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UNIT NO & TITLE: - NO.

10 & Financial Accounting

QUALIFICATION: - PEARSON BTEC LEVEL 4 HNC BUSINESS

YEAR: - 2018-2020

PREPARED BY: - PIYUSH BANG

REPORT LO1 to LO4

ASSESSOR NAME: - UTSAV GANDHI

PAGE | 1
SR.NO TOPIC PAGE NO
1 Introduction of subject
2 LO1: Record business transactions using double entry book-keeping,
and be able to extract a trial balance
3 P1: Apply the double entry book-keeping system of debits and credits.
Record sales and purchases transactions in a general ledger.
4 P2: Produce a trial balance applying the use of the balance off rule to
complete the ledger.
5 M1: Analyse transactions to show the progression from a previous trial
balance to the next one using double entry bookkeeping.
6 D1: Apply trial balance figures to show which statement of financial
accounts they will end up in.
7 LO2: Prepare final accounts for sole-traders, partnerships and limited
companies in accordance with appropriate principles, conventions and
standards
8 P3: Prepare final accounts from given trial balance.
9 P4: Produce final accounts for a range of examples that include sole-
traders, partnerships or limited companies.
10 M2: Make adjustments to balances of sum accounts for example,
accruals, depreciation and prepayments before preparing the final
accounts.
11 D2: Compare the essential features of each financial account statement
to analyse the differences between them in terms purpose, structure
and content.
12 LO3: Perform bank reconciliations to ensure company and bank
records are correct
13 P5: Apply the bank reconciliation process to prepare a number of bank
reconciliations.
14 M3: Apply the reconciliation process demonstrating the use of deposit
in transit, outstanding checks and Not Sufficient Funds (NSF) check.
15 D3: Prepare accurate bank reconciliations that apply appropriate tools
and techniques to check general accounts and balance sheets.
16 LO4: Reconcile control accounts and shift recorded transactions from
the suspense accounts to the right accounts
17 P6: Explain the process taken to reconcile control accounts and clear
suspense accounts using given account examples.
18 M4: Demonstrate understanding of the different types of accounts and
how and why they are reconciled.
19 D4: Produce accurate accounts that have been reconciled applying the
appropriate methods.
20 Reference/ Webliography
21 Bibliography
PAGE | 2
LO1: Record business transactions using double entry book-keeping, and be able to
extract a trial balance.

P1: Apply the double entry book-keeping system of debits and credits record sales and
purchases transactions in a general ledger.

 Receipts and Payments

A receipts and payments account is a summary of actual cash receipts and payments extracted
from the cash book over a certain period. All cash received and paid during the period
whether capital or revenue is included in this account. The receipts are entered on the debit side,
that in on the same side as that on which they appear in the cash book.

 Debits

A debit is an accounting entry that results in either an increase in assets or a decrease in


liabilities on a company's balance sheet. In fundamental accounting, debits are balanced by
credits, which operate in the exact opposite direction. For instance, if a firm takes out a loan to
purchase equipment, it would debit fixed assets and at the same time credit, a liabilities account,
depending on the nature of the loan.

 Credits

Credit is a contractual agreement in which a borrower receives something of value now and
agrees to repay the lender at some later date with consideration, generally with interest. Credit
also refers to an accounting entry that either decreases assets or increases liabilities and equity
on the company's balance sheet. Additionally, on the company's income statement, a debit
reduces net income, while a credit increases net income.

 Sales

A sale is a transaction between two parties where the buyer receives good services, and/or
assets in exchange for money. It can also refer to an agreement between a buyer and seller on
the price of a security. A sale functions as a contract between the buyer and seller of the
selected good or service.

 Purchase

A purchase means to take possession of a given asset, property, item or right by paying a
predetermined amount of money for the transaction to be completed successfully. In other
words, it’s an exchange of money for a particular good or service.

PAGE | 3
 General Ledger

A general ledger represents the record-keeping system for a company's financial data with debit
and credit account records validated by a trial balance. The general ledger provides a record of
each financial transaction that takes place during the life of an operating company. The general
ledger holds account information that is needed to prepare the company's financial statements,
and transaction data is segregated by type into accounts for assets, liabilities, owners' equity,
revenues, and expenses.

 Double Entry

Double entry, a fundamental concept underlying present-day bookkeeping and accounting,


states that every financial transaction has equal and opposite effects in at least two different
accounts. It is used to satisfy the accounting equation Assets = Liabilities + Equity. With a
double entry system, credits are offset by debits in a general ledger or T-account.

 Trial Balance

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled
into debit and credit account column totals that are equal. A company prepares a trial balance
periodically, usually at the end of every reporting period. The general purpose of producing a
trial balance is to ensure the entries in a company's bookkeeping system are mathematically
correct.

 Balance Off Rule

At the end of an accounting period, typically at the end of a month or year, it is necessary to
find the balance on each ledger account in order that a trial balance can be extracted as part of
the accounting cycle. The process is referred to as ‘balancing off accounts’ or balancing the
ledger.

