CHAPTER ELEVEN END OF PERIOD ADJUSTMENT

11.0 Learning Objectives………………………………………………………………..
11.1 Introduction………………………………………………………………………..
11.2 Deferred Revenue and Prepayments……………………………………………….
11.3 Accrued Expenses………………………………………………………………….
11.4 Accrued Revenue………………………………………………………………….
11.5 Other Adjustments…………………………………………………………………
11.5.1 Depreciation Expenses……………………………………………………………
11.5.2 Bad Debts…………………………………………………………………………
11.5.3 Provision for Doubtful Debts………………………………………………………
11.5.4 Bad Debt Recovered……………………………………………………………….
11.5.5 Provision for Discount on Trade Receivables……………………………………..
11.6 Summary………………………………………………………………………….



CHAPTER ELEVEN

END OF PERIOD ADJUSTMENTS

11.0  Learning Objectives
After you have studied this chapter, you should be able to:
• Differentiate between capital expenditure and revenue expenditure
• Explain the effect on profit if a revenue expenditure has been wrongly
classified as a capital expenditure, and vice versa
• Explain prepayments and accruals
• Pass adjusting entries in respect of prepayment and accruals
• Explain and pass entries in respect of bad debts and provision for doubtful debts
• Record increases and decreases in the provision for doubtful debts
• Calculate and make entries with respect to provisions for discount on receivables and creditors
Prepare Income statement and statement of financial position (extracts) showing the treatment of bad debts provision for doubtful debts, depreciation and provision for discount on trade receivables and payables and provision for doubtful debts, depreciation and provision for discount on trade receivables and payables

11.1  Introduction
Many changes in a company’s economic resources and obligations occur continuously. For example, interest accrues daily on debts, as does rent expense on an office building. Other resources and obligations such as employee salaries originate as service is rendered, with payment to follow at specified dates. The end of the accounting period generally does not coincide with the receipts or payment of cash associated with all the types of resource changes. Adjusting entries are therefore, used to record such resource changes to ensure the accuracy of the financial statements. This chapter will consider some of the adjustments most commonly used in the preparation of the final accounts.  As well as discussing why such adjustments are required, their treatment in both the Income statement and statement of financial position will be reviewed in detail.
Accountants rely on two principles in the adjusting process – revenue recognition and matching principles. The revenue recognition concept requires that revenue be reported when earned, not before and not after. Revenue is earned for most firms when services and products are delivered to customers. If a firm sells goods in 2003 to a customer, the revenue was earned in 2003 and as such should be reported in the 2003 Income statement, even if the customer paid for the goods in a period other than 2003.
The matching principle aims to report expenses in the same accounting period as the revenues that are earned as a result of incurring these expenses. The matching of expenses with revenue is a major part of the adjusting process. As an example if a business earns monthly revenue while operating out of rented store space, the matching concept stipulates that rent must be reported on the income statement for December, even if rent is paid in a month either before or after December. This ensures that the rent expense for December is matched with December revenue.
At the end of an accounting period it is likely that an organization will find that some expenses have been paid which relate to the next accounting period, whilst other amounts, which relate to the current period remain outstanding. In order that the account shows a true and fair view of the firm’s financial performance, adjustments for such items are necessary.  Adjustments are classified into three categories:
(1) Deferrals and prepayments
(2) Accruals
(3) Other adjustments

11.2  Deferred Revenue and Prepayments
Deferrals or prepayments refer to transactions where cash is paid or received before a related expense or revenue is recognized.  These transactions are recorded when cash is paid for expenses that apply to more than one accounting period or when cash is received for revenue that relates to more than one accounting period.  The portion of the expense or revenue that applies to the future periods is deferred as a prepaid expense (asset) or unearned revenue (liability).  If we do not make adjustments for prepayments and unearned revenues, profit for the current period will be understated or overstated respectively. Items, which normally need to be prepaid, include rates, insurance and road licensing fee.
The accounting entry requires the prepayment to reduce the relevant expense in the Income statement thereby increasing profit.  The same applies to the unearned revenue, where the adjusting entry reduces the relevant revenue in the Income statement thereby increasing profit.  Since conceptually the prepayment represents an amount owing to the firm from a third party and unearned revenue represents amounts owed by the business to third party, it is included under current assets and current liabilities respectively in the statement of financial position. The accounting entries are as follows:
Debit:  Prepayments (Statement of financial position)
Credit: Expenses (Income statement)
Debit:  Revenue (Income statement)
Credit: Unearned revenue (Statement of financial position)
Illustration 11.1
As an illustration let us assume that Santo Ltd. paid ¢240,000 for two years insurance protection beginning on December 1, 2000.
The cash payment of ¢240,000 will be debited to the insurance account. With the passage of time, the benefit of the insurance protection gradually expires and a portion of the unexpired insurance is transferred to the next accounting period as a prepaid expense.  For instance, one month‟s insurance coverage expires by December 31, 2000.  This expense is ¢10,000, or 1/24 x ¢240,000 and will be as follows:
Insurance Account
¢ ¢
1/12/2000 Cash     240,000  31/12/2000 Profit and loss         10,000
Prepaid c/f       230,000
    240,000         240,000
1/1/2001 Prepaid b/f     230,000   31/12/2001 Profit and loss (12/24  x  240,000)       120,000
31/12/2001 Prepaid c/f       110,000

    230,000         230,000

1/1/2002 Prepaid b/f       110,000


The balance carried forward of ¢230,000, and ¢110,000 represents insurance prepaid to be shown under current assets in the statement of financial position for the years 2000 and 2001 respectively.

The adjusting entries will be journalized as follows:
2000
Debit: Insurance Prepaid    ¢230,000
Credit: Insurance expense       ¢230,000
2001
Debit:  Insurance Prepaid    ¢110,000
Credit: Insurance expense       ¢110,000
Let us now illustrate the treatment of deferred revenue as follows: Illustration 11.2
Assume that Santo Ltd rented a small office in its building to a customer on January 1, 2001.
The rental agreement required the payment of ¢180,000 cash in advance for 18 months rent.

