Control Accounts & Bank Reconciliation

1. Bank Reconciliation (Video 17)

① What does "reconcile" mean?

Reconcile = compare / match. We match our record of the bank (the cash book, bank column only) with the bank's record (the bank statement). Both should show the same balance — but often they don't, so we find out why.

Cash book = my record. Bank statement = bank's record. Same money, two diaries.

② Why my "debit" is the bank's "credit"

	Me (cash book)	Bank (statement)
Bank balance is a…	ASSET (Dr balance)	LIABILITY (Cr balance) — it owes me my money
I deposit / receive money	Dr bank (asset ↑)	Cr my a/c (liability ↑)
I withdraw / pay money	Cr bank (asset ↓)	Dr my a/c (liability ↓)

③ Overdraft

Overdraft = I took out more than I had (bank allows short-term credit to good customers). e.g. $100,000 in bank, manager lets me take $120,000 → $20,000 overdraft.

• Overdraft is a liability → appears on the credit side (b/d overdraft = Cr); asset (money in bank) is on the debit side.
• In the BRS an overdraft is shown as a negative / in brackets.
• In the SOFP: money in bank = current asset; overdraft = current liability.

④ Two steps in every question

⑤ Step 1 — Updated / Revised / Amended Cash Book

Why update? The bank did some transactions (±) that I don't know about yet. As soon as I see them on the statement, I record them. b/d = brought down = opening balance; Dr b/d = money in bank, Cr b/d = overdraft.

DEBIT side (bank ↑)		CREDIT side (bank ↓)
Balance b/d	XXX	Balance b/d (Overdraft)	XXX
Trader's credit / transfer	XXX	Direct debit	XXX
Interest credited	XXX	Standing order	XXX
Dividend received	XXX	Bank charges	XXX
Debtor paid directly	XXX	Interest charged (debited)	XXX
Balance c/d (Overdraft)	XXX	Dishonoured / unpaid cheque	XXX
Total	XXX	Balance c/d  → Total	XXX
Balance b/d	XXX	Balance b/d (Overdraft)	XXX

(Board shows the two columns as "OR": the Cr side's Balance b/d (Overdraft) OR the Dr side's Balance b/d is used, depending on whether we start with money in bank or an overdraft. Balance c/d on the opposite side to b/d.)

⑥ What each item means (teacher's explanations)

Item (debit side)	Meaning	Cash book
Trader's credit / transfer	A party paid money directly into our account and we didn't know. Bank credited us, so we do the opposite.	Dr
Interest credited	Interest/profit paid by bank on a savings / deposit account (current / "checking" a/c = day-to-day use).	Dr
Dividend received	Return on shares we hold; seen on statement, not yet recorded.	Dr
Debtor paid directly	Customer (debtor) paid us straight into the bank.	Dr

Item (credit side)	Meaning	Cash book
Direct debit	We tell the bank to pay different parties, variable amounts (electricity, gas, water bills — amount changes with usage).	Cr
Standing order	Bank pays the same party, same amount, same date every time (e.g. $10,000 monthly instalment on a bike).	Cr
Bank charges	Fees for cheque book, debit/credit card, demand draft — banks earn from charges, not "in good faith".	Cr
Interest charged	Interest we pay on a loan / overdraft (= "interest debited").	Cr
Dishonoured / unpaid cheque	Cheque we received from a customer bounced → reverse the entry.	Cr

⑦ Step 2 — Bank Reconciliation Statement (BRS)

Updated cash book already has everything the bank did. Now deal with items already in my cash book but not yet on the bank statement — "timing" items. Two common ones:

Bank Reconciliation Statement — most common format
Balance as per updated cash book	XXX
Add: unpresented cheques	XXX
Less: uncredited lodgements	(XXX)
Balance as per bank statement	XXX

• Balance from updated cash book: Dr b/d = positive; Cr b/d (overdraft) = (negative / in brackets).
• The "balance as per bank statement" is always given in the exam. If your answer = given figure ⇒ done correctly ⇒ full marks.

⑧ Reverse format (examiner's trick)

Sometimes the printed format starts with balance as per bank statement and ends with balance as per updated cash book. Then do reverse working:

Check: result must equal the balance b/d of your updated cash book (positive ⇒ Dr b/d; negative ⇒ overdraft b/d).

