Credit memo and debit memo in the bank reconciliation

A bank credit memo is an item on a company's bank statement that increases a company's checking account balance. A bank debit memo is an item on the bank statement that reduces the company's checking account balance. Since these items are already on the bank statement, the only adjustment that could be required is in the company's accounting records. The old rule for the bank reconciliation "Put it where it isn't" means that the bank's credit memo amount must be added to the company's accounting records, if it is not yet in the company's accounts. Since the bank credit memo increased the checking account balance, the company's Cash account will have to be debited and another account will need to be credited. For example, if the bank statement shows a credit memo for Rs 1000 for interest earned, the company will need to have a debit of Rs 1000 in its Cash account and will need a credit of Rs 1000 in Interest Revenue or Interest Income.

If the bank statement shows a debit memo of Rs 250 for a service fee, the bank statement balance was decreased by Rs 250. As part of the bank reconciliation process the following entry must be made if the item has not yet been recorded in the company's records: debit Bank Fee Expense or Miscellaneous Expense Rs 250 and credit Cash Rs 250. The company's Cash account needs to be credited because this company's asset account decreased.

The reason the bank used "debit" to decrease the company's checking account is that its customers' checking account balances are liabilities for the bank. (The bank's cash was debited when customers deposited money and the bank's liability account Demand Deposits or Checking Account Deposits was credited.) When the bank pays a customer's check, the bank's cash is reduced and the bank's liabilities are reduced. The bank records this with a credit to Cash and a debit to Demand Deposits.

Ledger Account Balancing

The objective to be achieved through the whole process of accounting is to collect all the information relating to an element at a single place.

This is achieved by preparing the ledger.

Each Ledger Account provides information relating to one element. By information we mean the accounting information.

Ledger Account - Balance, Balancing

The benefit with the ledger account is that all the accounting information relating to an element can be obtained at a single place.
Based on the information that has been posted into the ledger from the journal we can obtain the information pertaining to the date and amount of transaction and the other account affected by the transaction
Apart from these, other information, like ledger account balance, can also be derived from the ledger account.

Ledger Account Balance

The ledger account is a collection of all the debits and credits made in relation to an account head at a single place.
The debits and credits, which are actions of opposing nature, are collected separately on either side of the account.

Ledger account balance is the net amount obtained by setting off the sum of all debits and sum of all credits against each other.
In setting off, we always assume that the greater sum is being set off from the smaller one. Thus the ledger account balance is also interpreted as

• Debit side total − Credit side total
  (if debit side total is greater)
• Credit side total − Debit side total
  (if Credit side total is greater)

Mathematically, ledger account balance is the absolute difference between the credit side total and the debit side total.

⇒ Ledger Account Balance

= | Debit side total − Credit side total |

Ledger Balancing

The act of finding the balance in a ledger account is called Ledger Balancing.

Illustration

Cash a/c

DrCr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c	– – – – –	20,000 5,000 1,50,000 10,000 5,000
	Sub Total		2,14,500		Sub Total		1,90,000

The total of the debit side is 2,14,500 and that of credit side is 1,90,000.

⇒ The balance in this Ledger account is 24,500 (2,14,500 − 1,90,000).

Sub Totals !!

Conventionally, the totals of the postings on the debit side (sum of debit side item values) or on the credit side (sum of credit side item values) are not shown in a ledger account.
To enable understanding the concept of balancing a ledger account, we have shown them and named them sub-totals.
Till you get accustomed to the concept of ledger account balancing, add up the items and show the total as sub-totals (at least with a pencil). It will help make things easier.

Is it a Debit balance or a Credit balance?

Since the balance is obtained by setting off the sum of debit side amounts and sum of credit side amounts, we can say that what remains is related to the greater sum.
The nature of the balance is related to the greater sum.

• If the total of the debit side is greater,
  the ledger account has a debit balance
• If the total of the credit side is greater
  the ledger has a credit balance.

Illustration

Cash a/c

DrCr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c	– – – – –	20,000 5,000 1,50,000 10,000 5,000
	Sub Total		2,14,500		Sub Total		1,90,000

The total of the

• debit side is 2,14,500
• credit side is 1,90,000

∴ Balance in this Ledger account

= Absolute difference of totals

= | 2,14,500 − 1,90,000 |

= 24,500

Debit side total is greater than the credit side total

∴ Nature of balance is debit.

This ledger account has a debit balance of 24,500.

When to balance? What idea does the balance give?

The ledger account is balanced periodically. In general, ledger accounts are balanced at varied time periods as daily, weekly, monthly, annually.

