SS1 Financial Accounting Lesson Notes-Third Term. To get complete lesson notes from week 3- 10, contact us directly.
SUBJECT: FINANCIAL ACCOUNTING CLASS: SS1
SCHEME OF WORK
WEEK TOPIC
- The Bank Account and its operations
- Bank Reconciliation Statement
- Bank Reconciliation Statement
- Final Accounts of a Sole Trade
- Final Accounts of a Sole Trade.
- The Balance Sheet
- Opening Entries and Recording of Subsequent Financial Transactions
WEEK ONE
TOPIC : THE BANK ACCOUNT AND ITS OPERATIONS
CONTENTS
- TYPES OF ACCOUNTS A BUSINESS OR INDIVIDUAL CAN MAINTAIN WITH A BANK
- BENEFITS DERIVED BY A BUSINESS THAT OPERATES BANK ACCOUNTS
- TREATMENT OF BANK OVERDRAFTS
- TREATMENT OF DISHONOURED CHEQUES
- REASONS WHY A BANK MAY DISHONOUR A CUSTOMER’S CHEQUES
A bank is a financial institution that accepts deposit of money from its customers and lend money to some other customers on request.
TYPES OF ACCOUNTS THAT CAN BE OPERATED WITH COMMERCIAL BANKS
- Current Account
- Savings Account
- Fixed Deposit Account
- Foreign Currency Domiciliary Account
BENEFITS DERIVED BY A BUSINESS THAT OPERATES BANK ACCOUNT
- Safe-keeping of the funds (money ) of the business.
- Ability to borrow from the bank to expand the operations of the business by means of loans and overdrafts
- Safe-keeping of other valuables e.g. documents, jewellery etc.
- The business can obtain business advice from the bank to promote/enhance its operations
- The bank acts as agent of payment on behalf of the business
- The business may earn interest on its deposits with the bank if it operates savings or deposit accounts
- The bank can act as referee to recommend the business to local /foreign businesses
- The business can buy/sell foreign exchange from/to the bank
TREATMENT OF BANK OVERDRAFT
Bank overdraft is granted when a customer is allowed to draw cheques over and above his credit balance with the bank. When the account is overdrawn, the business owes money to the bank. The effect of this is that the Bank Account in the Cash Book will have a credit balance instead of the normal debit balance.
EVALUATION QUESTIONS
- List three features of each of the following (a) current account (b) savings account (c) fixed deposit account
- What is a Cash Book
TREATMENT OF DISHONOURED CHEQUES
Dishonoured cheques are cheques received from customers of a business and lodged into a bank but were rejected(i.e. the bank declined to pay ) as a result of insufficient funds in the drawers account, irregular signature of the drawer etc. When the business received the cheque initially, the Cash Book (i.e. bank column) was debited but when the cheque is dishonoured the Cash Book will have to be credited to reverse the earlier entry.
REASONS WHY BANKS MAY DISHONOUR CHEQUES
- Insufficient funds in drawer’s account
- Irregular signature of the drawer
- If the cheque is not dated
- If the cheque is post-dated (i.e. the cheque is presented at the bank before the date written on it)
- If the amount in words is different from the amount in figures
- Stale cheque (i.e. the date on the cheque is more than six months before the date it was presented to the bank for payment)
- If the cheque is not signed or where there are more than one signatories to the account; the signatures are not complete
- If the cheque is mutilated i.e. torn
- Alteration on cheque not endorsed (signed) by the drawer
- Payment stopped by the drawer
- If the account is frozen on the orders of a court of law or other competent government agencies e.g. EFCC
- If the account is closed
- If the bank receives notice of the death, insanity or bankruptcy of the customer.
