BTHM-Topic 8 Control Accounts and Accounting for VAT Financial Accounting
Topic 8 – Control Accounts and Accounting for value added tax
In this chapter we will learn about the purpose of a bank reconciliation statement, Sales ledger
control account and a purchases ledger control account. We will also explain the principles of the
operation of a value added tax (VAT).
Bank Reconciliation Statement
Terms used in banking:
Bank charges and interest- charges made by the bank for providing the services of a bank
account while interest charged is for making funds available to a business when it is
overdrawn.
Bank giro credits (also referred to as credit transfers)- a method used by businesses to pay
creditors, wages and salaries.
Bank Lodgement – money deposited by a business into its bank account.
Bank overdraft- is a facility provided by the bank where it will continue to make payments
from a current account even though there are insufficient funds to cover the payment. This
is a short term loan on which the bank will charge interest on a day to day basis.
Direct debits- where the business gives permission for an organisation to collect amounts
owing direct from its bank account. This method is often used to pay rent, insurance
premiums, telephone bills etc.
Out of date cheques- a cheque becomes “stale” six months after the date on the cheque.
Standing order- instructions given by a business to a bank to pay specified amounts at given
dates.
Unpresented cheques- cheques that have been sent but have not yet gone through the
recipient’s bank account.
Reasons why the balance on the bank statement may differ from the balance in the cash account
If there is a difference between the balance on the bank statement and the balance in the cash
account, then clearly we need to find out why.
There are three types of situations that can result in a difference:
1. Cash book errors and omissions
2. Bank mistakes
3. “Timing differences”- even if all the entries in the bank statement and the cash book are
correct, the two balances are unlikely to agree. This is because of unpresented cheques and
lodgements not credited. The receipts and payments have been correctly entered in the
cash book, but because of the time delay they have not appeared in the bank statement.
This is not a mistake on the bank’s part- the transactions will appear at some time in the
future- and so no correction is necessary. However, it we list the unpresented cheques and
lodgements not yet credited, we should be able to explain or reconcile the difference
between the balances. If we cannot reconcile the two then there must be errors remaining
which we must find.
4. The statement reconciling the balances is called a bank reconciliation statement.
1
, BTHM-Topic 8 Control Accounts and Accounting for VAT Financial Accounting
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.
Pro-forma bank reconciliation statement:
Balance per bank statement x
Add/less bank errors x
X
Add: lodgements not credited x
Less: Unpresented cheques (x)
Balance as per (corrected) cash account xxx
Example 1
At 30 June 2007, the balance on the cash account was Rs11,800 (DR), but the balance appearing on
the bank statement was Rs15,000(CR).
The reasons for the difference were as follows:
1. Bank charges of Rs20
2. A payment of Rs1,200 had been entered in cash account as Rs2,100
3. A cheque for Rs200 had been dishonoured
4. There were unpresented cheques totalling Rs6,500
5. Lodgements of Rs4, 000 had not yet appeared on the bank statement.
Calculate the correct balance on the cash account, and prepare a bank statement reconciliation
statement.
2
Topic 8 – Control Accounts and Accounting for value added tax
In this chapter we will learn about the purpose of a bank reconciliation statement, Sales ledger
control account and a purchases ledger control account. We will also explain the principles of the
operation of a value added tax (VAT).
Bank Reconciliation Statement
Terms used in banking:
Bank charges and interest- charges made by the bank for providing the services of a bank
account while interest charged is for making funds available to a business when it is
overdrawn.
Bank giro credits (also referred to as credit transfers)- a method used by businesses to pay
creditors, wages and salaries.
Bank Lodgement – money deposited by a business into its bank account.
Bank overdraft- is a facility provided by the bank where it will continue to make payments
from a current account even though there are insufficient funds to cover the payment. This
is a short term loan on which the bank will charge interest on a day to day basis.
Direct debits- where the business gives permission for an organisation to collect amounts
owing direct from its bank account. This method is often used to pay rent, insurance
premiums, telephone bills etc.
Out of date cheques- a cheque becomes “stale” six months after the date on the cheque.
Standing order- instructions given by a business to a bank to pay specified amounts at given
dates.
Unpresented cheques- cheques that have been sent but have not yet gone through the
recipient’s bank account.
Reasons why the balance on the bank statement may differ from the balance in the cash account
If there is a difference between the balance on the bank statement and the balance in the cash
account, then clearly we need to find out why.
There are three types of situations that can result in a difference:
1. Cash book errors and omissions
2. Bank mistakes
3. “Timing differences”- even if all the entries in the bank statement and the cash book are
correct, the two balances are unlikely to agree. This is because of unpresented cheques and
lodgements not credited. The receipts and payments have been correctly entered in the
cash book, but because of the time delay they have not appeared in the bank statement.
This is not a mistake on the bank’s part- the transactions will appear at some time in the
future- and so no correction is necessary. However, it we list the unpresented cheques and
lodgements not yet credited, we should be able to explain or reconcile the difference
between the balances. If we cannot reconcile the two then there must be errors remaining
which we must find.
4. The statement reconciling the balances is called a bank reconciliation statement.
1
, BTHM-Topic 8 Control Accounts and Accounting for VAT Financial Accounting
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.
Pro-forma bank reconciliation statement:
Balance per bank statement x
Add/less bank errors x
X
Add: lodgements not credited x
Less: Unpresented cheques (x)
Balance as per (corrected) cash account xxx
Example 1
At 30 June 2007, the balance on the cash account was Rs11,800 (DR), but the balance appearing on
the bank statement was Rs15,000(CR).
The reasons for the difference were as follows:
1. Bank charges of Rs20
2. A payment of Rs1,200 had been entered in cash account as Rs2,100
3. A cheque for Rs200 had been dishonoured
4. There were unpresented cheques totalling Rs6,500
5. Lodgements of Rs4, 000 had not yet appeared on the bank statement.
Calculate the correct balance on the cash account, and prepare a bank statement reconciliation
statement.
2
