Bank Reconciliation Statement s the verification of all the entries in the bank statement with the bank book of the business. First, let understand what bank statement and cash book mean. A bank statement is the financial statement showing the details of all the transactions that the business had made through the bank account. While cash book is subsidiary book in which all cash transactions of receipts and payments are recorded.
Definition of Terms
Bank charges: This is money deducted from the entity account by the Bank to cover the cost of looking after the account.
Unpresented cheque: Is a cheque draw but not yet been presented at the drawer’s bank.
Uncleared cheque/ effect: Are bank cheque that passed through the clearing system but not yet cleared. It appears on the debit side of the cash book.
Dividend: This is direct dividend receive into bank account.
Standing order: This is an order given to the bank to pay a fixed sum of money at regular intervals from one’s bank account to a designated payee. e.g. paying rent, paying utility bill etc.
Advantage of standing order
It helps to save the repeated drawing cheque;
They help to save spending money on stationery and postage and
it is certain that payments are made on the due date.
Disadvantages of standing order
There are bank charges for such services.
Dishonoured Cheque: This is cheque rejected by Bank. Top 11 of what will give rise to dishonoured cheque
When cheques are not signed or signed incorrectly (i.e. Irregular Signature)
No date shown on the cheque
When the cheque is mutilated
Insufficient funds in the account to meet the cheque
Alteration on the cheque without endorsement by the drawer’s signature.
Stale cheque: This is one that is more than 6months old. But is still valid after 6months if confirm from the drawer by the bank.
The death of the drawer
Non-existing account
Frozen account
Posted dated cheque: When the drawer of a cheque has insufficient funds to meet the amount of the cheque but expects to have sufficient in the future date the cheque in advance of the drawing date.
When payment is stopped by government authority.
Top 5 discrepancies between cash book and bank statements?
Pay-as-you-earn is a tax deducted from employee salary account and remitted on or before the 10th day of the month following the month in which salaries were paid. See relevant sections of the Personal Income Tax Act (PITA). (S.81 of Personal Income Tax Act Cap P8 LFN 2011). S. for details
WHAT IS TAXABLE ENTITLEMENT (GROSS) OR GROSS EMOLUMENTS
This is the total amount your employer pay to you as salary including all benefits arising from employment.
It can be a inform of wages, salaries, allowances including benefits in kind, gratuities, superannuation and any other incomes derived solely by reason of employment.
All manner of allowance you earn, provided it’s not a re-imbursement of expense to you, is taxable.
Finance Act 2020, defined “gross income” as income from all sources less non-taxable income, tax-exempt items listed in Paragraph (2) of the Sixth Schedule and all allowable business expenses and capital allowance (finance-act-2020). This is addition to the Act.
For example, if you spend an amount for training outside your station and the money is refunded or reimburse through your payslip, it must be subjected to tax. All pay not intended to be taxed must not be passed through payroll. Pay like training cost, transport to attend training etc.
TAX RELIEF (TAX ALLOWANCE)
This is amounts that can be deducted from a person’s annual income to reduce the amount on which tax is paid. Or the amount of your income which is exempt from tax aside from other statutory deductions.
Consolidated relief allowance of N200, 000 or 1 per cent of gross salary or whichever is higher plus 20 per cent of gross salary.
Percentage of Gross Income Relief (PGI): This relief is graduated and it is based on your Gross income. The higher your income, the more relief you receive. PGI relief is currently 20%. For example, if your Gross income per annum is N5, 000,000 then your PGI would be N1, 000,000.
TAX EXEMPT
The tax law provides certain payroll deductions as tax exempt or non-taxable deductions. Tax exempt amount has to be removed from Gross taxable Income (earnings) before applying the tax rules to determine tax. The following deductions are not Taxable (.i.e. Tax Exempts):
Pension Deductions (employer 10% and employee 8% of Basic salary, transport and housing allowance).
National Housing Fund Deductions (Employee 2.5% of basic salary).
Life Assurance Payments (this is obtained from the employee life policy document and monthly premium payment receipt is sufficient evidence to earn the tax exempt. Section 33(3) of Finance Act 2020 added that any premium payment. stated that there shall be allowed a deduction of annual amount of any premium paid by the individual during the year preceding the year of assessment to an insurance company in respect of insurance on his life or the life of his spouse or of a contract for a deferred annuity on his own life or the life of his spouse (finance-act-2020). This is addition to the Act.
The National Health Insurance Scheme (Government 10% and employee 5% of basic salary) but employer 5% has not be implemented yet in the federal government MDAs due to Labour objections.
Gratuity.
NIGERIA TAX TABLE
for pay-as-you-earn to be done, relief allowance and tax exemptions have been granted to work with, the balance of the income shall be taxed as specified in the tax table below.
Nigerian Payroll tax table comes in annual gross bands in six rows. Each band has a percentage tax value attached to it. The tax table rates must be applied to the Net Taxable Income to get Tax Payable.
Tax table and Rates from June 2011 tax year as see below.
