Bank Reconciliation, Inventories & Depreciation — Practice

Question 1

Explain why a cheque issued by a firm causes its cash book balance and its bank statement balance to differ, and state whether anything is wrong in either record.

Accepted Answer

Nothing is wrong in either record. The difference is purely one of timing.

The firm credits its cash book on the day it writes and hands over the cheque, because from its own point of view the money has been committed and is no longer available to be spent again. Recording it at that moment is what prevents the firm from issuing further cheques against money already promised.

The bank has no knowledge of the cheque until the payee presents it for payment, which may be several days later or longer. Until presentation, the bank's record of the account is unchanged.

During that interval the cash book balance is lower than the balance shown by the bank, by the amount of the unpresented cheque. Both records are correct on their own terms; they simply reflect the transaction at different dates.

This is why such items are called timing differences and why they require no rectifying entry in the books. They resolve themselves when the cheque is presented. Contrast items such as bank charges, which the bank has recorded and the firm has not — those are genuine transactions unknown to the firm and must be entered in the cash book once the reconciliation reveals them.

Question 2

On 31 March 2026 a firm's cash book showed a bank balance of ₹1,84,000. Cheques of ₹46,000 issued had not been presented; cheques of ₹28,000 deposited had not been credited; bank charges of ₹1,200 and interest credited of ₹3,400 did not appear in the cash book; and the bank had collected a dividend of ₹9,000 directly, not yet recorded by the firm. Prepare the reconciliation and state the balance as per the bank statement.

Accepted Answer

Reasoning is applied item by item from the cash book balance, asking in each case whether the bank's balance is higher or lower.

Bank Reconciliation Statement as at 31 March 2026

Balance as per cash book (Dr.) — ₹1,84,000

Add: cheques issued but not yet presented ₹46,000. The firm has already deducted them; the bank has not, so the bank's balance is higher.
Add: interest credited by the bank ₹3,400. The bank has added it; the firm has not.
Add: dividend collected directly by the bank ₹9,000. Same reasoning as interest.
Sub-total: ₹2,42,400

Less: cheques deposited but not yet credited ₹28,000. The firm has already added them; the bank has not, so the bank's balance is lower.
Less: bank charges ₹1,200. The bank has deducted them; the firm has not.

Balance as per bank statement — ₹2,13,200

Entries required in the books afterwards: the bank charges of ₹1,200, the interest of ₹3,400 and the dividend of ₹9,000 must be recorded in the cash book, because these are genuine transactions the firm had not yet entered. The two cheque items are timing differences and require no entry — they will resolve themselves on presentation and clearance.

Question 3

A firm's cash book shows an overdraft of ₹72,000 on 31 March 2026. Cheques of ₹34,000 issued were unpresented; cheques of ₹19,000 deposited were uncleared; the bank had debited ₹2,500 for charges and had paid an insurance premium of ₹8,000 under a standing instruction, neither recorded by the firm. Compute the overdraft as per the bank statement, explaining the method.

Accepted Answer

The reliable method is to treat the overdraft as a negative balance and apply exactly the same reasoning used for a favourable balance. No separate set of rules is needed, and inventing one is the commonest source of error in overdraft questions.

Balance as per cash book: overdraft ₹72,000, written as ₹(72,000).

Add: cheques issued but not presented ₹34,000. The firm has already deducted them, the bank has not, so the bank's position is better by this amount.
₹(72,000) + ₹34,000 = ₹(38,000)

Less: cheques deposited but not cleared ₹19,000. The firm has already added them, the bank has not, so the bank's position is worse.
₹(38,000) − ₹19,000 = ₹(57,000)

Less: bank charges ₹2,500. The bank has debited them, the firm has not.
₹(57,000) − ₹2,500 = ₹(59,500)

Less: insurance premium paid under standing instruction ₹8,000. The bank has paid it, the firm has not recorded it.
₹(59,500) − ₹8,000 = ₹(67,500)

Overdraft as per bank statement — ₹67,500.

The firm must record the bank charges of ₹2,500 and the insurance premium of ₹8,000 in its cash book, which will bring the cash book overdraft to ₹82,500. The two cheque items need no entry.

Present the answer as a statement with the overdraft clearly labelled at both ends; an unlabelled figure invites the examiner to read the sign the wrong way.

