The International Accounting Standards Board's Conceptual Framework for

Financial Reporting
 The International Accounting Standards Board's Conceptual Framework for
Financial Reporting: The Foundation of Global Accounting
Agenda & Learning Objectives
 Scope:
1. Introduction & Purpose of the Framework
2. Objective of General-Purpose Financial Reporting
3. Qualitative Characteristics of Useful Financial Information
4. The Reporting Entity Concept
5. Elements of Financial Statements
6. Recognition and Derecognition Criteria
7. Measurement Bases
8. Presentation and Disclosure Concepts
9. Concepts of Capital and Capital Maintenance
 Learning Objectives
By the end of this lecture, you will be able to:
 Explain the role and authority of the Conceptual Framework.
 Define the objective of financial reporting and identify the primary users.
 Distinguish between fundamental and enhancing qualitative characteristics.
 Define and identify assets, liabilities, equity, income, and expenses.
 Apply the recognition and derecognition criteria.
 Compare and contrast historical cost and fair value measurement bases.
 Understand the concepts of financial capital maintenance.

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What is the Conceptual Framework?
 Definition: The Conceptual Framework is a coherent system of interrelated
objectives and fundamentals that prescribes the nature function, and limits of
financial accounting and reporting. It is published by the International Accounting
Standards Board (IASB), the independent standard-setting body responsible for
issuing International Financial Reporting Standards (IFRS)

The IASB Framework provides the underlying rules, conventions and definitions that
underpin the preparation of all financial statements prepared under International
Financial Reporting Standards (IFRS).

 Ensures standards developed within a conceptual framework

 Provide guidance on areas where no standard exists
 Aids process to improve existing standards
 Ensures financial statements contain information that is useful to user.
 Helps prevent creative accounting

The revised IASB Conceptual Framework was issued in March 2018 and the new areas
included are as follows:

 Measurement basis
 Presentation and disclosure
 Derecognition

Whilst updates have been made to the following:

 Definitions of assets/liabilities
 Recognition of assets/liabilities

And clarification on:

 Measurement uncertainty
 Prudence
 Stewardship
 Substance over form

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 Analogy: Think of it as the "Constitution" for financial reporting.

o It provides the foundational principles that guide the IASB when creating
new IFRS.

o It helps preparers of financial statements develop accounting policies for

transactions not covered by a specific standard.

o It assists auditors, investors and other users in interpreting information.

 Important Note: The Conceptual Framework itself is not an International Financial

Reporting Standard. If there is a conflict between the Framework and a specific IFRS,
the IFRS standard overrides the Framework.

Why Do We Need a Framework?

 Consistency: Ensures accounting standards are consistent and logical, rather

than a collection of ad-hoc rules.

 Futureproofing: Provides a basis for the IASB to set standards for new and
emerging financial transactions (e.g., cryptocurrencies, complex financial
instruments).

 Guidance for Absence: When no specific IFRS applies, management must use
judgment to develop a policy. The Framework provides the criteria for that
judgment.

 Reduces Alternatives: Helps limit the number of alternative accounting

treatments for similar transactions, enhancing comparability across companies
and periods.

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The Core Pillars
The Objective of General-Purpose Financial Reporting
 Core Objective: "To provide financial information about the reporting entity that is
useful to existing and potential investors, lenders and other creditors in making
decisions about providing resources to the entity."

The decisions made by users will involve:

 Investment decisions
 Financing decisions
 Voting, or influencing management actions

The users will be assessing the management’s stewardship of the entity alongside its
prospects for the future, which will require the following information:

 Economic resources of the entity

 Claims against the entity
 Changes in the entity’s economic resources and claims.
 Efficiency and effectiveness of management

 Key Points:

o Primary Users: Existing & potential investors, lenders and other creditors. It
is important to note that this group does not primarily include management,
regulators, or the general public, though they may also use the reports.

o Their Decision: Decisions to buy, sell or hold equity and debt instruments,
and to provide or settle loans.

o Basis for Decisions: These users need to assess the entity’s prospects for
future net cash inflows.

 How is this done? By providing information about:

1. Economic Resources and Claims (The Statement of Financial
Position/Balance Sheet).

2. Changes in Economic Resources and Claims (The Statement of Profit or

Loss and Other Comprehensive Income, Statement of Changes in Equity).

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 Underlying Concept: Accrual Accounting. Information about past cash flows is
useful, but the accrual basis (recording transactions when they occur, not when cash
is paid/received) gives a better basis for assessing future performance.

Qualitative Characteristics - Useful Financial Information

These are the attributes that make the information provided in financial reports useful
to users. They act as a filter to ensure only the most useful information is included.

 Fundamental Characteristics (Mandatory for information to be useful):

o Relevance
o Faithful Representation
 Enhancing Characteristics (Increase the usefulness of information that is already
relevant and faithfully represented):

o Comparability

o Verifiability

o Timeliness

o Understandability

 The Cost Constraint: The benefits of providing the information must be greater
than the costs of providing and using it.

Fundamental Characteristics
1. Relevance:

 Information is relevant if it is capable of making a difference in the decisions

made by users.

 It has predictive value (helps users forecast future outcomes)

and/or confirmatory value (confirms or corrects past evaluations).

 Materiality is an aspect of relevance. Information is material if omitting it,

misstating it, or obscuring it could reasonably be expected to influence decisions.
Materiality is an entity-specific aspect of relevance based on the nature or
magnitude, or both, of the items to which the information relates.

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o Example: A $10,000 error in inventory is material for a small local business but
is almost certainly immaterial for a multinational corporation like Apple.

2. Faithful Representation:
 The information must faithfully represent the economic phenomena it purports to
represent. It must be a complete, neutral and free from error depiction of that
phenomenon.

 To be faithful, it must be:

o Complete: Includes all information necessary for a user to understand the

phenomenon being depicted, including all necessary descriptions and
explanations.

o Neutral: The information is free from bias. It is not selected, presented, or

structured in a way to achieve a predetermined result or to influence
behavior in a particular direction.

o Free from error: This means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the
information has been selected and applied with no errors. This
does not mean perfectly accurate in all respects (e.g., estimates can be free
from error if the process and inputs are correct).

Enhancing Characteristics

1. Comparability: Information is more useful if it can be compared with similar

information about other entities and with similar information about the same
entity for another period or date. This allows users to identify and understand
similarities and differences.

o Enabled by consistent application of accounting policies over time and

across entities.