For what period a ledger account is to be balanced is something that is dependent on the information that we wish to derive from the account and the frequency at which we wish to derive it. There is no rule or principle to specify the period for which a particular ledger account has to be be balanced.

The period for which balancing should be done can be better understood by looking at the information that the balance itself represents.

What idea does the ledger balance give?

Explanation for the information provided by the ledger account balance of some accounts.

Cash a/c

Cash a/c being a real account, is debited whenever cash comes into the organisation (receipts) and is credited whenever cash goes out of the organisation (payments).

Thus, the amount of balance in Cash a/c should give an idea of the amount of cash available with the organisation.

Cash balance is an information that may be needed frequently. So, we find it a general practice that businesses assesses the amount of cash on a daily basis at the end of the day at least.

Wages Paid a/c

Wages paid a/c is a nominal account. It is debited whenever Wages are paid.

Assuming that wages are being paid daily, if the organisation needs the information relating to the weekly expenditure on wages, it should balance the wages acount on a weekly basis.

The balance at the end of the first week indicates the first weeks expenditure. The balance at the end of the second week indicates the cumulative expenditure for the first two weeks. Deducting the balance at the end of the first week from this would give the expenditure for the second week.

Furniture a/c

Furniture a/c being a Real account, is debited whenever Furniture comes in (bought) and is credited whenever Furniture goes out (scrapped, sold, damaged etc).

Organisations wish to know the value of their assets at least once a year, generally towards the end of the year. Thus, Furniture a/c is balanced at the end of the year.

Mr. Ibrahim a/c

Mr. Ibrahim a/c being a personal account, is debited whenever he receives some benefit (buys goods on credit) from the organisation and is credited whenever he gives some benefit (pays money, returns goods purchased etc) to the organisation.

If the organisation needs the information relating to the balance due from Mr. Ibrahim (debtor) on a monthly basis, it should balance Mr. Ibrahim's a/c at the end of every month. The ledger balance gives the amount due and the nature of balance lets us know whether the amount is due to him or due from him.

The information may also be obtained as and when needed by balancing the account at that point when the information is needed.

Balancing Frequency

Frequency

•  The number of occurrences within a given time period.
•  oftenness
• 
  
• The frequency of balancing i.e. the number of times a ledger account is balanced in a time period (say a year) is dependent on the information needs of the organisation.

Balance - Carried down (c/d) or Carried forward (c/f)

Carried Forward

•  Transfer from one time period to the next
•  Carried Down
•  Carried Over

Consider Cash a/c and assume that it is being balanced on a daily basis.
At the end of each day, the cashier would be left with a certain amount of cash. How much is what is indicated by the balance in the Cash a/c.
What would he do with that cash?. He would take it over to the next working day. This explains the use of the phrase Carried Forward or Down to represent the balance at the end of a period.
We say that the balance is carried forward (down or over) to the next day (Or) more specifically the balance is carried forward (down or over) from the end of a day to the beginning of the next day.

Where do we show this in the Ledger Account?

• The phrase "Balance c/d" or "Balance c/f" is written immediately after the sub-total.
• It is written on the side with the lesser total.
• It is prefixed by "To" or "By" depending on which side it is being written.

Cash a/c

DrCr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c	– – – – –	20,000 5,000 1,50,000 10,000 5,000
	Sub Total		2,14,500	25/06/_5	Sub Total By Balance c/d	–	1,90,000 24,500
	tl		2,14,500		tl		2,14,500

Total

After writing down the balance being carried down or carried forward, if you add up the two sides starting from the sub-totals, the totals on the two sides would be the same. This is labeled as the total for each side of the ledger account.

Steps

• Add up the amounts in the relevant columns on both sides.
  Obtaining the sub-totals thereby
• Ascertain the total amount for the ledger account
  = Higher of the sub-totals
  Shown in the amount column as final total on both sides.
• Calculate the balance
  = absolute difference between the two sub-totals.
  Shown before the total, on the side having shorter total.
• Label the balanceAgainst the balance that is recorded,
  
  write the phrase "Balance c/d", prefixed with
  1. "By" if it falls on the credit side
     (making it By Balance c/d)
  2. "To" if it falls on the debit side
     (making it To Balance c/d).

Balance - Brought down (b/d) [or forward (b/f)]

Brought Forward

•  Transfer from the past time period to the current
•  Brought Down

Consider Cash a/c and assume that it is being balanced on a daily basis.
At the end of each day, the cashier would be left with a certain amount of cash. How much is what is indicated by the balance in the Cash a/c.
What would he do with that cash?. He would take it over to the next working day.
At the beginning of the next day, what would the cashier say?
I have brought down yesterdays cash balance. This explains the use of the phrase Brought Forward or Down to represent the balance at the beginning of a period.
We say that the balance is brought forward (down) from the previous day (Or) more specifically the balance is brought forward to the beginning of the day from the end of the previous day.