TAXABLE INCOME (NET)
This is derived after deducting the following from Gross Taxable Income. Some are extracted from payslip.
Gross Entitlement,
Tax Exempts, and Relief (Tax Allowance).
Apply tax table to the net amount as stated above
NON TAXABLE INCOME
End of year award
Compensation for personal injury
Any compensation for loss of office or employment
Medical or dental expenses incurred by employee
Note:
Compensation for loss office or employment
(1) Section 36(2) of Finance Act 2020 is amended by substituting for subsection 2 with a new subsection “2”.
(2) Sums obtained by a way of compensation for loss of office, up to a maximum of N10,000,000, shall not be chargeable gains and subject to tax under the Act. Provided that any sum in excess of N10, 000,000 shall not be so exempted but the excess amount shall be chargeable gains and subject to tax accordingly.
Finance Act 2020 inserted section (3) and (4)
(3) Any person who pays compensation for the loss of office to individual is required, at the point of payment of such compensation, to deduct and remit the tax due under this section to the relevant tax authority.
(4) The tax so deducted shall be remitted within the time specified under the Pay-As-You-Earn regulations issued pursuant to the personal income tax Act.
PAY-AS-YOU-EARN CALCULATION
In other word, monthly payments of Pay-As-You-Earn (PAYE) tax liabilities are to be made on or before the 10th day of the month following the applicable month (e.g. January tax to be remitted by 10th of February).
Assuming Senior Manager monthly payslip is as shown below. We look at how the statutory deductions were determined.
Taxable Income Calculation for an Senior Manager whose Gross Income is NGN 4.68 Million per annum
Below is the basis of Pay-as-you-earn calculation for a Senior Manager whose gross income is NGN 4.68 million per annum. The accountant has the responsibility to ensure that this PAYE is calculated accurately and deducted promptly
WHAT IS RESIDENCY RULE
Assuming the Senior Manager live in Rivers State but work in Abia State.
To apply residency rule, an employee’s PAYE is payable to the tax authority of the state of his/her residence. It is therefore the duty of the employer to deduct and remit it to the tax authority where the employee is resident.
If the employee is resident in Rivers State, the tax authority that is entitled to his pay-as-you-earn is the Rivers State Board of Internal Revenue.
PENALTY FOR FAILURE TO DEDUCT PAY-AS-YOU-EARN
In line with Section 74(1) of Personal Income Tax Act, 2011 states “ any person or body corporate who fails to deduct, or having deducted, fails to remit such deductions to the relevant tax authority within 30days. This will be from the date the amount was deducted or the time the duty to deduct arose. Such person shall be liable to a penalty of an amount of 10% of the tax not deducted or remitted in addition to the amount of tax not deducted or remitted plus interest at the prevailing monetary policy rate of Central Bank of Nigeria.
EXEMPTION OF MINIMUM WAGE EARNERS FROM PAYE/PIT
Section 37 of Finance Act 2020 “provided for minimum tax. The Act also provided for under the Sixth Schedule to this Act shall not apply to a person in any year of assessment where such person earns the National Minimum Wage or less from an employment (finance-act-2020)
BOOKS OF ACCOUNTS
By Section 12 of PITA 2011 stated that the keeping of books of accounts is very important. The Act stated that, if any taxable person fails or refuses to keep account, such a person shall be liable on conviction to a penalty of N50,000 for individuals and N500,000 for corporate entities.
Relevance of Source Documents to organizations cannot be over emphasized. It is important to an accountant and organization in the event of fraud.
Relevance of Source Documents
1. Audit Trail
Audit trail is a set of accounting documents that authenticate the transactions you record in your accounting books. Furthermore, it provides evidence that transaction has occurred. Also, during audit, source documents serve as back up for accounting journals and ledgers. Every business owner is responsible for recording the company’s transactions. Moreover, the relevance of source document to audit trail is such that it must have to include information about what the event was, who created the event, and the day and time the event happened.
2. Full Details of Transactions
It reveals all the basic fact about the transaction such as the amount of the transaction, to whom the transaction was made, the purpose of the transaction. Also, the date of transaction, serial number of the document, name of document such as Local Purchase Order (LPO), receipt, particular of person issuing the document, particular of person authoring the document, name of company/department issuing the document and name of company/department receiving the document.
3. Internal Control System
Internal controls system are the devices, rules, and measures effected by a company. This internal control ensures the integrity of financial and accounting information, uphold accountability, and prevent fraud. Source document is a good internal control mechanism.
4. Assist Accountants
Source documents assist accountants to prepare financial statement which auditor need for investigation. The movement starts from source documents to journalize transactions. In addition, posting is the process of transferring journal entries to the general ledger or subsidiary ledgers, depending on the needs of a company, by account.
5. Reference
In the accounting world, source documents include purchase order, sales invoice, bank statement, and receipts.
Source documents are created any time a business spends or receives money. However, when there is a report of any investigation into a transaction says fraudulent withdrawal from the bank, the bank statement which is one of the source documents will serve as reference point.
