CIMA - C2 Fundamentals of Financial Accounting
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190 12: Bank reconciliations ⏐ Part B Accounting systems and accounts preparation
(b) BANK RECONCILIATION STATEMENT AT 30 JUNE 20X0
$
$
Balance per bank statement
65
Add: outstanding lodgements
(ie cheques paid in but not yet credited)
400
deposit interest not yet credited (note 1)
60
460
525
Less: unpresented cheques
500
less cheque to Jones cancelled (note 2)
25
475
Balance per corrected cash book
50
Notice that in preparing a bank reconciliation it is good practice to begin with the balance shown by the bank statement
and end with the balance shown by the cash book. It is this corrected cash book balance which will appear in the
statement of financial position as 'cash at bank'. Questions sometimes give the information in the reverse order: as
always, read the question carefully.
Question
Bank reconciliations
From the information given below relating to PWW you are required:
(a) To make such additional entries in the cash account of PWW as you consider necessary to show the correct
balance at 31 October 20X2.
(b) To prepare a statement reconciling the corrected cash account balance as shown in (a) above with the balance at
31 October 20X2 on the bank statement.
Assessment
focus point
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Part B Accounting systems and accounts preparation ⏐ 12: Bank reconciliations 191
CASH AT BANK ACCOUNT IN THE LEDGER OF PWW
20X2 $ 20X2 $
October October
1
Balance b/f
274
1
Wages
3,146
8
Q Manufacturing
3,443
1
Petty Cash
55
8
R Cement
1,146
8
Wages
3,106
11
S Limited
638
8
Petty Cash
39
11
T & Sons
512
15
Wages
3,029
11
U & Co
4,174
15
Petty Cash
78
15
V
1,426
22
A & Sons
929
15
W Electrical
887
22
B
134
22
X and Associates
1,202
22
C & Company
77
26
Y
2,875
22
D & E
263
26
Z
982
22
F
1,782
29
ABC
1,003
22
G Associates
230
29
DEE Corporation
722
22
Wages
3,217
29
GHI
2,461
22
Petty Cash
91
31
Balance c/f
14
25
H & Partners
26
26
J Sons & Co
868
26
K & Co
107
26
L, M & N
666
28
O
112
29
Wages
3,191
29
Petty Cash
52
______
29
P & Sons
561
21,759
21,759
Z BANK – STATEMENT OF ACCOUNT WITH PWW
20X2 Payments Receipts Balance
October
$
$
$
1
1,135
1
cheque
55
1
cheque
3,146
1
cheque
421
O/D
2,487
2
cheque
73
2
cheque
155
O/D
2,715
6
cheque
212
O/D
2,927
8
sundry credit
4,589
8
cheque
3,106
8
cheque
39
O/D
1,483
11
sundry credit
5,324
3,841
15
sundry credit
2,313
15
cheque
78
15
cheque
3,029
3,047
22
sundry credit
1,202
22
cheque
3,217
22
cheque
91
941
25
cheque
1,782
25
cheque
134
O/D
975
26
cheque
929
26
sundry credit
3,857
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192 12: Bank reconciliations ⏐ Part B Accounting systems and accounts preparation
20X2 Payments Receipts Balance
October
$
$
$
26
cheque
230
1,723
27
cheque
263
27
cheque
77
1,383
29
sundry credit
4,186
29
cheque
52
29
cheque
3,191
29
cheque
26
29
dividends on
investments
2,728
29
cheque
666
4,362
31
bank charges
936
3,426
Answer
(a) CASH BOOK
$
$
31 Oct
Dividends received (W5)
2,728
31 Oct
Unadjusted balance b/f
(overdraft)
14
31 Oct
Bank charges (W4)
936
31 Oct
Adjusted balance c/f
1,778
2,728
2,728
(b) BANK RECONCILIATION STATEMENT
AT 31 OCTOBER 20X2
$
$
Corrected balance as per cash book
1,778
Cheques paid out but not yet presented (W3)
1,648
Cheques paid in but not yet cleared by bank (W7)
0
1,648
Balance as per bank statement
3,426
Workings
1 Payments shown on bank statement but not in cash book $(421 + 73 + 155 + 212)* $861
* Presumably recorded in cash book before 1 October 20X2
but not yet presented for payment as at 30 September 20X2
2 Payments in the cash book and on the bank statement
$(3,146 + 55 + 3,106 + 39 + 78 + 3,029 + 3,217 + 91 + 1,782 + 134 + 929 + 230 +
263 + 77 + 52 + 3,191 + 26 + 666)
$20,111
3 Payments in the cash book but not on the bank statement (Total payments in cash
book $21,759 minus $20,111)
$1,648
$
Alternatively
J & Sons
868
K & Co
107
O
112
P & Sons
561
1,648
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Part B Accounting systems and accounts preparation ⏐ 12: Bank reconciliations 193
4 Bank charges, not in the cash book $936
5 Receipts recorded by bank statement but not in cash book:
dividends on investments
$2,728
6 Receipts in the cash book and also bank statement
(8 Oct $4,589; 11 Oct $5,324; 15 Oct $2,313; 22 Oct $1,202;
26 Oct $3,857; 29 Oct $4,186)
$21,471
7 Receipts recorded in cash book but not bank statement
None
Chapter roundup
• A bank reconciliation is a comparison of a bank statement (sent monthly, weekly or even daily by the bank) with the
cash book. Differences between the balance on the bank statement and the balance in the cash book will be errors or
timing differences, and they should be identified and satisfactorily explained.
