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Adjustment entry !

Shivani (Learner) (1881 Points)

22 November 2015

Dear Friends

Question 1

If we receive a cheque on 31-3-15 from X and we have NOT deposited it in bank on 31-3-15, then what journal entries will we pass in our books?

Question 2

If we receive a cheque on 31-3-15 from X and have deposited it in bank on 31-3-15, then what journal entries will we pass in our books on 31-Mar-15? The cheque gets cleared on 03-Apr-16.

regards

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26 Replies

CA Final Student (Student CA Final ) (227 Points)
Replied 22 November 2015

For 1) Cheque on hand Dr To Party account 2) Bank account Dr To Party account In 2 there will be bank reconciliation as balance as per bank and book does not tally

Miss Rinkal (Student) (1304 Points)
Replied 22 November 2015

@ Shivani:

The question that you have asked is wrt reconciliation.

When we receive the cheque at that date; here 31-03-2015, journal entry has to be made I.e Bank A/c to be debited and X A/c to be credited.

When the cheque amt actually gets credited in your bank, I.e refer PB date. This will form part of reconciliation statement. I.e as per the given question if it gets credited on 3 April then balance as per pb will be short by such similar amt as it is reflected as balance as per bank book on 31-03-2015

So in the given question, the ans remains unchanged irrespective whether it is deposited or not. I.e on 31-03, journal entry will be passed as Bank A/c .... Dr To X A/c. However in Reconciliation statement that we prepare., reason will change. I.e cheque deposited but not yet cleared OR cheque recd but not yet deposited

Hope I have cleared your doubt

Nazish (Student) (22 Points)
Replied 22 November 2015

The cheque in hand clarification is the correct accounting concept,since,March being year-end and not month end, debiting Bank on 31/3 is wrong...

Miss Rinkal (Student) (1304 Points)
Replied 22 November 2015

@ Nazish:

There is nothing wrong in debiting Bank A/c. You already have received the cheque which in ordinary terms means you have recd the money. We are debiting bank a/c as cheque has already been received by us and ready for depositing. And reconciliation is done month end and/ or year end. But year end reconciliation definitely takes place. Month end reconciliation depends on size of the entity. Just because it is year end, you need not change your journal entry by making a separate ledger cheque in hand A/c. Reconciliation statement is made for that purpose only for correlating the difference between bank book and pass book/ bank statement as the case may be.

Miss Rinkal (Student) (1304 Points)
Replied 22 November 2015

@ Ansh:

In your first case, you are crediting party twice.

(Guest)

I think miss rinkal's suggestion is more accurate ...the first comment is wrong coz u are crediting party twice and u are debiting 2 balances I. E cheque in hand and bank ac..

(Guest)

Anyway when an accountant passes bank related entries...he debits and credits his books (perspective of the business not the bank)...ignore the cheque clearance dates coz u are not accounting from the perspective of the bank.

Miss Rinkal (Student) (1304 Points)
Replied 22 November 2015

@ Ubaid:

The correct way is to pass the entry and prepare reconciliation statement for the difference in balance as per pass book and bank book.

But nowadays, few accountants especially accounting entries of small firms do not prepare reconciliation and record the entries as per bank statement.

But such method is not a correct method of accounting. And cheque clearance dates are equally important whether it is a banking entity or non banking entity

Santosh Jha (Article) (33 Points)
Replied 22 November 2015

Practically first comment is viable...sch III as well has sub item called cheque on hand under cash and cash equivalent.

CA Final Student (Student CA Final ) (227 Points)
Replied 22 November 2015

I am not credting party account twice. It was answer of second question. Miss rinkal you should refer guidance note on revised schedule 6 ( now schedule 3) for further clarification on cheque in hand. You can never bank account if you have not deposited in bank. Moreover cheque in hand also have negative impact on company's financials and should always be disclosed for all stakeholders.

Ajit Hegde (CA - Final) (1367 Points)
Replied 22 November 2015

In the first comment. Party ac is not credited twice. It refered to two different accounting queries in the question. And the actual treatment, in my opinion, should be debiting Bank Ac irrespective of the deposit made or not. For that purpose only BRS is done.

Miss Rinkal (Student) (1304 Points)
Replied 22 November 2015

@ Ansh :

I m sorry I misunderstood your ans that you gave wrt journal entries. It looks as if 2 entries are passed. Thanks for the clarification.

And yes I agree with your ans. I m completely aware about the gn and disclosure requirements. The ans. that I had given was wrt other than companies. I.e on whom schedule iii is not mandatory or not required.

Actually I should have clarified myself earlier and hence would not create confusion.

Nonetheless thanks for further updating it.

Shivani (Learner) (1881 Points)
Replied 23 November 2015

Dear Friends

Thanks for all your replies.

But my question was not in regard to bank reconciliation.

my question was related to balance sheet finalisation.

Please consider the following:

On 31-Mar-15 the Bank balance as per our books and as per Bank Statement is same at Rs. 100000.

Now we receive a cheque of Rs. 20000 on 31-Mar-15 and we deposit the cheque in bank on same day.

Entry passed

Bank 20000

To Party 20000

Now in my books bank balance has shot up by Rs. 20000 but since cheque gets cleared on 3-Apr-15, the balance as per bank statement on 31-Mar-15 remains at Rs. 100000 whereas my book shows bank balance of Rs. 120000 on 31-Mar-15.

In order to find out the reason for difference, we prepare BRS on 31-Mar-15 and identify the cheque due to which difference is coming.

So far so good, no problem.

But my question that while BRS tells us the reason for difference it does not change bank balance in our books. We only get to know the reason for differnce. Now still on 31-Mar-15 my books show 120000 and banks books show 100000.

Now i have to finalise the balance sheet and i have to show bank balance at 100000 and not at 120000. I need to bring down my bank by 20000.

and for this i need to pass adjustment entry

Cheque deposited but not cleared 20000

To Bank 20000

and on 3-Apr-15 (date of clearing) i need to pass entry

Bank 20000

To Cheque depsoited but not cleared 20000

Thanks

And as regards cheques in hand, i prefer to always debit cheque in hand when we receive teh cheque instead of bank account. we can debit bank account when we deposit the cheque and can credit cheque in hand. It helps in maintaing proper internal control over cheques received and prevents from unncessarily inflating the bank account between the period of receipt of cheque and its actual deposit.

regards

Sajid.Maliyekkal (CA Final Student) (21 Points)
Replied 23 November 2015

I think it is better to debit Cheque A/C when receiving and transfer to Bank A/C on depositing it to bank for collection, by passing a contra entry. It is easy to trace the pending cheques being not collected if we keep a separate account calling Cheque A/C. There is no question of crediting party twice.