This transaction is recorded as a debit to cash and a credit to rent received account.  On December 31, 2001, the unadjusted Trial Balance will report ¢180,000 as rent received, which is overstated by ¢60,000 (6/18 x ¢180,000) relating to 2002.  The rent received account will be as follows:


The balance carried forward of ¢60,000 in 2001 represents unearned revenue which will be recorded under current liabilities in the statement of financial position for the financial statement for the year 2001. The adjusting entry will be journalised as follows:

Debit: Rent receivable A/c                            ¢460,000
Credit: Deferred Rent Revenue    ¢460,000
11.3  Accrued Expenses
Accrued expenses and accrued revenues reflect transactions where cash is paid or received after a related expense or revenue is recognized. It represents an item, the use of which the firm has already benefited from during the current accounting period, but which will not be paid for until the next accounting period. If we do not make an adjustment the profit for the current period will be overstated.  Examples of items that need to be accrued for include electricity, since it is not likely that these bills will exactly coincide with the firm’s accounting year-end. The accounting entry for accrued expense is:
Debit: Expense (Income statement)
Credit: Accrued expense (Statement of financial position)

In this case, the relevant expense in the Income statement is increased by the accrued amount whilst in the statement of financial position, accruals appear under current liabilities, reflecting an amount owing by the business.

Illustration 11.3
As an example, let us assume that Santo Ltd’s Trial Balance  recorded electricity expenses of ¢600,000 which cover the period up to 31st October 2000.  A careful examination of the previous electricity bills of Santo Ltd shows that the company’s consumption of energy is even throughout the period.

The above example tells us that the electricity charge in the Trial Balance does not cover the entire year. This means that an accrual is required for the period of November to 31 December 2000. Since electricity is used evenly throughout the year, we can estimate the outstanding amount based on the bills received to date. The ¢600,000 recorded in the Trial Balance  represents 10 months of electricity charge, therefore the accrual is estimated as follows:
Accrual = ¢600,000 x 2/10 = ¢120,000
The electricity expense recorded as follows:


The balance carried forward of ¢120,000 in 2000 represents accrued expense and will be recorded under current liabilities in the statement of financial position . The adjusting entry will be as follows:

Debit: Electricity expense A/c                           ¢120,000
Credit: Accrued Expense A/c       ¢120,000
11.4  Accrued Revenue
Accrued revenue refers to transactions where cash is received after related revenue is recognized. It represents an item, the use of which the firm has already dispensed with during the current accounting period, but which will not be received until the next accounting period. If we do not make an adjustment the profit for the current period will be understated.  Examples of items that need to be accrued for include interest earned on treasury bills of which payment has not been received, since it is not likely that the maturity of these bills will exactly coincide with the firm’s accounting yearend. The accounting entry for accrued revenue is:

Debit: Accrued income (Statement of financial position)
Credit: Interest Receivable (Income statement)

In this case the relevant income in the Income statement is increased by the accrued amount.  Whilst in the statement of financial position the accrued income will appear under current assets, reflecting an amount owned by the business.

Illustration 11.4
As an illustration, assume that the Trial Balance of Sky Ltd. shows interest receivable of
¢855,000. Excluded from the Trial Balance  is a 182 days Bank of Ghana Bond purchased on
August,  1 2001 at an interest rate of 15% per annum at a cost of ¢12,000,000. Sky Ltd Prepares account to December, 31 each year.

From the illustration above, Sky Ltd. will receive a total of ¢900,000 (15% x ¢12,000,000 x 6/12) representing interest that will be earned on the bond for the period August, 1 2001 to January, 31  2002. Since five months interest amounting to ¢750,000 (5/6 x ¢900,000) relates to 2001 financial year, it must be accrued in the Income statement for 2001 though the amount will be received after 2001. The interest receivable account will be recorded as follows:


The adjusting entry will be as follows:
Debit: Interest accrued A/c                           ¢750,000
Credit: Interest receivable A/c    ¢750,000
11.5  Other adjustments
11.5.1 Depreciation Expense
Non-current assets are the statement of financial position classification used to account for many productive assets with useful lives exceeding one year. The capital expenditures for these assets are matched against the revenues that the assets help to generate in an accounting period.  Depreciation is the process in which we spread the cost of a non-current asset over the accounting periods that benefited from its use.  Irrespective of the method of depreciation used, the accounting treatment is always the same:

Debit: Depreciation expenses (Income statement)
Credit: Provision for Depreciation (Statement of financial position)

The effect of the entry is to show depreciation as a business expense in the income statement, thereby reflecting the proportion of cost or valuation attributable to the current period. It should be cautioned that depreciation is a non-cash item. This means it is a book adjustment, which does not involve the physical movement of cash.

Illustration 11.5
The example below illustrates depreciation recorded for Santo Ltd.. at the end of 2002 under the straight-line method.

                         Assets Cost   Residual Estimated  Proportionate use by function
                             Value             Useful live  Selling         Administrative
           ¢                   ¢    Function       Function
Building  1,600,000     100,000            15 yrs               46%           54%
Equipment         910,000       10,000            10 yrs      

Computation:        40%          60%
Total ¢   ¢
Selling   Administration
Building [(¢1,600,000-¢100,000)÷15yrs]        100,000         46,000             54,000
Equipment[(910,000-10,000)÷10yrs]              90,000         36,000             54,000
Totals                                                            190,000         82,000           108,000


The adjusting entry for these two assets is: 
Dr Cr
¢ ¢
Depreciation  Selling expense     82,000 
Administration expense   108,000 
          Provision for Depreciation: Building   100,000
Equipment     90,000


The adjusting entry reduces the net book value of the building and equipment accounts.  The provision for depreciation is a contra account that has a balance opposite that of the assets account to which it relates.  Thus, the provision for depreciation is subtracted from the gross building and equipment accounts, leaving the net undepreciated account balances of ¢1,500,000 (¢1,600,000-¢100,000) and ¢820,000 (¢910,000-¢90,000) for building and equipment respectively in the statement of financial position.
11.5.2  Bad Debts
Where a business sells its goods on purely cash basis, does not have to worry about customers not paying for such goods. This is however not always the case. Goods and services are usually sold or rendered on credit, giving rise to trade receivables.  The business is therefore taking the risk of some customers defaulting in the payment of their receivables. Trade receivables that are not collected are called bad debts, which is a risk of doing business on credit terms.

