Bank Reconciliation Statement

The bank column of the cash book should contain the same information with the bank’s records
as shown in the bank statement but in the opposite sides. Cheques and cash paid into the bank
account are debited in the cash book and credited in the bank statement. Payments out of the
bank are debited in the bank statement and credited in the cash book. The contrasting records are
shown in the table below.

Description Bank column of cash book Bank statement

Receipts Debit Credit
Payments Credit Debit
Cash at Bank Debit balance Credit balance
Bank Overdraft Credit balance Debit balance

Since the two accounting records contain the same information, they ought to agree at any period
end. But often, the balances disagree due to the reasons given below:

1. Unpresented Cheques: These are cheques paid out, credited in the bank column of the
cash book but are yet to be presented to the bank for payment by the payee.

2. Uncreditedcheques: These are lodgments into bank, debited in the cash book but the bank
is yet to receive value for the cheques (yet to clear). Therefore, the bank has not credited
the account of the business.

3. Debits in the bank statement which have not been recorded by the firm in the cash book.

For example:
a. Bank charges and commissions, including VAT on turnover
b. Direct debits/Payments under standing order e.g. Subscriptions, HP instalments,
insurance premiums etc
c. Interest on loan and Advances
d. Dishonoured/returned cheques – cheques earlier credited by the bank but later
dishonoured by the paying bank.
4. Direct Credits into bank which are yet to be recorded in the cash book e.g.
a. Interest received on deposit and current accounts
b. Dividends received
c. Traders’ credit: transfers to company’s account following instructions from a
customer to his banker.
5. Errors in the cash book or in the bank statement.

Bank Reconciliation Procedure

1. Ensure that both the cash book and the bank statement are written up to the reconciliation
date.
 2. Check off debit side of the cash book against the credit side of the bank statement for
uncreditedcheques and direct lodgements.
3. Check off the credit side of the cash book against the debit side of the bank statements for
unpresentedcheques, bank charges, dishonouredcheques, payments under standing order
etc.
4. Check for errors in figures or omissions in both the cash book and bank statement.
Correct all errors identified in the cash book.
5. Update the cash book: Credit all items mentioned in 3(a) to (d) above and debit all items
mentioned in 4 above.
6. Prepare a reconciliation statement using items 1 & 2 above(i.e. uncreditedcheques and
unpresentedcheques), including adjustments for errors identified in the bank statement.

Format:
You may start with the bank statement balance or with the adjusted Cash book balance.

i. Starting with Bank statement balance.

=N=
Balance per Bank Statement x
Add: uncreditedcheques x
xx

Less: Unpresentedcheques x
xx
Add/(deduct): Bank errors x
Balance per Adjusted Cash Book xx

ii. Starting with Adjusted CashBookt balance.

=N=
Balance per Adjusted Cash Book x
Add: unpresentedcheques x
xx

Less: Uncreditedcheques x
xx
Add/(deduct): Bank errors x
Balance per Bank Statement xx

Illustration
Ukweni’s Cash Book showed an overdrawn balance of N60,000 as at November 30, 2013 on his
UBA Account No. 1. The Bank statement showed an overdraft of N8,200.
Your investigation revealed the following:
i. Cheque drawn amounting to N100,000 had not been presented for payment.
ii. Cheques amounting to N50,000 entered in the Cash Book as paid into bank had not
yet been cleared by the bank.
iii. A cheque for N24,000 drawn on his bank account no.1 had been charged by the bank
to his account no.2.
iv. The payment side of the Cash Book had been undercast by N14,000.
v. A dividend of N8,000 paid direct to bank had not been recorded in the Cash Book.
vi. Bank charges of N6,000 entered in the bank statement had not been entered in the
Cash Book.
vii. A cheque of N10,000 paid into the bank had been dishonoured and shown as such by
the bank, but no entry of the dishonoured cheque had been made in the cash book.
viii. A cheque book costing N200 had been charged in the bank statement but not yet
entered in the Cash Book.
Required:
Prepare -
a. An Adjusted Cash Book.
b. A bank Reconciliation Statement as at November 30, 2013.