• It is important to check the cash book against the bank statement regularly. There will almost always be differences –
arising from errors, omissions and timing differences.
• When the discrepancies due to errors, omissions and timing differences are noticed, appropriate adjustments must be
made. Errors must be corrected and omissions from the cash book entered. Any remaining differences should then be
identified as timing differences.
Quick quiz
1 The bank column of a cash book showed a closing balance of $550 (credit). Unpresented cheques amount to $1,500 and
receipts undeposited at the bank were $500. The bank statement balance was? (Hint: prepare a bank reconciliation.)
A $1,550 (in hand)
B $450 (in hand)
C $1,450 (in hand)
D $2,550 (overdrawn)
2 The cash book balance was $1,500 (debit). The bank statement revealed an overdrawn balance of $500. Unpresented
cheques were $1,200 and receipts undeposited were $3,000. The bank has incorrectly charged another customers
cheque to the company account. How much was the incorrect cheque drawn for?
A $3,200
B $6,200
C $3,800
D $200
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194 12: Bank reconciliations ⏐ Part B Accounting systems and accounts preparation
Answers to quick quiz
1 B Cash book (550)
Add unpresented cheques 1,500
Less undeposited receipts (500)
B/S balance 450 (in hand)
A Incorrect, you have treated the opening balance as a debit in the reconciliation.
C Incorrect, you have treated the undeposited receipts incorrectly.
D Incorrect, because you have treated the unpresented cheques incorrectly.
2 D Correct. $
Cash book 1,500 (debit)
Add: unpresented cheques 1,200
2,700
Less: undeposited receipts (3,000)
(300)
Bank error (200)
Bank balance (500) o/d
A Incorrect, you have omitted the undeposited receipts from the reconciliation.
B Incorrect, you have added back the undeposited receipts instead of deducting them from the cash book balance.
C Incorrect, you have reversed the treatments of the unpresented cheques and the undeposited receipts.
Now try the questions below from the Question Bank
Question numbers Page
52–55 402
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195
Topic list Syllabus references
1 Discounts B (4)
2 What are control accounts? B (4)
3 The purpose of control accounts B (4)
4 The operation of control accounts B (4)
5 Balancing and reconciling control accounts with sales and purchases ledgers B (4)
Control accounts
Introduction
In this chapter (and in Chapter 16) we explain how accounting errors can be detected, what
kinds of error might exist, and how to post corrections and adjustments to produce final
accounts.
The main control accounts we look at are those for receivables and payables.
Sometimes the amount received, or paid, will not be the same as the invoice total due to
discounts.
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196 13: Control accounts ⏐ Part B Accounting systems and accounts preparation
1 Discounts
1.1 Types of discount
A discount is a reduction in the price of goods.
There are two types of discount.
• Trade discount
• Cash discount, or settlement discount
Trade discount is a reduction in the cost of goods resulting from the nature of the trading transaction. It usually results
from buying goods in bulk.
For example, a customer is quoted $1 per unit for a particular item, but a lower price of 95 cents per unit for 100 units or
more at a time. An important or regular customer can be offered a discount on all goods, regardless of the order size,
because the total volume of his purchases over time is so large.
Cash discount is a reduction in the amount payable to the supplier in return for immediate payment rather than credit.
For example, a supplier charges $1,000 for goods, but offers a discount of 5% if the goods are paid for immediately in
cash.
Settlement discount is similar to cash discount. It is a discount on the price of the goods purchased for credit
customers who pay their debts promptly.
For example, a discount of 5% for payment within 30 days of the invoice date.
1.2 Accounting for trade discount
Trade discount is a reduction in the amount of money demanded from a customer at the time of the sale. If trade
discount is received by a business, the amount of money payable will be net of discount (ie it will be the normal sales
value less the discount). Similarly, if a trade discount is given by a business to a customer, the amount of money due will
be after deduction of the discount.
Trade discount is accounted for as follows.
(a) Trade discount received is deducted from the gross cost of purchases. Purchases are recorded at the net
invoiced amount which is after deducting the discount.
(b) Trade discount allowed is deducted from the gross sales price, so that sales are recorded at net invoiced
value which is after deducting the discount.
1.3 Cash discounts and settlement discounts received
Unlike trade discounts, cash and settlement discounts are not deducted from the invoice price of the goods. The invoice
is processed in the normal way and any discount received when payment is made is credited to a 'discounts received'
account.
Key term
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Part B Accounting systems and accounts preparation ⏐ 13: Control accounts 197
When a business is given the opportunity to take advantage of a cash discount or a settlement discount for prompt payment,
the decision as to whether or not to take the discount is a matter of financing policy, not trading policy, and the benefit is at the
time of payment.