Where a customer‟s debt is found to have gone bad, steps must be taken to remove such debts from the list of customers owing the business. This is done by completely writing off the debt from the receivables account. Writing off of a particular debt from the list of receivables accounts means that the value of the assets of the business has reduced or diminished. This in effect means that the business has incurred losses that must be accounted for by increasing the expense account of bad debt, which will eventually reduce profit and also reduce assets of receivables, which will also result in the reduction of the net assets of the business.

Where an account containing a debt is declared „bad‟ you must pass a journal entry as follows:
Debit: Bad debts expense account (Income statement)
Credit: Trade receivables‟ account (Statement of financial position)
It is important for companies to review its receivables periodically and identify those debts from which full payment is unlikely. These bad debts may then be written-off in the statement of financial position.  This practice prevents overstatement of both profit and assets and is required if bad debts are probable and can be estimated. At the end of the accounting period the total debt written off is transferred from the bad debt account to the Income statement as follows:
Debit: Income statement
            Credit: Bad debt account

Illustration 11.6
Jack Terror has been in business for several years dealing in the sale of second hand cloths. During the three years ended October, 31 2005, he presented the following information relating to receivables:
  Receivables
(including bad debts)
¢  Bad Debt
¢
October, 31 2003  4,500,000  1,200,000
October, 31 2004  8,750,000  3,850,000
October, 31 2005  12,200,000  6,300,000

You are required to show the above information for the year ended October, 31 2003, 2004, 2005 in the following accounts:
(a) Trade receivables
(b) Bad debt
(c) Income Statement (extracts)
Solution to Illustration 11.6

  Trade Debtors Account
¢ ¢
31/10/2004 Sales   8,750,000 31/10/2004 Bad debt    3,850,000
31/10/2004 Balance c/f    4,900,000
   8,750,000

11/01/2005 Balance b/f

Trade Debtors Account
¢   ¢

¢
2003 Gross profit xxxxxx
Less bad debts      1,200,000
2004 Gross profit xxxxxx
Less bad debts      3,850,000
2005 Gross profit xxxxxx
Less bad debts        6,300,000

11.5.3  Provision for doubtful debts
This refers to the possibility of a debt going bad in the future but for which the amount cannot be calculated with substantial accuracy. In the case of doubtful debts, the amount or estimate still remains in the list of receivables and is not cancelled from the receivables account as in the case of debts that have actually gone bad. Doubtful debt does not relate to any specific debtor, but the business recognizes the fact that not all the existing debts will be collected and as such, it is prudent that such uncertainty is reflected in the Income statement and the statement of financial position.  The accounting treatment necessary to make a provision for doubtful debts is:

1. When a provision is made for the first time: Debit: Income Statement
                        Credit: Provision for doubtful debts Account With the initial provision.

In this way the current year’s profit is reduced, whilst in the statement of financial position the provision is clearly shown and deducted from trade receivables.

2. In subsequent accounting period’s new estimate must be made in respect of debt that may be considered doubtful. The new provision should be compared with the existing one and where the current provision is greater than the previous one, the difference representing an increase in provision for doubtful debts should be accounted for as: Debit: Income statement
                        Credit: Provision for doubtful debts
                        With the increase in provision (i.e. the difference)
If the current provision is less than the previous one, the difference representing a decrease in provision for doubtful debts should be accounted for as: Debit: Provision for doubtful debts account
                        Credit: Income statement
With the decrease in provision (i.e. the difference)
Illustration 11.7
Viscosity Ltd. has been in business since 2003 dealing in the sale of mobile phones. During the three-years period ended December, 31 2005 the company presented the following information relating to receivables:
        Date   Trade
Receivables(excluding bad debts)
¢   Bad Debts
     ¢
31 December 2003  7,000,000  1,000,000
31December 2004  18,250,000  2,500,000
31December 2005  10,000,000  4,300,000

Viscosity Ltd. makes provision for doubtful debts at the rate of 6% on receivables. There was no balance on the provision for doubtful debt at the beginning of 2003 financial year.   You are required to show the above information for the year ended 31October, 2003,2004, 2005 in the following accounts:
(d) Bad debt
(e) Provision for doubtful debt
(f) Income Statement extracts
(g) Statement of financial position  (extracts)
Solution to Illustration 11.7
Bad debts Account
¢ ¢
31/12/2003 Trade debtors    1,000,000 31/12/2003 Profit and loss      1,000,000
31/12/2004 Trade debtors      2,500,000   31/12/2004 Profit and loss        2,500,000
31/12/2005 Trade debtors      4,300,000   31/12/2005 Profit and loss        4,300,000
Provision for doubtful debt
¢ ¢
31/12/2003 Balance c/f      420,000     31/10/2003 Profit and loss     420,000

31/12/2004 Balance c/f     1,095,000               01/01/2004 Balance b/f       420,000
                                       31/10/2004 Profit and loss       675,000
  1,095,000    1,095,000
31/12/2005 Profit and loss        495,000   01/01/2005 Balance b/f    1,095,000
31/12/2005 Balance c/f        600,000   31/10/2005
  1,095,000    1,095,000

/01/2006 Balance b/f       600,000


Income Statement (extract) for the year ended 31 December xxxxxxx
¢
2003 Gross profit xxxxxx
Less bad debts    1,000,000
           Increase in Provision for doubtful debt       420,000      1,420,000
2004 Gross profit xxxxxx
Less bad debts    2,500,000
           Increase in Provision for doubtful debt       675,000      3,175,000
2005 Gross profit xxxxxx
Add  Decrease in Provision for doubtful debt      495,000 
Less bad debts  (4,300,000)     (3,805,000)



11.5.4 Bad Debts Recovered
It normally occurs that a debt, which has previously been written off in past accounting periods, may be repaid or recovered. When this is the case it is usually advisable that such recovered debt be reinstated. The debt is reinstated in the sales ledger account to ensure that a detailed and concise history and behaviour of the debtor or customer is available to serve as a guide for future granting of credit in respect of the same customer. It will therefore assist the company in its credit rating of all customers that buy goods from them on credit.
The accounting entries when a debt is recovered are:
   Debit: Trade Receivables account
                           Credit:Bad debts recovered account                 With the amount of debt reinstated
   Debit: Cash or bank account
                           Credit:Trade Receivables account
With the amount recovered from receivables in settlement of all or part of the debt.