Suggested Solution
UKWENI
CASH BOOK
=N= =N=
Dividend Received 8,000 Balance b/d 60,000
Balance c/d 82,200 Undercast 14,000
Bank charges 6,000
Dishonouredcheque 10,000
Cost of cheque book 200
90,200 90,200
Balance b/d 82,200

UKWENI
Bank Reconciliation Statement as at November 30, 2014
=N=
Balance per bank Statement (8,200)
Add: Uncreditedcheques 50,000
41,800
Less: Unpresentedcheques 100,000
(58,200)
Adjust: Wrong entry to Account no.2 (24,000)
Balance per Adjusted Cash Book (82,200
Practice Exercise
T. Emeka maintains a business account with UBA Plc. The bank statement received for the
month of march 2014 showed a balance of =N=14,265 credit, but his cash book revealed a debit
balance of =N=13,380. Investigations revealed that:
1.Cheque no. 425 for =N=3,400 and cheque no. 043 for =N=6,000 deposited to the bank on
March 28, 2014 were not credited by the bank until Aril 2, 2014.
2. A cheque for =N=6,500 issued to Ikem Ltd had not been presented for payment.
3. A cheque for =N=3,000 received from a customer in full settlement of a debt of =N=3,300 had
been entered in the cash book at the full value of the debt.
4. Dividend of =N=650 from PZ Plc had been paid direct to the bank.
5. The bank deducted a total of =N=125 as its charges for the month.
6. The bank had credited a cheque of =N=3,560 of V. Amaka to T. Emeka account.
Required:
a. Adjusted Cash Book
b. Bank Reconciliation Statement as at March 31, 2014.
DEPRECIATION
Capital expenditure like building, plant, fixtures and fittings do normally last for more than one
year. It is obviously possible that these assets may deteriorate with the passage of time due to its
usage. There is therefore the need to recognise the loss in the value of non-current assets in the
books of accounts. Depreciation is the systematic allocation of the depreciable amount of an
asset over its useful life. Residual value is the expected disposal value of the asset (after
deducting disposal costs) at the end of its expected useful life. Useful life is the period over
which the asset is expected to be available for use by the business entity.
Causes of depreciation include: physical deterioration, obsolescence, inadequacy depletion, time
factor, etc.
Methods of calculating depreciation
There are several methods of calculating depreciation. These include:
1) Straight Line Method or Fixed Instalment Method
2) Reducing Balance Method or Diminishing Balance Method
3) Sum-of- the-Years’-Digits Method
4) Units-of-Output Method
5) Revaluation Method
6) Machine Hour Method
7) Depletion of Unit Method

Straight line method

Under this method, an equal amount of depreciation is charged in each accounting period over
the useful life of the non- current asset.
Annual Depreciation = Original cost of Asset –Salvage/residual Value
Useful Life of Asset
Illustration
On January 1, 2016 Ade Limited purchased a motor vehicle for #250,000,000. The motor vehicle
has an estimated useful life of five (5) years with a salvage value of #5,000,000.
Required: Calculate the depreciation charge and accumulated depreciation for each of the years
and show the net book value as at the end of 2020 accounting period using the straight-line
method.
SOLUTION
Annual Depreciation = #250,000,000 – #5,000,000 = #49,000,000
5

Year Carrying Depreciation Accumulated Carrying

amount at for the year Depreciation amount at
start of year end of year
¢ ¢ ¢ ¢
2016 250,000,000 49,000,000 49,000,000 201,000,000
2017 201,000,000 49,000,000 98,000,000 152,000,000
2018 152,000,000 49,000,000 147,000,000 103,000,000
2019 103,000,000 49,000,000 196,000,000 54,000,000
2020 54,000,000 49,000,000 245,000,000 5,000,000

Reducing Balance Method

Under this method of depreciation, the book value of a non-current asset at the beginning of the
year is multiplied by a fixed percentage to determine the depreciation for the accounting year.
This procedure is repeated in subsequent accounting periods so as to reduce the depreciable
amount of the non-current asset to its residual value or to zero if it has no residual value.

Depreciation Rate = l – n ROOT OF (residual value /cost of asset)

Where
n = estimated useful life of the asset.

Illustration
Use the question under straight line method
Required: Calculate the depreciation charge and accumulated depreciation for each of the years
and show the net book value as at the end of 2020 accounting period using the straight-line
method.
SOLUTION
Dep. Rate is 1 – 5 ROOT OF (5,000,000/250,000,000)
It will look like this:
Year Cost/ Rate Depreciati Accumulat Carrying
Carrying on for the ed amount of
amount at year Depreciati at end year
beginning on
¢ % ¢ ¢ ¢
1 1,000,000 27.52 275,200 275,200 724,800
2 724,800 27.52 199,465 474,665 525,335

ACCOUNTING ENTRIES:
Dr Depreciation expense account
Cr Accumulated depreciation account
Dr Statement of Profit or Loss
Cr Depreciation expense account
DISPOSAL OF NON-CURRENT ASSET
Dispose of non-current assets is either selling it for cash, exchanging it for a similar asset or a
different one, or merely by discarding the asset. In all these three situations you must remember
to take out the asset disposed from the main non-current asset account. This is done by opening
an account for the purpose of the disposal.

