Bank Reconciliation, Partnership & Non-Profit Accounting

Bank Reconciliation and Partnership Accounting

1.2.1 Meaning of a Bank Reconciliation Statement

A bank reconciliation statement shows the causes of disagreement between the balance shown by the Bank Pass Book and the balance shown in the cash book (under the Bank column) at the end of a specific period or month. Generally, it is prepared at the end of every month by the bank. If the transactions with the bank are large in number, then a Bank Reconciliation Statement is prepared at the end of every week.

In short, a bank reconciliation statement is prepared to verify the balance shown by the Bank Pass Book and the balance shown in the cash book.

1.2.3 Need and Importance of Preparing a Bank Reconciliation Statement

It is necessary for a business to reconcile both the cash book balance and bank pass book balances; otherwise, it might result in a serious lapse on either part. To locate the difference in the bank pass book and cash book balance, a reconciliation statement is prepared. A Bank Reconciliation Statement gives assurance that the balance as per the bank cash book and bank pass book is tallying or the same, and there is no difference as they are reconciled. In the absence of a bank reconciliation statement, no one can guarantee that the bank cash book balance matches the bank pass book balance. Therefore, it is prepared after a specific period, maybe monthly, quarterly, and so on.

Nowadays, every field has become computerized, and banks are no exception. If information provided to the computer is wrong, it will create lots of problems and may show an inaccurate balance. For having control over all these things, a bank reconciliation statement becomes necessary, and it is also useful for both the bank and the business.

1.2.4 Process for Preparing a Bank Reconciliation Statement

There is a possibility of omitting the entry of a transaction from one book or recording a wrong entry of a particular transaction, which will result in a difference in the balance of both books. To reconcile the same, a bank reconciliation statement is prepared as follows:

1. Deciding the period and date on which the reconciliation statement is prepared.
2. Updating the bank pass book until the reconciliation date.
3. Checking the balance of the cash book and bank pass book. If there is any difference in balance, then it becomes necessary to prepare a bank reconciliation statement.
4. Cross-ticking the entries: The next step is to compare the entries made in the cash book and bank pass book and then cross-tick them. Hence, in the first instance, we should put the extracts of the bank column of the cash book and the pass book before us and tick off the common entries found on the Debit/Receipts side of the cash book and the Credit/Deposits column of the bank pass book. Similarly, the common Entries found on the Credit/Payment side of the Cash Book and the debit/withdrawals column of the bank pass book should be crossed or ticked.
5. Jotting down unticked entries: In the next step, we should take down separately the entries that remained to be ticked off in the cash book as well as the bank pass book.

4.2.3 Kinds of Partnership

Now, we have to see the kinds of partnership as a form of commercial organization. There are mainly two kinds of partnership as follows:

1. General Partnership
2. Limited Partnership

(a) General Partnership

It is a popular form of partnership in India and it exists in India. According to the Indian Partnership Act, 1932, there are three kinds of general partnership.

1. Partnership at Will: An agreement of partnership at will does not mention the period of partnership. Partnership is continued as long as partners wish. Any partner can demand dissolution of partnership by giving 14 days' notice in advance to other partners.
2. Partnership for a Specific Period: Partnership may be for a specific period as per the partnership agreement. Then it is called partnership for a specific period. On completion of such period, the partnership is dissolved. If the partnership is continued even after the completion of such a specific period, then it becomes a partnership at will.
3. Particular Partnership: The partnership in which partners come together to do a particular type of work is called a particular partnership. On completion of such work, the partnership comes to an end. For example, if four auditors agreed to audit the accounts of a particular company, then on completion of such audit work, the partnership comes to an end.

(b) Limited Partnership

It is not in existence in India. It is found in England. In a limited partnership, the liability of partners except one partner is limited in case of discharging partnership debts. Limited liability partners do not have the right to participate in the management of the partnership business. But the liability of at least one of the partners is unlimited.

4.2.4 Kinds of Partners

There are different types of partners according to their participation in the management of the partnership business. There are the following types of partners.

1. Working Partner: The partner participating in the day-to-day management of the partnership business is called a working partner. His liability is unlimited. He may be given a salary.
2. Sleeping Partner: All partners may not participate in the management of the partnership business. Similarly, all partners may not possess organizing skills. Hence, all partners do not participate in the day-to-day management of the partnership business. The partner who does not actively participate in the partnership business is called a sleeping partner. But he contributes capital to the partnership as per the partnership agreement. His liability is unlimited.
3. Nominal Partner: A person having goodwill in doing similar business may be admitted as a partner in the partnership. His goodwill may be used in doing partnership business. He does not contribute capital. He does not participate in managing the partnership business. But his liability is unlimited.
4. Minor Partner: A partner below 18 years of age is called a minor partner. A person above 18 years of age can only enter into a partnership agreement. But with the consent of all partners, a minor can be admitted into the partnership as a partner. He is not responsible for the loss of the partnership business. On completion of 18 years of age, the liability of such a partner becomes unlimited.
5. Partner by Estoppel: A person not having a partnership may create a false impression by his talk, behavior, writing, or action that he is a partner in the partnership.