PAGE | 4
The following are the transactions of Kristine’s business during her first month of trading.

1. Kristine starts a business and pays in £5,000 as capital


2. The business buys a car for £1,000 cash
3. They buy goods for resale for £500 cash
4. They buy more goods for resale for £600 on credit from Mr A
5. They pay rent of £200 cash
6. They sell half the goods for £800 cash
7. They sell the remaining goods on credit for £900 to Mrs X
8. They pay £400 cash on account of the amount owing to Mr A
9. They receive £500 from Mrs X
10.Kristine withdraws £100 cash from the business

PAGE | 5
 Journal Entry

Debit Credit
Date Particular L.f Rs Rs
1 Cash A/C DR 5000
To Kristine A/C 5000

2 Car A/C DR 1000


To Cash A/C 1000

3 Purchase A/C DR 500


To Cash A/C 500

4 Purchase A/C DR 600


To Mr A A/C 600

5 Rent A/C DR 200


To Cash A/C 200

6 Cash A/C DR 800


To Sale A/C 800

7 Mrs X A/C DR 900


To Sale A/C 900

8 Mr A A/C DR 400
To Sale A/C 400

9 Cash A/C DR 500


To Mrs X A/C 500

10 Drawing A/C DR 100


To cash A/C 100

Total 10000 10000

PAGE | 6
 Ledger Account

Debit Cash A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
1 To kristine A/C 5000 2 By Car A/C 1000
6 To Sale A/C 800 3 By Purchase A/C 500
9 To Mrs X A/C 500 5 By Rent A/C 200
8 By Mrs A A/C 400
10 By Drawing A/C 100

By Balance c/d 4100

6300 6300

Debit Kristine A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
1 By Cash A/C 5000

To Balance c/d 5000

5000 5000

Debit Car A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
2 To Cash A/C 1000

By Balance c/d 1000

1000 1000

PAGE | 7
Debit Purchase A/C Credit
Date Particular L.F Amt Date Particular L.F Amt
3 To Cash A/C 500
4 To Mr A 600

By Balance c/d 1100

1100 1100

Debit Mr A A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
8 To cash A/C 400 4 By Purchase 600

To Balance c/d 200

600 600

Debit Rent A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
5 To Cash A/C 200

By Balance c/d 200

200 200

PAGE | 8
Debit Sale A/C Credit
Date Particular L.F Amt Date Particular L.F Amt
6 By Sale A/C 800
7 By Mrs A/C 900

To Balance c/d 1700

1700 1700

Debi
t Mrs X A/C Credit
Date Particular L.F Amt Date Particular L.F Amt
7 To Sale 900 9 By Cash 500

By Balance c/d 400

900 900

Debit Drawing A/C Credit


Date Particular L.F Amt Date Particular L.F Amt
10 To Cash A/C 100

By Balance c/d 100

100 100

PAGE | 9
P2: Produce a trial balance applying the use of the balance off rule to complete the ledger.

 Purpose of Trial Balance

The purpose of a trial balance is to ensure that all entries made into an organization's general
ledger are properly balanced. A trial balance lists the ending balance in each general
ledger account. The total dollar amount of the debits and credits in each accounting entry are
supposed to match. Therefore, if the debit total and credit total on a trial balance do not match,
this indicates that one or more transactions were recorded in the general ledgers that were
unbalanced.

From a practical perspective, accounting software packages do not allow users to enter
unbalanced entries into the general ledger. This means the trial balance is not needed by entities
that have computerized systems. If a business is still using manual record keeping, then the trial
balance has more value, since it is possible to create unbalanced entries in such a system.

When a manual recording keeping system is used, the trial balance is also used to create
the financial statements. This means that the account balances in the trial balance are manually
aggregated into the line items found in the financial statements.

Auditors also use the trial balance. They request it early in an audit, and transfer the ending
account balances from this report into their auditing software. They then use audit procedures to
test these balances.

SR.NO Particular L.F Debit Credit


1 Cash A/C 4100
2 Kristine A/C 5000
3 Car A/C 1000
4 Purchase A/C 1100
5 Mr A A/C 200
6 Sale A/C 1700
7 Mrs X A/C 400
8 Drawings A/C 100
9 Rent A/C 200

6900 6900

PAGE | 10
M1: Analyse transactions to show the progression from a previous trial balance to the
next one using double entry bookkeeping.

Characteristics of Trial Balance: - Keeping in mind the definition of the trial balance we can
define the following characteristics and use of the trial balance:-

1. Trial balance is prepared in tabular form only. It contains debit column for debit balance
of accounts and credit column for credit balances of accounts.
2. Only the closing balances of the accounts are shown in trial balance.
3. The closing balance of stock is never shown in trial balance. It is always shown as foot
note.
4. Other adjustments against which no entries are passed in the books also not shown in trial
balance. They are also shown as footnotes.
5. The trial balance is prepared on a particular date as required by the management or at the
end of the financial year.
6. Trial balance is not an account. It is a statement only.
7. The balance of all accounts is shown at one place. Thus it is the summary of all accounts.
8. It shows the arithmetical mistake of the entries.
9. Trading, profit and loss account and the balance sheet are prepared with the help of trial
balance only.

