Chapter Xlix, a Condition Analogous to This Was Mentioned Where the

joint account was charged and the contributing partners’ accounts were credited with interest, while the managing partner was charged and the joint account credited with interest on all joint funds retained in his possession.

=Partners’ Accounts and the Account Current.=—Occasionally, also, in partnership adjustments at the close of a fiscal period, the agreement may require the business, i.e., the partnership, to allow each partner credit for interest on his investments and charge him with interest on his withdrawals. Each partner’s account is treated very much as an account current of the business when such adjustments are prescribed.

=Illustration of Account Current.=—Thus, while the old account current as formerly understood and applied to the ordinary customer and creditor relationship is now very seldom encountered, the principle of it is met with frequently enough to demand explanation and illustration. No special form is necessary for the stating of an account current; the interest calculations on the various balances can be made outside the account and only the net result be embodied in the account. A form of account is shown in Form 45, however, which exhibits all necessary data on its face. Take the following account on which 5% interest is to be charged and allowed:

B. I. PERKINS, CURRENT ACCOUNT ==================================================================== 19— | 19— July 4 Cash 1,250.00 | June 4 Balance 600.00 Aug. 11 Note 60 da., no int. 1,500.00 | July 4 Mdse. n/30 1,400.00 Nov. 11 Cash 1,000.00 | Aug. 3 Mdse. n/30 1,000.00 Dec. 7 Cash 400.00 | Oct. 2 Mdse. 2,100.00 10 Rtd. Goods of | Dec. 4 Mdse. 800.00 Dec. 4 50.00 |

=Adjusting the Account Current.=—Adjustment of such accounts is usually made periodically. Referring to the illustration shown in Form 45, the interest calculation is made counting the exact number of days from each “date of value” to and including December 31. Interest is figured, for the sake of ease of calculation, on a 360-day basis. A 365-day basis would be more accurate and this is often done on current accounts between banks. The “date of value” is the date from which interest may be equitably charged or allowed. For example, in the above account, the credit for merchandise purchased on July 4, but with a credit allowance of 30 days, may not equitably be allowed till 30 days thereafter, or August 3. On the debit side, the note for $1,500 dated August 11, at 60 days with no interest, cannot be equitably counted until it comes due, i.e., on October 10. Similarly, the “date of value” on December 10, for the goods returned of the transaction of December 4, must be reckoned as of the same date as the original transaction, for only a portion of the full credit set up is allowed to remain.

In the above problem, the credit interest exceeds the debit by $35.80. This amount is therefore brought as an additional credit into the account. The account as now adjusted will be sent to B. I. Perkins for his verification. When formally approved, or if no objection is made to it after a reasonable length of time, the account is balanced and it becomes now what is termed an adjusted account. This periodic adjustment makes possible the localization of disagreements and their settlement while the facts are still fresh in mind. Its effect, however, is to produce a slight compounding of interest unless the balance is immediately settled.

Another method of making the interest calculation is on the basis of the balance of the account after each transaction and the length of time it remains unchanged, i.e., until the next transaction changes the balance. This method follows somewhat the method illustrated in Chapter XXXIII for division of partners’ profits on the basis of the amount of the investment and the length of time invested; but under this method it is not possible to make so condensed and apparent a statement of account as by the method illustrated in full above.

It sometimes happens that the “date of value” may fall beyond the settlement date, as where the term of credit throws the time of payment far enough ahead that payment cannot be demanded till after a periodic settlement time. The effect of such a condition is to reverse the interest charge for the period beyond the settlement date to an interest credit, or vice versa. The method of averaging accounts or equation of payments, as it is sometimes called, may be used to advantage here. Explanation and illustration of this method are given in Chapter LII.

=The Bank Account an Account Current.=—The bank’s account with a depositor is a good example of the account current. Except by special agreement, the allowance of interest is not customary. Periodically, the depositor’s pass-book is balanced or a statement of his account is rendered by the bank. When the balanced pass-book, with canceled checks, is returned to the depositor, or when the statement of account is rendered by the bank, the record kept by the depositor—as shown by his check book stubs or by the bank column in his cash book—will not usually show the same balance as that indicated by the bank’s statement, and adjustment or reconciliation is necessary to check the accuracy of the statement. In Chapter XLI, regarding the handling of cash, the policy was recommended of depositing all receipts and paying only by check. A cash book kept under that plan, making use of a net cash column on both sides, does not need an additional column for the bank record because everything shown in the net cash columns has either been deposited in the bank or paid out by check. The cash book balance, therefore, should be the same as the bank’s balance. If the record of the bank account is kept only on the check book stubs or interleaves, this balance should be the same as the bank’s. But however kept, there will almost invariably be a few outstanding checks which the depositor’s cash book or check book shows as having been issued, but which have not been presented to the bank for payment at the time the statement of account is rendered and which therefore are not included in the statement. This brings about a difference which must be reconciled.