2. Verifiability: Verifiability helps assure users that information faithfully

represents the economic phenomena it purports to represent. It means that
different knowledgeable and independent observers could reach a consensus,

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although not necessarily complete agreement, that a particular depiction is a
faithful representation.

o Direct Verification: Checking an amount itself (e.g., verifying cash by

counting it).

o Indirect Verification: Checking the inputs, methods, and assumptions used

to arrive at the amount (e.g., verifying the calculation of depreciation
expense).

3. Timeliness: Information is available to decision-makers in time to be capable of

influencing their decisions. Having relevant information available sooner can
enhance its capacity to influence decisions. Older information is generally less
useful.
4. Understandability: Information is classified, characterized, and presented
clearly and concisely. The Conceptual Framework assumes that users have
a reasonable knowledge of business, economic activities, and accounting, and a
willingness to study the information with diligence.

The Reporting Entity Concept

 Definition: A reporting entity is an entity that is required, or chooses, to prepare

financial statements. It can be a single entity, a portion of an entity, or, most
commonly, a group comprising a parent and its subsidiaries.

 Purpose: To define the boundary of the information presented. It answers the

question: "What set of economic activities are we reporting on?"

 Key Concept: Control (for Consolidated Financial Statements):

o A parent company (the reporting entity) controls another company (an

investee, e.g., a subsidiary) if the parent has all of the following:

1. Power over the investee (rights to direct its relevant activities).

2. Exposure, or rights, to variable returns from its involvement

with the investee.

3. The ability to use its power over the investee to affect the
amount of the investor’s returns.

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o If all three are present, the parent must prepare consolidated financial
statements, where the financial statements of the parent and subsidiary
are combined as if they are a single economic entity.

The Building Block

Elements of Financial Statements - Definitions

These are the "building blocks" from which the financial statements are constructed.
They are the broad classes of events that are grouped together.

 Asset: A present economic resource controlled by the entity as a result of past

events. An economic resource is a right that has the potential to produce
economic benefits.

A present economic resource controlled by the entity as a result of past events, and which
has the potential to produce future economic benefits.

Breaking it down:

 Present economic resource → something of value that can generate benefits.

 Controlled by the entity → the company has the right to use it and restrict others
from using it.
 Result of past events → arises from a past transaction (e.g., buying equipment,
signing a contract).
 Potential to produce economic benefits → expected to bring in cash, reduce
expenses, or provide utility

o Example: Cash, inventory, property, plant & equipment, patents, a right to

use a building (under a lease).

 Liability: A present obligation of the entity to transfer an economic resource as

a result of past events.

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A present obligation of an entity to transfer an economic resource (usually cash, goods, or
services) as a result of past events.

Breaking it down:

 Present obligation → the entity has a duty it cannot easily avoid.

 Transfer of an economic resource → settlement will require giving up cash,
delivering goods, or providing services.
 Result of past events → the obligation arises from something that has already
happened (e.g., borrowing money, purchasing goods on credit, signing a contract

o Example: Loans payable, accounts payable, warranty obligations, lease

obligations.

 Equity: The residual interest in the assets of the entity after deducting all its
liabilities. It represents the claim held by the owners of the entity.

o Fundamental Accounting Equation: Assets - Liabilities = Equity

 Income: Increases in assets, or decreases in liabilities, that result in increases in

equity, other than those relating to contributions from holders of equity claims.

o Includes both Revenue (from ordinary activities) and Gains (e.g., from
selling a fixed asset for more than its book value).

 Expenses: Decreases in assets, or increases in liabilities, that result in decreases

in equity, other than those relating to distributions to holders of equity claims.

o Includes expenses (e.g., rent, salaries) and losses (e.g., from a lawsuit, selling
a fixed asset for less than its book value).

Connecting the Elements

 Transaction 1: A company sells goods for $1,000 cash. The goods originally cost
$600 to purchase.

o Asset (Cash) increases by $1,000 -> This increase in an asset

represents Income (Revenue).

o Asset (Inventory) decreases by $600 -> This decrease in an asset

represents an Expense (Cost of Sales).

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o The net effect is that Equity increases by $400 ($1,000 - $600), which is
the profit for that transaction.

 Transaction 2: A company takes out a bank loan of $5,000.

o Asset (Cash) increases by $5,000.

o Liability (Loan Payable) increases by $5,000.

o No effect on Equity. This is because the increase in assets is exactly

matched by an increase in claims against those assets (liabilities). The
owners' residual interest has not changed.

Recognition and Derecognition

 Recognition: The process of incorporating an item that meets the definition of
an element into the financial statements—both in words (in the line item) and in
numbers (for its monetary amount).

 Recognition Criteria: An item is recognized if:

1. It meets the definition of one of the elements (Asset, Liability, Equity,

Income, or Expense), and

2. Recognition provides useful information (i.e., the information is

relevant and provides a faithful representation).

 Relevance: Is the item material? Would its recognition make a

difference?

 Faithful Representation: Can the item be measured reliably? Is

the measure a sufficiently faithful representation? (High
uncertainty may prevent faithful representation).

 Derecognition: The removal of all or part of a previously recognized asset or

liability from an entity's statement of financial position.

o Goal: To faithfully represent both:

 Any assets and liabilities retained after the transaction that gave
rise to the derecognition.
 The amount of any gain or loss arising from the derecognition.

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o Example: Selling a piece of equipment (derecognize the asset, recognize a
gain/loss), fully repaying a bank loan (derecognize the liability).
Measurement Bases - "How do we put a number on it?"
Definition: Measurement is the process of determining the monetary amounts at which
the elements of the financial statements are to be recognized and carried in the
statement of financial position and statement(s) of financial performance.

 Historical Cost: A measurement basis based on the value of the consideration given
to acquire an asset (or the value of the consideration received to take on a liability)
at the time of its acquisition or incurrence.

o Asset: Initially measured at its cost. Subsequently, it is often measured at cost

less any accumulated depreciation/amortization/impairment losses.

o Liability: Initially measured at the value of consideration received.

Subsequently, it can be measured at the amount required to settle the
obligation.

o Pros: Reliable, verifiable, objective.

o Cons: Can become irrelevant over time as it does not reflect current market
values (e.g., land purchased 50 years ago for a fraction of its current value).

 Fair Value: A market-based measurement. It is the price that would be received to

sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.

o Pros: More relevant, reflects current economic conditions and market

expectations.

o Cons: Can be less reliable if markets are inactive or illiquid, requires more
estimation and judgment (subjectivity).

 Other Bases: Value in Use (for impairment testing), Current Cost, etc.

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Measurement - Illustration

 Scenario: Company A buys a building for $1 million in cash on January 1, 2023.

