6. Reconciliations, JE and Doubtful Debts Flashcards
What is the nominal ledger bank balance?
This is the same as a General Ledger Account.
What are the common transactions (deposits and payments) performed by a UK bank?
Bankers’ automated clearing service (BACS) - Payments by electronic transfer which usually clear within three working days.
Clearing House Automated Payment System transfer (CHAPS) - Payments by electronic transfer which are guaranteed to arrive on the same day.
Deposit (DEP) A cash deposit made in a bank branch which will be paid into a bank account.
Direct debit (DD) An instruction that authorises an organisation to collect varying amounts from an account – only with advanced notice – by electronic transfer.
Faster payments service (FPS) - Real-time account-to-account electronic transfers via internet banking,
telephone banking or through a bank branch.
Interest (INT) Bank interest earned by a customer on a bank
Point of sale (POS) POS refers to the location in which a payment is accepted – effectively, a debit card payment.
Standing order (SO) Instruction to a bank to pay a set amount at regular intervals by electronic transfer.
What does a typical bank statement for a company include?
- Opening Balance: The statement begins with the opening balance, which is the amount of
funds in the account at the start of the statement period. - Deposits received
- Payments made
- Bank Charges and Interest
- Closing Balance: The statement concludes with the closing balance, showing the amount in
the account at the end of the statement period.
What is a bank reconciliation statement, and how is it prepared?
A bank reconciliation is a control to ensure that the difference between the balances reflects
timing of transactions rather than Fraudulent transactions or theft, unexpected charges that have not been approved or human errors.
Prepared:
1. Tick off matching transactions
2. Identify monetary differences (this will be done for you in assessment question)
3. Categorise problematic entries
a) Only on nominal ledger
b) Only on bank statement
c) Timing Difference, Error or bank initiated items
4. Prepare the Bank reconciliation
5. Prepare correcting journal entries
What sort of errors, omissions or discrepancies might a bank reconciliation reveal?
Differences in monetary amounts can be due to an error such as:
* A transposition error (e.g. £350 recorded as £305)
* A typographical error (e.g. £350 recorded as £359)
Generally these are the rest:
- Outstanding deposits – deposits made that are yet to clear the bank statement, e.g. a cheque received from a credit customer
- Outstanding payments – payments made that are yet to clear the bank statement, e.g. a BACS payment made to a supplier
- Bank-initiated items – transactions made directly through the bank but not yet recorded in
the entity’s accounting records, e.g. a direct debit payment, bank interest received, bank charges - A non-existent receipt or payment has been recognised (e.g. a transaction debited or
credited to bank in error)
What is a subsidiary ledger?
A subsidiary ledger is a detailed, supporting ledger that provides a breakdown of transactions within a
nominal ledger account.
How does the subsidiary ledger work?
In a computerised accounting system, whenever a trade receivables transaction is posted, the name
of the related customer, or the customer code (details) must be recorded so that the subsidiary ledger relating to the customer can be updated.
What are common trade receivables transactions and the journal entries to account for them?
Dr Trade receivables
Cr SPL – revenue
Cr VAT account
Journal entry for a credit sale for a VAT registered business
Dr SPL - revenue
Dr VAT account
Cr Trade receivables
Journal entry for a credit note for VAT registered business
Dr Bank
Cr Trade receivables
Journal entry for a cash receipt
What are common trade payables transactions and the journal entries to account for them?
Dr SPL - purchases
Dr VAT account
Cr Trade payables
Journal entry for a credit purchase for VAT registered business
Dr Trade Payables
Cr SPL - purchases
Cr VAT account
Journal entry for a credit note for VAT registered business
Dr Trade Payables
Cr Bank
Journal entry for a payment to credit supplier
What is a control account reconciliation?
A control account reconciliation is the reconciliation between the nominal ledger account (trade receivables or trade payables) and the subsidiary ledgers.
Subsidiary ledgers need to be manually updated each time an entry is posted to the nominal ledger.
What is a suspense account used for?
1.Where accountant doesn’t know where to post it in the nominal ledger
2. The TB doesn’t balance
CHECK
What is the process for preparing a correcting journal entry if a suspense account has been used?
3 steps
- Consider what has been done
- Consider what should have been done
- Prepare the correcting journal entry
What are the common errors and omissions that might be identified during a bank reconciliation?
- A transposition error (e.g. £350 recorded as £305)
- A typographical error (e.g. £350 recorded as £359)
What are bad or doubtful debts?
Bad debts are debts that cannot (or are highly unlikely to) be recovered. These are removed from TR.
Doubtful debts are debts that may not be recovered. These doubtful debts are left in the TR but the TR amount is reduced by the allowance and net fig. used in SoFP.
What is the formula that is used to calculate the trade receivables amount in the SoFP when there is an allowance for Doubtful debts?
Trade Receivables – Allowance for Doubtful Debts = Net Amount shown on face of SOFP
