Imaginary Bookkeeper

6 June 2016

Under each error below is an explanation to a recently hired bookkeeper how it would be shown on a cash reconciliation.  To do cash reconciliation, we normally reconcile the bank records and company records, hence when we do cash reconciliation which is also called bank reconciliation.  Middle City – Online Accounting Tutorial (2006) says that bank reconciliation compares the information in the bank statement with the company’s Cash account, and finds any discrepancies.  The balances of bank and book are brought to balance under the adjusted balance method.  Hence the treatment of each of the correction of under each of the error below is assumed to be under the adjusted balance method of bank reconciliation.

a. The bank recorded a deposit of $200 as $2,000.

Imaginary Bookkeeper Essay Example

Answer: The bank balance will have to add $ 1,800 as part of the bank balance.

b. The company’s bookkeeper mistakenly recorded a deposit of $530 as $350.

Answer: The book balance is to be increased by $ 180

c. The company’s bookkeeper mistakenly recorded a payment of $250 received from a customer as $25 on the bank deposit slip.  The bank caught the error and made the deposit for the correct amount.

Answer: The book balance will have to be increased by $ 225 to correct the error.

d. The bank statement shows a check written by the company for $255 was erroneously paid (cleared the account) as $225.

Answer: The bank balance will have to be decrease by $ 30.

e. The bookkeeper wrote a check for $369 but erroneously wrote down $396 as the cash disbursement on the company’s records.

Answer: The book balance will have to be increased by $27.

PART 2

IMAGINARY DOG BREEDING BUSINESS, WANT TO BORROW MONEY, WHAT WILL SHE NEED TO TAKE TO THE BANK WITH HER ALONG WITH HER APPLICATION TO THE BANK.

Below are the answers to questions in relation to Lucy’s actions on the financial statements:

Question 1.  What are the effects of Lucy’s classification on the financial statements?

The classification of Lucy from the liability account because the amount of $ 50,000 was a loan, to an equity account would overstate the equity account of Lucy Shafer and understate the liability account.

Question 2.  Are there any ratios that might be of concern to the local bank that will be misstated by Lucy’s actions?

Yes, there are ratios that may be misstated by Lucy’s actions. These include the debt to equity ratio which will be overstated because it would appear that she has little or no debt when in fact it has not.  Debt to equity ratio is used to measure financial leverage.

Another ratio that will be affected is the return on equity if she has already an income statement.  Return on equity will be understated because the formula to compute the same is to divide net income to total stockholders equity.  By including the $ 50,000 loan as part of the equity would therefore decrease the return on equity assuming the same amount of income.  Her net income however is not affected because her action of reporting the interest payments as miscellaneous expenses is correct.

Question 3. Do you think Lucy’s actions are unethical? Suppose Lucy’s uncle agrees to be a partner in the company and Lucy can afford to buy his share by repaying the $50,000 with interest. Does that change your opinion?

As to whether Lucy’s action are unethical, the answer is yes because that violates the generally accepted accounting principles (GAAP)  but a wise auditor of the bank where she will borrow money using the financial statement,  could easily find the misstatement if the auditor will conduct verification especially the fact that the related interest payment is an expense.

If her uncle agrees to be a partner then the debt to equity ratio and return on equity ratio would be correctly stated however, the fact of repaying he uncle’s share with interest is not correct, hence financial statement may still be misstated on some point.  This is because the moment that her uncle becomes a partner, both become decision-makers as partners not only to the running of the business but as to how financial information would be presented.

Any repayment then to her uncle should not be considered as expense under the present accounting rules but partner’s withdrawal or drawing.  With Lucy’ treating therefore the interest payment as expense would overstate expenses and therefore understate income.  By understating income, the return on equity will still be understated by a certain degree and that would diminish her chance of borrowing because banks would normally prefer higher return on equity because the same measures profitability.

Reference:

1. Middle City – Online Accounting Tutorial, 2006, Chapter 7 Financial Assets {www document} URL < http://www.middlecity.com/ch07.shtml>,

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