Accounting Entries
On the disposal of non-current asset, the following entries must be passed:
Open a Non-current Asset Disposal Account and;
1) Transfer the cost of the non-current asset sold to the non-current asset disposal account thus:
Dr. Non-current asset disposal Account
Cr. Non-current asset Account
2) Transfer the accumulated depreciation on the asset sold to the non-current asset disposal
account as follows:
Dr. Accumulated depreciation Account
Cr. Non-current asset disposal Account
3) The amount realized from the sale of the non-current asset must be recorded thus:
Dr. Cash, Bank or Sundry receivables Account
Cr. Non-current asset disposal Account
If the non-current asset account ends in credit bal. (i.e. bal b/d), it means there is profit on
disposal and is it ends in debit bal. (i.e. bal b/d), it means there is loss on disposal.
Illustration
From the above e.g. in straight line method, if at 1 st Jan. 2021 the cost of the asset was
#250,000,000 with accum. Depreciation of #245,000,000. It was disposed for #8,000,000. Show
the disposal account.

END OF YEAR ADJUSTMENTS

Capital expenditure and Revenue Expenditure

Capital Expenditure
Capital expenditure may be defined as the cost of acquiring a non-current asset for use in an
entity. Capital expenditure includes such costs that are incurred in adding value to existing non-
current assets in order to improve their earning capacity and to prolong their lives for more than
one accounting period.
Examples of capital expenditure are:
a) Purchase price of non-current assets such as motor vehicles, buildings, furniture and fittings,
plant and machinery
b) Extension or any improvement of a permanent nature made to any structure
c) Legal fees of acquiring land or buildings
d) The cost incurred in bringing any non-current asset to its present location
e) Any other cost that must be incurred in getting the non-current assets ready for its intended
use.
Revenue Expenditure
Revenue expenditure on the other hand is any cost in which its earning potential is exhausted
within one accounting period. Such expenditures are not made to increase or improve the value
of non-current assets but rather, are made for the maintenance and day-to- day running of the
business.
Examples of revenue expenditure are:
1) The cost incurred in acquiring trading inventories for sale
2) Cost of repairing any non-current assets
3) Discount allowed on credit sales
4) Expenses in connection with rent, insurance, telephone and electricity.
5) Staff salaries and emoluments.
Differences between capital and revenue expenditure
1. Time: Benefits derived from revenue expenditure is used up within one accounting
period, WHILE, the benefits from capital expenditure extends to more than one
accounting period.
2. Type of account: An increase in capital expenditure is added or debited to a non-current
asset account, which is finally disclosed in the statement of financial position, WHILE,
all revenue expenditures are charged to the Statement of profit or loss.
3. Accruals and Prepayments

The income and expenses that should be brought into the account for the purpose of determining
profit or loss for a reporting period should be strictly income and expenses attributable to that
period. But it often happens that at the end of the period, some expenses relating to the reporting
period have been incurred but neither paid nor brought into the books. Similarly, some costs may
have been incurred and paid, but the benefits derivable from the expenditure extend beyond the
current accounting/reporting period.
In cases like these, adjustments are made in the accounts to ensure that only expenses incurred
and that are wholly relating to the reporting period are used in ascertaining the profit or loss for
the period.
Therefore, ACCRUED EXPENSES OR INCOME are expenses or income of which cash is paid
or received after related expense or income is recognised. That is, the expenses or income will
not be received or paid until next accounting period.
PREPAID EXPENSES OR INCOME: Prepayments refer to transactions where cash is paid or
received before a related expense or revenue is recognized. These transactions are recorded when
cash is paid for expenses that apply to more than one accounting period or when cash is received
for revenue that relates to more than one accounting period. The portion of the expense or
revenue that applies to the future period is deferred as a prepaid expense (asset) or unearned
revenue (liability).

Illustrations

1. Expenses owing at the end of the period

A Ltd pays a yearly rent of N480,000 on its office accommodation. By the end of the year, the
company owed rent for the last quarter of the year.