Advantages of trial balance Disadvantages of trial balance


To check the debits equal the credits It does not prove that all transactions have been
recorded
To find the uncover errors in journalizing It does not prove that the ledger is correct

To find the uncover errors in posting Numerous errors may exist even though the trial
balance columns agree
To locate the errors in ledger accounts It cannot find the missing entry from the journal
To make financial statements It cannot find the missing entry from the ledger
To list the accounts at a single place It cannot protect the repeated postings
To know the ending balance of each account It cannot protect the offsetting errors
at a glance
To make the adjustments for unrecorded It cannot protect the errors of principles
transactions
To find the missing amount of an account in It cannot protect the errors of commission
the special case
To test the mathematical accuracy of It cannot protect the errors of omission
recording process

PAGE | 11
D1: Apply trial balance figures to show which statement of financial accounts they will
end up in.

PAGE | 12
LO2: Prepare final accounts for sole-traders, partnerships and limited companies in
accordance with appropriate principles, conventions and standards.

 Financial Statement :

Financial statements provide a picture of the performance, financial position, and cash flows of
a business. These documents are used by the investment community, lenders, creditors, and
management to evaluate an entity.

 Financial Reports:

Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified
period of time. Financial Reporting is usually considered as end product of Accounting.

Financial Statement Financial Reports


 Financial report means any report about  Financial statements on the other hand
monitory matters. In other words a are also financial reports. But in the
financial report is about the transactions business and accounting the term
that have financial effects. To run a financial statement has more of a formal
business financial reports play important status.
role as relevant financial information is  Usually financial statements refer to
transmitted to relevant users inside and either a statement included in the
outside the entity to help them in complete set of general purpose
making decisions. financial statements or a complete set of
 For example; bank statement, aged general purpose financial statements.
debtors analysis report etc. And due the same reason whenever the
 Some financial statements are prepared term financial statement is used, it is
on regular basis at equal intervals and often assumed that a report is about
some are prepared as and when needed. entity’s financial position, financial
performance, cash flows or fluctuations
in equity.
 How Financial Report is produce?

Financial reports must be produced in a specific order. This is because the balance sheet uses
information from the general ledger; the income statement uses information from the balance
sheet, and cash flow analysis uses information from both.

 Balance Sheet

A balance sheet is vital to assessing the financial health of your business at a specific point in
time. Its structure is identical to the accounting equation, with assets most often listed on the
left, and liabilities and owner’s equity listed in separate sections on the right.
PAGE | 13
 Income Statement

Income statement starts by listing gross sales revenues for the accounting period. Deductions
for sales returns and discount allowances are then subtracted from gross sales to arrive at total
net sales. Inventory expenses, including an opening inventory valuation, delivery charges, and
monthly inventory purchases are totaled and subtracted from total net sales to calculate gross
profit for the reporting period.

 Cash Flow Report

A cash flow report is vital for determining whether your business has enough liquid assets to
pay its daily operating expenses and short-term debt obligations. It differs from an income
statement in that rather than focusing on profit or loss, a cash flow report focuses on cash
generation and cash outflows. It is important for assessing how your business generates cash.
Start by listing cash-on-hand available at the beginning of the month.

 How Financial Statement is produce?

The financial statements prepared for most small businesses comprise a balance sheet and an
income statement. Usually these are prepared by an accountant. But with the help of computer
software, you may be able to prepare your own financial statements. If you need to prepare
financial statements for a third party, such as a banker, sometimes the third party may request
that the financial statements be prepared by a professional accountant or certified public
accountant.

 Balance Sheet

Also called a statement of financial position, a balance sheet is a financial snapshot of your
business at a given date in time. It lists your assets, your liabilities and the difference between
the two, which is your owner's equity, or net worth. The accounting equation (assets = liabilities
+ owner's equity) is the basis for the balance sheet.

 Income Statement

Also called a profit and loss statement, or a "P&L," an income statement lists your income,
expenses and net income (or loss). The net income (or loss) is equal to your income minus your
expenses. Your business's tax return will use a variation of the income statement to determine
your potentially taxable income.

PAGE | 14
P3: Prepare final accounts from given trial balance figures adjusting for accruals,
depreciation and prepayments.