 On January 1, 2023 (Acquisition Date):

o Historical Cost & Fair Value are the same: $1 million.

o Journal Entry: Dr. Building (Asset) $1,000,000 | Cr. Cash (Asset) $1,000,000

 On December 31, 2023 (Year-End):

o Historical Cost Model: The building is still carried at its historical cost of $1m,
less accumulated depreciation. Assuming a 40-year useful life and no residual
value, annual depreciation is $25,000. The carrying amount is $975,000.

o Fair Value Model: An independent valuer determines that similar buildings

now sell for $1.2 million.

o Under the revaluation model (allowed by the standard IAS 16 Property, Plant
and Equipment), the company could choose to measure the building at its fair
value.

o Journal Entry for Revaluation: Dr. Building (Asset) $225,000 | Cr. Revaluation
Surplus (Equity) $225,000 (to increase the asset from $975k to $1.2m).

 Analysis: This shows the trade-off: Fair Value ($1.2m) is more relevant to a user
assessing the current value of the company's assets but requires an expert valuation
(potentially less verifiable/objective than the original invoice). Historical Cost
($975k) is more reliable but less relevant.

Presentation and Disclosure Concepts

Presentation: How financial information is aggregated, classified, and displayed within

the primary statements (Statement of Financial Position, Statement of Profit or Loss and
Other Comprehensive Income, etc.).

 Objective: To provide a structured and clear summary that is useful for decision-
making.

 Key Concepts:

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o Aggregation: Combining items with similar characteristics.

o Offsetting: Assets and liabilities, and income and expenses, should

generally NOT be offset unless required or permitted by a specific IFRS
standard. They must be presented gross.

o Classification: Items are classified into groupings like current vs. non-
current to reveal the entity's operating cycle and liquidity.

 Disclosure: Providing additional information in the notes to the financial statements

that is not presented on the face of the primary statements.

o Objective: To explain the items presented in the primary statements and

provide additional material information that is relevant to users.

o Principles-Based Disclosure: The Framework encourages entities to apply

judgment to provide effective communication. The focus is on
disclosing material information to avoid "disclosure overload"—where too
much immaterial information obscures useful information.

Capital and Capital Maintenance

 This concept links the definition of profit to the concept of capital. It defines what we
mean by "maintaining capital," which then determines how profit is measured.

 Financial Capital Maintenance: Under this concept, a profit is earned only if

the financial (or monetary) amount of the net assets (assets minus liabilities) at
the end of the period exceeds the financial amount of net assets at the beginning of
the period, after excluding any distributions to, and contributions from, owners.

o This is the concept used in traditional accounting under IFRS.

o It can be measured either in:

 Nominal monetary units (the standard model, ignoring inflation), or

 Units of constant purchasing power (adjusting for inflation – used

in hyperinflationary economies as prescribed by the standard IAS
29 Financial Reporting in Hyperinflationary Economies).

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 Physical Capital Maintenance: Under this concept, a profit is earned only if
the physical productive capacity (or operating capability) of the entity at the end
of the period exceeds the physical productive capacity at the beginning of the period.

o This concept is not commonly used in general-purpose financial reporting

under IFRS. It is more of a theoretical or managerial accounting concept.

 The choice of concept determines the accounting model. The IFRS Conceptual
Framework is based on the Financial Capital Maintenance concept.

Conclusion & Synthesis

Bringing It All Together - A Practical Scenario

 Scenario: TechStart Inc. spends $500,000 over six months on programmer

salaries to develop a new software product that is technologically feasible and
expected to generate future sales.

 Applying the Framework Step-by-Step:

1. Element? Is this an Asset or an Expense?

 Definition of Asset: Is it a present economic resource (the software

code)? Yes. Controlled by the entity? Yes. Result of past events
(payment of salaries)? Yes. Potential to produce economic benefits
(future sales)? Yes.

 Conclusion: The cost meets the definition of an Intangible Asset.

2. Recognition? Does recognition provide useful information?

 Relevance: The $500,000 amount is material for TechStart.

Capitalizing it as an asset is relevant to understanding the
company's investment and future profitability.

 Faithful Representation: The cost of salaries is a directly

measurable, faithful representation of the cost incurred to create
the asset.

 Conclusion: The cost should be recognized as an asset.

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3. Measurement? At what amount?

 Historical Cost: $500,000 (the directly attributable cost).

 Fair Value: Not used, as it would be highly subjective for a unique,

unfinished software product.

4. Presentation: Where does it go?

 On the Statement of Financial Position under Non-Current Assets

-> Intangible Assets.

5. Subsequent Treatment: Once the software is launched, the asset will be

amortized (an expense) over its useful life. This expense is matched
against the revenue it generates, determining profit. This profit figure is
based on the concept of financial capital maintenance (profit is the
amount after maintaining the capital invested in the asset).

Summary & Key Takeaways

 The Conceptual Framework is the foundational bedrock of IFRS, acting as a
constitutional guide.

 Its ultimate objective is to provide decision-useful information to capital

providers (investors and creditors).

 Usefulness is determined by Fundamental (Relevance, Faithful Representation)

and Enhancing (Comparability, Verifiability, Timeliness, Understandability)
characteristics.

 Transactions are broken down into five Elements (Assets, Liabilities, Equity,
Income, Expenses).

 Items are Recognized only if they meet the definition of an element and their
recognition provides useful information.

 Measurement involves a critical trade-off between the relevance of Fair Value

and the reliability of Historical Cost.

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 The Financial Capital Maintenance concept underpins how we define and
measure profit.

Slide 19: References & Further Reading

 IASB (2018). Conceptual Framework for Financial Reporting.
 International Financial Reporting Standards (IFRS), specifically:
o IAS 1 Presentation of Financial Statements
o IAS 16 Property, Plant and Equipment
o IAS 38 Intangible Assets
o IFRS 13 Fair Value Measurement

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The Accounting Cycle: From Source Documents to the Trial Balance
Books of Prime Entry, Ledgers, Double-Entry and Error Correction
 Scope:
1. The Role of Books of Prime Entry (Subsidiary Books)
2. The Ledger and the Double-Entry System
3. Balancing Ledger Accounts
4. The Trial Balance
5. Types of Accounting Errors
6. Correcting Errors using Suspense Accounts & Journals
 Learning Objectives: By the end of this lecture, you will be able to:
o Explain the purpose and use of each Book of Prime Entry.

o Record transactions in ledger accounts using double-entry rules.

o Balance off ledger accounts and transfer balances.

o Prepare a Trial Balance.

o Identify and classify different types of accounting errors.

o Correct errors using journal entries and a Suspense Account.