EVALUATION QUESTIONS
- List and explain three parties to a cheque
- List five source documents employed in making entries into the Cash Book
READING ASSIGNMENT
- Simplified and Amplified Financial Accounting Page 54 – 57
- Business Accounting 1 Page 83 – 89
GENERAL EVALUATION QUESTIONS
- State five benefits a business can derive when it operate bank account
- List three differences between bank overdraft and bank loan
- State four differences between a Current Account and a Savings Account
- Give seven reasons why a bank may dishonour its customer’s cheque
- Explain in details the following terms (a) post-dated cheque (b) stale cheque (c) dishonoured cheque
WEEKEND ASSIGNMENT
- Which of the following books of original entry is used to record all payments and receipts by cash or cheque (a) Sales Day Book (b) Cash Book (c) Purchases Day Book (d) General Journal
- An analytical cash book is used to (a) indicatesources of cash received (b) categorize petty cash payment (c) separate cash and bank balances (d)analyze amounts due from debtors
- Which of the following is not a source document (a) cheque stub (b) cash receipt (c) cash book (d) sales invoice
- In which ledger is the account of Yao, a debtor found (a) Nominal Ledger (b) Purchases Ledger (c) General Ledger (d) Sales Ledger
- Which of the following has multiple uses (a) Sales Journal (b) Purchases Journal (c) General Journal (d) Returns Outwards Journal
THEORY
- List five services provided by a bank to its customer
- Give three reasons why a business will prefer to operate a current account with a bank instead of a savings account.
WEEK 2 Date……………………………
TOPIC : BANK RECONCILIATION STATEMENT
CONTENTS
- Definition of terms:
- Cash Book
- Bank Statement
- Bank Reconciliation Statement
- Uses of a Bank Statement
- Items causing discrepancy(disagreement) between the Cash Book balance and the Bank Statement balance
CASH BOOK
A Cash Book is a subsidiary book of account that is used to record the receipt and payment of cash and cheques by a business organization. The Cash Book functions both as a subsidiary book and a ledger. The Cash Book is part of the double entry system.
BANK STATEMENT
A Bank Statement is a statement prepared by a bank and sent to the customer at periodic intervals showing the transactions that has taken place between the bank and its customer for a particular period of time.
FORMAT OF A BANK STATEMENT
GUARANTY TRUST BANK PLC
Ikeja Branch
Account : Abigail Adelana Account No: 3513721186
Statement from : 1st November, 2017 to 30th November, 2017
Date Details Debit Credit Balance
2017 N N N
Nov 1 Balance b/f 28,000cr
4 Cheque No. 141372 10,000 18,000cr
10 Cash deposit 3,00021,000cr
12 Credit Transfer 16,00037,000cr
15 Cheque No. 141373 12,000 25,000cr
21 Cheque lodgements 33,000 58,000cr
22 Standing Order 18,000 40,000cr
30 Bank Charges 200 39,800cr
USES OF A BANK STATEMENT
- To check the transactions that has taken place within that period
- It is used as a source document
- It is used for bank reconciliation
- It is used for auditing purposes
- It is used to determine the opening balance and the closing balance of a bank account
BANK RECONCILIATION STATEMENT
A bank reconciliation statement is a statement prepared by an account holder (i.e. the trader or the business) for the purpose of identifying the causes of disagreement (or discrepancy) between the Cash Book balance and the Bank Statement balance and to reconcile (or harmonize) the two balances.
ITEMS CAUSING DISCREPANCY (DISAGREEMENT) BETWEEN THE CASH BOOK BALANCE AND THE BANK STATEMENT BALANCE
A Items in the Cash Book but not in the Bank Statement
- Unpresented cheques
- Uncredited cheques
- Errors in the Cash Book
B Items in the Bank Statement but not in the Cash Book
- Bank charges
- Dividends
- Standing Orders
- Credit Transfers (or Direct Credits)
- Direct Debits
- Dishonoured Cheques
- Interest received from the bank e.g. on fixed deposit
- Interest charged on overdrafts/loans
- Errors in the Bank Statement
EVALUATION QUESTIONS
- What is a Bank Reconciliation Statement
- What is the purpose of a Bank Statement to a businessman
UNPRESENTED CHEQUES
These are cheques issued by the business but are yet to be presented for payment at the bank by the payee.
Unpresented cheques will be found on the credit side of the Cash Book but not on the debit side of the Bank Statement
The effect of unpresented cheques is to make the Bank Statement balance to be higher than the Cash Book balance.
UNCREDITED CHEQUES
These are cheques received by the business and lodged (or deposited) in the bank but have not been credited in the Bank Statement. Uncredited cheques will be found on the debit side of the Cash Book but not on the credit side of the Bank Statement. The effect of uncredited cheques is to make the Cash Book balance to be higher than the Bank Statement balance.
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ERRORS IN THE CASH BOOK
These are mistakes of omissions, duplications, wrong figures etc. made in the recordings/entries posted into the Cash Book
BANK CHARGES
These are amounts deducted by the bank from the customers account in respect of services rendered by the bank to the customer for that period. Bank charges will include Commission on Turnover (COT), cost of cheque books issued to customers etc.