Trial balance as on 31 December 2016

Particular Dr (RS) Cr (RS)


Premises at cost 120000
Depreciation(premises) 7200
Long term loan 52800
Capital 70000
Debtors 1900
Creditors 1500
Drawings 6750
Cash 150
Opening stock 4200
Fixtures & fittings 5000
Depreciation(fixtures & fittings) 1000
Vehicles 10000

Depreciation(vehicles) 2000
Bank(LOAN) 750

Sales 195000
Purchases 154000
Wages 20500
Sundry expenses 9500
VAT 1750
Closing stock- P & L a/c 5200

Closing stock-B/ 5200


Total 337200 337200

Premises depreciate at 2 %( straight lines)

Vehicles & fixtures and fittings depreciate at 20 %( straight lines)

Wages prepaid- 560 & sundry expenses- 500


PAGE | 15
TRADING AND PROFIT AND LOSS ACCOUNT

For the Year end 31 December 2016

Particulars Amt (RS) Amt (RS) Amt (RS)


Sales 195000
(-) Cost of goods sold
Opening stock 4200
(+)Purchases 154000
(-)Closing stock 5200 153000

Gross Profit 42000

(-) Expenses
Wages 20500
(-)P.paid 560 19940
Sundry expenses 9500
(+)O/S 500 10000
Depreciation
Premises 2400
Fixtures & fittings 1000
Motor vehicles 2000 5400 35340

Net Profit 6660

PAGE | 16
BALANCE SHEET AS ON 31 DECEMBER 2016

Particulars Amt (RS) Amt (RS)


Fixed Assets
Premises 120000
(-)Provision for depreciation 7200
(-)Depreciation at 2%p.a 2400 110400

Fixtures & fittings 5000


(-)Provision for depreciation 1000
(-)Depreciation at 20%p.a 1000 3000

Motor vehicles 10000


(-)Provision for depreciation 2000
(-)Depreciation at 20%p.a 2000 6000
119400

Current Assets (A)


Cash 150
Debtors 1900
Closing stock 5200
Wages P.paid 560
7810
Current Liabilities (B)
Creditors 1500
VAT 1750
O/S Sundry expenses 500
Bank loan 750
4500
Working Capital (A-B) 3310

(-) Long term Liabilities


Long term Loan 52800

NET ASSETS 69910

PAGE | 17
Financed By:
Capital 70000
(+)Net Profit 6660
76660
(-)Drawings 6750
CAPITAL EMPLOYED 69910

PAGE | 18
P4: Produce final accounts for a range of examples that include sole-traders, partnerships
or limited companies.

Trial balance of Olivia Boulton, as at 31 December 2017

Debit (RS) Credit (RS)


Stock at 1 January 2017 50000
Purchases 420000
Sales 557500
Shop Expenses 6200
Wages 33500
Rent paid 750
Telephone expenses 500
Interest paid 4500
Travel expenses 550
Premises 200000
Shop Fittings 40000
Debtors 10100
Bank 5850
Cash 50
Capital 75000
Drawings 27000
Loan from Bank 150000
Creditors 14500
Value Added Tax 2000
799000 799000

PAGE | 19
FINANCIAL STATEMENT OF SOLE-TRADERS

TRADING AND PROFIT AND LOSS ACCOUNT

Of Olivia Boulton for the ended 31 December 2017

(RS) (RS)
Sales 557500
Opening Stock (1 January 2017) 50000
Purchases 420000
470000
Less Closing Stock (31 December 2017 42000
Cost of Sales 428000
Gross Profit 129500

Less Overheads
Shop expenses 6200
Wages 33500
Rent paid 750
Telephone Expenses 500
Interest paid 4500
Travel expenses 550
46000
Net Profit 83500

PAGE | 20
BALANCE SHEET OF OLIVIA BOULTON

AS ON 31 DECEMBER 2017

(RS) (RS) (RS)


Fixed Assests
Premises 200000
Shop Fittings 40000
240000
Current Assests
Stock 42000
Debtors 10100
Bank 5850
Cash 50
58000
Less Current Liabilities
Creditors 14500
Value Added Tax 2000
16500
Working Capital 41500
281500
Less Long-term Liabilities
Loan from bank 150000
Net ASSETS 131500

FINANCED BY
Capital
Opening Capital 75000
Add net profit 83500
158500
Less drawings 27000
Closing Capital 131500

PAGE | 21
Trial balance as on 31 December 2017

Particulars Debit (RS) Credit (RS)


Sales 250000
Purchases 156000
Sales returns 5400
Purchase returns 7200
Discount received 2500
Discount allowed 3700
Stock on 1st Jan, 2011 12350
Salaries 46000
Electricity & gas 3000
Rent and taxes 2000
Sundry expenses 4700
Premises 100000
Equipment 30000
Vehicles 21500
Debtors 23850
Bank Overdraft 851
Cash 125
Creditors 12041
VAT 3475
Akshit 50000
Ram 60000
Drawings 10442
Long term 33000
Total 419067 419067

PAGE | 22
FINANCIAL STATEMENT OF PARTNERSHIPS

TRADING AND PROFIT AND LOSS ACCOUNT

for the Year end 31 December 2017

Particular Amt (RS) Amt (RS) Amt (RS)