4.2.7 Partnership Accounts

We have studied until now the meaning of partnership, the nature of partnership, the number of partners in a partnership, the organization and management of a partnership, etc. Now, we will study partnership accounts in detail.

A partnership has to maintain different books of accounts to record the transactions in them. The Partnership Act does not mention the names of books of accounts to be kept by a partnership. It maintains books of accounts as per its needs. A partnership firm maintains the following books of accounts as far as possible.

• Purchase Book
• Sales Book
• Purchase Returns Book
• Sales Returns Book
• Debtors Ledger
• Creditors Ledger
• Journal
• Cash Book
• Bills Receivable Book
• Bills Payable Book

The above books of accounts differ from business to business. Banking company books of accounts may not be useful for recording the transactions of a trader. Partnership accounts and sole trader accounts are similar to some extent; these are maintained on the double-entry principle. A partnership, as compared to a sole trader, has to keep the following accounts differently.

1. Partners' Capital A/c
2. Partners' Current A/c
3. Partners' Drawing A/c
4. Partners' Loan A/c
5. Partners' Interest A/c

5.2.1 Partnership Agreement

A partnership agreement is central to partnership existence. It is necessary to settle disputes, misunderstandings, and differences among partners in conducting business. It is necessary to register a written partnership agreement with the government. Provisions of the Indian Partnership Act, 1932, are applicable on such matters on which the partnership agreement is silent.

A partnership agreement contains the provisions regarding the name of the partnership, the nature of the business and period, capital contributions of partners and their participation in management, the ratio of profit or loss, partner's drawings and interest thereon, interest on partner's capital, salary and commission to partners, admission of a new partner, retirement or death of a partner, rights and duties of partners, the method of settlement of partners' disputes, partnership accounts, goodwill valuation, and dissolution of partnership.

5.2.3 Partnership Trial Balance

Every business organization wants to know exact and true information about net profit or loss at the end of each financial year, its financial position, creditors, debtors, etc. Such information can be obtained by a partnership only after the preparation of its final accounts.

A trial balance is to be prepared for the preparation of partnership final accounts. At the end of the financial year, ledger accounts are balanced to know their debit-credit balances. A trial balance is prepared by taking debit and credit balances of ledger accounts in debit and credit columns of it respectively. The tallying of the trial balance shows the arithmetical accuracy of books of accounts. A trial balance may not tally due to a mistake in writing accounts. Such mistakes are to be found out and it is to be tallied. If we are in urgency in the preparation of final accounts and there is no sufficient time to find out such mistakes, then the difference in the trial balance is temporarily debited or credited to a suspense account and the trial balance is to be tallied. During the next financial year, mistakes are to be found out and these are rectified and ultimately the suspense account is closed.

7.2.1 Retirement of a Partner

A partnership can be dissolved on the retirement or death of a partner. If two or more partners desire to continue the old business, then a new partnership agreement will be made. After the retirement of a partner, the remaining partners can continue the existing business. The retiring partner will not be responsible for the profit or loss and the transactions made after his retirement.

According to the partnership agreement, the share of the retiring partner and the mode of payment are decided. The following factors should be taken into account while deciding the share of the retiring partner.

1. Original capital of a partner.
2. Adjustment of current account.
3. Undistributed profits.
4. Profit or loss on revaluation.
5. Share in Goodwill

7.2.2 Retirement of Partner: Accounting Entries

1. Capital of a Partner: Write the opening balance of capital in the respective ledger accounts. For this, a journal entry is not required.
2. Transfer of Current Account: Under the fixed capital method, the profit or loss and the drawings are recorded in the current account. When a partner retires, the balance in the current account will be transferred to his capital Account.

   The entry will be passed as follows:

   Retiring partners Current A/c

   To Retiring Partners Capital A/c

   (Being the transfer of retiring partners current account to his capital account)

3. Undistributed Profit or Loss: All accumulated profits like Reserve, P & L A/c credit balance and

9.2.1 Accounts of Non-Profit Making Associations

Meaning

Non-trading organizations are those organizations that are not engaged in trading activities. These organizations deal in monetary transactions, which are of a charitable or non-trading nature. Hence, purchasing and selling of goods are not undertaken by these organizations. The aim of such organizations is not to earn Profit but to give Services.

Since they are not doing any trading activity for earning profit, they do not prepare a trading and profit and loss account. However, these concerns also need to maintain accounts for knowing the financial position.

At the end of the year, instead of preparing a detailed trial balance, a summary of the cash book is prepared which is called a Receipt and Payments a/c. The receipts and payments a/c will not show the profit or loss of the organization. Even though the aim of the organization is not to earn profit, unless they meet their expenses out of their income, they cannot survive. To know whether the concern is meeting the expenses out of income, an account called an Income and Expenditure A/c is prepared. The concern will also have assets and liabilities which will require the preparation of a Balance Sheet also.