1.4 Example: cash discount received
A buys goods from B, on the understanding that A will be allowed a period of credit before having to pay for the goods.
The terms of the transaction are as follows.
• Date of sale: 1 July 20X6
• Credit period allowed: 30 days
• Invoice price of the goods: $2,000
• Discount offered: 4% for prompt payment
A has a choice between holding on to his money for 30 days and then paying the full $2,000, or paying $2,000 less 4%
($1,920) now. This is a financing decision whether it is worthwhile for A to save $80 by paying its debts sooner.
If A decides to take the cash discount, he will pay $1,920, instead of the invoiced amount $2,000. The cash discount
received ($80) will be accounted for in the books of A as follows.
(a) In the trading account, the cost of purchases will be at the invoiced price of $2,000.
(b) In the income statement, the cash discount received is shown as though it were income received.
We would have:
$
Cost of purchase from B by A (trading account)
2,000
Discount received (income in the I/S)
(80
)
Net cost
1,920
Settlement discounts received are accounted for in exactly the same way as cash discounts received.
1.5 Cash discounts and settlement discounts allowed
The same principle is applied in accounting for cash discounts or settlement discounts allowed to customers. Goods are
sold and the offer of a discount is a matter of financing policy for the business, and not trading policy.
1.6 Example: settlement discount received
X sells goods to Y at a price of $5,000. Y is allowed 60 days' credit before payment, but is also offered a settlement
discount of 2% for payment within 10 days of the invoice date. X issues an invoice to Y for $5,000. X has no idea
whether or not Y will take advantage of the discount. In trading terms Y is a debtor for $5,000.
If Y subsequently decides to take the discount, he will pay $5,000 less 2% ($4,900) ten days later. The discount allowed
($100) will be accounted for by X as follows.
(a) In the trading account, sales are valued at their full invoice price, $5,000.
(b) In the income and expenditure account, the discount allowed will be shown as an expense.
We would have:
$
Sales (trading account)
5,000
Discounts allowed (I&E)
(100
)
Net sales
4,900
Cash discounts allowed are accounted for in exactly the same way as settlement discounts allowed.
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198 13: Control accounts ⏐ Part B Accounting systems and accounts preparation
(a) Trade discounts are received at the time of sale. Sales and purchases are recorded net of trade discounts (ie after
deducting the discount).
(b) Cash and settlement discounts are received at the time of payment. Sales and purchases are recorded gross (ie
before deducting the discount) when payment is made or received. Any discount received from suppliers is
credited to a discounts received income account and any discount allowed to customers is debited to discounts
allowed expense account.
Question
Income statement with discounts
You are required to prepare the income statement of Seesaw Timber Merchants for the year ended 31 March 20X6, given
the following information.
$
Inventory, 1 April 20X5 18,000
Purchases at gross cost 120,000
Trade discounts received 4,000
Cash and settlement discounts received 1,500
Goods in inventory, 31 March 20X6 25,000
Cash sales 34,000
Credit sales at invoice price 150,000
Cash and settlement discounts allowed 8,000
Selling expenses 32,000
Administrative expenses 40,000
Drawings by proprietor, Tim Burr 22,000
Answer
SEESAW TIMBER MERCHANTS
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH 20X6
$
$
Sales (note 1)
184,000
Opening inventory
18,000
Purchases (note 2)
116,000
134,000
Less closing inventory
25,000
Cost of goods sold
109,000
Gross profit
75,000
Discounts received
1,500
76,500
Expenses
Selling expenses
32,000
Administrative expenses
40,000
Discounts allowed
8,000
80,000
Net loss transferred to SOFP
(3,500
)
Assessment
focus point
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Part B Accounting systems and accounts preparation ⏐ 13: Control accounts 199
Notes
1 $(34,000 + 150,000)
2 $(120,000 – 4,000)
3 Drawings are not an expense, but an appropriation of profit.
Question
Discounts allowed
Fill in the blanks.
(a) Fred sells goods on special offer to Bert. The goods usually sell for $100 but Bert pays $90. The double entry to
record this sale in Fred's books is:
DEBIT _________________ account $
CREDIT _________________ account $
(b) Fred sells goods to Tom for $100, but agrees to accept $95 if payment is within 30 days. The double entry to
record this sale in Fred's books is:
DEBIT _________________ account $
CREDIT _________________ account $
The double entry to record the receipt of $95 is:
DEBIT _________________ account $
DEBIT _________________ account $
CREDIT _________________ account $
Answer
(a) DEBIT Cash account $90
CREDIT Sales account $90
(b) DEBIT Receivables account $100
CREDIT Sales account $100
Then:
DEBIT Cash account $95
DEBIT Discounts allowed account $5
CREDIT Receivables account $100
2 What are control accounts?
A control account is an account in the nominal ledger in which a record is kept of the total value of a number of similar
but individual items.
The two most important control accounts are those for receivables and payables. They are part of the double-entry
system.
Key term
FA
S
T F
O
RWAR
D
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