Sales 250000
Sales Returns 5400 244600
(-) Cost of goods sold
Opening stock 12350
(+)Purchases 156000
(-)Returns 7200 148800
(-)Closing stock 16300 144850
Gross Profit 99750

(-) Expenses
Salaries 46000
Electricity & Gas 3000
Rent & Taxes 2000
Sundry expenses 4700
Discount Allowed 3700 59400

(+)Income

Discount received 2500

Net Profit 42850

PAGE | 23
BALANCE SHEET AS ON 31 DECEMBER 2017

Particular Amt (RS) Amt(RS) Amt(RS)


Fixed Assets
Premises 100000
Equipment 30000
Vehicles 21500 151500

Current Assets (A)


Debtors 23850
cash 125
Closing Stock 16300 40275

Current Liabilities (B)


Bank overdraft 851
Creditors 12041
VAT 3475 16367

Working Capital (A-B) 23908

(-) Long term Liabilities


Loan 33000

NET ASSETS 142408

Financed By:
Akshit 50000
(+) Net Profit 21425 71425
Ram 60000
(+) Net Profit 21425
(-)Drawings 10442 70983
CAPITAL EMPLOYED 142408

PAGE | 24
M2: Make adjustments to balances of sum accounts for example, accruals, depreciation
and prepayments before preparing the final accounts.

D2: Compare the essential features of each financial account statement to analyse the
differences between them in terms purpose, structure and content.

PAGE | 25
LO3: Perform bank reconciliations to ensure company and bank records are correct.

Meaning:

The pass-book and cash-book must show the similar bank balance on particular date. But in an
actual practice it is not so, because some of the entries might not have been recorded or wrongly
recorded in any of the two books. Therefore, it is desirable for the businessman to check
periodically the entries in the pass-book with entries in the bank column of the Cash-book. The
statement, which is prepared periodically with a view to reconcile the two balances o a
particular date, is called as “Bank Reconciliation Statement”.

Definition:

“A statement which is prepared to reconcile the difference between the between the balance
shown by bank column of Cash book and balance shown by Bank pass Book and also showing
causes of disagreement of these two balance is called as “Bank Reconciliation Statement”.

Need and Importance of a Bank Reconciliation Statement

A Bank Reconciliation Statement is required and important because of the following reasons.

1. It detects the mistakes/ errors and omissions made either in the Pass-book or in the cash-
Book.
2. It highlights the causes of between the bank balance as per Cash-Book and the bank
balance as per Pass–Book.
3. It explains any delay in the collection of cheques.
4. It reduces the chances of various frauds by the staff handling cash.
5. There is moral check on the staff of the organisation to keep the cash records always up-
to-date.

PAGE | 26
P5: Apply the bank reconciliation process to prepare a number of bank reconciliations.

The Bank column of a cash book showed a debit balance of RS 49000 on 31st October 2011.
While comparing the cash book balance with pass book balance following different were
noticed.

1. Cheques of Rs 9000 and Rs 15000 were deposited but were not collected and credited by
bank till 31st October, 2011.
2. Our debtor directly deposited Rs 8000 into the bank a/c not recorded in the cash book.
3. Bank credited interest on Investment Rs 500.
4. Cheque of Rs 10000 issued but not presented for payment to the Bank.
5. Bank paid Insurance premium Rs 6000 but not entered in the cash Book.
6. Bank debited Bank charge Rs 100.

Particulars Amount (RS) Amount (RS)


Balance as per Cash Book 49000
Add:
I. Direct deposit by debtor credited in pass book
only 8000
II. Interest credited by bank in pass book only 500
III. Cheque issued but not presented for payment 10000 18500
67500
Less:
I. Cheques deposited but not collected by Bank 24000
II. Insurance paid by Bank debited in Pass Book only 6000
III. Bank charges debited by Bank in Pass Book only 100 30100

Balance as per pass book 37400

PAGE | 27
M3: Apply the reconciliation process demonstrating the use of deposit in transit,
outstanding checks and Not Sufficient Funds (NSF) check.

Particular Amount (RS) Amount (RS)


Balance as per Cash Book 320000
Add:
Interest Income 30
Deposit in transaction 25000 25030

Less:
Check printing Charge 200
Service Charge 150
NSF Fee 10
NSF deposit rejected 500
Uncleared Checks 80000 80860

Balance as per pass book 264170

PAGE | 28
D3: Prepare accurate bank reconciliations that apply appropriate tools and techniques to
check general accounts and balance sheets.

PAGE | 29
LO4: Reconcile control accounts and shift recorded transactions from the suspense
accounts to the right accounts.

P6: Explain the process taken to reconcile control accounts and clear suspense accounts
using given account examples.