At the end of the accounting period the balance in the bad debt recovered account will either be transferred directly to the Income statement or to the main bad debt account. Either mode of transfer will produce the same result since the dab debt account will eventually be transferred to the Income statement with the net value.

11.5.5 Provision for Discount on Trade Receivables

In certain businesses provision is made for cash discount that is expected to be offered to customers on the trade receivables balance at the statement of financial position date. Proponents of this concept argue that since companies allow discounts from credit sale for prompt payment recording net realisable value of receivables as the balance on receivables account less provision for doubtful debt will not give the best estimate of the amount expected to be collected from trade receivables. They argue that to estimate the realisable value of receivables, consideration should be given to the impact or effect of cash discount, hence the determination of provision for discount on receivables.
The manner in which provision for discount on receivables is calculated is almost the same as that obtained when calculating provision for doubtful debts. You must however remember to apply whatever rate or percentage on the net amount of trade receivables less provision for doubtful debts. This is so because discounts are allowed on debts expected to be paid and not bad debts.  

Illustration 11.7
Mahatma Ltd. has been in business since 2003 dealing in the sale of Italian executive shoes. During the three years ended 31December 2005 the company presented the following information relating to receivables:
  Trade
Receivables  Provision  for doubtful debts  Provision for cash discount allowed
  ¢  ¢  %
31st December 2003   17,000,000  1,000,000  4
31st December 2004  28,550,000  4,500,000  4
31st December 2005  22,000,000  2,800,000  4


You are required to show the above information for the years ended 31 October, 2003, 2004, and 2005 in the following accounts:
Provision for discount on receivables
Income Statement extracts
Statement of financial position extracts
Solution to Illustration 11.8


Income Statement (extract) for the year ended 31 December xxxxxxx
¢
2003 Gross profit
Less  Provision for doubtful debt      1,000,000 xxxxxx
            Provision for discount on debtors         640,000      1,640,000
2004 Gross profit
Less  Provision for doubtful debt      3,500,000 xxxxxx
            Provision for discount on dereceivables         322,000      3,822,000
2005 Gross profit
Add  Decrease in provision for doubtful debt     1,700,000  xxxxxx
            Decrease in provision for discount on debtors         194,000

Statement of Financial Position (extract) as at 31 December xxxxxxx
                                                         ¢               ¢          ¢
Debtors                                                                       17,000,000
Less  Provision for doubtful debt      1,000,000
            Provision for discount on debtors      640,000      1,640,000     1,894,000

                                                                                                                       15,360,000
Debtors                                                                     28,550,000
Less  Provision for doubtful debt      4,500,000
            Provision for discount on debtors      962,000      5,462,000
   23,088,000
Debtors                                                                     22,000,000
Less  Provision for doubtful debt     2,800,000
      768000           3,568,000
      18,432,000

11.6   Summary
In this chapter we have considered some of the adjustments that are often made to improve the quality of the year-end accounts used to prepare the financial statements.  We should also understand that these adjustments are needed in order to record the actual expenses incurred and the actual revenue earned for the accounting year. It must be remembered that each of the adjustments considered will impact upon the Income statement and the statement of financial position.

We have also learned that depreciation is a business expense that must be charged in the Income statement of any period that a non-current asset has been in use. In addition we learned that any business debt that an organization is unable to collect is called a bad debt and that there is the need to also record provision for bad debts so that the receivable figures in the statement of financial position  will reflect the amount that the business is likely to collect from receivables.

Finally we have also learnt how to record bad debts, provisions for doubtful debts, provision for cash discount in the ledger, Income statement and the statement of financial position.  It is hoped that, students will have a better understanding of the purpose and accounting treatment for depreciation, bad debts provision and accruals and prepayments.

CHAPTER EIGHT - BANKING SYSTEMS AND SERVICES

8.0 Learning Objectives………………………………………………………………..
8.1 Introduction……………………………………………………………………….
8.2 Current Account………………………………………………………………….
8.2.1 Opening a Bank Current Account…………………………………………
8.2.2 Cheques……………………………………………………………………………
8.2.3 Pay-in-Slip…………………………………………………………………………
8.2.4 Dishonoured Cheques……………………………………………………………..
8.2.5 Stop Payment Order……………………………………………………………….
8.3 Interest Bearing Accounts…………………………………………………………
8.3.1 Savings Accounts………………………………………………………………….
8.3.2 Fixed Deposit Account…………………………………………………………….
8.4 Inter-Bank Transfers……………………………………………………………….
8.4.1 Mode of Operation of Electronic Banking Products………………………………
8.5 Credit Cards……………………………………………………………………….
8.6 Bank Statement…………………………………………………………………….
8.6.1 Example of a Bank Statement……………………………………………………
8.7 Bank Reconciliation Statement……………………………………………………
8.7.1 Steps Involved in the Recognition of Discrepancies……………………………
8.7.2 Preparation of the Bank Reconciliation Statement………………………………

CHAPTER EIGHT
BANKING SYSTEMS AND
 SERVICES

8.0  Learning objectives
At the end of this chapter candidates should be able to
  Know the types of accounts a business can open with the bank
  Understand interbank transfers
  Understand the role and operations of the electronic fund transfer (EFT).
  Recognize the causes of discrepancy between bank statement and cash book balances.
 Determine the cash available to a business for inclusion in the end of period statement of financial position.
  Prepare a bank reconciliation statement.

8.1  Introduction
In the last chapter we said that one of the ways to guide against loss of cash through theft and fraud is to open and maintain a bank account. Apart from guiding against theft a business entity or customer can also enjoy some credit facilities and professional advice from its/his bank. There are two main types of account a customer may keep with the bank. These are current accounts and savings accounts.

8.2  Current Account
A current account is operated by the use of cheques. Money can be withdrawn from the account anytime without giving prior notice to the banker. For this reason it is called “Demand Deposit.” The customer usually does not enjoy any interest on current account balances. In a few cases, little interest may be given by the bank. A current account customer may be granted an overdraft.

