Bank Reconciliation Statement

BANK RECONCILIATION STATEMENT

Meaning-:

Bank reconciliation statement is a statement which reconciles the bank balance as per cash book with the balance as per passbook by showing all causes of difference between the two.

Importance of bank Reconciliation statement -:

·         Bring out any errors that may have been committed either in the cash book or pass book.

·         Helpful in detecting errors, frauds at the time of passing entries in the cash book or pass book

·         Any undue delay in the clearance of cheques will be shown up by the reconciliation

·         Helpful for finding out the actual position of the bank balance.

Causes of difference between bank balance shown by cash book and that shown by passbook -:

1. Cheques issued but not presented for any payment-:   The entry in the cash book is made immediately on issue of cheque but naturally entry will be made by the bank only when the cheque is presented for payment. There will thus be a gap of some days between the entry in the cash book and in the pass book.
2. Cheques deposited for collection but not yet collected-: The client debits bank column of cash book as soon as he deposits cheques with the bank for collection, but the bank credits client’s account only when it has collected cash on the chaques so deposited. It results in the bank balance as per cash book being higher than the balance as per pass book.
3.  Bank charges not entered in the cash book -: As soon as these charge (incidental charge, collection charge) are made, the bank debits the customer’s account in its own books and this reduces the bank balance. But the customer will know such charges only when he received a statement of account from the bank, until than, bank balance as per passbook will be less then bank balance as per cash book.
4. Interest credited or debited by bank, not entered in the cash book -: when bank allow interest to a customer, it will credit customer‘s account and his bank balance as per pass book will increase. But the customer will not pass the entry in cash book. Simultaneously till he knew the fact, thus the balance will differ. Likewise, interest on overdraft is debited to the customer’s account and till the same is not entered in the cash book.  
5.  Direct collections on behalf of customers -:A banker may receive amounts due to the customer by way of dividends, rent, interests etc. directly from the persons concerned on account of standing instructions of the customer to such persons. Similarly, debtors may also deposit the amounts directly to the bank. The bank credits the account of the customer for such collections as soon as it gets such payments. But same will be entered in the cash book only when customer receives the statement from the bank. Thus the balances differ.
6.  Direct payment by bank-: Usually, the bank is given standing instructions for certain payments to be made, such as payment of insurance premium, interest on loan, electricity bill etc. Bank, while making payments, debits pass book but the customer has no information of the same till he is informed. It results in a difference in balances.
7.  Dishonour of cheques/bills-: When cheque or bill of exchange discounted with the bank is dishonoured, the same is debited in the pass book but not given effect in the cash book until the intimation is received. It will cause a difference in the two balances.
8. Cheques received and entered in the cash book but omitted to be deposited into the bank-: When cheque is received, the same is entered in the cash book but it may not be deposited into the bank immediately. This will cause a difference in the two balances.
9.  Errors-:There may be errors in the accounts maintained by the customer or/ and by the bank. A wrong debit or credit given by the customer or the bank leads to a difference in the balances.

Significance of BRS -:

1. It highlights the causes of difference between the bank balance as per cash book and the balance as per pass book. Necessary adjustments can, therefore, be carried out at an early date.
2. It reduces the chance of fraud by the staff dealing with cash and cash bring.
3. It acts as a moral check on the staff of the organization to keep the cash records always up to date.
4.  Bank balance as per cash book cannot be accepted as final unless it is supported by statement of passbook. When these two balances do not tally, reconciliation becomes essential to determine the correct bank balance that can be used while finalizing the accounts.
5. It helps in finding out actual position of the bank balance.

PROCEDURE OF PREPARING BRS-:

A bank reconciliation statement is prepared as on a particular date for a particular period to reconcile the bank balance as per cash book with balance as per pass book by showing causes of difference between the two. The statement starts with bank balance as per cash book and then additions to and subtractions from this balance are made to arrive at the balance as per pass book. Alternate procedure is to start with bank balance as per pass book and to end up with bank balance as per cash book.