Where do we show this in the Ledger Account?

• The phrase "Balance b/d" or "Balance b/f" is written immediately after the total.
• It is written on the side with the greater total.
• It is prefixed by "To" or "By" depending on which side it is being written.

Cash a/c

DrCr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received a/c	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c	– – – – –	20,000 5,000 1,50,000 10,000 5,000
	Sub Total		2,14,500	25/06/_5	Sub Total By Balance c/d	–	1,90,000 24,500
	tl		2,14,500		tl		2,14,500
25/06/_5	To Balance b/d	–	24,500

Use of Sub-Totals is optional

In practice, the total of the debit side and the credit side, which we marked as sub-totals are not shown in a ledger account.
U of sub totals helps ensure accuracy and reduce calculation errors. If you wish that the sub-totals should not appear in you final answer, use a pencil for it and erase it after you complete balancing the account.

A balanced ledger account without the sub-totals being shown

Cash a/c

DrCr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
15/06/_5 19/06/_5 24/06/_5 24/06/_5	To Capital a/c To Goods/Stock a/c To Mr. Natekar a/c To Commission Received	– – – –	2,00,000 12,000 2,000 500	17/06/_5 17/06/_5 18/06/_5 18/06/_5 21/06/_5 25/06/_5	By Furniture a/c By Rent Paid a/c By Bank a/c By Goods/Stock a/c By Wages Paid a/c By Balance c/d	– – – – – –	20,000 5,000 1,50,000 10,000 5,000 24,500
	tl		2,14,500		tl		2,14,500
25/06/_5	To Balance b/d	–	24,500

The balance in a ledger account being the difference between the two actual totals, it would be very helpful to use the sub-totals. It makes things easier for you. To stress on its optional use we have shown it in light ink.

 

The Difference Between Accounts Payable and Notes Payable

Liabilities constitute a company’s legal obligations that occur during the course of its business operations. Liabilities appear on a company’s balance sheet, and they are classified as current or long-term. Two common liabilities listed on an organization’s balance sheet include accounts payable and notes payable. Accounts payable is classified as a current liability, and notes payable is classified as a current or long-term liability. A company must understand the importance of accounts payable and notes payable to effectively manage its finances.

Understanding Accounts Payable

Accounts payable represents the amount of money a company owes to its supplier for the purchase of goods or services on credit. The accounts payable account is listed as a current liability because a company must pay its debt in a short period of time. Most companies require business customers to pay their invoices within 30 days and do not require interest payments. Some companies analyze how effectively they pay their accounts payable balances by computing the accounts payable turnover ratio. To calculate the ratio, you must divide total supplier purchases by the average accounts payable for the period. Investors and managers use this information to calculate the number of times a company pays its accounts payable balance in a given period.

Understanding Notes Payable

Notes payable represents a written promissory note that a company receives when it borrows money from a lender. The notes payable account possesses a credit balance. For example, a company borrows $50,000 from a bank. The company posts a credit to its notes payable account for $50,000 and a debit to its cash account for $50,000. If a company must repay a note within one year, it lists the note on its balance sheet as a current liability. If the note is due in one year or later, the company lists the note as a long-term liability.

Interest on Notes Payable

In most cases, companies must pay interest on money borrowed from a lender. The promissory note states the specific interest rate and the terms. Common interest terms require companies to pay interest every six months. A company must account for interest paid on its notes owed to the lender. It must also accrue outstanding interest payments that it has yet to pay, which is typically done on December 31 of the initial year. When a company accrues interest, it debits interest expense and credits interest payable. When a company makes a payment on the principal balance and interest, it debits notes payable, interest expense and interest payable and credits cash.

The Balance Sheet

Accounts payable and notes payable are listed on a company’s balance sheet as a part of its liabilities. The balance sheet provides a snapshot of a company’s financial position at a given point. Managers and investors use the balance sheet to make important financial decisions regarding a company. Accounts payable and notes payable are used in conjunction with other accounts on financial statements to compute important financial ratios.

BUSINESS COMMUNICATION: IMPORTANT TECHNICAL TERMS AND PHRASES

• Arrival:

During the period of business i.e. a day or a week, the fresh stock brought to the market called arrival. It refers to only fresh addition to the total supply of commodity in the market.

• Bad book:

When a jobber finds the prices of his previously bought securities have gone down, it is known as bad book.