Bank charges will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book
The effect of bank charges is to make the Cash Book balance to be higher than the Bank Statement balance.
DIVIDENDS
Dividends represent the part of the profits of a limited liability company that is given to shareholders as a reward for their investments in the company
Dividends will be found on the credit side of the Bank Statement but not on the debit side of the Cash Book
The effect of dividends is that the Bank Statement balance will be higher than the Cash Book balance
STANDING ORDERS
Standing orders represent instructions given by an account holder to the bank to pay on his behalf, on a regular basis, a fixed amount of money to a named beneficiary.
Standing orders will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book
The effect of standing order is to make the Cash Book balance to be higher than the Bank Statement balance
CREDIT TRANSFERS (or DIRECT CREDITS)
Some customers or debtors of the business may settle their outstanding accounts by paying directly into the business account with the bank.
Credit transfers will be found on the credit side of the Bank Statement but not on the debit side of the Cash Book
The effect of credit transfer is to make the Bank Statement balance to be higher than the Cash Book balance.
DIRECT DEBITS
This is an arrangement whereby a bank will pay on behalf of the account holder, bills that are presented by third parties.
Direct debits will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book
The effect of direct debits is to make Cash Book balance to be higher than the Bank Statement balance.
DISHONOURED CHEQUES
These are cheques received by the business and lodged into the bank but have been returned unpaid by the drawer’s bank.
Dishonoured cheques will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book
The effect of dishonoured cheque is to make the Cash Book balance to be higher than the Bank Statement balance.
INTEREST RECEIVED FROM THE BANK e.g. on Fixed Deposits
Where a customer maintains both current account and fixed deposit account, the bank may pay interest on such fixed deposit into the customer’s current account. Interest on fixed deposits will be found on the credit side of the Bank Statement but not on the debit side of the Cash Book. The effect of interest on fixed deposits is to make the Bank Statement balance to be higher than the Cash Book balance.
INTEREST CHARGED ON OVERDRAFTS
When a current account holder is allowed to overdraw his account, the bank will charge interest on the balance overdrawn on a monthly basis
Interest on overdraft will be found on the debit side of the Bank Statement but not on the credit side of the Cash Book
The effect of interest on overdraft is to make the Bank Statement balance to be smaller than the Cash Book balance.
ERRORS IN THE BANK STATEMENT
These are mistakes of omissions, duplications, wrong figures etc. made by the bank in the recordings made in the Bank Statement
EVALUATION QUESTIONS
- List eight items that will cause the Cash Book balance not to agree with the Bank Statement balance
- Explain how the items listed above may cause a difference between the Cash Book balance and Bank Statement balance.
READING ASSIGNMENT
- Simplified and Amplified Financial Accounting Page 95 – 114
- Business Accounting 1 Page 209 – 225
GENERAL EVALUATION QUESTIONS
- Define the following: (a) Bank Statement (b) Bank Reconciliation Statement
- What is the purpose of a Bank Statement to a businessman
- Identify and briefly explain any five reasons why the Cash Book and Bank Statement may disagree
- List four features of each of the following (a) Current Account (b) Savings Account
- State five services rendered by commercial banks to their customers
WEEKEND ASSIGNMENT
- The bank column in the Cash Book shows a credit balance of N18,000. This means (a) a total payment of N18,000 (b) a left-over of N18,000 in the bank (c) an overdraft of N18,000 (d) a gross receipt of N18,000
- Which of the following may have been recorded in the Cash Book and fail to appear in the Bank Statement (a) bank charges and commission (b) cheques issued, presented and cashed (c) bank lodgements (d) payments made by the bank on a standing order
- Which of the following is not a cause of discrepancy between Cash Book and Bank Statement balance (a) uncredited cheques (b) paid cheques (c) standing orders (d) dishonoured cheques
- Items in the Bank Statement of a business but not in the Cash Book before preparation of bank reconciliation statement do not include(a) bank charges (b)standing order (c) presented cheques (d) interest on overdraft
- A document sent by a bank to its current account customers detailing their transactions over a given period is (a) bank reconciliation statement (b) bank statement (c) credit transfer (d) banker’s advice
THEORY
- What is a (a) bank statement (b) bank reconciliation statement
- List five source documents used in preparing the Cash Book
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