Show the rent account for the year and extract of the Income statement.
Suggested solution

Rent A/C
=N= =N=
Cash/bank 360,000 SCI (Profit & Loss a/c) 480,000
Balance c/d (Rent due) 120,000
480,000 480,000
Balance b/d 120,000

Note: if the identity of the Landlord is known, the corresponding credit entry will go to his
account. E.g. Assume the building is leased from Asaolu Properties Ltd, the accounts will appear
as follows:
Rent A/C
=N= =N=
Cash/bank 360,000 SCI (Profit & Loss a/c) 480,000
Asaolu Properties Ltd 120,000
480,000 480,000
The accounting entry for accrued expense is:
=N= =N=

Dr. Cr.
Expense (Statement of Profit or loss) x
To: Accrued expense (Statement of financial position) x

Statement of comprehensive Income (Profit & Loss Account) - Extract.

Rent A/c 120,000

Asaolu Properties Ltd (Accrual a/c i.e liability) 120,000

Expenses paid in Advance (Prepayments)

Assume A Ltd paid N600,000 as rent for 2 years, the rent for year 1 is N300,000 and is the figure
that will enter the income account for the purpose of determining profit or loss for the period.
The balance of N300,000 is prepaid rent (rent paid in advance) and will be carried forward to the
subsequent period.
The rent a/c will appear as follows:
Rent A/C
=N= =N=
Cash/bank 600,000 SCI (Profit & Loss a/c) 300,000
Bal.(Rent prepaid) c/d 300,000
600,000 600,000
Balance b/d 300,000

The accounting entry for prepaid expense is:

Dr. Cr.
Prepaid a/c x
Expense a/c x

Income received in Advance and Income in Arrear

Any income received in advance is carried forward to the subsequent period to which it belongs
while revenue (income) in arrear/accrued is brought into the current period (when it is earned)
irrespective of the fact that it is not yet received.
Illustration
Aba Sports Club received the following subscriptions from its members in 2012:

Jan. 10. 2011 subscriptions paid in 2012 N500,000.

Feb. 8 Other subscriptions received N4,800,000. N400,000 of which is in respect of
2013 annual subscriptions.
Required: Show the subscription a/c for 2012.

Suggested Solution
Subscriptions A/c
=N= =N=
1/1/12. Balance b/d 500,000 10/1/12 Bank 500,000
31/12/12 SCI (P & L a/c) 4,400,000 8/2/12 Bank 4,800,000
31/12/12 Bal.(Income in Adv.) c/d 400,000
5,300,000 5,300,000
1/1/13 Balance b/d 400,000
Treatment in Statement of Financial Position (Balance Sheet)

1. All expenses prepaid are shown as current asset (prepayments) in the balance sheet
(statement of financial Position - SFP).
2. All accrued expenses are shown as current liabilities in the SFP
3. All income received in advance are grouped under current liabilities in the SFP
4. All unreceived income (accrued income) are shown as debtors and grouped under current
assets in the SFP.
Bad debts and Provision for Bad & Doubtful Debts
A debt is considered bad and written off to Income statement when it is proven that nothing
could be recovered from the debtor out of the amount owed. Bad debts may arise as a result of:
 Disputed invoices (whole or part)
 Death or bankruptcy of the debtor
 Failure of the debtor’s business etc
The value of the ascertained bad debt is removed from the debtor’s a/c and charged to the
income statement. The accounting entries are:
Dr. SCI (Profit & loss a/c)
Cr. Debtor’s A/c; with the amount written off.
Provision for Bad & doubtful debts
It is usually prudent to provide for the risk of default and inability for all amounts owing by
debtors. This is done through an age analysis of debtors or a general percentage provision based
on experience on the performance of accounts receivable. The required entries are:
Dr. SCI (Profit & loss a/c)
Cr. Provision for bad debts A/c; with the amount of provision
This is done to reduce the current year`s profit. The provision for bad debts is carried to the
Balance Sheet where it is deducted from the value of debtors.
In subsequent accounting period’s, new estimate must be made in respect of debts that may be
considered doubtful. The new allowance should be compared with the existing one and where
the current allowance is greater than the previous one, the difference representing an increase in
allowance for doubtful debts should be accounted for as follows:
Debit: Statement of Profit or Loss With the increase
Credit: Allowance for doubtful debts (current allowance less previous allowance)
However, if the current allowance is less than the previous one, the difference representing a
decrease in allowance for doubtful debts should be accounted for as follows:
Debit: Allowance for doubtful debts account with the reduction in allowance made
Credit: Statement of Profit or Loss (Previous allowance less current allowance).

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