 Control Account:

General ledger account whose balance reflects the total of balances of related subsidiary ledger
accounts. Accounts receivable and accounts payable are the most commonly used control
accounts, and their balances serve as a crosscheck (control) of the accuracy of the associated
subsidiary records. Also called controlling account

 Process taken to reconcile control accounts


 Step-1: Adjust errors of control a/c in Receivable/ Payable Control Account by recording
debits or credits
 Step- 2: Adjust errors of receivable/ payable ledger in the list of receivable/ payable
ledger balances by adding & deducting.

 Suspense Account

A suspense account is a general ledger account in which amounts are temporarily recorded. The
suspense account is used because the appropriate general ledger account could not be
determined at the time that the transaction was recorded.

PAGE | 30
 Difference between Control Account & Suspense Account
 Suspense Account

Figures or financial items included in a suspense account are transactional. For example, when a
transaction is carried out and is coded incorrectly, they cannot be further processed
immediately. Other conditions may also include missing an account number on a loan, deposit
transaction, or even a check drawn on a depositor’s account that is not properly endorsed or
signed by the depositor.

In the case of a suspense account, they are properly inquired, researched, and then cleared the
very following day. The total balances of suspense accounts are cleared as of the reported date
and their balance cannot be reported as ‘other assets’ or ‘other liabilities’. Their balances can be
reviewed which can include the material amounts. In addition, bank authorities regularly
monitor and reconcile suspense accounts. Stale suspense items are charged off when classified
as uncollectible and entered as a loss in the report of the concerned authority or in the report of
examination.

Suspense accounts are usually created to handle uncertainties or ambiguities if you do not know
where the amount should go. Suspense accounts can also be known as general ledgers that hold
uncertain or confusing transactions. An example of a suspense account can when a person who
has more than one item or multiple outstanding items that sends a payment without defining
which item the payment is for. So, rather than leaving these payments off of the bookkeeping
records, you can simply put that transaction into a suspense account until you decide where it
belongs.

 Control Accounts

Control accounts are used on a temporary basis to record transactions until there comes a time
to post them to a permanent account. Control accounts are more simple accounts where you
easily enter cash received as a Control amount until the money is acknowledged, verified, and
then deposited in your bank. Control account can also be used in a way for accounts receivable.

Sometimes, amounts or costs are put into a Control account and then those respective payments
are moved or transferred into a more appropriate account afterward. Control accounts are also
used to verify the ongoing amounts of expenses and income. Both of these amounts are
recorded in a timely manner so that the accounting is as accurate as possible.

PAGE | 31
 Comparing the Two

Both the suspense and Control accounts are temporary accounts where transactions that are
added can then be transferred to their appropriate accounts such as the income or expense
account. They both have entirely different workings and functionality as Control accounts hold
transactions for later use or transfer ensuring that the accounting information is recorded
accurately. Whereas, a suspense account is operated or used when there is an accounting
problem for the time being and then the accounting problem is resolved later. Both of these
accounts are zeroed out at the end.

Control accounts can be used for different Control purposes and are reviewed to ensure that all
remaining balances are either zeroed out or explained. The main purpose of Control accounts is
to ensure that accounts are zeroed out and whether or not the remaining values are valid.
Control accounts are most useful for occasions or situations which include:

 Funds that are not transferred to the bank until the new year
 Reversal of certain payments need to be cleared out
 Incorrect amount posting which needs to be cleared out
 All wages need to be banked and cleared to be zeroed out

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 SUSPENSE ACCOUNT EXAMPLE:

Suspense account accounting is used when the correct classification cannot be determined at the
time of posting. Suppose for example, an unidentified cash payment of 1,000 has been made.
The suspense accounts entry journal to post the unclassified transaction would be as follows:

Suspense account journal entry

Account Debit (RS) Credit (RS)


Cash 1000
Suspense account 1000
Total 1000 1000

The debit of 1,000 is unidentified and is posted as unclassified to the suspense account in the
balance sheet.

At a later stage transaction analysis shows that the amount related to the payment of interest,
and a correcting interest suspense account entry is made as follows:

Suspense account correcting journal entry

Account Debit (RS) Credit (RS)


Interest Expense 1000
Suspense account 1000
Total 1000 1000

The original entry to the suspense accounts has now been reversed, so the balance on the
account is zero. Having been correctly identified, the interest expense account now contains the
correct amount of 1,000.

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SUSPENSE ACCOUNT EXAMPLE 2:

When you receive cash of $100 from the client but not sure about the transaction against which
he made this payment then you can 1st pass this entry and once you could determine that then
you can reverse this transaction in the following manner-

Suspense account journal entry

Account Debit (RS) Credit (RS)


Suspense account 100
Cash 100
Total 100 100

Suspense account correcting journal entry

Account Debit (RS) Credit (RS)


Suspense account 100
Account Receivable 100
Total 100 100

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M4: Demonstrate understanding of the different types of accounts and how and why they
are reconciled.