The Accounting Data Processing Cycle

Flowchart:

 Step 1: Transaction Occurs (e.g., Sell goods, buy equipment, pay rent).
 Step 2: Source Document Created (e.g., Invoice, Receipt, Cheque Counterfoil).
 Step 3: Record in Books of Prime Entry (This is where we start today).
 Step 4: Post to Ledger Accounts (Double-Entry Bookkeeping).
 Step 5: Prepare a Trial Balance (Check for arithmetic accuracy).
 Step 6: Prepare Final Financial Statements (Income Statement, Statement of
Financial Position).
Key Concept: Books of Prime Entry are listing devices that summarize similar
transactions before they are posted to the ledger. They save time and reduce the risk of
error.

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Books of Prime Entry - An Overview

Definition: Books of Prime Entry (or Subsidiary Books) are the books in which
transactions are first recorded. They are not part of the double-entry system itself but
are a step towards it.

The Main Books:

 Sales Day Book: For all credit sales.

 Purchases Day Book: For all credit purchases.

 Sales Returns Day Book: For goods returned by customers.

 Purchases Returns Day Book: For goods returned to suppliers.

 Cash Book: For all cash and bank transactions.

 Petty Cash Book: For small cash payments.

 General Journal: For all transactions that do not fit elsewhere (e.g., corrections,
depreciation, purchase of non-current assets on credit).

Sales Day Book & Posting

 Purpose: To record all INVOICES issued for credit sales.

 Format:

Total Net
Invoice Customer VAT
Date Details Amount Amount
No. Name ($)
($) ($)

01/1
INV101 A. Smith Goods 120.00 20.00 100.00
0

05/1
INV102 B. Jones Goods 240.00 40.00 200.00
0

Total for
360.00 60.00 300.00
October

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1.2 Purchase Day Book (Purchases Journal)

 What it records: Credit purchases with invoice numbers and supplier names.

 Columns typically: Date | Invoice No. | Supplier | Details | Invoice Total.

Example entry (Purchases Day Book):

Date Invoice No. Supplier Details Total Amount ($)

03/07 P001 Supplier X Stock purchased on credit 2,500

Posting principle: Post total purchases to Purchases/Inventory account (debit) and

individual amounts to each supplier (Trade Payables — credit).

1.3 Cash Book (combined Cash and Bank)

 What it records: Cash receipts and payments, bank receipts and payments. The

cash book usually acts as the ledger for Cash and Bank accounts.

 Format: Two columns (or combined): Receipts (Dr) side and Payments (Cr) side

with separate columns for Cash and Bank.

Typical entries in cash book:

 Cash sales (receipt) — Debit Cash, Credit Sales.

 Receipts from debtors (bank or cash) — Debit Bank/Cash, Credit Trade

Receivables.

 Payments to suppliers by bank — Debit Trade Payables, Credit Bank.

 Drawings taken in cash — Debit Drawings, Credit Cash.

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Example lines (Cash Book):

Date Details Bank Dr Cash Dr Bank Cr Cash Cr

01/07 Owner capital introduced 10,000
08/07 Cash sales 800
10/07 Receipt from A (bank) 1,400
12/07 Payment to Supplier X (bank) 1,200
18/07 Stationery (cash) 150
20/07 Drawings (cash) 300

Posting principle: Entries in the cash book are typically posted directly to the ledger
accounts for Cash / Bank; the other side of each entry is posted to the relevant ledger (e.g.,
Sales, Trade Receivables, Trade Payables, Expenses, Drawings).

Date Details Bank Cash Bank Cash

1/7/2025 Owner capital introduced 10,000
8/7/2025 Cash sales 800
10/7/2025 Receipt from A (bank) 1,400
12/7/2025 Payment to Supplier X (bank) 1,200
18/07/2025 Stationery (cash) 150
20/07/2025 Drawings (cash) 300

Posting principle: Entries in the cash book are typically posted directly to the ledger

accounts for Cash / Bank; the other side of each entry is posted to the relevant ledger

(e.g., Sales, Trade Receivables, Trade Payables, Expenses, Drawings).

1.4 Petty Cash Book

 What it records: Small payments from a petty cash float (postage, office tea,

minor stationery).

 Operation: Establish a petty cash float by withdrawing cash from main Cash;

record petty payments in petty cash book; periodically replenish petty cash by

paying the total petty payments from main cash and recording the expense

entries.

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Example petty cash entries:

 05/07 Petty cash float established — Dr Petty Cash $100, Cr Cash $100.

 14/07 Postage paid — Dr Postage Expense $15, Cr Petty Cash $15.

 16/07 Tea — Dr Tea Expense $10, Cr Petty Cash $10.

 30/07 Replenishment — Dr Petty Cash $35, Cr Cash $35 (and record the

individual expense accounts were already debited in the petty cash book).

1.5 Returns books (Returns Inwards and Returns Outwards)

 Returns Inwards (Sales Returns) — records goods returned by customers

(credit notes). Usually posted as Debit Sales Returns and Credit Trade

Receivables.

 Returns Outwards (Purchase Returns) — records goods returned to suppliers

(credit notes). Posted as Debit Trade Payables and Credit Inventory (or

Purchases Returns).

Example: 09/07 Sales return from Customer A $200: Dr Sales Returns $200, Cr Trade

Receivables — Customer A $200.

15/07 Purchase return to Supplier X $100: Dr Trade Payables — Supplier X $100, Cr

Inventory (or Purchase Returns) $100.

1.6 Journal (General Journal)

 What it records: Non-routine, adjusting or correcting entries: depreciation,

accruals, prepayments, bank charges appearing on bank statement, corrections

of errors, transfers and suspense adjustments.

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Example adjusting entries used later in worked example:

 Bank charges shown on bank statement of $25 not yet recorded in books: Dr

Bank Charges Expense $25, Cr Bank $25.

 Accrued electricity expense $60 at period end not yet recorded: Dr Electricity

Expense $60, Cr Accrued Expenses (liability) $60.

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2. Posting to the ledger (double-entry system) — step-by-step

Principle: For every transaction, total debits must equal total credits. Ledger accounts

show increases and decreases using debit and credit entries depending on the nature of

the account (assets increase by debits; liabilities and equity increase by credits;

revenues increase by credits; expenses increase by debits).

Steps to post from books of prime entry to the ledger:

1. Record transactions in the appropriate book of prime entry (with correct

narration and reference).