Question 4

State the rule for valuing inventory and explain why the comparison must be made item by item rather than on the inventory as a whole.

Accepted Answer

Inventory is valued at the lower of cost and net realisable value.

Cost comprises the purchase price plus non-recoverable duties and taxes, freight inwards and other costs of bringing the inventory to its present location and condition, with trade discounts deducted. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

The comparison must be item by item because the rule exists to apply prudence, and aggregation defeats it. Suppose one line of stock cost ₹80,000 and can now realise only ₹50,000, while another cost ₹60,000 and could realise ₹95,000. Compared in total, cost is ₹1,40,000 and realisable value ₹1,45,000, so the aggregate test would carry the stock at cost and recognise nothing.

That result recognises no loss on the first item because it has been masked by an unrealised gain on the second — and prudence specifically forbids anticipating gains while requiring known losses to be provided for. Item by item, the first line is written down to ₹50,000 and the second stays at ₹60,000, giving ₹1,10,000. The loss of ₹30,000 is recognised, and the potential gain of ₹35,000 is not.

The difference between the two answers, ₹30,000, is precisely the amount by which aggregation would have overstated both profit and assets.

Question 5

Opening stock was 200 units at ₹40 each. Purchases during the year were 500 units at ₹50 and then 300 units at ₹60. Sales were 700 units. Compute the value of closing stock and the cost of goods sold under FIFO and under weighted average cost, and comment on why the two differ.

Accepted Answer

Units available: 200 + 500 + 300 = 1,000. Units sold: 700. Closing stock: 300 units.

Total cost of goods available for sale:
200 × ₹40 = ₹8,000
500 × ₹50 = ₹25,000
300 × ₹60 = ₹18,000
Total ₹51,000

FIFO. The earliest units are assumed sold first, so the 300 units remaining are the most recent purchases — all 300 from the final lot at ₹60.
Closing stock = 300 × ₹60 = ₹18,000
Cost of goods sold = ₹51,000 − ₹18,000 = ₹33,000

Weighted average cost.
Average cost per unit = ₹51,000 ÷ 1,000 = ₹51
Closing stock = 300 × ₹51 = ₹15,300
Cost of goods sold = ₹51,000 − ₹15,300 = ₹35,700

Comment. The physical facts are identical under both methods; only the assumption about which units remain differs. Because prices rose through the period, FIFO leaves the newest and dearest units in stock, giving a higher closing stock and therefore a lower cost of goods sold and a higher reported profit — here ₹2,700 higher. Weighted average spreads the price rise across all units, so closing stock is lower and profit correspondingly lower.

The difference of ₹2,700 is not a valuation error in either case. It is why the cost formula used must be disclosed and applied consistently from year to year, so that a change in reported profit reflects a change in the business rather than a change in assumption. Note also that FIFO values the balance sheet figure closer to current cost, which is the argument usually made in its favour when prices are moving.

Question 6

State whether each of the following should be included in the closing stock of Bharat Traders as at 31 March 2026, with reasons: (a) goods costing ₹60,000 sent to an agent on consignment, unsold; (b) goods costing ₹25,000 sent to a customer on sale or return, approval not yet given; (c) goods costing ₹40,000 purchased and in transit, ownership having passed to the firm; (d) goods costing ₹35,000 lying in the firm's godown, received from a supplier on consignment; (e) goods costing ₹18,000 sold and delivered before the year end but not yet paid for.

Accepted Answer

The governing test throughout is ownership on the balance sheet date, not physical possession.

(a) Goods on consignment, ₹60,000 — include. Goods sent to a consignee do not pass in ownership on despatch; the consignee holds them as agent and property passes only when the consignee sells them to a third party. They remain Bharat Traders' stock and are included at cost, even though they are not on the premises.

(b) Goods on sale or return, ₹25,000 — include. Under a sale or return arrangement, property passes only when the buyer signifies approval, does an act adopting the transaction, or retains the goods beyond the agreed or a reasonable time without notice of rejection. None has occurred, so ownership has not passed and the goods remain in the seller's stock at cost, not at selling price.

(c) Goods in transit, ₹40,000 — include. Ownership has passed under the contract terms, which is the sole test. That the goods have not physically arrived is irrelevant. A corresponding liability to the supplier must also be recorded, since both the asset and the obligation exist on the balance sheet date.