The major rule of reconciliations is that there is no account that cannot be reconciled.
Inappropriately we did not say ‘easily’ – sometimes it is very difficult, often really difficult -
but usually means the information required is difficult to attain, with all info available it is
always achievable. This begs an assessment of whether the profit surpasses the price or whether
the time is worth the effort or whether the exercise will be so troublesome that it is not worth
the consequence on the accounts. The problem is that even if the account balances there could
be mistakes – reconciliation does NOT guarantee accuracy, still, it does increase the possibility
that it is accurate. The second rule is that you must have all the info necessary to make the
matches to eradicate the transactions that have been dealt with. However, you can get most of it
right and it comes down to a matter of judgement. Types of Reconciliation’s are, basically, four
kinds of reconciliation.

1 Within the account itself: For instance, Prepaid Expenses. The account functions as a
holding pen on the Balance Sheet for items prepaid and are transferred out when paid.
There are typically 2 sources of entries; one arises when the expense is raised in the
suitable period. For instance: Rent for the current month. The other when the expense is
paid. This method caters for the essential to match the expense to the period, no matter
when the expanse is paid. If paid in the suitable month it is a wash in the Prepaid Expense
account, if not it is mechanically carried on the balance sheet properly, no matter when it
was actually paid. Situations that are covered by this procedure include:
 Monthly recurring expenses
 Annual payments
 Advance payments of all types
Still, this kind of reconciliation calls for an amortization of amounts posted into the
account, leaving a balance as yet unallocated. The best procedure to deal with this is to
renovate what must happen and compare it with what has happened.

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2 With an external account: sub-types:
2.1 Bank Accounts Bank accounts warrant special mention: Each firm has some. Bank
accounts are allegedly under our control BUT the bank does it their way, it is maintained
by the bank. We will make modifications in our account to imitate the external items. In
the case of the bank account, we make entries in our books, in the form of deposits and
payments; still, there are items that we might not have introduced that appear on the bank
statement that we require to procedure through our GL account.
 The reconciliation will reflect 2 types of difference:
 Outstanding items such as deposits and payments that are in the GL but have not yet hit
the bank.
 Items that have been managed through the bank but we have not processed through the
GL.

The first, outstanding, will typically automatically adjust when the check is presented - unless it
is lost or goes stale. The second requirements to be entered into the GL or it will cause a
permanent difference between the two accounts (GL and Bank Account).In recent times there
are many ways that items are managed through the bank that might not be in the GL. Wires,
ATM cards, P-cards etc. Moreover, the advent of ACH has resulted in extra work being
required to reconcile bank accounts.

2.2 Other External Accounts Circumstances that are covered by this method include:
 Medical scheme suppliers
 Insurance carrier accounts
 Accounts Payable (Vendor account)
 Accounts receivable (Customer account)

It would remain nice if the external 3rd party were supportive in all cases. Still, each company
does it their way. Consider a vendor’s account. They pledge transactions and we receive the
information and respond through handling the costs or expenses into our system. Yet, we also
initiate some transactions – chargebacks, returns and payments.

 There are 2 methods of maintaining accounts payable:


 Open item
 Balance forward

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3 With another account: For instance, inter-company accounts. These are the nastiest from
the point of view that they are prone to mistake, typically because they need continuous
reconciliations to keep them in sync. There will be outstanding on both sides and these
will result in permanent differences unless the opposite side is familiar.

Reconciliations need a list of initiated transactions which have towards remained outlined to the
other side or managed on the other side. One method of dealing with this is to have two
accounts each firm or division having an account for the items they initiate and one that the
other side pledges. Still, the result will always net to the same, whether you use 1 or 2 accounts.

Sometimes firms will have two accounts, one for transactions that they initiate and one for
transactions that they respond to (the other companies ‘initiated’ account).This sometimes make
simpler the situation.

4 Control account: In this type a GL Control account balance is approved with the total of
the individual accounts in the sub-ledger. Reconciliation accounting business give you
consist and precise work which can be easily used for the benefits of the decision-making
desires.
 The main benefits of working with Reconciliation accounting are below:
 Consistent Data Source: Reconciliation accounting business give you consist and precise
data which can be easily used for the benefits of the decision-making desires. This in turn
guarantees competence in workflow and there is no expenditure of time.
 Maximize your ROI: Reconciliation accounting work give significant cost reduction and
gives you high Return of asset.
 High Superiority Work: Main benefits of Reconciliation accounting work are to get high
quality work as per your needs with reasonable rates.

Securities, Uniformity, Rapid growth, Speed, services and improve customer satisfaction,
improved presentation, Backend effective work environment these are main goal of
Reconciliation accounting.

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 Why is Reconciliation Important in Accounting?

Reconciliation is an accounting process that proves and documents that account balances are in
agreement. It's a fundamental account process that ensures the actual money spent matches the
money leaving an account at the end of a fiscal period. This is especially important for
businesses and individuals to inspect fraudulent activity and to prevent financial
statement errors.

At the end of every fiscal month and quarter, it's a good idea to reconcile an account. When
reconciling an account, businesses and individuals prove that every transaction sums to the
correct ending account balance. Generally, there are two ways to reconcile an account:
reviewing documents and reviewing analytics.