2. Post individual entries (e.g., each credit sale) from the sales day book to the

individual customer ledger (Trade Receivables ledger).

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3. Post the totals of each book (daily/weekly/monthly) to the corresponding

control account in the general ledger — e.g., total of sales day book to Sales

account (credit), total of purchases day book to Inventory/Purchases account

(debit).

4. Post cash book entries directly to the ledger for Cash and Bank accounts and to

the counterpart general ledger accounts.

5. Post journal entries to respective ledger accounts (e.g., bank charges to

expense, accrual to expense and liability).

6. Regularly balance ledger accounts (calculate closing balances) and prepare a

trial balance.

2.1 Worked example (posting sequence)

Below is a compact list of the transactions for the worked example that we will use to

show how records flow from books of prime entry to the ledger and trial balance.

ABC Traders — Sample transactions for July (perpetual inventory system used in

example):

1. 01/07 Owner invested cash $10,000.

2. 03/07 Purchase stock on credit from Supplier X (Invoice P001) $2,500.

3. 04/07 Credit sale to Customer A (Invoice S001) $1,600 (Cost of goods sold

$1,000).

4. 05/07 Petty cash float established from Cash $100.

5. 08/07 Cash sales $800 (COGS $500).

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6. 09/07 Sales return from Customer A $200 (cost of returned goods $120).

7. 10/07 Received payment from Customer A by Bank $1,400 (settlement).

8. 12/07 Paid Supplier X by Bank $1,200.

9. 14/07 Petty cash payment: Postage $15.

10. 15/07 Purchase return to Supplier X $100.

11. 16/07 Petty cash payment: Tea $10.

12. 18/07 Stationery purchased for cash $150.

13. 20/07 Owner withdrew cash for personal use $300 (Drawings).

14. 25/07 Bank charges $25 (appears on bank statement; not yet in books).

15. 28/07 Accrued electricity expense $60 (adjustment).

Step A — Record in books of prime entry (examples)

 Sales Day Book (credit sales): 04/07 S001 Customer A $1,600

 Purchases Day Book: 03/07 P001 Supplier X $2,500

 Returns Inwards (Sales Returns): 09/07 CRN-001 Customer A $200

 Returns Outwards (Purchase Returns): 15/07 CRN-P001 Supplier X $100

 Cash Book (cash and bank columns): lines for 01/07, 05/07, 08/07, 10/07

Example

Record each transaction in t-accounts: (a) Kristine starts a business and pays in

$5,000 as capital (b) The business buys a car for $1,000 cash (c) They buy goods for

resale for $500 cash (d) They buy more goods for resale for $600 on credit from Mr A

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(e) They pay rent of $200 cash (f) They sell half the goods for $800 cash (g) They sell the

remaining goods on credit for $900 to Mrs X (h) They pay $400 cash on account of the

amount owing to Mr A (i) They receive $500 from Mrs X (j) Kristine withdraws $100

cash from the business

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Balancing the accounts

The rules for balancing are: (a) draw total lines on both sides of the t-account (b) add

up the bigger of the two sides and put this total on both sides of the account (c) fill in the

missing figure on the smaller of the two sides – this figure is the balance on the account

(d) carry forward this balance by also writing it on the opposite side of the account,

below the total lines. The figures above the total lines can now be effectively ignored,

because we have replaced them by the net figure or balance, below the total lines.

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The Trial Balance

 Definition: A Trial Balance is a list of all the ledger account balances at a

particular date. The debit balances are listed in one column and the credit

balances in another.

 Purpose:

1. To check the arithmetical accuracy of the bookkeeping. (Do total debits

equal total credits?).

2. To act as a starting point for preparing the financial statements.

 Important Limitation: A Trial Balance can only detect errors that cause an

inequality (e.g., posting only one side of an entry). It cannot detect errors of

principle, omission, or commission that do not break the debit/credit equality.

Format of a Trial Balance

 Trial Balance of XYZ Ltd as at 31 December 2023

Account Name Debit Balance (£) Credit Balance (£)

Premises 100,000

Equipment 25,000

Inventory 15,000

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Account Name Debit Balance (£) Credit Balance (£)

Trade Receivables 12,500

Bank 4,500

Cash 500

Trade Payables 8,000

Loan 20,000

Capital 100,000

Sales 85,000

Cost of Sales 55,000

Rent Expense 12,000

Salaries Expense 18,000

Totals 242,500 213,000

 Problem! Totals do not agree (£242,500 ≠$213,000). This indicates an

arithmetic error that must be found and corrected.

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Types of Accounting Errors

Errors NOT Disclosed by the Trial Balance (Equality is maintained):

 Error of Complete Omission: A transaction is completely omitted from the

books.

 Error of Commission: Posting to the correct side but to the wrong account of

the same type (e.g., Debiting Mr. A's account instead of Mr. B's).

 Error of Principle: Posting to the wrong type of account (e.g., Debiting

"Purchases" instead of "Non-Current Assets" for equipment bought).

 Compensating Errors: Two or more errors that cancel each other out (e.g., an

extra$100 debit is balanced by an extra$100 credit elsewhere).

 Error of Original Entry: Recording the wrong amount in the Book of Prime

Entry, which is then posted correctly (e.g., Invoice for$450 recorded as$540 in

Sales Day Book).

 Reversal of Entries: Posting the correct amounts but on the wrong sides (e.g.,

Dr Sales, Cr Bank for a cash sale).

Suspense Accounts & Error Correction

 Suspense Account: A temporary account used to force the Trial Balance to agree

when a difference exists due to an undiagnosed error. The amount of the

difference is placed in this account.

 Process:

1. Open a Suspense Account with the value of the Trial Balance difference.

2. Investigate and find the errors.

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3. Correct each error using a Journal Entry. The Suspense Account will

often be part of this correction.

4. Once all errors are corrected, the Suspense Account should have a zero

balance and can be closed

Example

The Trial Balance has a credit difference of$900. A Suspense Account is opened with a

credit balance of$900.

 The following errors are found. Correct them with journal entries.