(d) Goods received on consignment, ₹35,000 — exclude. The firm holds these as agent for the consignor and never owns them. They are physically present, which is exactly what makes this the standard trap. Including them would overstate both stock and profit.

(e) Goods sold and delivered, ₹18,000 — exclude. Ownership passed to the customer on delivery, so the goods are no longer the firm's stock. The unpaid amount appears as a debtor, not as inventory. Non-payment affects recoverability, not ownership.

Question 7

Distinguish the periodic and perpetual inventory systems, and explain why a firm using a perpetual system should still conduct physical verification.

Accepted Answer

Under the periodic system no continuous record of stock movement is maintained. Purchases are recorded as they occur, and the quantity on hand is established only by physical counting at the period end. Cost of goods sold is then derived as opening stock plus purchases less closing stock.

Under the perpetual system, stock records are updated continuously with every receipt and every issue, so the book quantity and value are known at any moment. Cost of goods sold is recorded as sales occur rather than derived at the end.

The decisive difference is what each can reveal. Under the periodic system, cost of goods sold is a residual figure computed from the count, so anything missing for any reason — theft, wastage, breakage, clerical error — is silently absorbed into it and reported as though it had been sold. The system cannot distinguish goods sold from goods lost, because it has no independent expectation of what should be present.

The perpetual system does have that independent expectation. Because a book quantity exists, a physical count can be compared against it and any difference isolated and identified as shortage or surplus, then investigated. This is the system's principal control advantage, and it is purchased at the cost of continuous record-keeping.

Physical verification remains necessary under a perpetual system precisely because the book figure is only a record of what should be there. Records can be wrong through unrecorded issues, posting errors or deliberate manipulation, and goods can be lost without any entry being made. Only a count establishes what is actually present.

The two therefore work together rather than as alternatives: the perpetual records supply the expectation, and the physical count tests it. Neither alone provides both the running information and the independent confirmation.

Question 8

A firm's year ends on 31 March 2026 but stock was physically counted on 7 April 2026, when it was valued at ₹4,60,000. Between 1 and 7 April, purchases received were ₹52,000, goods costing ₹78,000 were sold, sales returns received were ₹6,000 at cost, and purchase returns sent out were ₹9,000. Compute the value of stock as at 31 March 2026.

Accepted Answer

The count establishes what was present on 7 April. To arrive at the position on 31 March, every movement in the intervening period must be reversed — additions since the balance sheet date removed, and reductions since the balance sheet date added back.

Stock as physically counted on 7 April 2026 — ₹4,60,000

Add back: cost of goods sold between 1 and 7 April, ₹78,000. These goods were present on 31 March and left before the count, so they must be restored.
Add back: purchase returns sent out, ₹9,000. These goods were present on 31 March and were despatched to the supplier before the count.
Sub-total: ₹5,47,000

Deduct: purchases received between 1 and 7 April, ₹52,000. These arrived after the balance sheet date, so they were not present on 31 March and must be removed.
Deduct: sales returns received, ₹6,000 at cost. These came back after the balance sheet date and were not part of the firm's stock on 31 March.

Stock as at 31 March 2026 — ₹4,89,000

Two points of method carry marks. First, the direction of each adjustment follows mechanically from asking whether the movement increased or decreased stock after the balance sheet date, and reversing it — there is no list to memorise. Second, sales returns must be brought in at cost and not at selling price, since stock is carried at cost; using the sale value would overstate the closing figure by the margin on those goods.

Question 9

A proprietor says: 'I charge depreciation every year, so by the time the machine wears out I will have the money to replace it.' Identify the two misconceptions in this statement and state what depreciation actually is.

Accepted Answer

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life, the depreciable amount being cost less estimated residual value. Its purpose is to give effect to the matching concept: an asset earns revenue across several periods, so its cost must be spread across those periods rather than charged wholly to the period of purchase.

The first misconception is that depreciation provides funds. It does not. Charging depreciation is a book entry that debits the Profit and Loss Account and reduces the carrying amount of the asset. No cash moves and no money is set aside anywhere. What the charge does is reduce reported profit, which indirectly restrains the amount available for distribution as dividend or drawings — so cash may be retained in the business as a consequence, but it is not earmarked and may equally be spent on anything else. A firm intending to fund replacement must deliberately invest an amount outside the business, for example in a sinking fund.