 Documentation Review

Documentation review is a common process of accounting reconciliation. This process reviews


the appropriate amount for each transaction and determines whether the amount in the account
matches the actual amount spent. For example, suppose a responsible individual keeps all of his
receipts and likes to make sure that the money he spent is going to the right places. He notices
that he was charged 20 times on numerous occasions on his credit card bill.

These charges are small, and he neglects them assuming they are lunch expenses. Then, he
inspects the company charging his credit card and realizes he does not have any receipts from
this company. He calls his credit card company to dispute this and finds that his credit card
information is compromised due to a criminal who gathered his information from a business he
shops at regularly. The credit card company and the business reimburse him for the incorrect
charges. This active account reconciliation allowed the individual to cancel his credit card and
stop all fraudulent activity.

 Analytics Review

Analytics review is another common process that individuals or business can use for reconciling
an account. Under this process, businesses estimate the actual amount that should be in the
accounts based on previous account activity levels. This process is important for businesses to
check for fraudulent activity or balance sheet errors.

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 How to reconcile an account?

When you reconcile an account, you are proving that the transactions that sum to the ending
account balance for the account are correct. This means you can prove one of the following two
assertions:

 That the transactions included in a revenue, expense, gain, or loss account belong in that
account, and so should not be shifted into an account that more closely matches the
nature of the transaction; or
 That the transactions included in an asset, liability, or equity account are valid, and so
should not be flushed out of the balance sheet by shifting the transactions into accounts
associated with the income statement.

Auditors want to see account reconciliation for larger accounts, though reconciliations should
be performed even in the absence of an auditor request, since this is a good accounting practice
that leads to more accurate financial statements.

Account reconciliation is usually done for all asset, liability, and equity accounts, since their
account balances may continue on for many years. It is less common to reconcile a revenue or
expense account, since the account balances are flushed out at the end of each fiscal year.
However, this may be done simply to verify that transactions were recorded in the correct
account; reconciliation may reveal that a transaction should be shifted into a different account.
Usually, this means moving an expense into a different account.

There are two ways to reconcile an account, which are:

 Documentation review: A documentation review is the most common form of account


reconciliation, and the one that auditors prefer. Under this method, call up the account
detail in the accounting software, and review the appropriateness of each transaction
listed in the account. For example, if you are reconciling the trade accounts receivable
account, the balance in the account should exactly match the total of the open accounts
receivable report.
 Analytics review: Under an analytics review, create an estimate of what should be in the
account, based on historical activity levels or some other metric. For example, estimate
the amount of expected bad debts in the open accounts receivable account, and see if this
approximately matches the balance in the allowance for doubtful accounts contra
account.

If the account reconciliation reveals that an account balance is not correct, adjust the account
balance to match the supporting detail. By doing so, you can always justify the account

PAGE | 39
balances. Also, always retain the reconciliation detail for each account, not only as proof, but
also so that it can be used as the starting point for account reconciliations in subsequent periods.

Conclusion:

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D4: Produce accurate accounts that have been reconciled applying the appropriate.

 Biruta has prepared the following trial balance.


Particular Dr Cr
Motor Van, at cost 5500
Inventory 6230
Receivables Ledger Control 19167
Cash at bank 218
Petty Cash 50
Payables Ledger Control Account 13166
Prepayment 490
Accruals 70
Motor Van – Accumulated Depreciation 2000
Sales 93870
Purchases 76182
Rent Expenses 1200
Wages expenses 12500
Electricity 516
Telephone 230
Accountancy expense 500
Van expense 280
Depreciation expense 1000
Capital 10000
Suspense Account 4957
Total 124063 124063

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The trial balance does not balance, and Biruta realises that this means that there must be errors
in the bookkeeping.

On investigation, the following errors are discovered:

1 A transposition error was made when posting a sales day book total of £8,132. The
correct figure was entered in the receivables ledger control account, but it was posted to
the sales account as £1,832
2 The balance on the electricity account was incorrectly recorded and should read £615
3 One cash payment for electricity of £200 had been recorded throughout as £20
4 When accounting for the telephone accrual of £70 at the year end, a single entry had been
made. It was the expense account entry that had been missed out.
5 A mistake had been made when casting the purchases account. The total should have
been £77,356

Journal Account

Particular Debit Credit


Supense A/c DR 6300
To sales A/C 6300

Electricity A/C DR 99
To Supense A/C 99

Telephone A/C DR 70
To Supense A/C 70

Purchase A/C DR 1174


To Supense A/C 1174
Total 7643 7643

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Ledger Account

Supense
Debit A/C Credit
Date Particular L.F Amt Date Particular L.F Amt
1 To Sales A/C 6300 1 By Balance b/d 4957
2 By Electricity A/C 99
3 By Telephone A/C 70
4 By Purchase A/C 1174

6300 6300

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