⑨ Which bank balance goes in the Statement of Financial Position?

Three candidates: (a) balance b/d before updating, (b) balance b/d after updating = updated cash book, (c) balance per bank statement.

2. The Three Ledgers (Video 35)

Ledger = any book containing T-accounts. Three kinds:

Ledger	Contains
Sales ledger	Individual personal a/cs of credit customers (Mr A, Mr B, Mr C)
Purchase ledger	Individual a/cs of credit suppliers (Mr X, Mr Y, Mr Z)
General (nominal) ledger	Everything else: sales, purchases, returns, cash, bank, assets, liabilities, income, expenses … plus the control accounts SLCA & PLCA

Why make control accounts?

• As the business grows (more customers/suppliers) we need a check & balance on the individual ledgers.
• Without a control a/c, an error in a sales ledger balance can't be detected.
• Error = unintentional; fraud = intentional — control a/c helps to prevent / minimise both.
• Segregation of duties: ledgers kept by one person, control accounts by a different person ⇒ much less chance of error/fraud.
• Gives total credit sales / credit purchases quickly & helps in making financial statements.

3. Sales Ledger Control Account — SLCA (Videos 18 & 35)

SLCA (= Total Debtors a/c = Trade Receivables Ledger Control a/c) is a debtor-type account → an ASSET, one combined account for all customers. Kept in the general ledger. Can be made for a year, 6 months or 1 month.

① Normal vs minority (abnormal) balances

• Normal: opening balance b/d on DEBIT → closing balance c/d on CREDIT (c/d is always on the opposite side; c/d becomes next period's b/d).
• Minority / abnormal: balance b/d on CREDIT (liability — we owe some customers) → c/d on DEBIT.

Why a credit balance? (board: "State why SLCA may have a credit balance") — it shows the amount the company owes to a debtor / customer:

1. Over / duplicated payment by customer (owes 1,000, paid 1,200 ⇒ return 200; or paid 1,000 twice ⇒ return 1,000).
2. Sales return after the settlement of an account (bought on credit, paid, then returned faulty goods ⇒ we must pay the money back).
3. Advance payment from the customer, who then decides not to buy ⇒ refund due.

② Entries in SLCA

Transaction	Side of SLCA	Full double entry	Why / note
Credit sales	Dr — "Sales"	Dr SLCA, Cr Sales	debtors ↑. Only credit sales; cash sales never (they go Dr Cash, Cr Sales — no debtor born).
Bank dishonoured cheque	Dr — "Bank (dishonoured cheque)"	Dr SLCA, Cr Bank	reverses the earlier receipt; debtor owes again.
Interest charged to debtors	Dr — "Interest charged"	Dr SLCA, Cr Interest income	penalty for late payment, e.g. 10% of $1,000 = $100 ↑ debtors.
Bank refund to debtors	Dr — "Bank (refunds)"	Dr SLCA, Cr Bank	repaying a minority (credit) balance = liability ↓ ⇒ debit.
Cheque / cash received	Cr — "Bank"	Dr Bank, Cr SLCA	write the account name (Bank), not "cheque received".
Discount allowed	Cr	Dr Disc. allowed (expense), Cr SLCA	customer paid early.
Return inwards (sales return)	Cr	Dr Return inwards, Cr SLCA	goods returned: faulty / wrong size, colour, specification.
Bad debts (irrecoverable)	Cr	Dr Bad debts (expense), Cr SLCA	customer cannot pay.
Contra – PLCA	Cr — "Contra – PLCA"	Dr PLCA, Cr SLCA	see Contra, section 5.

③ The SLCA (board version, year 2020)

Sales Ledger Control Account (SLCA) — Debit		$	Credit		$
1 Jan 2020	Balance b/d	xx	1 Jan 2020	Balance b/d (Cr)	x
31 Dec 2020	Sales	xx	31 Dec 2020	Bank	xx
	Bank (dishonoured chq)	xx		Discount allowed	xx
	Interest charged	xx		Return inwards	xx
	Bank (refund)	xx		Bad debt	xx
				Contra – PLCA	xx
31 Dec 2020	Balance c/d (Cr)	x	31 Dec 2020	Balance c/d	xx
	Totals	XXX		Totals	XXX
1 Jan 2021	Balance b/d	xx	1 Jan 2021	Balance b/d (Cr)	xx

Dates: write 31 Dec once on each side (all items belong to the end of the period). The "(Cr)" b/d and c/d are the minority balances — they may or may not exist.