 Error 1: A cash sale of$800 was completely omitted from the books. (Error of

Complete Omission).

o Correction: The entry was never made. We must record it now.

o Journal Entry:

 Dr Cash$800

 Cr Sales$800

 Error 2: A payment of$1,500 for rent was correctly entered in the cash book but

was posted to the Rent Account as$1,050. (Error of Calculation).

o Analysis: The Rent Account is understated by$450. It needs to be

increased (Debited) by$450.

o Journal Entry:

 Dr Rent Expense$450

 Cr Suspense Account$450 (This clears part of the suspense)

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 Error 3: A purchase of machinery for$4,000 on credit was recorded in the

Purchases Day Book. (Error of Principle).

o Analysis: We have Dr Purchases$4,000 (Wrong) and Cr Payables$4,000

(Correct). We need to remove the Purchases and create a Non-Current

Asset.

o Journal Entry:

 Dr Machinery (Non-Current Asset)$4,000

 Cr Purchases$4,000

 Error 4: A receipt of$700 from a customer, Mr. Brown, was correctly entered in

the cash book but was posted to the account of Mr. Green. (Error of Commission).

o Analysis: Mr. Green's account is overstated (he was credited$700 he

shouldn't have been). Mr. Brown's account is understated (he still shows

the debt).

o Journal Entry:

 Dr Mr. Green's Account$700 (Reduce the overstatement)

 Cr Mr. Brown's Account$700 (Correct the understatement)

The Suspense Account After Corrections

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 Suspense Account

Debit Credit

Opening Difference 900

Error 2 Correction 450

Balance c/d 450

Totals 900

Balance b/d 450

 Analysis: The Suspense Account still has a debit balance of$450. This means we

have not found all the errors that caused the original imbalance. The

investigation must continue until the Suspense Account balance is zero.

The Limitation of the Trial Balance

The Trial Balance only proves the arithmetical accuracy of the ledger (i.e., total debits

= total credits). It does not prove that the entries are correct. Errors that do not break

this equality will not be detected by the Trial Balance. These errors will cause both the

Statement of Profit or Loss and the Statement of Financial Position to be materially

misstated.

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1. Error of Complete Omission

 Description: A transaction is completely omitted from the accounting records.

No debit or credit entry is made.

 Example: A business makes a cash sale of$500 but fails to record it in the Cash

Book and the Sales Account.

 Effect on Financial Statements:

o Statement of Profit or Loss:

 Revenue is understated by$500.

 Profit is understated by$500.

o Statement of Financial Position:

 Assets (Cash) are understated by$500.

 Equity (Retained Earnings) is understated by$500 due to the

lower profit.

o The accounting equation (A = L + E) still balances, but at an incorrect,

lower level.

2. Error of Commission

 Description: An entry is posted to the correct side (debit/credit) but to the

wrong account of the same type.

 Example: A payment of $1,000 for rent (an expense) is correctly debited but

posted to the "Insurance Expense" account instead of the "Rent Expense"

account.

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 Effect on Financial Statements:

o Statement of Profit or Loss:

 Total expenses are correct. ($1,000 is still shown as an expense).

 But the breakdown of expenses is wrong. "Insurance Expense"

is overstated by $1,000 and "Rent Expense"

is understated by$1,000. This misleads users analysing cost

behaviour.

o Statement of Financial Position:

 No effect. Assets (Cash) decreased correctly, and Equity decreased

correctly due to the expense. The error is confined to the income

statement classification.

3. Error of Principle

 Description: An entry is posted to the wrong type of account, violating an

accounting principle. This is a more serious version of an error of commission.

 Example 1 (Revenue vs. Liability): Receiving a $5,000 cash loan is credited to

"Sales Revenue" instead of a "Loan Payable" account.

o Effect: Revenue and Profit are overstated. Liabilities are

understated. This severely overstates financial health.

 Example 2 (Expense vs. Asset): Paying $15,000 to buy a van (a non-current

asset) is debited to "Motor Expenses" instead of the "Van (Non-Current Asset)"

account.

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o Effect on Financial Statements:

 Statement of Profit or Loss:

 Expenses are overstated by$15,000.

 Profit is understated by$15,000.

 Statement of Financial Position:

 Non-Current Assets are understated by$15,000 (the van

is missing).

 Equity is overstated by$15,000 (because profit was

understated, but this is counterintuitive. The understated

profit reduces equity, but the asset omission means equity

is ultimately too high. The full correction would fix this).

The key takeaway is that both accounts are materially

misclassified.

4. Compensating Errors

 Description: Two or more separate errors cancel each other out, so the total

debits still equal total credits.

 Example: The Rent Expense account is undercast (added up incorrectly) by$300,

and the Sales Revenue account is also undercast by$300.

 Effect on Financial Statements:

o The net effect on profit is zero (£300 less expense and$300 less

revenue cancel out).

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o However, both individual line items are wrong. Revenue is

understated by$300, and Expenses are understated by$300. This

misrepresents the company's gross profit margin and overall

performance. The Trial Balance would not highlight this issue.

5. Error of Original Entry

 Description: The wrong amount is recorded in a Book of Prime Entry (e.g., the

Sales Day Book), and this incorrect amount is then posted correctly to the ledger

accounts.

 Example: A credit sale of$2,400 is recorded in the Sales Day Book as$2,040. The

double entry is then Dr Receivables$2,040 Cr Sales$2,040.

 Effect on Financial Statements:

o Statement of Profit or Loss:

 Revenue is understated by$360 (£2,400 -$2,040).

 Profit is understated by$360.

o Statement of Financial Position:

 Assets (Trade Receivables) are understated by$360.

 Equity is understated by$360.

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6. Complete Reversal of Entries

 Description: The correct accounts are used, but the debits and credits are

swapped.

 Example: . A better example is paying a supplier$1,000. The bookkeeper

incorrectly records: Dr Bank $1,000, Cr Supplier $1,000.

 Effect on Financial Statements:

o Statement of Profit or Loss: No direct effect (no income or expense

account involved in this specific error).

o Statement of Financial Position:

 Assets (Bank) are overstated by$2,000. Why? The incorrect

entry increased bank by $1,000. The correct entry should

have decreased bank by $1,000. The net error is a$2,000 difference

from the true balance.

 Liabilities (Supplier) are understated by$2,000. The incorrect

entry reduced the supplier balance by $1,000. The correct entry

would not have changed the supplier balance (it would be Dr

Supplier, Cr Bank). The true liability remains, so it is understated

by the full $1,000.

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Summary Table: Effect of Errors Not Disclosed by Trial Balance

Effect on Effect on Effect on Effect on

Error Type
Profit Assets Liabilities Equity

Complete
Understated Understated - Understated
Omission

Error of None (but

Commissio misclassificatio None None None

n n)

Error of Over/ Over/ Over/ Over/

Principle Understated Understated Understated Understated

May be

Compensati None (but

May be None May be None May be None
ng Errors individual

items wrong)

Error of

Original Understated Understated - Understated

Entry

Reversal of Over/ Over/ Over/

None (usually)
Entries Understated Understated Understated

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Control Accounts and Reconciliation

What is a Control Account?