A Cheque book is issued to the account holder when a current account is opened. Each cheque is assigned with identification number that is serially numbered. The holder of the account can issue cheques for payment to any person he has done business with. However, the cheques must be duly signed by the drawer and the signature, which must be regular or identical to the signature on the mandate card.

Money is deposited into the bank account through pay-in-slip. The number assigned to the cheques and pay-in-slip is printed in magnetic ink to make processing of transactions possible by the computer.
At intervals, usually every month, the banker will send bank statement to its customers, detailing all cash lodgement, payment cheques, dishonoured cheques, bank charges, direct payments, dividend warrants received on behalf of the customer etc.

8.2.1 Opening a Bank Current Account

Every business entity is required to open a current account to transact its business. The bank requires the customer to provide the following items /information for opening a current account.
(a) A written application to open an account, stating the type and purpose of the account.
(b) Two or more reference letters from people who maintain current accounts with any branch of the bank or other banks.
(c) Completed mandate cards.
(d) Two or more passport photographs.
(e) Copy of the Article and Memorandum of Association if it is a corporate organization or deed of partnership for partnership firms and constitution in respect of un-incorporated body.
(f) An extract of the minutes of the meeting in which the decision to open the account was taken.
(g) An initial deposit as may be stipulated by the bank from time to time.
(h) In some countries evidence of payment of tax by the sole trader, partner or the limited liability company.
(i) The specimen signature by the authorized person must be signed on the mandate card. The signature on cheques is compared with the specimen signature each time the customer wants to make withdrawal.

8.2.2 Cheques

A cheque is a written order upon a particular banker to pay a certain sum of money to a specified person or organization. There are three parties to a cheque namely
 i.  The drawer- issues the cheque
ii.  The drawee- The bank on which the cheque is written and
iii.   The payee- the person to whom the cheque is payable.

One of the means by which a bank customer can know the balance in his/her account is to record on the cheques‟ counterfoils the amount of money drawn and the amount of money deposited. Another means of knowing the balance is through the amount recorded in the bank columns of the cash book.

8.2.3 Pay-In-Slip
A bank customer fills out pay-in-slip for each deposit usually in duplicate or triplicate.
Some pay-in-slips are carbonized.

Items to be found on a pay –in-slip or cash lodgements teller are:-
i. Date
ii. Bank and branch
iii.  Account number
iv. Account name
v. Note and coin denomination
vi. Amount in words
vii. Amount in figures
viii. Total amount
ix. Payer’s name and signature
x. Payer’s telephone number
 xi. Mothers‟ maiden name

Details of cheques are analyzed on the reverse side of the pay-in-slip, if the latter is not the carbonized type.

The bank teller will sign the duplicate copy of the pay-in-slip. This will serve as documentary evidence of the amount deposited. The pay-in-slip can be compared with the amount debited in the cash book.

8.2.4 Dishonoured Cheques
A business may deposit a cheque received from a customer into its bank account but the bank may refuse to honour the cheque for various reasons. A cheque that is so treated is referred to as a dishonoured cheque.

A cheque may be dishonoured for any of the following reasons:-
i. The cheque is not dated
ii. The amount in words does not correspond to the figure written on the cheque
iii. The balance in the drawer’s account is not sufficient to accommodate the amount to be drawn with the cheque.
iv.  The cheque has been mutilated
v.  The cheque has become stale
vi.  Signature on the cheque is irregular
vii.   The cheque is post-dated viii.   The cheque is not signed.
ix. Suspicion that the cheque has been stolen from the drawer and there is a need to seek further confirmation from the drawer.

8.2.5 Stop Payment Order

When a cheque is lost or stolen, the owner of the cheque should issue a stop payment order on the bank. He should identify the missing cheque by its serial number and amount if the cheque had been issued and signed. The stop order is issued to prevent payment to a wrong person.

8.3  Interest Bearing Accounts
Some business organisations transact a large volume of business through their current accounts every month, and they may not be able to earn any interest on their current account balances. Therefore some businesses usually open some other accounts on which they can earn interests; these could be referred to as interest-bearing accounts. These consist of savings account and fixed deposit account. They will transfer surplus cash from the current account to these accounts to earn interests

8.3.1 Savings Account
This type of account is meant for the small savers to keep their surplus funds. This account is usually opened by individuals such as clubs, associations, salary earners, petty traders etc. A prospective customer who is a salary earner should bring a letter of introduction from his/her employer, upon which he/she will be given the bank’s application forms to complete and supply the following information:
(i) His full names and address (Not P. O. Box)
(ii) Business or Occupation
(iii) Specimen signature or thumb print
(iv) Three (3) recent passport photographs, and
(v) Customer’s identity card or international passport or driver’s license.
(vi) The initial deposit. This varies from bank to bank. The bank then issues the paying-in-booklet to the customer to enter the initial deposit and every subsequent deposit.

Some other distinguishing features of savings account are:
(i) No cheques are required for withdrawal
(ii) Customers may not be granted overdraft facilities on this type of account
(iii) Interest is payable on the sum standing to the customer’s credit
(iv) The balance standing to a customer’s credit on savings account is repayable on demand. Although, there is a dormant rule, which requires at least 7 days notice before withdrawal is made.
(v) Customer must be present physically when withdrawal is made.
(vi) In some years back, passbooks were issued to the customer to show both the credit and debit entries of the account. But nowadays, paying-in-slips and withdrawal booklets are issued to customers to make payments to and withdrawals from their accounts.
(vii) No reference is required for this type of account except where cheques will be paid into the account in the future, but a letter of introduction is required where the account will be used to receive the customer’s salary.

8.3.2 Fixed Deposit Account
In this situation, an account is kept with the bank in form of investment for a specific period of time usually 30 days, 60 days, 90 days or 180 days. A fixed rate of interest is paid by the bank on such bank deposits. The banker needs to be adequately informed before cash can be withdrawn from this account.
The features of this type of account are as follows:
(i) The balance standing to a customer’s credit on deposit account is repayable or rolled-over upon a written application after a stated or agreed period.
(ii) The customer is not issued with cheque book but with a receipt or certificate indicating the terms and conditions of the deposit e.g. amount fixed, interest rate, date of maturity etc.
(iii) Both the bank and the customer agree on the terms and conditions of the relationship, such as interest rate, amount and duration of the account.
(iv) No bank statement is issued to the customer.
(v) No reference is taken since the account requires cash transaction. But where lodgement of cheque is anticipated in the future, bank must ensure that references are taken and all the necessary account opening procedures are followed.
(vi) No commission is charged by the bank.