④ Balancing & marks

• If every item is given, the account balances automatically.
• Balance c/d not given? Total the bigger side (put that figure on both sides) and the missing figure is balance c/d.
• Only ONE unknown in a T-account. If neither c/d is given calculate the normal (debit) b/d; if the normal one is given and the examiner asks for the abnormal one, calculate the minority balance.
• A single balance with no description ⇒ assume debit (normal).
• Examiner gives 1 mark for balance b/d — never forget to bring it down.

4. Purchase Ledger Control Account — PLCA (Videos 18 & 35)

PLCA = combined account of all suppliers (creditors) → a LIABILITY. Kept in the general ledger (nominal ledger); individual suppliers are in the purchase ledger.

• Normal: balance b/d on CREDIT → balance c/d on DEBIT.
• Minority: balance b/d on DEBIT (an asset — supplier owes us) → c/d on CREDIT.

Why a debit balance in PLCA?

1. Duplicate / excess payment to supplier (owe 1,000, paid 1,500 — by mistake or deliberately, e.g. closing the relationship) → we expect a refund.
2. Advance paid but goods not bought → expect advance back.
3. Bought on credit, paid, then returned goods (purchase return) → supplier owes us the money.

Transaction	Side of PLCA	Full double entry	Why / note
Credit purchases	Cr — "Purchases"	Dr Purchases, Cr PLCA	liability ↑. Always credit purchases (cash purchases never here); write "Purchases", not "credit purchases".
Interest charged by suppliers	Cr — "Interest charged"	Dr Interest expense, Cr PLCA	penalty for paying late ⇒ we owe more.
Bank refunds (from suppliers)	Cr — "Bank (refunds)"	Dr Bank, Cr PLCA	refund of a minority (debit = asset) balance ⇒ asset ↓ ⇒ credit.
Payments to suppliers	Dr — "Bank"	Dr PLCA, Cr Bank	liability ↓. If not stated cash/cheque → Bank (businesses usually pay by bank).
Discount received	Dr	Dr PLCA, Cr Disc. received (income)	paid supplier early ⇒ liability ↓.
Return outwards (purchase return)	Dr	Dr PLCA, Cr Return outwards	faulty / not needed / wrong size, colour, spec.
Contra – SLCA	Dr — "Contra – SLCA"	Dr PLCA, Cr SLCA	see section 5.

The PLCA (board version)

Purchase Ledger Control Account (PLCA) — Debit		$	Credit		$
1 Jan 2020	Balance b/d (Dr)	x	1 Jan 2020	Balance b/d	xx
31 Dec 2020	Bank	xx	31 Dec 2020	Purchases	xx
	Discount received	xx		Interest charged	xx
	Return outwards	xx		Bank (refunds)	xx
	Contra – SLCA	xx
31 Dec 2020	Balance c/d	xx	31 Dec 2020	Balance c/d (Dr)	x
		XX			XX
1 Jan 2021	Balance b/d (Dr)	xx	1 Jan 2021	Balance b/d	xx

PLCA is the mirror image of SLCA: normal balance Cr (SLCA: Dr); minority Dr (SLCA: Cr); purchases/interest on Cr (SLCA: sales/interest on Dr). Same balancing rules: only one unknown; if no c/d given find the normal one.

5. Contra Adjustment (SLCA ⇄ PLCA)

Contra = one person is both our customer and our supplier. He owes us AND we owe him ⇒ instead of both paying, cancel the common (lower) amount.

Debtor a/c is credited (asset ↓), creditor a/c is debited (liability ↓), both by the same amount.

6. Worked Question — Trade Receivables Ledger Control Account

7. Control Accounts Reconciliation (Video 19 — AS Level)

Idea: like bank reconciliation but for the control account. Reconcile = compare/match total of individual balances with control account balance. (Control accounts basics are; reconciliation is AS Level.)