The second misconception is that depreciation measures the asset's value. It does not attempt to. The written down value of a machine is unrecovered cost, not market value, and the two may differ substantially in either direction. This is why a profit or loss commonly arises on disposal: the difference between proceeds and book value simply shows that the advance estimates of useful life and residual value did not match what actually happened. Neither a profit nor a loss on sale indicates that the depreciation policy was wrong.

The causes of depreciation are physical wear and tear, the effluxion of time, obsolescence, and depletion in the case of wasting assets.

Question 10

A machine costs ₹5,00,000 with an estimated residual value of ₹50,000 and a useful life of five years. Compute the depreciation for each of the first three years under the straight line method and under the written down value method at 25%, and explain the circumstances in which WDV gives the better application of matching.

Accepted Answer

Straight line method.
Depreciable amount = ₹5,00,000 − ₹50,000 = ₹4,50,000
Annual charge = ₹4,50,000 ÷ 5 = ₹90,000
Year 1: ₹90,000, closing book value ₹4,10,000
Year 2: ₹90,000, closing book value ₹3,20,000
Year 3: ₹90,000, closing book value ₹2,30,000

Written down value method at 25%, applied to opening book value.
Year 1: ₹5,00,000 × 25% = ₹1,25,000, closing book value ₹3,75,000
Year 2: ₹3,75,000 × 25% = ₹93,750, closing book value ₹2,81,250
Year 3: ₹2,81,250 × 25% = ₹70,313, closing book value ₹2,10,937

The rate is applied to the opening book value each year, not to cost, which is why the charge declines. Applying it to cost would simply reproduce the straight line method.

When WDV matches better. Matching requires that the cost of using an asset be set against the revenue that use generates. For many assets the total annual cost of ownership is not just depreciation but depreciation plus repairs, and repair costs characteristically rise as the asset ages — little in the early years, substantially more later.

Under the straight line method the depreciation charge is constant while repairs climb, so the combined charge rises steadily across the life even though the asset may be delivering roughly comparable service throughout. Under WDV the depreciation charge falls as repairs rise, and the two tend to offset, producing a more even total charge across the years and therefore a truer matching of cost against the benefit obtained.

A second and purely practical reason for WDV's prevalence in India is that the Income-tax Act prescribes it for most blocks of assets, so firms often adopt it to avoid maintaining two sets of computations.

Question 11

Explain the two methods of recording depreciation and state which is preferable and why. A firm bought a machine for ₹8,00,000 on 1 April 2023 and another for ₹3,00,000 on 1 October 2024, charging depreciation at 10% per annum on the straight line method. On 30 September 2025 the first machine was sold for ₹5,60,000. Show the profit or loss on sale and explain the sequence followed.

Accepted Answer

The two methods of recording.

Charging directly to the asset account credits the asset itself each year, so the account carries the written down value and the original cost ceases to be visible once the first charge is made.

Using a Provision for Depreciation Account, also called Accumulated Depreciation, leaves the asset account undisturbed at cost and accumulates all charges in a separate account. The balance sheet then discloses cost, accumulated depreciation and the net carrying amount.

The second is preferable and is what companies use, because it preserves information the first destroys. A reader can see both what the asset originally cost and how much of that cost has been consumed, which together indicate the age and remaining service potential of the asset base. Under the first method a machine near the end of its life and a cheap new machine can show the same figure, and nothing distinguishes them.

Profit or loss on the sale of the first machine.

Depreciation is ₹8,00,000 × 10% = ₹80,000 per annum.
Year ended 31 March 2024: ₹80,000 (full year, held from 1 April 2023)
Year ended 31 March 2025: ₹80,000
Period 1 April 2025 to 30 September 2025: six months, ₹40,000
Accumulated depreciation to the date of sale = ₹80,000 + ₹80,000 + ₹40,000 = ₹2,00,000

Book value on 30 September 2025 = ₹8,00,000 − ₹2,00,000 = ₹6,00,000
Sale proceeds = ₹5,60,000
Loss on sale = ₹6,00,000 − ₹5,60,000 = ₹40,000, charged to the Profit and Loss Account.