 Definition: A control account is a summary account in the general ledger that

represents the total of a large number of similar individual transactions. The

individual details are kept in a separate subsidiary ledger.

 The Two Main Types:

1. Sales Ledger Control Account (SLCA): Also known as the Total Debtors

Account. It summarizes all financial transactions with credit customers.

2. Purchases Ledger Control Account (PLCA): Also known as the Total

Creditors Account. It summarizes all financial transactions with credit

suppliers.

 The Concept: The balance on the control account (e.g., SLCA = £50,000) should

always equal the sum of the individual balances in the corresponding subsidiary

ledger (e.g., Customer A £10k + Customer B £15k + ... = £50,000). This is a key

accounting control.

Purpose and Advantages of Control Accounts

 Internal Control: The primary purpose is to provide a check on the accuracy of

the bookkeeping. A discrepancy between the control account and the subsidiary

ledger total signals an error that must be investigated.

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 Efficiency: Allows the general ledger to be kept concise. Managers don't need to see

every individual customer transaction; the single SLCA balance tells them the total

amount owed.

 Division of Labor: Different clerks can maintain the subsidiary ledgers (e.g., one for

customers A-L, another for M-Z) while a senior accountant maintains the control

account. This reduces the risk of fraud and error.

 Facilitates Preparation of Trial Balance: The trial balance only needs the totals

from the control accounts, not hundreds of individual balances, making it easier to

prepare.

 Aids in Error Identification: Pinpoints the type of error (e.g., a transposition error

in a customer account) by isolating it to a specific ledger.

The Sales Ledger Control Account (SLCA)/

 Nature: The SLCA is an asset account. A debit balance is normal, representing

money owed to the business. Standard Format & Sources of Entries:

Sales Ledger Control Account (SLCA)

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Debit Side (Increases
Credit Side (Decreases Debtors)
Debtors)

Bank (cash received from

Balance b/d (opening debtors) X X
customers)

Credit Sales (from Sales Day

X Discounts Allowed X
Book)

Interest Charged on late Sales Returns (from Returns Day

X X
payments Book)

Contra Entries (see slide 9) X Bad Debts Written Off X

Contra Entries X

Balance c/d (closing debtors) X

Totals Y Totals Y

Example: Preparing a SLCA

Scenario: The following information is extracted from the records of XYZ Ltd for
October 2023:

 Opening balance on SLCA: £20,000 (Debit)

 Total credit sales from Sales Day Book: £55,000

 Cash and cheques received from customers: £48,000

 Discounts allowed to customers for early payment: £2,000

 Sales returns from customers: £3,500

 A bad debt written off: £1,500

 Interest charged on overdue accounts: £300

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Solution:
Sales Ledger Control Account

Debit £ Credit £

Balance b/d 20,000 Bank 48,000

Credit Sales 55,000 Discounts Allowed 2,000

Interest Charged 300 Sales Returns 3,500

Bad Debts 1,500

Balance c/d 20,300

Totals 75,300 Totals 75,300

Balance b/d 20,300

Conclusion: The closing balance of debtors is £20,300. This figure should appear on the
Statement of Financial Position as a current asset.

The Purchases Ledger Control Account (PLCA)

Nature: The PLCA is a liability account. A credit balance is normal, representing money
owed by the business.

Standard Format & Sources of Entries:

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Purchases Ledger Control Account (PLCA)

Debit Side (Decreases Credit Side (Increases

Creditors) Creditors)

Bank (cash paid to suppliers) X Balance b/d (opening creditors) X

Credit Purchases (from

Discounts Received X X
Purchases Day Book)

Purchases Returns (from

X Interest Charged by suppliers X
Returns Day Book)

Contra Entries (see slide 9) X Contra Entries X

Balance c/d (closing creditors) X

Totals Y Totals Y

The following information is extracted from the records of XYZ Ltd for October 2023:

 Opening balance on PLCA: £15,000 (Credit)

 Total credit purchases from Purchases Day Book: £40,000

 Cash and cheques paid to suppliers: £38,000

 Discounts received from suppliers: £1,200

 Purchases returns to suppliers: £2,800

 Interest charged by a supplier for late payment: £150

Purchases Ledger Control Account

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Debit $ Credit $

Bank 38,000 Balance b/d 15,000

Discounts
1,200 Credit Purchases 40,000
Received

Purchases Returns 2,800 Interest Charged 150

Balance c/d 13,150

Totals 55,150 Totals 55,150

Balance b/d 13,150

Conclusion: The closing balance of creditors is £13,150. This figure should appear on
the Statement of Financial Position as a current liability.

The Concept of a Contra Entry

Definition: A contra entry occurs when a business is both a customer and a supplier to
the same company. Instead of sending payment and receiving payment, they set off the
amounts against each other.

Example: XYZ Ltd owes ABC Ltd $2,000 for supplies. ABC Ltd owes XYZ Ltd $800 for
services. They agree to a contra settlement: XYZ Ltd will pay ABC Ltd the net amount of
$1,200.

Journal Entry in XYZ Ltd's Books:

 Dr Purchases Ledger Control Account (ABC Ltd) $800 [Reducing what we owe
them]

 Cr Sales Ledger Control Account (ABC Ltd) $800 [Reducing what they owe us]

 Effect: This entry appears on both the debit of the PLCA (reducing a liability)
and the credit of the SLCA (reducing an asset).

Common Discrepancies and How to Resolve Them

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1. Transposition Error: Figure written incorrectly (e.g., $1,360 entered as $1,630). The
difference between the two numbers will be divisible by 9. Solution: Check postings for
this value.

2. Omission: Failing to post a transaction to an individual account (e.g., a payment from

Customer X is posted to the SLCA but forgotten in Customer X's personal
account). Solution: Trace all entries from the day books and cash book to the individual
accounts.

3. Incorrect Posting: Posting a transaction to the wrong customer's account (e.g.,

crediting payment from Customer A to Customer B's account). The control account will
balance, but the subsidiary ledger will not. Solution: Review postings for the transaction
amount.

4. Balance Brought Down Error: An incorrect balance b/d on an individual

account. Solution: Check the arithmetic when the account was last balanced.

5. Unposted Contra Entry: The contra entry was made in the control account but not in
the individual subsidiary ledger accounts. Solution: Ensure the contra is posted to both
the specific customer and supplier accounts.

Reconciliation of Control Accounts

Purpose: To verify that the balance on the control account matches the sum of the
individual balances in the subsidiary ledger (the list of customer or supplier accounts).