Steps for preparing a bank reconciliation statement-:

1. The cash book should be completed and the balance as per bank column on a particular date should be found out covering the period for which the statement has to be prepared.
2. The bank should be requested to complete and send to the firm the bank pass book.
3. Check the entries of the debit and credit sides of the bank columns of the cash book with corresponding entries on the credit and debit sides of the pass book relating to the same period.
4. The items not tallying should be classified into common groups according to their characteristics.
5. The balance as shown by any one book (i.e. the cash book or the bank pass book) should be taken as the base. This is, as a matter of fact, the starting point for determining the balance as shown by the other book after making suitable adjustments taking into account the causes of difference.
6. The effect of the particular cause of difference on the balance shown by the other book should be noted.
7. In case, the cause has resulted in an increase in the balance shown by the other book, the amount of such increase should be added to the balance as per the former book which has been taken as the base.
8. In case, the cause has resulted in a decrease in balance shown by the other book, the amount of such decrease should be deducted from the balance as per the former book which has been taken as the base.

                                                                                               

                                                                                               

SPECIMEN OF BANK RECONCILIATION STATEMENT

(From Balance as per Cash Book)

Bank Reconciliation Statement as on....1

Note: If the reconciliation statement has been started with balance, as per the pass book, to arrive at balance as per cash book the entries made above should be reversed i.e. all added items should be deducted and deducted items should be added.

PREPARATION OF BRS WHEN OVERDRAFT BALANCES ARE GIVEN-:

In case the books show an adverse balance i.e. an overdraft, the procedure is just the reverse of that which has been discussed in the case of a favorable balance. Overdraft means overdrawing of a bank account. The customer is allowed to draw from his account over and above his balance subject to a limit agreed upon. The bank pass book will show a debit balance in the account of the customer and similarly there will be a credit balance in the bank column of the cash book.

SPECIMEN OF BANK RECONCILIATION STATEMENT

(From overdraft balances)

Bank Reconciliation Statement as on....

Note: If the reconciliation statement has been started with overdraft as per the pass book to arrive at overdraftas per the cash book the entries made above should be reversed i.e. all added items should be deducted and all deducted items should be added.

Alternative Method is to keep two columns ‘Plus’ and ‘Minus’. All additions are to be shown in ‘plus’ column while all deductions in the ‘minus’ column. Balance is to be shown in ‘plus’ column while overdraft is shown in ‘minus’ column.

 PREPARATION OF BRS WHEN EXTRACTS OF CASH BOOK AND PASS BOOK ARE GIVEN-:OK AND PASS BOOK ARE GIVEN

In some instances, students are given extracts from the cash book and the pass book and are required to find out causes of differences and prepare a bank reconciliation statement. In solving such a problem, the following points should be noted:

1.          Heading of the pass book, and
2.        Period for which cash book and pass book are given.     

Heading of the pass book can be given in two ways:

1.              Party in account with bank: It means pass book is a copy of party’s account in the books of bank.Generally, pass book is written in this form. The student should compare debit side of the cash book with credit side/column of the pass book and also compare credit side of the cash book with debit side of the pass book.
2.             Bank in account with party: It means pass book is the copy of bank’s account (so far as it relates to the party) in the books of bank. In this form the student should compare debit side of the cash book with the debit side/ column of the pass book and credit side with credit side/column.

Practically in such situations, upto date bank statement is obtained and the cash book is amended by

incorporating only those transactions in respect of which entries have been made in the pass book. The errors in the cash book are also rectified by suitable entries and thus the upto date bank balance as per cash book is obtained. This balance appears in the balance sheet.

For examination purpose, a reconciliation statement may be prepared after amending the cash book

especially if it is mentioned or when the firm prepares reconciliation statement on the date of closing the books of account.

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Company Accounts -: Issue of Share Capital

SHARE CAPITAL

The total capital of the company is divided into shares, the capital of the company is called “share capital”.

Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a

company and it also includes stock. A share is one unit into which the total share capital is divided. It is a

fractional part of the share capital and forms the basis of ownership in the company.

Types of Share Capital in Balance sheet -:

1)Authorized Share Capital: A company estimate its maximum capital requirements. This amount of capital mentioned in ‘capital clause ‘Memorandum of Association. It is shown in balance sheet at face value.

