Current Assets and Bank Reconciliation
Current Assets:
Current Assets include Cash, banks and temporary investments, clients, petty cash, and inventory.
Bank Reconciliation
1. When the bank balance does not match the company’s balance:
a. Deposits in transit: These are deposits that were made after the cutoff date of the statement or that are not yet reflected by the bank due to processing time.
b. Checks receivable: These are checks received by the company that have not yet been cleared by the bank.
c. Bank errors: These include charges or payments made to an account using a check from another company.
2. When the book value of the company does not match the bank balance:
a. Charges for banking services: These occur when bank charges and commissions have not been recorded in accounting.
b. Deposit of bad checks: These are checks deposited when there were insufficient funds, and were returned by the bank.
c. Collection of documents: This refers to a service fee for collecting business documents.
d. Payment of documents: This is a service charge for documents that the company authorizes the bank to process on the due date, but which have not yet been accounted for.
e. Errors in books: These are errors made in the accounting records of the company.
There are three ways to perform bank reconciliation:
- Based on the balance of the business accounting records up to the balance of the bank statement.
- Based on the balance of the bank statement up to the balance of the accounting records of the business.
- For squared reconciliation, starting from both balances to reach a reconciled balance.
Temporary Investments
Temporary investments are securities or other investment vehicles that are convertible into cash in the short term. Examples include:
- Investment companies: Securities (shares) issued by corporations.
- Government instruments: Investment instruments issued by the government.
In both cases, the accounting involves debiting an expense account and crediting Cash Equivalents in the Banks when acquired. When selling government instruments and there is a profit, a debit is made to the banks, with a credit to Cash Equivalents (in the amount of the investment) and Interest Income (for the gain). However, if there is a loss, a debit is made to Banks (for the amount tendered) & Marketable Securities (the loss), with a credit to Term Investments (for the initial investment amount).
For each time reversal, the following must be shown:
- The cost of acquisition.
- The date of acquisition.
- The number of shares, bonds, certificates, or securities held.
- The cost per unit.
- Information necessary to determine the gain or loss when you sell an investment.
Customers and Accounts, and Notes Receivable
The classification is as follows:
- Clients: These are accounts receivable for credit sales of goods or services related to the main business activity. Their main feature is that they do not accrue interest if paid on time.
- Notes receivable: These are documents representing amounts yet to be recovered from the sale of goods or services. Their main feature is that they accrue interest over the loan term.
- Officials and employees: This is the outstanding balance of the employees, officers, or shareholders of the company.
- Sundry debtors: These are documents or accounts receivable for operations other than normal business.
There is also interest receivable, dividends receivable, rents receivable, and other items.
All sales on credit carry the risk that some customers may not pay and become bad debt.
Methods for Estimating Uncollectible Accounts
- Percentage of sales method (income statement): This method applies a percentage to credit sales for the period, as shown in the income statement. This percentage is obtained through an analysis of the losses experienced in prior periods. A debit is recorded to Bad Debt Expense and a credit to Allowance for Bad Debt. In the statement of financial position, the Allowance for Bad Debt account is listed as a deduction from current assets under Accounts Receivable/Customers to arrive at Accounts Receivable/Net. If, after a few periods, the estimate of uncollectible accounts accumulates to a significant amount (as a result of applying the percentage to the accumulated account balance of the Allowance for Doubtful Accounts), management may decide to adjust the data through a debit to Allowance for Bad Debts and a credit to Bad Debt Expense.
- Percentage of accounts receivable method (statement of financial position): This method applies a percentage to the balance of Accounts Receivable, as shown in the balance sheet. Unlike the previous method, this amount is not cumulative but represents the new balance that the Allowance for Doubtful Accounts should show. Therefore, the adjustment will be made by subtracting the existing credit balance of the account from the result of applying the percentage. The accounting entry is the same as in the previous method.
- Direct write-off method: In this method, unlike the previous two, no provisions are made. Instead, the company waits to receive notification that the account is uncollectible and then applies the accounting entry: debit Bad Debts Expense, credit Customers.
Notes Receivable
An example of a note receivable is a promissory note, which is a written promise made by one person to another to pay a certain amount of money on a certain date.
Calculating Interest on a Note
Interest = Principal x Rate x Time
Where:
= Value of the loan principal.
Rate = rate of interest represented as a percentage to be applied to principal.
Time = number of days or months that will elapse until the maturity of the loan.
It is noteworthy that the rate and timing must be expressed in the same unit
as that is, if the time is in months, the percentage should be expressed in months
to apply the formula, which is to apply simple interest. Issues such as interest
compound, which includes compounding periods are beyond the aim of this course.
The accounting record when the note is signed by the client is a charge to the
Notes receivable with a credit to Customer (if the event that a customer requested
extra time to pay) and when the customer pays off the promissory note is a charge to the banks,
credited to Notes receivable and interest income.
Finally, there is the account Inventories. Inventories are assets of the company
intended for sale or production for later sale. Are the main source of
Company revenue.
The value of inventories includes all costs incurred for purchase and
processing, as well as necessary to give your current location and condition.
Includes the purchase price, tariffs, unrecoverable taxes, transportation,
storage and other costs attributable to the acquisition, but should
discounted discounts, rebates and other similar items.
There are different ways to value stocks:
Specific costs. Here you are required to keep detailed records of information
related to each purchase transaction in order to identify specific bills
are related to the goods available at the end of the period and to have the cost of
each. It is most useful for companies that purchase products that are identified
facility and / or handle a limited number of identifiable goods or lots.
First in first out (FIFO). Here first are commodities to be bought
the first to be sold, consuming the relevant transaction costs.
As stocks at the end of the period, will be the last to be acquired, which are
the most recent purchase, valued at the last purchase price. This causes the final
will have a greater balance in inventory (overestimated) and a lower cost of sales (undervalued).
Last in, first out (LIFO). Here are the latest commodity to be bought
(Most recent) are the first to be sold, consuming the transaction costs
concerned. As stocks at the end of the period will be the first to
were acquired, which are the oldest purchases, valued at the price of the first
shopping. This causes the end having a lower balance in inventory (undervalued)
and a higher cost of sales (overrated).
Weighted average. Here it is recognized that prices vary as they are acquiring
goods during the period. The units of the final inventory must be valued at
average cost per unit of stock during the entire period.