8.4  Inter-Bank Transfers
Through the use of computer and the internet, a lot of electronic equipment is now available which enables banks to transfer funds from the account of one customer to another without the need for exchange of paper document. This electronic equipment is turning the monetary system to a cashless society.

At present in Nigeria, some of the available Electronic banking products are AutoTeller Machine (ATM), Electronic Fund Transfer (EFT) and Electronic devices such as the Magnetic Ink Character Recognition (MICR).

Apart from the foregoing, there are some other forms of electronic banking which are yet to be available in Nigeria. These include: Electronic Fund Transfer At Point of Sales (EFTPOS), Debit Cards and Smart Cards.

We shall now discuss the mode of operation of some of these products.

8.4.1  Mode of Operation of Electronic Banking Products

i)  Auto-Teller Machines (ATM)
ATM is a cash dispenser which is designed to enable customers enjoy banking services without coming in contact with the Bank Teller (Cashier). The machine, therefore, performs the function traditionally reserved for cashiers. It is electronically operated and as such response to request by customers is done instantly.
(a) ATM is user-friendly and it guides users through the instructions that have been pre-programmed into it for easy operation.
(b) Access to the ATM is through the use of Personal Identification Number (PIN) and a plastic card that contains magnetic strips with which the customer is identified. Banks usually handover the PIN personally to the customer who is usually instructed not to disclose the number to a third party.
(c) It is essential for users to ensure the safety of the ATM card as well as to ensure that its surface is not mutilated. Otherwise, the machine may reject it, even where the PIN has been correctly entered.
(d) The first step to take while using the ATM is to insert the Card and thereafter the PIN. Then the customer can select the service required e.g. withdrawal, in which case the „Withdrawal‟ Key is depressed, and then presses the number keys for the amount of money required as well as the denominations wanted. It is not enough to punch the amount required, it is also necessary to press “ENTER” for the ATM to work.

Other functions that the machine is capable of performing are:
  Printing of statements
  Provision of account balances
  Transfer of funds
  Payment of bills
  Cash Advances and
  Display of Promotional messages

The objective of introducing the ATM in Nigeria is to decongest the counter; hence these ATM can only perform withdrawal functions.

ii) Electronic Fund Transfer (EFT)
EFT system allows customers account to be credited electronically instantly anywhere in the country especially in banks where there is on-line service. It provides a more suitable and cost-effective way of transferring funds when compared with the traditional modes such as Mail/Telegraphic transfers. It is more secure and time saving when money is transferred through EFT. Such money is transferred electronically by the bank through their branches or accredited agents.

iii) Electronic Fund Transfer At Point of Sale (EFTPOS)
This is a system which enables a customer’s account to be debited instantly with the cost of purchase in an outlet. The system requires the customer to be an ATM Card holder.

iv) Electronic Card Products (DEBIT CARD)
At present, most banks in Nigeria issue electronic debit cards. Debit Cards are like the EFTPOS that are supposed to be passed to a customer’s account immediately.

There are two popular debit cards; the Pass Card and the Smart Card.
(a) Pass Card
This product is processed in an IBM machine by debiting a customer’s bank account.

(b) Smart Card
This is a debit card whose micro-chips contain additional information on bio-data and financial position of the holder.

8.5  Credit Cards
A credit card is a convenient method of payment which embodies two essential aspects of basic banking functions; the transmission of payment and the granting of credits.

A credit card is similar to a cheque which is drawn upon the funds of the credit card company rather than upon the personal account of the customer. The credit card company would pay cash promptly to the creditor to redeem the credit card.

At the end of the month, the credit card company bills the credit card holder for all the drafts it has redeemed during the month. Making sales through credit cards, suppliers receive cash more quickly from credit sales and avoid problems of bad debts.

There are bank credit cards and non-bank credit cards.
(a) Bank Credit Cards: - Some widely used credit card is the master card. A business may deposit bank credit card draft directly in its bank account together with cash and cheques received from a customer. The bank accepts the credit cards for immediate deposit. Therefore sales to bank customers using credit cards are treated immediately as cash sales. The banker deducts some service charges from the customer‟s balances for handling the credit cards.

(b) Non bank credit cards: - Non bank credit cards drafts are not deposited directly into the bank. Therefore non bank credit cards drafts received from customers are not treated as cash sales but amount receivable from them.

The credit cards are sent to the credit cards company at periodic intervals. The credit cards company will now send cheques to the holder of the credit card draft. The amount received by this holder would not be the face value of the sales made or services rendered. The credit card company would have discounted the amount say by 5% to pay him for handling the credit cards.

Illustration 8.1
Ossei Ltd. based in Ghana, sold some goods for N65,400 to a customer who uses Bafo Ltd.. Credit card. After seven days Ossei Ltd. sent the credit card drafts to Bafo Ltd.
which redeems the draft after deducting 7.5% discount.

Show the entries in the book of Ossei Ltd.

Solution to Illustration 8.1
(1)  When the sales is made                 DR    CR
                  N      N
Receivables  65,400 
Sales    65,400
To record sales to a customer using Bafo  Ltd.. credit cards
 

(2)  When Bafo Ltd. redeems the draft
              DR    CR
                    N      N
Cash                                                                          60,495
Discount expenses on credit cards                              4,905
Receivables Account                           65,400
To record the collection of Amount due  from Bafo Ltd. less 7½% discount.

Note: The credit card expenses will be treated as part of the operating expenses in the income statement.

8.6  Bank Statement
The bank usually sends a bank statement to its customer at the end of every month. The statement contains details of the receipts and payments by and on behalf of the customer for that period. Receipts will include cash paid into the customer‟s account and those paid by third parties direct into the bank. Until the customer receives the bank statement or a credit advice transaction alert in respect of the direct credit to his bank account, the business may not be aware of it or the amount involved.

Payment or withdrawal will also include details of cheques issued by the customer, bank charges and payments made on behalf of the customer to third parties by the bank ( if the customer so directs the bank, this is called a standing order).

