I understand that on preparing a balance sheet some people treat uncleared cheques to creditors as a current liability.
If this is the case, what entry would appear under the heading of current assets in order to balance the accounts?
Would the bank balance include uncleared cheques? Or would a separate account balance be listed?
Ive recently taken over from an accountant. In the previous year's accounts £1500 in uncleared cheques appear as a current liability. However, in the current assets section, the bank balance listed has been adjusted downwards to reflect these uncleared cheques. Consequently, in order to balance assets and liabilities CAPITAL has been understated by £1,500
I think I can fix this in the next accounts by 1) omitting uncleared cheques from the balance sheet, and 2) by journal entry, debiting CREDITORS (£1,500) and crediting CAPITAL (£1,500), the narrative being correction of error in previous years accounts.
If this is a correct way of dealing with the matter, how would I word the capital section in the next accounts in order to reflect this adjustment?
Yes I would agree with your journal. There is no need to reduce the bank balance and show as a creditor, as you have seen this has the effect of showing the cheques twice. Personally I show them by the reduction of the bank balance.
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Then just put something along the lines of correcting an error made in a previous year due to understatement of capital. No need for lengthy explanations, it can be discussed verbally if necessary at the meeting when the accounts are presented.
The format would be;
Opening Cap Add net profit Add adjustment Closing Cap
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
