Quiz 5: Accounting for and Presentation of Current Assets

Business

The transaction are given as of September 30 and a bank reconciliation must be made to record these transactions. img Notes: • The given bank statement balance is recorded as an indicated balance under bank records for $22,260. • The given cash ledger account balance is recorded under company's books for $24,860. • The deposit in transit for $2,400 is recorded under bank records since deposit in transits increase the balance of the bank account. • The outstanding checks for $760 are recorded under bank records since outstanding checks reduce the balance of the bank account. • The interest earned of $60 is recorded under the company's books since interest is already calculated in the bank records and must be adjusted for the company's books. • The bank service charge of $140 is recorded under company's books since a bank charge is already calculated in the bank records and must be adjusted for the company's books. • The NSF checks of $900 are recorded under company's books since the check amounts must be reduced from the company's books.

(a) Bank Reconciliation statement: It is the statement that explains the difference between the amounts that is shown in the bank statement and balance which is reflected in the bank closing balance recorded at a point of time as per the cash book. Reconciliation helps to make the necessary adjustments to off-set the difference. Journal Entry: • Journal entry is the first step to record any transaction in the books of accounts. • Recording financial transaction in a journal book in the form of an entry is known as journalizing. Journal entries are prepared by using three rules of accounting standards, they are as follows: The rule is: Debit the receiver and Credit the giver. The rule is: Debit what comes in and Credit what goes out. The rule is: Debit the Expense and Credit the Income. Adjusting entries: • Adjusting entries are the journal entries, which record any unrecognized income or expense for the period. • Adjusting entries records, at the end of a reporting period, revenues / expenses that have been earned / incurred, but not yet recorded in the accounting books. Prepare a bank reconciliation statement as follows: img Explanation: Deposits in transit are note collected. Hence, it is subtracted to arrive at the reconciled balance. Bank service charges are subtracted as these charges are not recorded in the general ledger of cash account. Checks returned by bank due to not having sufficient balance. Hence, it is subtracted from the cash balance. Outstanding checks are not paid, it is added to cash balance. Interest credited by bank in the bank account is added to the cash account. Prepare the adjusting entries which reflects reconciling items of H' INC as at September 30, as follows: The bank service charge is considered as an expense, so it is debited while cash is credited. The adjusting entry for the bank service charge expense of $140 debits bank service charge expense and credits the cash account. img The NSF checks are initially recorded as a cash receipt from customers and therefore the adjusting entry must debit accounts receivable and credit cash. The adjusting entry for the NSF check adjustment of $900 debit accounts receivable and credit the cash account for reversal. img Interest is considered as revenue. Increase in cash is to be debited and interest revenue account is to be credited. img (b) Compute the amount of cash to be included in the September 30, balance sheet for the company's bank account: The amount of cash that is reported on the balance sheet on September 30 is determined by calculating the change in cash account and adding it to the initial cash account balance of $24,860. The change in cash is a decrease of $140 from the bank service charge, a decrease of $900 from NSF check, a decrease of $2,400 for deposits in transit and an increase of $80 from interest revenue and outstanding checks of $760. The total change of $2,600. The decrease of $2,600 from the initial cash balance gives new cash balance of $22,260. Therefore, the amount of cash to be included in balance sheet of the company's bank account is img

The accounts receivable and bad debts accounts balance at the end of the year can be calculated using the given transactions. Accounts receivable is increased by sales on account and reduced by cash collection and write-offs. The ending balance for accounts receivable is calculated by adding sales on account of $300,000 to the beginning balance of accounts receivable of $72,000 and then subtracting cash collections of $290,000 and write-offs of $6,000. img Hence, the ending accounts receivables are $76,000. The allowance for bad debts expense is increased by bad debts expense and decreased by write-offs. The ending balance for allowance for bad debts is calculated by adding bad debts expense of $7,100 to the beginning allowance for bad debts of $5,750 and subtracting write-offs of $6,000. img Hence, ending allowance is $6,850.

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