Unit 3: Bank reconciliation, depreciation & final accounts
Basic Accounting notes · PTU syllabus (BBA 102-18)
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Unit summary
At the end of a period a business checks its bank balance, provides for wear and tear of assets, and prepares final accounts. This unit covers the bank reconciliation statement, depreciation with SLM and WDV, and the trading account, profit and loss account and balance sheet of a sole proprietor.
After this unit you can
- Prepare a bank reconciliation statement
- Calculate depreciation using SLM and WDV
- Prepare a trading and profit and loss account
- Prepare a balance sheet for a sole proprietor
PTU syllabus topics
- Bank Reconciliation Statement
- meaning and importance of depreciation
- WDV and SLM methods
- preparation of trading and profit & loss account and balance sheet for a sole proprietorship
Charged on
Original cost
Book value at start of year
Annual charge
Same every year
Falls every year
Asset value reaches
Zero or scrap value
Never exactly zero
Suits
Assets used evenly, e.g. furniture
Assets that lose value early, e.g. machinery
Topic 1
Bank reconciliation statement
The balance in the cash book (bank column) and the pass book (bank statement) often differ because of timing and errors. A bank reconciliation statement (BRS) explains the difference.
- 1Balance as per cash book
- 2Add
Cheques issued but not presented; direct credits by bank (interest, collections)
- 3Less
Cheques deposited but not credited; bank charges; direct debits
- 4Balance as per pass book
Causes of difference: cheques issued but not presented, cheques deposited but not cleared, bank charges, interest credited, direct payments and errors.
Topic 2
Depreciation
Depreciation is the permanent, gradual fall in the value of a fixed asset due to use, wear and tear, passage of time or obsolescence. It is charged to show the true profit and the true value of assets.
Charged on
Original cost
Reducing book value
Annual amount
Same every year
Falls every year
Formula
(Cost − scrap) / useful life
Rate × opening book value
Suits
Furniture, buildings
Machinery, vehicles
Example
Machine cost ₹1,00,000, scrap ₹10,000, life 5 years. SLM depreciation = 90,000 / 5 = ₹18,000 a year. WDV at 20%: year 1 ₹20,000, year 2 ₹16,000 (20% of 80,000).
Topic 3
Trading and profit and loss account
- Trading account finds gross profit: Sales − (Opening stock + Purchases + Direct expenses − Closing stock).
- Profit and loss account finds net profit: Gross profit + other incomes − indirect expenses (salaries, rent, advertising, depreciation).
| Direct expenses (Trading A/c) | Indirect expenses (P&L A/c) |
|---|---|
| Wages, carriage inwards, freight, power, factory rent | Office salaries, rent, advertising, carriage outwards, bad debts, depreciation |
Topic 4
Balance sheet of a sole proprietor
A balance sheet shows the financial position on a date: liabilities and capital on one side, assets on the other.
| Liabilities | Assets |
|---|---|
| Capital (+ net profit − drawings) | Fixed assets: land, building, machinery (less depreciation) |
| Long-term loans | Investments |
| Current liabilities: creditors, bills payable, outstanding expenses | Current assets: stock, debtors, cash, bank, prepaid expenses |
Exam tip
Arrange assets in order of permanence or liquidity, and always adjust capital for net profit and drawings.
Key terms
- Bank reconciliation statement
- A statement reconciling cash book and pass book balances
- Depreciation
- Gradual fall in the value of a fixed asset
- Gross profit
- Sales minus cost of goods sold
- Net profit
- Gross profit plus other income minus indirect expenses
- Balance sheet
- A statement of financial position on a date
Quick revision
- BRS explains timing differences and errors.
- SLM: equal amounts; WDV: reducing amounts.
- Trading A/c → gross profit; P&L A/c → net profit.
- Balance sheet: assets = liabilities + capital.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Why do cash book and pass book balances differ?
- Q2.Define depreciation and give two causes.
- Q3.Differentiate between SLM and WDV.
- Q4.Distinguish between direct and indirect expenses.
- Q5.What is a balance sheet?
Long-answer questions
- Q1.Prepare a bank reconciliation statement from given information.
- Q2.Calculate depreciation for five years under SLM and WDV and compare.
- Q3.Prepare a trading and profit and loss account and balance sheet from a trial balance.
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