6. Correct Errors
Sources document one will be able to verify whether or not an accounting entry is accurate or correct. It is used to correct errors and omission of transactions. Also, situation where staff will deliberately omit or cause error to occurred will be detected with the investigation of the source documents.
7. Reconciliation
Source documents helps to reconcile with the balances in accounts to see if some documents have not been recorded. Also, if some transactions recorded in the accounts do not appear to have any supporting documents. Frequent reconciliation of account will help to reduce fraudulent activities.
Conclusion.
The relevance of source documents to checkmating fraud is such that organization will need to monitor. That will ensure the right thing is done with the available resources.
There are basic assumptions which underline the preparation of financial statements of business enterprise. There are stated below:
Going concern concept: accounting assumes that the business will continue to operate for a long period of time. In other words, it means continuity in business or Continuity Assumption.
The continue preparation of financial statement in accordance with International Financial Reporting Standard (IFRS) is an evidence of going concern. Even the auditor may also carry out investigation see that the going concern is intact.
Example of going concern is prepayment and accrual of expenses. The company accept these expenses because they believe the business will continue to run. If for example any part or section or department or product line is discontinue, it does not means there is no longer a going concern. Going concern is for the entire company.
During Covid19, a lot of companies had financial issues and were unable to pay their obligation. Various government gives those companies a bailout and a guarantee of all payments to creditors. The companies are a going concern despite of its current weak financial position. But if government imposes a restriction on the manufacture of a certain goods and service for the period say 1 year. Then the company will no longer be a going concern since they might not be able to sell any product.
2. Entity concept: This accounting concept separates the business from its owner. Meaning the business is a legal entity. It can sue and be sued. It also means the owners of a business are limited to how much he has invested not his personal resources. So for example, if the owner brings in additional capital into the business, we will treat this as a liability on the balance sheet of the business.Entity concept ensures that each company is tax separately.
Let look at these examples, Mrs. Ese bought a building having 5 office space for $5000 per month. She uses three office for his business and two for personal purpose. In line with business entity concept, only $3,000 (the rent of two offices) is a valid expense of the business
Another example is when owner of a business lends loan to his company. It would be strictly recorded as a liability and that has to be paid back to the owner.
3. Matching Concept:This concept states that the revenue and the expenses of a transaction should be included in the same accounting period. So to determine the income of a period all the revenues and expenses (whether paid or not) must be included. The matching accounting concept follows the realization concept. First, the revenue is recognized and then we match the costs associated with the revenue. So costs are matched with revenue, the reverse would be an incorrect system.
4. Dual concepts: this says that there are two aspects of accounting. It is represented by the assets of the business and liabilities (i.e. claims against it). Assets =liabilities + capital. So for example. Say the business buys an asset worth N10, 000. So now the Fixed Assets of the company will increase by N10, 000. But at the same time, the bank or cash balance will reduce by N10, 000 and so the transaction will have a dual effect in accounting. And also the Balance Sheet will stay balanced.
5. Realization concepts: in accounting, profit should not be recognized until the goods are passed to the customer.
6. Money measurement concept: Accounting is only concerned with the facts that can be measured in monetary terms with fair degree of objectivity. Accounting does not record that the firm has a bad or good management team, poor morale among staff. So for example, if the company underwent a major management overhaul this would have no effect on the accounting records. This concept is actually one of the major drawbacks of accounting.
7. Accrual concept: Revenue and cost are usually recorded in accounts when they are earned or incurred rather than when the money is received or paid.
8. Full Disclosure Concept: This concept states that all relevant information will be disclosed in the accounting statements. A lot of external users depend on these financial statements for their information to make investing decisions. So no information/transactions etc of relevance to any one of them will be omitted from these statements for the benefit of the company.
9. Cost Concept: This accounting concept states that all assets of the firm are entered into the books of account at their purchase price (cost of acquisition + transport + installation etc). In the subsequent years to, the price remains the same (minus depreciation charged). The market price of the asset is not taken into consideration.
10. Accounting Period Concept:Every organization, according to its needs, chooses a specific period of time to complete an accounting cycle. Generally, the time chosen is a year we call the accounting year. The time period is mentioned in the financial statements.
11. Substance over form: usually transactions are recorded and accounted for by their commercial realities rather than their legal form. Substance over form is an accounting concept which means that the economic substance of transactions and events must be recorded in the financial statements rather than just their legal form in order to present a true and fair view of the affairs of the entity.
12. Faithful representation: For financial report to be useful, the financial information must not only represent relevant phenomena but must faithfully represent the phenomena that it purports to represent.
13. Timeliness: It means having information available to decision makers in time to be capable of influencing their decisions. The older the information the less important it become.
14. Relevance: Relevant information is capable of making a difference in the decisions made by users.
15. Comparability: The information about a firm is more useful if it can be compared with similar information about other enterprise and with similar information about the same enterprise for another period or date.
