Unit 3: Final accounts and bank reconciliation
Basic Accounting notes · PTU syllabus (BSIT405/BSBC305)
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Unit summary
Final accounts show the profit earned and the financial position, and bank reconciliation keeps the cash book honest. This unit covers final accounts without adjustments, bank transactions and the preparation of a simple bank reconciliation statement.
After this unit you can
- Prepare a trading account
- Prepare a profit and loss account and balance sheet
- Explain common bank transactions
- Prepare a simple bank reconciliation statement
PTU syllabus topics
- Final accounts without adjustments
- bank transactions
- preparation of a simple bank reconciliation statement
- 1Start with balance as per cash book
- 2Add cheques issued but not presented
- 3Less cheques deposited but not credited
- 4Adjust bank charges and direct credits
- 5Result = balance as per pass book
Topic 1
Final accounts: an overview
- 1Trial balance
- 2Trading account
Gross profit or gross loss
- 3Profit and loss account
Net profit or net loss
- 4Balance sheet
Financial position on the closing date
Gross profit
Sales − returns − (opening stock + purchases − returns + direct expenses − closing stock)
Cost of goods sold
Opening stock + net purchases + direct expenses − closing stock
Net profit
Gross profit + other incomes − indirect expenses
Topic 2
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 3
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.
Example
Without adjustments: sales ₹5,00,000; purchases ₹3,20,000; opening stock ₹40,000; closing stock ₹60,000; wages ₹30,000; salaries ₹45,000; rent ₹24,000. Gross profit = 5,00,000 − (40,000 + 3,20,000 + 30,000 − 60,000) = ₹1,70,000. Net profit = 1,70,000 − 45,000 − 24,000 = ₹1,01,000.
Topic 4
Bank transactions
- Deposit
- Cash or cheques paid into the account (pay-in slip)
- Withdrawal
- Cash taken out by cheque, withdrawal slip or ATM
- Cheque
- Order to the bank to pay — bearer, order or crossed
- Electronic transfers
- NEFT, RTGS, IMPS and UPI
- Direct debits
- Bank charges, EMI, standing instructions
- Direct credits
- Interest, dividends collected, customer transfers
- Cash book vs pass book: the cash book (bank column) is kept by the business; the pass book or bank statement is kept by the bank — the business's debit is the bank's credit.
Topic 5
Preparing a simple 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.
| Bank reconciliation statement as on 31 March | ₹ |
|---|---|
| Balance as per cash book | 52,000 |
| Add: cheques issued but not yet presented | 8,000 |
| Add: interest credited by bank | 1,200 |
| Less: cheques deposited but not yet credited | (6,500) |
| Less: bank charges debited | (300) |
| Balance as per pass book | 54,400 |
Key terms
- Trading account
- Account showing gross profit or loss
- Profit and loss account
- Account showing net profit or loss
- Balance sheet
- Statement of assets, liabilities and capital on a date
- Pass book
- Bank's record of the customer's account
- Bank reconciliation statement
- Statement explaining the difference between cash book and pass book balances
Quick revision
- Trial balance → trading → P&L → balance sheet.
- Direct vs indirect expenses.
- Balance sheet: liabilities and capital; fixed and current assets.
- Bank transactions; cheques; NEFT, RTGS, UPI.
- BRS: causes of difference; add and less items.
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.What does a trading account show?
- Q2.Distinguish direct and indirect expenses.
- Q3.What is cost of goods sold?
- Q4.Distinguish cash book and pass book.
- Q5.Give two causes of difference between cash book and pass book balances.
- Q6.Why is a BRS prepared?
Long-answer questions
- Q1.Prepare a trading and profit and loss account and balance sheet (numerical).
- Q2.Explain the format and items of a balance sheet.
- Q3.Explain the causes of difference between cash book and pass book.
- Q4.Prepare a bank reconciliation statement (numerical).
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