Self Appraisal - Work

A BEAUTIFUL STORY - 

A little boy went to a telephone booth which was at the cash counter of a store and dialed a number. 

The store-owner observed and listened to the conversation:   

Boy : “Lady, Can you give me the job of cutting your lawn? 

Woman : (at the other end of the phone line) “I already have someone to cut my lawn.” 

Boy : “Lady, I will cut your lawn for half the price than the person who cuts your lawn now.” 

Woman : I’m very satisfied with the person who is presently cutting my lawn. 

Boy : (with more perseverance) “Lady, I’ll even sweep the floor and the stairs of your house for free. 

Woman : No, thank you.   

With a smile on his face, the little boy replaced the receiver. 

The store-owner, who was listening to all this, walked over to the boy.   

Store Owner : “Son… I like your attitude; I like that positive spirit and would like to offer you a job.” 

Boy : “No thanks, 

Store Owner : But you were really pleading for one. 

Boy : No Sir, I was just checking my performance at the job I already have. I am the one who is working for that lady I was talking to!   

** This is called self Appraisal** Give your best and the world comes to you!!!!!

Computation of Total Turnover for the purpose of Tax Audit

Tax Audit:-

Under the provisions of section 44AB, every person carrying on business is required to get his account audited if the total sales, turnover or gross receipts in the previous year exceed 100 Lakhs rupees. Similarly a person carrying on a profession is required to get his accounts audited if the total sales, turnover or gross receipts in the previous year exceed twenty five Lakhs rupees.

ICAI through a Guidance Note clarified the following points:

1. Where a person is carrying on more than one businesses or more the one professions – the total turnover of all the businesses or professions shall be clubbed together and tax audit shall be liable to be conducted if the total turnover exceeds prescribed limits.
2. Where a person is carrying on business as well as profession and the turnover of the business say is Rs. 120 lakhs and the gross receipts of the profession say is Rs. 22 Lakhs. In such a case, ICAI has clarified through a guidance note that the assessee is liable to get the tax audit done of both the business as well as profession because the turnover from the business exceed the limit of Rs. 100 lakhs. However, if his total Turnover say was Rs. 95 Lakhs and gross receipts from profession say was Rs. 22 Lakhs, he would not be required to get his tax audit done.
3. In case where a person has a total turnover of say Rs. 98 Lakhs and has sold a Car for say Rs. 8 Lakhs. In such a case, the total amount on adding up becomes Rs. 106 Lakhs i.e. above Rs. 100 lakhs. Confusion arises whether the person is liable to get an audit done in this case and ICAI has clarified that the turnover will not include any amount on the sale of the fixed asset as it was held by the person for business use and not for the purpose of sale.
4. ICAI has further clarified that the amount received from the following items shall not be included while computing the Total Sales/Total Turnover/ Gross Receipts:-

Sale Proceeds of Fixed Assets

Sale Proceeds of Assets held as Investments

Rental Income

Income by way of Interest unless assessable as Business Income

Any expense which is in nature reimbursement to the Agent by the Client

Bank Reconciliation Statement

The cash book also serves the purpose of both the cash account and the bank account and shows the balance of both at the end of the period. Once the cash book has been balanced, it is usual to check its details with the records of the firm’s bank transactions as recorded by the bank.

The amount of balance shown in the passbook or the bank statement must tally with the balance as shown in the cash book. But in practice, these are usually found to be different. Hence, we have to ascertain the causes for such difference. It will be observed that a bank statement/passbook shows all deposits in the credit column and withdrawals in the debit column. Thus, if deposits exceed withdrawals it shows a credit balance and if withdrawals exceed deposits it will show a debit balance (overdraft).

Bank Reconciliation Statement: A statement prepared to reconcile the bank balance as per cash book with the balance as per passbook or bank statement, by showing the items of difference between the two accounts.

Need for Reconciliation

It is generally experienced that when a comparison is made between the bank balances as shown in the firm’s cash book, the two balances do not tally. Hence, we have to first ascertain the causes of difference thereof and then reflect them in a statement called Bank Reconciliation Statement to reconcile (tally) the two balances.

In order to prepare a bank reconciliation statement we need to have a bank balance as per the cash book and a bank statement as on a particular day along with details of both the books. If the two balances differ, the entries in both the books are compared and the items on account of which the difference has arisen are ascertained with the respective amounts involved so that the bank reconciliation statement may be prepared.

Reconciliation of the cash book and the bank passbook balances amounts to an explanation of differences between them. The difference between the cash book and the bank passbook is caused by:

• Timing differences on recording of the transactions.

