business accounting

Question

Ah Jie is owner of Jie Kopitiam. At the end of each month, Ah Jie prepares a bank reconciliation statement for her business bank account. At 31 May 2019 her ledger balance was RM2,759 (credit) and her bank statement showed that she had funds of RM131 at the bank.

She has the following information:

(i) Jie has arranged for RM2,500 to be transferred from her personal bank account into the business bank account. The bank made the transfer on 30 May, but Jie has not made any entry for it in her records.

(ii) On 21 May, Jie withdrew RM100 cash which she did not record.

(iii) Cheque number 202003, which Jie issued to a supplier, appears on the bank statement as RM650. Jie incorrectly recorded the cheque as RM560.

(iv) The bank debited Jie’s account with charges of RM129 during May. Jie has not recorded these charges.

(v) On 31 May, Jie lodged RM457. On the bank statement, this amount is dated 3 June 2019.

(vi) Jie was advised by the bank that she earned RM52 interest for the period in May that her account was in credit. Jie recorded this in May, but the bank did not credit her account until June 2019.

(vii) Three of the cheques issued in May, with a total value of RM942, were not debited on the bank statement until after 31 May.

(viii) A cheque for RM276, issued to a supplier, was cancelled but Jie has not recorded the cancellation of the cheque.

Required:

(a) Show the bank account in Jie’s general ledger, including any adjusting entries required due to the information given in points (i) to (viii). Note: You MUST present your answer in a format which clearly indicates whether each entry is a debit or a credit. [14 marks]

(b) Prepare a reconciliation of the bank statement balance to the corrected balance on the bank account in Jie’s general ledger. [3 marks]

(c) Indicate how the bank balance will be reported in Jie’s final accounts and the value to be reported. [3 marks]

Answer 1

The key to this problem is that the May 2019 ledger balance must be adjusted to get to a total, the balance the bank shows must be adjusted to get to a total, and those 2 totals must match.

The fact that the two adjusted totals must match is a great "check" that you have properly reconciled.

You must determine which numbers in (i) to (viii) adjust the May 2019 ledger unadjusted balance and which adjust the bank's reported balance.

These are the items which adjust the May 2019 ledger balance (shown as journal entries where debits=credits).

(i)

debit JK Bank Account RM2,500 credit Capital Contribution (or maybe Loan Payable to Shareholder/Owner) RM2,500

(ii)

credit JK Bank Account RM100 debit Distribution (or Loan Payable to Shareholder/Owner etc.) RM100 [The problem is not requiring you to specify the offset account but this is some kind of distribution or dividend or loan to Shareholder/Owner or payment on Loan Payable to Shareholder/Owner]

(iii)

credit JK Bank Account RM90 debit Accounts Payable RM90

(iv)

credit JK Bank Account RM129 debit Bank Fees (expense) RM129)

(v)

I had to look up the definition of lodged with regards to a bank account "This means to pay a cheque into a bank account." https://www.proz.com/kudoz/english/finance-general/3441493-lodge-a-cheque-into-a-bank-account.html

So, we understand she booked a payment to the bank account in May which really she should show as paid June 3 as the funds were not available to her company until June 3.

Therefore, we need to reverse the May Entry

credit JK Bank Account RM457 debit Capital Contribution (or maybe Loan Payable to Shareholder/Owner) RM457

[this deposit to the bank will be posted in JK’s books for June]

(viii)

debit JK Bank Account RM276 credit Accounts Payable RM276

The other items (vi) to (vii) are adjustments to the balance the bank shows. (vi) the bank balance is 52 too low as the bank did not post until after May 31. (vii) the bank balance is too high 942 as the bank did not clear the check until after May 31.

Required

( a )

The JK Bank Account has a May 31 balance of credit RM2759 before adjustments. See adjustments (i), (ii),(iii),(iv),(viii)

So far we have

-2,759

2,500

-100

-90

-129

-457

276

sums to -759 this is a credit

The bank account in Jie’s general ledger should not show a credit balance.

A negative cash balance results when the cash account in a company's general ledger has a credit balance.

The credit or negative balance in the checking account is usually caused by a company writing checks for more than it has in its checking account.

When a company prepares its balance sheet, a negative balance in the cash account should be reported as a current liability

This account might be called "Overdrawn checks" or "Checks paid exceeding cash", but you are not required to state what this account is.

Because of the above there is a final adjusting entry for the month debit RM759 JK Bank Account credit the current liability account RM759.

The final May 31 bank account in Jie’s general ledger is ZERO.

-2,759

2,500

-100

-90

-129

-457

276

759

Sums to zero

Because a current liability of RM759 shows on the balance sheet. The liability RM759 is a credit

( b )

-2759 unadjusted JK Bank Account May 31 balance

2500 deposit not included above (owner arranged for RM2,500 to be transferred from her personal bank account into the business bank account)

-100 cash withdrawal not recorded

-90 check recorded at wrong value

-129 bank fees (expense to JK)

-457 deposit recorded in May that happened in June

276 unrecorded cancellation of cheque

Sums to -759 total to reconcile to bank's balance

131 bank account balance per bank statement

52 May's interest recorded by bank in June

-942 May checks cleared in June

Sums to -759 total to reconcile to JK Bank Account balance before JK Bank Account's balance was reclassified to current liabilities

Two above totals reconcile!

( c )

the bank balance will be reported in Jie’s final accounts at a zero balance. Jie's Current Liabilities will include a liability (credit) of 759 ["Checks paid exceeding cash"]