• Individual T-accounts are summarised in a list / schedule of debtors (schedule of trade receivables) = Mr A + Mr B + Mr C.
• If list total = SLCA b/d ⇒ no errors/fraud likely. If not ⇒ investigate & correct errors.

① Examination format — TWO things to prepare

Just as bank rec = (1) updated cash book + (2) BRS, control account rec = (1) corrected control account + (2) reconciliation statement.

When both agree after corrections ⇒ reconciliation successful (Mr A + Mr B + Mr C = SLCA).

② Where does each error get corrected? (rule of thumb)

• Where control a/c figures come from: Sales ← sales day book; Return inwards ← returns inward journal; Bank ← cash book; Discount allowed ← discount column of cash book; Bad debts & contra ← general journal.
• "Error was in the sales journal / purchase journal / general journal" ⇒ fix the control a/c (top section).
• "Mr B paid us and we forgot to record it in Mr B's account" ⇒ fix the list of balances.
• Omissions (both books forgot) ⇒ adjust both.

8. Past Paper — May 2016 Paper 21 Q3 (Suria)

Trial balance extract at 31 March 2016 ($)
Revenue	287,000	Leasehold premises (25-yr lease), cost	100,000
Purchases	143,800	Computers, cost	44,000
Returns inwards	3,150	Office furniture, cost	15,500
Inventory 1 Apr 2015	15,340	Prov. depn: leasehold / computers / furniture	7,000 / 16,600 / 12,000
Capital	70,000	Wages & salaries	26,500
Drawings	28,000	Computer maintenance	12,200
Commission receivable (income)	4,900	Rent and rates	10,000
Provision for doubtful debts	910	6% bank loan (repayable 30 Jun 2016)	40,000
Bank interest paid	1,500	Heat and light	7,300
Advertising	12,600	General expenses	8,700
Cash and bank (Dr)	520	Trade payables / Trade receivables	18,600 / 27,900

Adjustments at 31 March 2016 — worked

#	Information	Treatment & working
1	Inventory valued at $17,990	closing inventory (current asset) → $17,990
2	Commission receivable $1,400 outstanding	income accrued: 4,900 + 1,400 = 6,300; $1,400 is an other receivable
3	Advertising incl. $5,700 for 6 months ending 31 Jul 2016	4 of the 6 months fall after year-end → prepaid 5,700 × 4/6 = $3,800 (other receivable); expense 12,600 − 3,800 = 8,800
4	General expenses accrued $2,400	expense 8,700 + 2,400 = 11,100; $2,400 other payable

#	Information	Treatment & working
5	Computer costing $8,000 recorded in computer maintenance	capital expenditure wrongly treated as revenue → computers cost 44,000 + 8,000 = 52,000; maintenance 12,200 − 8,000 = 4,200
6	Depreciation on all non-current assets owned at year-end	see working below
7	Trade receivables $1,900 irrecoverable; provision to be 4%	see working below

Profit for the year — $62,270 (my working to check the board figure)

Suria — Statement of Financial Position as at 31 March 2016 (board answer)

	Cost $	Acc. dep $	NBV $
Non-current assets
Leasehold premises	100,000	(11,000)	89,000
Computers [44,000 + 8,000]	52,000	(25,450)	26,550
Office furniture	15,500	(13,550)	1,950
			117,500
Current assets
Inventory		17,990
Trade receivables	26,000
Less: provision for doubtful debts	(1,040)	24,960
Other receivables [1,400 + 3,800]		5,200
Cash & bank		520	48,670
Total assets			166,170
Capital & liabilities
Opening capital		70,000
Add: profit for the year		62,270
Less: drawings		(28,000)	104,270
Current liabilities
Trade payables		18,600
6% bank loan 2016 (due 30 Jun 2016 ⇒ within 1 yr)		40,000
Other payables [2,400 + 900]		3,300	61,900
Total capital & liabilities			166,170

Red "1" / "1 of" beside the NBVs on the board are presumably mark-scheme ticks (mark / own-figure follow-through). Loan is a current liability because it is repayable on 30 June 2016, i.e. within 12 months.

9. Full Chapter Cheat-Sheet