Financial Accounting Concepts

Causes of disagreement in the Cash Book and Pass Book

1. (a) What is a Bank Reconciliation Statement? Explain the causes of disagreement in the balances shown by the Cash Book and Pass Book. (10)



Generally, all the transactions made through Cash or by cheque are not recorded at the same time in the Cash Book and the Pass Book regularly because some transactions are recorded in the Cash Book first and recorded in the Pass Book after some days.

On the other hand, Some transactions are recorded in the Pass Block first and later in the Cash Book. Here lies the problem for a trader or the business. So, on a particular date, both the books do not show an equal balance. Those transactions which appear on any one of the books only are the main causes of differences/discrepancies or disagreements.

A statement is prepared to reconcile those differences/disagreements with the cash book or the pass book balance on a particular date, known as a bank reconciliation statement. For preparing a Bank Reconciliation Statement with the help of the balance of a particular book, the disagreements are to be considered as follows:

Suppose the balance of a Cash Book is given and for a particular disagreement or mistake if the said balance is—

(a) less than the Pass Book balance, then the difference is to be added to the Cash Book balance and

(b) Similarly, if the said balance is greater than the Pass Book balance, the difference must be deducted from the Cash Book balance. Hence, all the disagreements are to be considered, as stated above.

By preparing the bank reconciliation statement, it is generally confirmed that there are no other undetected causes of differences, because when this statement is prepared by taking one of the book’s balances as the basis, then the result which will come out after the adjustment of the disagreements would be the other book’s balance. But suppose the resultant balance is not tallying with the book’s original balance. In that case, it indicates that still there are some undetected causes Of difference or disagreements or mistakes which are to be found. Here lies the importance of preparing the bank reconciliation statement.

Some causes of differences between a cashbook balance and a passbook balance are:

  1. Cheque deposited but not credited by the bank
  2. Cheque issued but not cashed
  3. Bank charges and interest are not accounted for in the cash book
  4. Direct collections made by the bank on behalf of customers
  5. Clerical errors in recording cash book or passbook transactions

(b) Why do you maintain the bill book separately? State the transactions recorded in Bill Receivable and Bills Payable journals. (10)

2. (a) What is a suspense account? Why is it opened, and how is it closed? Explain. (10)

A suspense account is an account used to temporarily record transactions that cannot be identified or matched to the appropriate accounts. The purpose of a suspense account is to keep a record of such transactions until more information is available so that they can be correctly recorded in the accounting system.

Suspense accounts are typically used when there are errors or omissions in financial records, such as missing or mismatched transaction data, journal entries, or general ledger entries. These errors and omissions may arise from mistakes made during transaction recording or when preparing financial statements, among other reasons.

When these errors and omissions occur, the affected transactions must be identified and corrected before finalizing the financial statements. If this information is not available immediately, a suspense account may be opened on the books to track such items until further information is received.

The use of a suspense account ensures that all transactions are accounted for and recorded despite any issues or delays encountered along the way. The balance in a suspense account represents only those unidentified transactions and journal entries that require adjustment later.

To close a suspense account and resolve any identified discrepancies, the company must first identify what caused them if dependent on external factors such as external payments processor then contact them for assistance. Once done adjusting entries need to be made with the reverse original entry method which includes debiting it by the total sum of value it has right now (which will decrease its value to 0), after this credit needs to be passed on to corresponding accounts depending upon nature of error which was causing it to hold-up individualization at first place.
Once all balances have been resolved through adjustment entries made using the reverse original entry method, any remaining funds are transferred back into their respective accounts closing off the Suspense Account.

(b) Why is a provision for doubtful debts created? How is it shown on the Balance sheet? Explain (10)

A provision for doubtful debts is created to account for the possibility that some customers may not pay their outstanding debts. This provision is an estimate of bad debts that may arise in the future, based on historical data and other relevant factors such as economic conditions, creditworthiness of customers, and changes in payment trends.

The purpose of creating a provision for doubtful debts is to ensure that a company’s financial statements accurately reflect its true financial status. If a company does not account for potential bad debts, its accounts receivable balance will be overstated, which can lead to incorrect assumptions about the company’s liquidity and ability to meet its financial obligations.

On the balance sheet, a provision for doubtful debts is shown as a reduction in the accounts receivable line item. Specifically, it is subtracted from gross accounts receivable to arrive at net accounts receivable. Net accounts receivable is the amount that management believes will be collected from customers after accounting for estimated bad debt losses.

For example, if a company has $100,000 in gross accounts receivable and estimates that 3% of this amount ($3,000) will be uncollectible, it will create a provision for doubtful debts of $3,000. The net accounts receivable balance on the balance sheet would then be $97,000 ($100,000 – $3,000).

It’s important to note that creating provisions for doubtful debts requires judgment and estimation by management. As such, it’s important that companies use consistent methodologies and adjust their provisions regularly based on changes in customer creditworthiness or economic conditions.

3. How would a not-for-profit organization deal with the following items. (4X5)

(a) Outstanding Subscriptions – At the end of the accounting period, if a member’s subscription payment is unpaid, the organization should record the unpaid sum as receivable in its financial statements.

(b) Donation –

(c) Tournament Fund

(d) Legacy,

(e) Life Membership Fees

4. (a) What is a joint venture? Explain various methods of recording the joint venture transaction. Give entries in each case. (10)

Meaning of Joint Venture

Joint ventures are legal agreements between two or more entities in which the parties jointly own, operate and/or control the assets of a business. Typically, joint ventures involve two or more parties that enter into a formal agreement and divide the responsibilities, risks, rewards, costs and profits of the business. For example, the partners can be individuals, families, corporations or other entities.

Joint ventures can occur with a single partner or multiple partners and may operate in numerous industries, such as business, manufacturing, real estate, technology, media, marketing, law, education, or any other field where partnerships or joint ventures exist.

Joint ventures can help to resolve competitive issues in various industries. For example, if two companies dominate the market, a joint venture may increase both companies’ reach and sales. As a result, it can provide opportunities for the joint venture partners to gain new clients and sell new products to their customers.

(b) Differentiate between : (10)

  • (i) General Commission and Del Creder Commission
  • (ii) Normal Loss and Abnormal Loss

5. “Incomplete records system is unscientific, incomplete, inaccurate and unsystematic”. Explain (20)

The incomplete record system, also known as the single-entry system, is not a typical practice like the dual aspect-based double-entry system. The double entry system is based on the scientific dual aspect notion, which enables the scientific localisation of any inaccuracy caused by emission, omission, or clerical error. If there is a mistake in the double-entry system, the trial balance will not be balanced.

Single-entry accounting does not adhere to any set principles or norms when documenting financial transactions. Hence it is an unscientific and unsystematic approach.

However, the use of a single entry system or an incomplete record system does not offer any distinct benefits. These records are kept by accounting novices or small business owners who are not compelled by law to keep books of account.

Considering the above differences between the incomplete record system and the double-entry system, we can identify the following limitations:

  • This method is unfinished and unscientific.
  • Automatic account checks and reconciliations are not feasible.
  • It is not possible to identify the exact surplus or deficiency of revenue over expenditure for non-trading businesses and the exact profit or loss for commercial enterprises.
    Due to the improper maintenance of asset and liability records, the true financial status may not be known.
  • The system is unreliable; banks and tax officials, among others, have little faith in it.
    Because these aspects are not documented, it is easier to conduct fraud.
  • Comparing the trading performance and financial positions of different time periods does not yield business-progressive results.

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