Acct 101 Assignment 3 Last Due Date For Submission 6 Decembe ✓ Solved

Acct 101assignment 3last Due Date For Submission 6 Decemb

Explain the importance of Bank Reconciliation Statement and give real examples explaining all possible items that make differences between cash balance in general ledger and bank statement balance.

Explain how the direct write-off method and the allowance method are applied in accounting for uncollectible accounts receivables? Explain with examples.

Define depreciation and list methods of depreciation with numerical examples for each method.

Paper For Above Instructions

Bank Reconciliation Statement: Importance and Examples

Bank reconciliation is a crucial accounting process that helps ensure the accuracy of an organization's financial statements. It involves comparing the bank statements with the company's records to identify discrepancies and confirm that the cash transactions are correctly recorded. The importance of a Bank Reconciliation Statement (BRS) can be highlighted through several key points.

First, it helps in detecting errors. Errors can originate from both the bank and the company's accounting records. For example, if the company records a cash deposit of $1,000 while the bank records it as $1,500 due to a clerical error, the reconciliation will highlight this discrepancy.

Second, BRS allows organizations to identify fraudulent activities. If a company notices unauthorized transactions that do not align with its records during the reconciliation process, this could indicate fraud. For instance, if the company detects a debit from its account for a purchase it did not make, it can take immediate action to investigate the matter.

Third, bank reconciliation allows for cash flow monitoring. By regularly reconciling accounts, financial managers can obtain a clearer picture of the cash on hand versus the cash available in the bank. This is critical for planning and forecasting.

The differences between cash balance in the general ledger and the bank statement can arise from several factors, including outstanding checks, bank deposits in transit, bank fees, and interest income.

Example 1: Outstanding Checks

Imagine a company issued checks totaling $5,000 that have not yet cleared the bank. In such a case, while the general ledger cash balance reflects the payment, the bank statement will not yet show a reduction in cash for these checks, leading to discrepancies.

Example 2: Deposits in Transit

If the company made a deposit of $3,000 on the last day of the month but the bank processes it the following month, this deposit will be reflected in the company’s general ledger but not in the bank statement, causing differences in reported cash balances.

Direct Write-Off Method vs. Allowance Method for Uncollectible Accounts Receivables

The accounting for uncollectible accounts receivable can be approached through two primary methods: the Direct Write-Off Method and the Allowance Method.

The Direct Write-Off Method involves charging uncollectible accounts directly to expense when they become uncollectible. This method is straightforward; for instance, if a customer owes $1,000 and is declared bankrupt, the company will directly write off the amount as a bad debt expense. This method is simple but does not adhere to the matching principle because it can distort financial statements by misaligning expenses and revenues within the same period.

On the other hand, the Allowance Method accounts for uncollectible receivables by estimating the amount of accounts receivable that may not be collected. Companies record this estimation in an Allowance for Doubtful Accounts, reflecting on the balance sheet. For instance, if a company estimates that 5% of its total receivables amounting to $200,000 will be uncollectible, it would record an expense of $10,000 in the current period and adjust the allowance account to reflect this estimation.

This method aligns more closely with the matching principle, providing a more accurate picture of net receivables on the balance sheet.

Depreciation: Definition and Methods

Depreciation refers to the systematic allocation of the cost of a tangible asset over its useful life. This accounting method allows businesses to spread the expense of an asset over the period it is used, which accurately reflects the asset's declining value over time.

Several methods exist for calculating depreciation:

• Straight-Line Method: The simplest method, where an equal amount of depreciation is allocated each year. For example, an asset costing $10,000 with a useful life of 5 years will have an annual depreciation expense of $2,000.
• Declining Balance Method: A more aggressive method where depreciation is higher in the early years. If the asset uses a 20% rate, the first-year depreciation would be $2,000 (20% of $10,000), while in the second year, it would be $1,600 (20% of $8,000 remaining value).
• Units of Production Method: Depreciation is based on usage. If the asset estimates a total of 50,000 units of production and a $10,000 cost, the cost per unit is $0.20, thus if 10,000 units are produced in one year, the depreciation for that year would be $2,000.

These methods ensure that businesses adhere to proper accounting practices while accurately reflecting asset expenses over time.

References

• Accounting Principles. (2020). Financial Accounting Standards Board.
• Harrison, W. T., Horngren, C. T., & Thomas, C. (2021). Financial Accounting. Pearson Higher Ed.
• Wild, J. J., & Shaw, K. W. (2017). Fundamental Accounting Principles. McGraw-Hill Education.
• International Accounting Standards Board (2019). International Financial Reporting Standards.
• North, W. E. (2018). Bank Reconciliation: A Comprehensive Guide. Accounting Today.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. Wiley.
• American Institute of CPAs. (2022). Accounting for Uncollectible Accounts.
• Wiley, C. K. (2020). Understanding the Direct Write-Off Method. Accounting Coach.
• Bloomberg Tax. (2021). Understanding Different Depreciation Methods.
• Investopedia. (2020). Depreciation Definition. Retrieved from [Investopedia](https://www.investopedia.com/terms/d/depreciation.asp).