The balance at the end of the period represents the balance as per bank statement. This balance can be a credit balance (favourable) or a debit balance (overdraft). Remember though that in the cash book of the customer, a favourable balance is a debit balance and a credit balance is an overdraft.

8.6.1 Example of a Bank Statement
Illustration 8.2 below is used as an example of a bank statement.

Illustration 8.2
Mr.  K. A. Afolabi maintains a current account No. 000023456 with XYZ Bank Ltd..
The balance on the account as at 31/12/2001 was N15,500 credit.

Mr. Afolabi‟s transaction with the bank in the month of January 2002 were as follows
(i) N10,000 cash deposited on 2/1/2002.
(ii) A cheque of N2,500 issued to Mr. Afolabi by one of his receivables was lodged into his bank account on 6/1/2002.
(iii) He drew a „cash‟ cheque number 000062 for N4,000 on 7/1/2002. The cheque was presented to the bank and payment received on that date.
(iv) He issued a cheque No.000063 for N5,000 to one of his creditors, Mr. S. O. Babalola on 10/1/2002. Mr. Babalola presented the cheque to XYZ Bank Ltd. on 13/1/2002 and received payment.
(v) Received cheques totalling N22,000 from various customers and lodged them into the account on 14/1/2002. All cheques matured for credit to the account on 19/1/2002.
(vi) There was a standing agreement between the bank and Mr. Afolabi that his monthly life assurance premium of N2,150 should be paid direct to the insurance company by the bank. The bank remitted this on 25/1/2002
(vii) A customer living upcountry deposited a cash sum of N9,500 into Mr.
Afolabi‟s account No 000023456 with the local branch of XYZ Bank Ltd..  on 27/1/2002. The bank credited Mr. Afolabi‟s Account the same day.
(viii) On 31/1/2002 XYZ Bank Ltd. debited Mr. Afolabi‟s account with a service charge of N420.50.

You are required to prepare a statement as it would have been prepared by XYZ Bank Ltd reflecting the above transactions

Solution to Illustration 8.2
XYZ Bank Limited
202 Marina, Lagos Statement In respect of:
Account No:   000023456
Customer:    Mr. K. A. Afolabi
Period covered:  01/01/2002 – 31/01/2002
Date issued:    05/02/2002



Date      Transaction       Debit N      Credit N        Balance N
01/01/2002  Balance b/f                    15,500
02/01/2002  Cash deposit                     10,000                           25,500
06/01/2002  Cheque deposit          2,500                            28,000
07/01/2002  Cheque No 000062 –cash                   4,000            24,000
13/01/2002  Cheques No 000063-                          5,000            19,000
19/01/2002  Cheque deposit          22,000                          41,000
25/01/2002  Standing Order                                     2,150          38,850
27/01/2002  Cash deposit                   9,500                           48,350
31/01/2002
  service charge                      420.50                     47,929.50
Opening Balance  15,500.00
Total Debit  11,570.50
Total credits  44,000.00
Closing balance  47,929.50

8.7  Bank Reconciliation Statement
The bank and its customer (e.g. a business entity) maintain independent records in respect of the transactions taking place between them. Therefore it is necessary to reconcile the bank statement balance with the bank balance in the cash book to be assured that the two are in agreement on the amount of money deposited and cheques drawn.

Usually the bank column balance and bank statement balance are not always in agreement and they need to be reconciled.
The disagreement between the two may be traced to the following factors:-
(a) Unpresented cheques: - These are the cheques drawn on the bank and given to the payees but they have not been presented for payment to the bank. The cash book of the business has been credited (that is it has been treated as payment through the bank by the business) this transaction would appear on the credit side of the cash book but missing from the debit side of the bank statement.
(b) Uncredited cheques: - these are cheques deposited in the business bank account and not yet recorded in the bank statement until three or four days thereafter, whereas it would have been recorded on the debit side of the cash book.
The transaction will appear on the debit side of the cash book but missing from the credit side of the bank statement.

(c) Bank charges:- These are charges made by the bank to cover the expenses in handling bank account. The major charges are based on the volume (i.e. turnover) of the transactions on the account. It is sometimes called commission on turnover (COT). Other charges are charges for cheque book, interest charges on bank overdraft facilities from the bank, administration expenses etc.
These charges would have been recorded in the bank statement but will be missing on the credit side of the cash book.

(d) Direct Debits: These are direct payments of expenses on behalf of the business. These have the same effect as the bank charges.
(e) Direct Credits: These are amounts received on behalf of the business directly by the bank. The bank statement would have been credited but the entry will be missing from the debit side of the cash book.
(f) Error of the customer or of the bank

8.7.1 Steps Involved In the Recognition of Discrepancies

(a) Tick items on the debit side of the cash book against items on the credit side of the bank statement. Outstanding items on the debit side of the cash book but missing on the credit side of the bank statement are uncredited cheques. List them.
(b) Tick items on the credit side of cash book against items on the debit side of the bank statement. Items outstanding on the credit side of the cash book but missing on the debit side of the bank statement are unpresented cheques. List them.
(c) The remaining items on the debit side of the bank statement are bank charges and standing order. List them.
(d) The remaining items on the credit side of the bank statement are amounts paid into the bank directly for the benefit of the business entity by its customers (i.e. direct credits).
(e) After all these have been adjusted, it should be possible to reconcile the cash book balance with the balance on the bank statement. If it is not, then there are some errors which further investigation would reveal and be traced to their sources.

8.7.2     Preparation of the Bank Reconciliation Statement

Two main steps are involved in the preparation of a bank reconciliation statement.
(1) Determine the adjusted cashbook balance. This adjustment will not be         affected by items (a) and (b) above. The adjustment will be affected mainly by items (c) and (d).
(2) Reconciling the adjusted cash book balance with the bank statement    balance.