• Bare:

When market is short of a particular security.

• Bear:

Any speculator who sells a future in the hope that he will purchase at lower price and sell at a higher price.

• Bear raid:

A bear sells a future in the hope that price will fall and he will make purchases at a lower prices to gain. Since his gain depends upon the fall in price, he tries to bring down the price of that commodity. In this endeavor, he starts spreading rumors and news in the market. Such a campaign by the bear is known as bear raid.

• Bear sentiments/bearish sentiments:

When there is a feeling among speculators that the prices will fall the feeling is known as bearish sentiments.

• Bearish hells:

Suspension of market due to abnormal fall in price of a commodity. When the prices of stock go as below as the limit fixed by the market, the transaction of such a share is stopped to stop further fall. Such a stoppage is known as bearish hella.

• Blue chips:

Blue chips are the shares of a company having greater earning power, and a better record of dividend payment.

• Boom:

Heavy volume of business and rise in market value of a security. It refers to prosperity, increase in prices and good volume of business.

• Budlah:

Postponement of transaction on the next settlement day.

• Bull:

A bull is a speculator who buys forward without the intention of taking delivery and making payment in the expectation that the prices will rise in future. Thus he hopes to gain by selling it before the payment day.

• Bull Liquidation/ Bull unloading:

A bull is a person who expects a rise in price of a commodity and he purchases in order to make a profit. When settlement date arrives he is committed to settle the transaction no matter what is the position of the prices.

• Bull sentiments:

When a bull has a feeling that the prices of certain commodities will move up, it is known as bullish sentiments.

• Bullion:

Precious metal, gold, or silver in mass or bars but not as coins.

• Bullish Hella:

When the price of a stock goes too high i.e. it goes beyond the maximum limit fixes by the market, the transaction of such shares are suspended for the time being. Such a stoppage is known as bullish hella.

• Call rate:

It is the rate which is charged by the commercial banks over call loans. Call loans are those loans which are issued for a very short period of time and are repayable on a short notice or at call. The period generally ranges from some hours to weeks.

• Depression:

The condition of the market indicating falling prices and low volume of the business touching the bottom.

• Dumping:

To sell the goods at the lowest possible price in a foreign market.

• Forward business futures:

It refers to the contracts for future delivery. But in actual practice the future contracts are not settled by making/taking delivery but by the payment of the difference at the time of delivery.

• Forward buying:

Making purchases for which delivery will be made at the stated future date.

• Free market:

When a dealer can either buy or sell larger or small parcels of securities without difficulties.

• Glut:

It refers to oversupply of a commodity in a certain market. Due to glut conditions prices come down.

• Hella:

It is temporary suspension of market dealing due to abnormal rise or fall in prices. There may be bullish hella or bearish hella showing either situation.

• Jobber:

A jobber does not act as an agent but as a principal and deals in his own name. He does not possess or take delivery of what he sells or purchases from other parties, since his operations are of speculative nature. His profit is the margin between the buying and selling prices. A jobber is a member of the exchange.

• Normal or face value:

It is the amount stated on the face of the securities. However, in the case of shares of joint stock companies, the shares certificate mentions both the nominal value of the share and the amount actually paid thereon by a shareholder.

• Off take:

It refers to the total purchases of certain commodity in the market during a particular period.

• Option:

An option is a right to buy or sell certain good within a specified period of time at a certain price.

• Poor takes:

A small amount of purchase made in market.

• Ready business/actual:

When the goods are actually delivered after the contract has been made between the parties.

• Rigging:

An organization of bulls formed with a view to control the market by artificial means and get prices in their favor.

• Scrip:

This is the common term employed in the stock exchange for any kind of security. Such as government paper, debenture and shares.

• Setback:

It referred to fall in price after the period of healthy business.

• Slump:

Sudden fall in the market value of a security is termed as slump or a period of low business activity.

• Spade:

When the price rises or falls by an insignificant margin, it is known as spade.

• Speculation:

This term applies to future business and not ready business. If the goods are bought or sold for future delivery with the object of making settlement by the payment or receipt of the difference, it is known as speculation.

• Square deal:

The sale by bulls and the purchases by the bears to settle their respective accounts are known as square deal.

• Stag:

A person, who applies for shares in a new issue in order to get a gain on it, is known as stag.

• Street price:

A stock exchange is locked at a fixed time under the rules. But buying and selling of securities is often carried on even after the exchange is closed thus the prices quoted after the working hours is called street price.

• Underwriter:

When a broker undertakes the responsibility of selling the shares in the market on behalf of the issuing body, technically he is known as underwriter.