 Step-by-Step Process:

1. Extract the closing balance from the SLCA or PLCA.

2. Obtain the detailed list of all individual balances from the subsidiary
ledger.

3. Add up all the individual balances.

4. Compare the two totals.

5. If they agree: The ledgers are likely accurate.

6. If they disagree: You must investigate and find the discrepancy.

Summary & Key Takeaways

 Control Accounts (SLCA & PLCA) are summary accounts in the general ledger.

 Their primary purpose is internal control and error detection.

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 The balance on a control account must equal the total of the individual balances
in its subsidiary ledger.

 A contra entry is used to settle mutual debts between a customer and supplier.

 Reconciliation is a vital process to ensure ledger accuracy.

 Common discrepancies include transposition errors, omissions, and mispostings.

Bank Reconciliation
Purpose of Bank Reconciliation

Definition: Bank Reconciliation is the process of comparing the balance in the Cash
Book (company’s records) with the balance shown on the Bank Statement (issued by
the bank) to identify and explain any differences.

 Objective:

o Detect errors in the Cash Book or Bank Statement.

o Identify unrecorded transactions such as bank charges or direct debits.

o Ensure accuracy and reliability of cash balances in financial statements.

o Strengthen internal control over cash

The preparation of a bank reconciliation statement

(a) compare the cash account to the bank statement and tick off all items that agree

(b) any remaining items must be either errors or timing differences

(c) correct any errors in the cash account by putting through the necessary debits or
credits (in the examination write up a t-account, starting with the balance given in the
question and ending with the correct balance)

(d) prepare a bank reconciliation statement. This is always a statement (not a t-

account), starting with the balance on the bank statement, listing any bank errors and
timing differences, and ending with what should be the corrected balance in the cash
account.

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Pro-forma bank reconciliation statement:

Balance per bank statement x

Add/Less bank errors x

Add: Lodgements not credited x

Less: Unpresented cheques (x)

Balance as per (corrected) cash account x

Illustration:

 Cash Book shows: $5,000

 Bank Statement shows: $4,700

 Difference = $300 (must be investigated).

Timing Differences

These are differences caused by delays in recording transactions.

Unpresented Cheques

Cheques issued by the business but not yet cleared (presented) at the bank.

1. Example:

o Business issues cheque $500 on 28 July.

o Not presented until 2 August.

o Cash Book already reduced by $500, but Bank Statement not yet reduced.

Deposits in Transit (Outstanding Lodgements)

Amounts received and recorded in Cash Book but not yet credited in the Bank
Statement.

 Example:

o Cash deposit $1,200 recorded on 30 July.

o Bank processes it on 1 August.

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o Cash Book balance is higher than Bank Statement by $1,200.

Adjusting Items

Transactions recorded by the bank but not yet entered in the business’s Cash Book.

1. Bank Charges

o Fees deducted by the bank for services (e.g., $50 monthly charge).

o Adjustment: Debit Bank Charges Expense, Credit Cash/Bank.

2. Direct Debits

o Automatic payments instructed by business (e.g., $200 insurance premium).

o Adjustment: Debit Insurance Expense, Credit Cash/Bank.

3. Standing Orders

o Fixed payments made regularly (e.g., $100 rent monthly).

o Adjustment: Debit Rent Expense, Credit Cash/Bank.

4. Dishonoured Cheques (Returned Cheques)

o Customer cheque deposited but later rejected by bank.

o Example: Customer cheque $500 dishonoured.

o Adjustment: Debit Accounts Receivable, Credit Cash/Bank.

Preparation of Bank Reconciliation Statement

 Start with balance per Cash Book or balance per Bank Statement.

 Adjust for timing differences and unrecorded items.

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Format (Balance per Cash Book):

Bank Reconciliation Statement as at 31 August 2025

Particulars Amount ($)

Balance as per Cash Book 5,000

Add: Deposit in Transit +1,200

Less: Unpresented Cheques -500

Less: Bank Charges -50

Less: Direct Debit (Insurance Premium) -200

Balance as per Bank Statement 5,450

Correcting Errors in Cash Book and Bank Statement

1. Errors in Cash Book

o Wrong posting, omission, or duplication of entries.

o Example: Cheque of $350 entered as $530 → Correct by reversing and

recording correctly.

o T Account Illustration (Bank/Cash Book):

Cash Book (Bank Column)

Dr (Receipts) Cr (Payments)

Correction +180 (error)

2. Errors in Bank Statement

o Rare but possible (e.g., another customer’s transaction wrongly debited).

o Action: Notify the bank immediately for correction.

Importance of Regular Reconciliations in Internal Control

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 Fraud Prevention: Helps detect unauthorized withdrawals or fictitious
transactions.

 Error Detection: Identifies mistakes in recording transactions.

 Cash Management: Provides accurate cash balances for decision-making.

 Financial Reporting: Ensures correct presentation of cash/bank balances in

financial statements (per IAS 1 — Presentation of Financial Statements).

Worked Example — Full Reconciliation

 Cash Book balance (Dr): $10,000

 Bank Statement balance: $9,350

 Information:

o Unpresented cheque: $800

o Deposit in transit: $600

o Bank charges: $50 (not yet recorded)

o Standing order (rent): $400 (not yet recorded)

Step 1: Update Cash Book

 Bank charges $50 → Dr Bank Charges, Cr Bank $50

 Rent $400 → Dr Rent Expense, Cr Bank $400

 Adjusted Cash Book Balance = $10,000 – 450 = $9,550

Step 2: Prepare Bank Reconciliation Statement (starting with Adjusted Cash

Book)

Particulars Amount ($)

Balance as per Cash Book 9,550

Add: Deposit in Transit +600

Less: Unpresented Cheque -800

Balance as per Bank 9,350

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Conclusion

 Bank Reconciliation ensures accuracy, prevents fraud and strengthens internal

control.

 Must be performed monthly or more frequently in high-volume businesses.

 Provides confidence in the accuracy of reported cash balances.

At 31 December 2007, the balance on the cash account was $11,820 (DR) , but the
balance appearing on the bank statement was $15,000 (CR).

The reasons for the difference were as follows:

(1) Bank charges of $20

(2) A payment of $1,200 had been entered in the cash account as $2,100

(3) A cheque for $200 had been dishonoured

(4) There were unpresented cheques totalling $6,500

(5) Lodgements of $4,000 had not yet appeared on the bank statement

Calculate the correct balance on the cash account, and prepare a bank
reconciliation statement.

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