
Drake, M. and et.al., 2017. Who uses financial statements? a demographic analysis of financial
statement downloads from edgar. Accounting Horizons. 31(3). pp.55-68.
Henderson, D. and et.al., 2015. Issues in financial accounting. Pearson Higher Education AU.
Minnis, M. and Sutherland, A., 2017. Financial statements as monitoring mechanisms: Evidence
from small commercial loans. Journal of Accounting Research. 55(1). pp.197-233.
Robson, K., Young, J. and Power, M., 2017. Themed section on financial accounting as social
and organizational practice: exploring the work of financial reporting. Accounting
Organizations and Society. 56.pp.35-37
Sedláček, J., 2016. Financial Statements in the Financial Decision Making. European Financial
Systems 2016. p.678.
Vanauken, S. and et.al., 2016. Turkish SMEs’ use of financial statements for decision making.
The Journal of Entrepreneurial Finance. 19(1). p.6
Wang, C., 2014. Accounting standards harmonization and financial statement comparability:
Evidence from transnational information transfer. Journal of Accounting Research. 52(4).
pp.955-992.
Online
Financial accounting. 2018. [Online]. Available through: <
https://www.accountingcoach.com/financial-accounting/explanation>.
Bank Reconciliation. 2018. [Online]. Available through: <
https://accountingexplained.com/financial/cash-and-equiv/bank-reconciliation>.