2)Issued share capital: Whatever portion of the shares capital issued by the company, it is called ‘issued capital’. It is shown in balance sheet at factory value. 8. Portion of authorized capital which is not issued is known as ‘Un-issued capital’. It is not shown in balance sheet.

3)Subscribe share capital: Part of issued share capital wh9ich is subscribed by public and allotted by company. (Includes face value of shares issued for consideration other than cash).

4)Called-up shares capital: The portion of issue price of shares which a company has demanded or called from shareholder is known as ‘called-up capital’ and the balance.

5)Paid-up shares Capital: Portion of the called-up which is paid by shareholders when shareholders. When shareholders fail to pay a particular amount it is known as ‘calls-in-arrear’.

6)Reserve capital: As per companies Act, 2013 a company may be by passing a special resolution decide that certain portion of its subscribed uncalled capital shall not be called up except in the event of winding up to the company (i.e. it is that portion which company has decided to call only in the event of liquidation of company)

Capital reserve, which is created out of profits only, is a part of reserve and surplus and are not available for declaration of dividend. (May be use to write-off capital losses such as discount on issue of shares, may be used to issue bonus shares, subject to condition that reserve is realized in case.

TYPES OF SHARES

1.      Preference shares -:

          Preference shares enjoy preference over equity shares in the matter of:

                   (a) Payment of dividend

                   (b) Repayment of capital

2.  Equity shares -:

Equity share are those share, which are not preference share. It means that they do not enjoy any preferential rights in the matter of payment of dividend or repayment of capital. Equity share capital can be-:

              (i) with voting rights; or

              (ii) with differential rights as to dividend or voting or any other right

Important points-:

        I.Equity shares are non-preferential shares and are known as common shares.

      II.To issue shares, private company depend upon ‘private placement of shares’.

    III. A public company issues prospectus inviting general public to subscribe for its    shares.

    IV.Applications are deposited in a scheduled bank by interested parties

      V.First installment paid along with application is called ‘Application Money’.

    VI.Application money must be at least 5% of face value of shares as per companies Act, 2013.

  VII.The minimum application money to be paid by an application along with the application money shall not be less than 25% of issue price, as per SEBI guidelines.

VIII. As per SEBI guidelines, a company must receive a minimum of 90% subscription is aginst the entire issue.

    IX.A company cannot proceed to make allotment of shares, till minimum subscription is received within 30 days from date of issue of prospectus.

      X. If the company does not receive minimum subscription of 90% of issue, the entire subscription shall be refunded to9 the applicants within 15 days from the date of closure of issue. In case of delayed refund, interest for the delayed period shall be payable.

    XI. In case of delay in refunding, the company becomes liable to pay interest @15% p.a. on the amount of refund.

  XII. Second installment is known as ‘Allotment Money’

XIII.Subsequent installment, if any, to be called by company are known as ‘calls’.

XIV.Successful applicants become the shareholders of the company.

  XV. A period of at least one month must be there between two calls.

XVI.The Securities and Exchange Board of India (SEBI) Guidelines, require that shares issued are made fully paid-up within twelve months of the date of allotment if size of issued is upto Rs. 500 cores.

XVII.Under-subscription means shares offered are for subscription is more than the number of shares subscribed by public.

XVIII. When shares applied for by public are more than shares offered over-subscription. [Number of shares is allotted is restricted to nu8mber of shares issued for subscription]

XIX.Full subscription means shares issued and shares applied for subscription are equal.

JOURNAL ENTRIES FOR ISSUE OF SHARES FOR CASH:

Under the issue of share capital by a company, The under mentioned entries are made in the financial books:

Sometimes separate Application and Allotments accounts are not prepared and entries relating to Application and Allotment monies are passed through a combined Application and Allotment A/c.

Issue of Shares at Premium-:

The shares of many successful companies which offer attractive rates of dividend on their existing capitals fetch a higher price than their face value in the market. When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus, the excess of issue price over the face value is the amount of premium. For example, if a share of Rs. 10 is issued at Rs. 12, Rs. (12 – 10) = Rs. 2 is the premium.

The premium is usually payable with the installment due on allotment. However, some companies may charge premium with share application money or partly with share application money and partly at the time of allotment of shares. It may be included in call money also.