=Reconciliation of Bank Balance.=—Two methods of reconciliation are used. The one brings the bank’s balance into agreement with that of the depositor; the other starts with the depositor’s balance and brings it into agreement with that of the bank. The first step in the reconciliation is to discover which of the checks issued by the depositor have not been paid by the bank. This is done by arranging the returned checks in numerical sequence and comparing these with the depositor’s record of checks issued. Usually the total of these few unpaid checks will be equal to the discrepancy between the two records, and so will reconcile them.

The following problem is given to illustrate the above discussion:

PROBLEM. On March 20, at the close of the day, the bank’s statement showed a balance of $1,525.14. The depositor’s record on the same date showed $604.19. The following checks were outstanding: No. 529B, $214.50; 542B, $379.60; 557B, $119.40; 581B, $75.20; and 992A, $132.25.

Reconciliation statement, as on March 20, 19—:

Bank balance as per bank’s statement $1,525.14 Outstanding checks: No. 992A $132.25 529B 214.50 542B 379.60 557B 119.40 581B 75.20 920.95 ------- --------- True balance as per cash (or check) book $ 604.19 ---------

Other method:

True balance as per cash book $ 604.19 Outstanding checks: No. 992A $132.25 529B 214.50 542B 379.60 557B 119.40 581B 75.20 920.95 ------- --------- Bank balance as per bank’s statement $1,525.14 ---------

=Other Reconciliation Factors.=—Oftentimes other items than those shown must be taken into consideration when reconciliation is made. Where several bank accounts are kept and a check register—in addition to the cash book—is used to keep record of the accounts with the various banks, it may happen that checks drawn on one bank are wrongly charged to another; that checks drawn, or deposits made one day, are not credited until the next; that certain drafts deposited with the bank for collection are not credited to the depositor’s account until collection is made, whereas the depositor debited the bank at the time of the deposit; again it may be that the item of bank’s charges for collection has not yet been recorded; or that interest on deposit balances has not been credited, etc. All such items must be considered when reconciliation is made. Where there are many of these adjustment items to be taken account of, it may be necessary to list them in formal schedules under such heads as:

1. Bank charges, we do not credit. 2. Bank credits, we do not charge. 3. We charge, bank does not credit. 4. We credit, bank does not charge.

Examples of transactions bringing about the above debits and credits are:

1. Protest fees charged against the depositor’s account, of which he has not been notified.

2. Interest on bank balance credited by bank before the depositor is notified.

3. Deposits made and charged to bank but not yet credited by bank or credited in error to some other depositor’s account.

4. Checks drawn but not yet presented to the bank for payment.

When the first method of reconciliation is used, items (1) and (3) must be added to the bank’s balance and items (2) and (4) must be subtracted from it in order to arrive at the cash book balance. The following problem will illustrate this:

PROBLEM. In the bank’s statement of July 1, 19—, with a balance of $675, are included protest fees in connection with the collection of checks amounting to $7.50, and interest allowed on our average bank balance of $16.67. Our deposits for June 30, 19—, totaling $250 in the morning and $100 in the afternoon, have not been credited by the bank. Outstanding checks amount to $180. Our cash book balance on July 1, 19— was $835.83.

Bank reconciliation statement as of July 1, 19—:

Bank balance as per bank’s statement $ 675.00 Add: Deposit not included in above balance $350.00 Bank charge not included in our balance—protest fees 7.50 357.50 ------- --------- $1,032.50 Deduct: Outstanding checks $180.00 Bank interest, not included in our balance 16.67 196.67 ------- --------- Balance as per cash book $ 835.83 =========

It will be seen that neither the cash book balance nor the bank balance is a correct statement of the cash available for checking. The depositor, in order to find this amount, will have to take account of the figures given by the bank for items he has not known about. His checking balance in the above problem is ascertained as follows:

Cash book balance $835.83 Less—Bank charges 7.50 (expenses to the depositor) ------- $828.33 Plus—Bank credits 16.67 (income to the depositor) ------- True balance available for checking $845.00 =======

There is not usually so much difficulty in reconciling the bank account; but where several bank accounts are maintained, it is easy to misplace debits and credits and a formal statement of reconciliation should always be made and kept as a part of the record. This reconciliation should be made every time a statement is received from the bank. The frequency of asking for a statement of account from the bank depends somewhat upon the volume of transactions handled through the bank, but it should be secured at least every month and particularly whenever formal statements of profit and loss and balance sheet of the depositor are made up.

=Reconciliation Statement a Permanent Record.=—The reconciliation statement should be made as a permanent record. A customary place of record is on the check stub of the same date. Where a check register is used, it should be made a part of the record there. Occasionally it is incorporated in the cash book. Wherever made it should be easily available for proof at a subsequent period. When reconciliation is to be made as of a past date, i.e., at a time subsequent to the date on which reconciliation is desired, the bank’s cancellation date on the returned checks must be used to determine what checks were outstanding on that date.

=Reconciling Other Accounts.=—Occasionally the dealings between two firms located at a distance from each other may be such that items are in transit one or both ways at the time when statement of account is rendered. If this is the case, the methods of reconciliation applied above to the bank account may have to be used before agreement or comparison of the two records can be effected.