Step 1 - Determining the adjusted Cash Balance
Format
Cash Book (with Adjustment)
           N            N
Balance b/d  x  Standing order                                  x
Direct debit                                x       Cheque earlier lodged
             now dishonoured                      x
Add: - Direct Credit  x  Bank charges                                 x
  Understatement  x  Overstatement of cash                 x
  _  Adjusted cash balance         x
  xx                                                         xx
          

The adjusted cash book balance is the amount that will be shown in the statement of financial position




Step 2 - Reconciling the adjusted cashbook with the bank statement
                N
  Adjusted Balance as per cash book  xx
  Add: Unpresented cheques  xx
         Error of overstatement by bank  xx     xx
  Less: Uncredited cheques    xx
  Error reducing the business balance 
  committed by bank    xx     xx
  Balance as per bank statement  xx
            Using an Alternative Method
                             N
  Balance as per bank statement  xx
  Add: Uncredited cheques    xx
  Bank error reducing cash balance  xx
   Less:
  Unpresented cheques                          xx
  Bank error overstating cash balance  (xx)
  Adjusted Balance as per cash book     xx

Illustration 8.3
The following bank account and bank statement relate to the firm of Mohammed and Sons for the period of 1 to 12 September, 2007
Bank Account
2007                                 N  2007      N 
Sept 1 Bal b/f                 6000     Sept 2  Cheque Owen              400 
      3 Cash                     500    2  Cheque Peter               150 
      5 Cheque Kuku            85    6  Cheque Ringo               105 
      7 Cheque Labe           220    8  Cheque Smith             365 
     9  Cheque Michael      155              10 Cheque Thomas                         1,120 
    11  Cheque Ndidi         360    12  Balance c/d                     5,180 
                                                7,320                                                  7,320 
    Balance b/d         5,180
Bank statement as at 12 September, 2007

2007    Debit  Credit  Balance 
      N    N      N 
          Sept 1 Balance        6,000 
  2  Cheque no. 98876  400      5,600 
  3  Cash    500    6,100     
      4  Charges    20      6,080 
  5  Cheque deposits    85    6,165 
  6  Cheque no.98877  150      6,015 
  7  Cheque deposit    220    6,235 
  8    Cheque deposit (by Umoru)  600      6,835 
  9  Cheque dishonoured  85      6,750 
  10 Standing order
    (Insurance Premium)  560      6,190 
  11 Cheque 98878  105      6,085 

You are required to:
(a) Effect the necessary adjustment to the bank account and prepare the adjusted balance.
(b) Prepare a Bank Reconciliation Statement

Solution  to Illustration 8.3

(A) Adjusted Bank Account
Date                                    N                                   N
Sept 2007   Balance b/d                   5,180     Bank charges                     20
             Direct credit (Umoru)         600     Standing Order                       560
                                                          Dishonoured cheques          85
                                             _____    Bal c/d                             5,115
                                              5,780                                         5,780
           Balance b/d                5,115






(B) Bank Reconciliation Statement at 12 September, 2007    
N
Adjusted balance as per cash book
Add:- unpresented cheques:-    5,115
    Smith  365 
    Thomas          1,120  1,485
     less:- Uncredited cheques:    6,600
    Micheal  155 
    Ndidi  360  515
Balance as per Bank statement     6,085

Illustration 8.4
The following is the summary of the cash book of Akintola Enterprises for the month ended 31/12/20X5

              Cash Book 
                 N               N
Balance b/d          2,110  sundry payment   23,280
Sundry receipt   22,610  bal. c/d    1,440
  24,720    24,720
Balance b/d  1,440 

On investigation the following errors were discovered.
i. Bank charges of N53 showed on the bank statement had not been entered in the cash book.
ii. A cheque drawn for N27 had been returned by the bank marked “Returned to Drawer” but this had not been recorded in the cash book.
iii. The opening balance in the cash book was wrongly brought down as N2,110 instead of N2,205.
iv. The last page of the pay-in-slip book showed a deposit of N2,178 which had not yet been credited to the account by the bank.
v. The bank had debited a cheque for N108 in error to the entity‟s account.
vi. The bank statement showed an overdrawn balance of N50
vii. A payment of N70 cheque was treated as a receipt in the cash book.
viii. Three cheques issued to suppliers for N321, N555 and N45 had not been presented for payment.

You are required to
(a) Write up the cash book.
(b) Prepare a bank reconciliation statement.

Solution to Illustration 8.5
Akintola Enterprises
(a)  Adjusted Cash Book
          N          N
Balance b/d  1,440  Bank Charges  53
Difference in opening bal.  95  Error in cheques drawn  140
    Dishonoured cheque  27
  _____  Balance c/d  1,315
  1,535 
Balance b/d  1,315
  1,535
(b)  Bank Reconciliation Statement at 31 December 1996 
                N    N
Adjusted balance as per cash book 
Add: unpresented cheques  321
  555  1,315
                                        45  921
 
Less: Uncredited cheque  2,178  2,236
         Debit in error by the bank  108  2,286
Balance as per Bank Statement (Overdraft)                                         50

Note: Payment of N70 cheque recorded in error as receipt gave a correction of N140 in the cash book because the error will be cancelled first before the N70 is reinstated on the credit side.



Illustration 8.5
The following information was extracted from the records of a petty trader as at 30th of June 20X9.

Balance as per Bank Statement was N1,000 credit. Cash Book balance showed N37,000 credit in the Bank Account column.
The following had been reflected in the Bank Statement but not in the Cash book.

Bank charges                           N5,000
Bank loan interest                               N1,000
Interest from investments        N2,000
Dividends from shares                       N12,000

In addition a cheque for N20,000 issued to Kete was dishonoured because of insufficient fund. Another cheque for N30,000 issued to Jimoh remained unpresented.
A cheque for N20,000 from Kudiratu was yet to be credited
You are required to produce an adjusted Cash Book and then a Bank Reconciliation as at 30th June 20X9.    

Solution to Illustration 8.5Adjusted Cash Book Account
                 N              N
Interest on Investments      2,000       Balance b/f    37,000
Dividends    12,000       Bank charges      5,000
Kete (dishonoured Cheque)                   20,000       Interest on loan       1,000
Balance c/f      9,000                                ___  
                                           43,000                                              43,000
Balance c/d                                               9,000
Bank Reconciliation Statement as at 30th June 20X9
 N
Adjusted Cash Book Balance  (9,000)
Add: unpresented cheques  30,000
  21,000
Less: Uncredited cheque  20,000
Balance per Bank statement                           1,000