• Errors made by the business or by the bank.

Timing Differences

When a business compares the balance of its cash book with the balance shown by the bank passbook, there is often a difference, which is caused by the time gap in recording the transactions relating either to payments or receipts. The factors affecting time gap includes:

1. Cheques issued by the bank but not yet presented for payment
2. Cheques paid into the bank but not yet collected
3. Direct debits made by the bank on behalf of the customer
4. Amounts directly deposited in the bank account
5. Interest and dividends collected by the bank
6. Direct payments made by the bank on behalf of the customers
7. Cheques deposited/bills discounted dishonoured

Differences Caused by Errors

Sometimes the difference between the two balances may be accounted for by an error on the part of the bank or an error in the cash book of the business.

This causes difference between the bank balances shown by the cash book and the balance shown by the bank statement.

1. Errors committed in recording transaction by the firms
2. Errors committed in recording transactions by the bank

Preparation of Bank Reconciliation Statement

After identifying the causes of difference, the reconciliation may be done in the following two ways:

• Preparation of bank reconciliation statement without adjusting cash book balance.
• Preparation of bank reconciliation statement after adjusting cash book balance.

Preparation of Bank Reconciliation Statement without adjusting Cash Book Balance

To prepare bank reconciliation statement, under this approach, the balance as per cash book or as per passbook is the starting item. The debit balance as per the cash book means the balance of deposits held at the bank. Such a balance will be a credit balance as per the passbook. Such a balance exists when the deposits made by the firm are more than its withdrawals. It indicates the favorable balance as per cash book or favorable balance as per the passbook. On the other hand, the credit balance as per the cash book indicates bank overdraft. In other words, the excess amount withdrawn over the amount deposited in the bank. It is also known as unfavorable balance as per cash book or unfavorable balance as per passbook.

We may have four different situations while preparing the bank reconciliation statement. These are:

1. When debit balance (favourable balance) as per cash book is given and the balance as per passbook is to be ascertained.
2. When credit balance (favourable balance) as per passbook is given and the balance as per cash book is to be ascertained.
3. When credit balance as per cash book (unfavourable balance/overdraft balance) is given and the balance as per passbook is to ascertained.
4. When debit balance as per passbook (unfavourable balance/overdraft balance) is given and the cash book balance as per is to ascertained.

Dealing with favourable balances

The following steps may be initiated to prepare the bank reconciliation statement:

1. The date on which the statement is prepared is written at the top, as part of the heading.
2. The first item in the statement is generally the balance as shown by the cash book. Alternatively, the starting point can also be the balance as per passbook.
3. The cheques deposited but not yet collected are deducted.
4. All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are added.
5. All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the passbook but not entered in cash book, bills and cheques dishonored etc. are deducted.
6. All the credits given by the bank such as interest on dividends collected, etc. and direct deposits in the bank are added.
7. Adjustment for errors are made according to the principles of rectification of errors.
8. Now the net balance shown by the statement should be same as shown by the passbook.

It may be noted that treatment of all items shall be the reverse of the above if we adjust passbook balance as the starting point.

(b) Dealing with overdrafts

So far we have dealt with bank reconciliation statement where bank balances has been positive – i.e., there has been money in the bank account. However, businesses sometimes have overdrafts at the bank. Overdrafts are where the bank account becomes negative and the businesses in effect have borrowed from the bank. This is shown in the cash book as a credit balance. In the bank statement, where the balance is followed by Dr. (or sometimes OD) means that there is an overdraft and called debit balance as per passbook.

An overdraft is treated as negative figure on a bank reconciliation statement.

Preparation of Bank Reconciliation Statement with Adjusted Cash Book

When we look at the various items that normally cause the difference between the passbook balance and the cash book balance, we find a number of items, which appear only in the passbook. Why not first record such items in the cash book to work out the adjusted balance (also known as amended balance) of the cash book and then prepare the bank reconciliation statement. This shall reduce the number of items responsible for the difference and have the correct figure of balance at bank in the balance sheet. In fact, this is exactly what is done in practice whereby only those items which cause the difference on account of the time gap in recording appear in bank reconciliation statement.

These are as (i) cheques issued but not yet presented, (ii) cheques deposited but not yet collected, and (iii) due to an error in the passbook.

Step 1 : Tick off the items in both cash book and bank statement

Step 2 : Updating the cash book from the bank statement.

Step 3 : Balance the cash book bank columns to produce an updated balance.

Step 4 : Identify the remaining unticked items from the cash book.