                                                        

                         JOURNAL ENTRY

    When allotment money becomes due:

      Share Allotment A/c Dr. (with the money due on allotment including premium)

              To Securities Premium A/c (with the premium amount)

              To Share Capital A/c (with the share allotment amount)

The Securities Premium Account must be shown as “Securities premium reserves” separately in the liabilities side of the balance sheet under the head “Reserves & Surplus”.

Issue of Shares at A Discount-:

When shares are issued at a price lower than the face value, they are said to be issued at discount. Thus, the excess of the face value over the issue price is the amount of discount. For example, if a share of ` 10 is issued at ` 9 then ` (10 – 9) = Re. 1 is the discount.

As per companies Act 2013, a company shall not issue shares at a discount except as provided in section 54 for issue of sweat equity shares. Any share issued by a company at a discounted price shall be void.

Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.

SUBSCRIPTION OF SHARES:

Accounting for issue of shares depends upon the type of subscription. Whenever a company decides to issue shares to public, It invites application for subscription by issuing a prospectus. It is not necessary for company receives application for the number of shares to be issued by it. There are three of possibilities:

Full subscription-:Issue is fully subscribed if the number of shares offered for subscription and the number of shares actually subscribed by the public are same. To start discussion on accounting treatment for issue of shares let us assume that the issue is fully subscribed.

Undersubscription-: It means the no. of shares offered for subscription is more than the number of shares subscribed by the public. In this, the journal entries as discussed above are passed but with one charge i.e., calculation of application, allotment and for that matter, the call money is based on no. shares actually applied and allocated. it must be remembered that shares can be allotted, in this case, only when the minimum subscription received.

Oversubscription-:Issue of shares are generally either under or over subscribed. If an issue is over subscribed, some application may be rejected and application money refunded and in respect of others, only a part of shares applied for may be allotted and the excess amount received can be utilized towards allotment and call money which has fallen due or will soon fall due for payment. The entries are:

1.      On refund of application money to applicants to whom shares have not been allotted:

                     Share application a/c Dr.

                            To Bank a/c

2.      When only a part of shares applied for are allowed:

       Share Application a/c Dr. (With the amount received in advance for allotment)

                    To share Allotment a/c

                    To shares calls in advance a/c

Calls in advance and interest on calls in advance -:CALLS-IN-

 If authorised by the articles, a company may receive from a shareholder the amount remaining unpaid on shares, even though the amount has not been called up. This is known as calls-in-advance. It is a debt of a company until the calls are made and the amount already paid is adjusted. Calls-in-advance may also arise when the number of shares allotted to a person is much smaller than the number applied for and the terms of issue permit the company to retain the amount received in excess of application and allotment money. Of course, the company can retain only so much as is required to make the allotted shares fully paid ultimately. The calls-in-advance account is ultimately closed by transfer to the relevant call accounts. It is noted that the money received on calls-in-advance does not become part of share capital. It is shown under a separate heading, namely ‘calls-in-advance’ on the liabilities side. No dividend is paid on calls-in-advance.

                             Accounting Treatment

On receipt of call money in advance:

                            Bank Dr.                             (with the amount of call

                                To Call-in-Advance A/c    money received in advance)

As and when calls are made:

                       Calls-in-Advance A/c Dr.         (with the amount adjusted on

                                  To Relevant Call A/c     relevant call becoming due)

The amount received as calls-in-advance is a debt of the company, the company is liable to pay interest on the amount of Calls-in-Advance from the date of receipt of the amount till the date when the call is due for payment. Generally the Articles of the company specify the rate at which interest is payable. If the articles do not contain such rate, Table A will be applicable which leaves the matter to the Board of directors subject to a maximum rate of 12% p.a. It is to be noted that the interest payable on Calls-in- Advance is a charge against the profits of the company.

As such, Interest on Calls-in-Advance must be paid even when no profit is earned by the company.

                          Accounting Treatment

  If Interest on Calls-in-Advance is paid in cash -

                           Interest on Calls-in-Advance A/c Dr. (with the amount of

                                                        To Bank                           interest paid)

  If interest on Calls-in-Advance is not paid in cash -

                           Interest on Calls-in-Advance A/c Dr.     (with the amount of

                                           To Sundry Shareholders A/c      interest payable)

  At the end of the year, when interest on Calls-in-Advance is transferred to Profit and Loss A/c -

                           Profit and Loss A/c Dr. (with the amount of interest)

                                  To Interest on Calls-in-Advance A/c

Calls in arrears and interest on calls in arrearsIN ARREAR AND

When calls are made upon shares allotted, the shareholders holding the shares are bound to pay the call money within the date fixed for such payment. If a shareholder makes a default in sending the call money within the appointed date, the amount thus failed is called Calls-in-Arrear.

The interest on Calls-in-Arrear is recoverable according to the provisions in this regard in Articles of the company. But if the Articles are silent, Table ‘F’ shall be applicable which prescribes that if a sum called in respect of shares is not paid before or on the day appointed for payment, the person who failed to pay shall pay thereof from the day appointed for payment to the time of actual payment at a rate not exceeding 10% per annum. However, the directors have the right to waive the payment of interest on Calls-in-Arrear. The interest on Calls-on-Arrear Account is transferred to the Profit and Loss Account at the end of the year.

                           Journal Entries

     When call money is in arrear:

                           Calls-in-Arrear A/c Dr.     (with the amount-failed by

                                To Relevant Call A/c     the shareholders)

    On receipt of amount of Calls-in-Arrear with interest, on a subsequent date:

                           Bank Dr. (with the amount received)

                               To Calls-in-Arrears A/c

                               To Interest on Calls-in-Arrear

FORFEITURE OF SHARES:

‘Forfeit’ means taking away of property on breach of condition. Failure to pay call money results in forfeiture of shares. It is the action taken by company to cancel the shares.

Forfeiture should be done ‘bonafide’ in the interest of company.

If member fails to pay calls on due date, BOD may serve a notice requiring payment of call together with interest, If any. Notice shall state further period of 14 days from the date of service of notice. If the amount is not paid even then, such shares shall be liable to be forfeited by passing board resolution. A person whose shares have been forfeited shall cease to be a member but shall remain liable to pay to the company all monies payable by him in respect of such shares. If the premium has already been received by the company, it cannot be cancelled even if the shares are forfeited in future. Shares may be forfeited for non –payment of calls, premium or the unpaid portion of face value of shares.

·         Fully paid-up shares may be forfeited for realization of debts of shareholders if the Articles so provide it.

·         Reissue of forfeited shares is not allotment of shares but only a ‘sale’.

FORFEITURE OF SHARE WHICH WERE ISSUED AT PAR:

RE-ISSUE OF SHARE:

ISSUE OF SHARE FOR CONSIDERATION OTHER THAN CASH:

(Imp) points for consideration for students:

(a) Loss on re-issued should not exceed the forfeited amount.

(b) If the loss on re-issue is less than the amount forfeited, the surplus shall be transferred to capital reserve.

(c) The forfeited amount on shares not yet reissued should be shown in the balance sheet as an additional to the share capital.

(d) When only a portion of the forfeited shares are re-issued, then the profit made on re-issue of such shares must be transferred to capital reserve.

(e) When the shares are re-issued at a loss, such loss is to be debited to “Forfeited shares account”.

(f) If the shares are re-issued at a price which is more than the face value of the shares, the excess amount will be credited to securities premium account.

(g) If the re-issued amount and forfeited amount (taken together) exceeds the face value of the shares are re-issued, it is not necessary to transfer such amount to securities premium account.

(h) Even though original shares cannot be issued at a discount, but forfeited shares can be issued at a discount.

(i) If forfeited shares are re-issued at a discount the amount of discount can in no case, exceed the amount credited to the shares forfeiture amount.

FORFEITURE OF SHARES WHICH WERE ISSUED AT PREMIUM:

If the premium has already receivedby the company, it cannot be cancelled even if the shares are forfeited in the future.

FORFEITURE OF FULLY PAID SHARES:

CALCULATION OF PROFIT ON RE-ISSUE OF FORFEITED SHARE:

Students will appreciate that the credited balance of forfeited share account cannot be considered a surplus untill the shares forfeited have been re-issued, because the company may, on re-issue, allow the discount to the new purchaser equivalent to the amount held in credit in this regard in the forfeited share a/c.

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