The sequence followed, which carries the marks. First, charge depreciation on the asset up to the date of sale — omitting this half-year charge of ₹40,000 is the single commonest error and it misstates both the loss and the accumulated depreciation. Second, transfer the asset's cost of ₹8,00,000 and its accumulated depreciation of ₹2,00,000 to an Asset Disposal Account. Third, enter the sale proceeds of ₹5,60,000. Fourth, the balancing figure of ₹40,000 is the loss and is transferred to the Profit and Loss Account.

The second machine, bought on 1 October 2024, attracts ₹15,000 for the half year to 31 March 2025 and ₹30,000 for the year to 31 March 2026, and continues in the books. A loss on sale does not indicate that the depreciation policy was wrong; it shows only that the estimated residual value and useful life did not match the eventual outcome.

Question 12

Distinguish a change in accounting policy from a change in accounting estimate in the context of depreciation, explaining how each is accounted for and why the treatments differ. Illustrate with (i) a switch from WDV to SLM and (ii) a revision of an asset's remaining useful life from four years to two.

Accepted Answer

The distinction turns on whether what has changed is the method of measurement or the expectation about facts.

A change in accounting policy is a change in the basis of measurement itself — the rule by which the figure is arrived at. Switching from the written down value method to the straight line method is such a change, because both methods were available and applicable throughout and the enterprise has decided to measure differently.

A change in accounting estimate is a revision of a judgement about future facts, made because new information has emerged. Useful life and residual value are estimates made in advance, and revising them is not a change in how depreciation is computed but a change in the inputs to an unchanged computation.

Treatment of a change in policy — retrospective. Depreciation is recomputed for all prior years as though the new method had always been applied. The difference between the total recomputed and the total actually charged is adjusted in the year of change, and the change together with its effect is disclosed. Such a change is permitted only where required by statute or an accounting standard, or where it results in a more appropriate presentation of the financial statements.

Treatment of a change in estimate — prospective. Nothing already reported is restated. The carrying amount at the date of revision, less any residual value, is spread over the remaining revised useful life.

Why the treatments differ. A change of method means the past figures were computed on a basis the enterprise now considers inferior, so comparability requires that the past be restated onto the new basis; otherwise the trend of reported profit would reflect the change of rule rather than the performance of the business. A change of estimate involves no such defect. The earlier estimate was the best available on the information then existing, and the earlier figures were correct when made. Restating them would rewrite history for information that did not exist at the time, and would also destroy the record of what was actually reported.

Illustrations.

(i) Switch from WDV to SLM. Recompute depreciation for every prior year under SLM, compare the total with the total charged under WDV, and adjust the difference in the year of change, with disclosure of the change, the reason and the amount.

(ii) Remaining useful life revised from four years to two. Suppose the carrying amount is ₹3,00,000 with a residual value of ₹20,000. No prior year is touched. The remaining depreciable amount of ₹2,80,000 is spread over two years, giving ₹1,40,000 a year in place of the ₹70,000 that the original four-year estimate implied. The nature and effect of the revision are disclosed.

Question 13

The closing stock of a firm for the year ended 31 March 2025 was overstated by ₹1,20,000. The error was discovered only in March 2027, by which time both the 2024-25 and 2025-26 accounts had been finalised. Analyse the effect on the reported profit and the balance sheet of each affected year, and state the position at 31 March 2026.

Accepted Answer

The closing stock figure enters both financial statements at once and with linked effects, and because this year's closing stock is next year's opening stock, an error in it misstates two consecutive years in opposite directions.

Year ended 31 March 2025.

In the Trading Account, closing stock is deducted from the cost of goods available for sale. Overstating it by ₹1,20,000 understates the cost of goods sold by ₹1,20,000 and therefore overstates gross profit, and hence net profit, by ₹1,20,000.

In the Balance Sheet, stock is a current asset. Overstating it overstates total assets by ₹1,20,000, and the overstated profit flows into capital, overstating that by the same amount. The balance sheet still balances — which is precisely why the error is not self-revealing.

Year ended 31 March 2026.

The overstated closing stock of 2024-25 becomes the opening stock of 2025-26. Opening stock is added in arriving at the cost of goods available for sale, so an overstated opening stock overstates the cost of goods sold by ₹1,20,000 and understates the profit of 2025-26 by ₹1,20,000.

Provided the closing stock of 2025-26 was itself correctly valued, the balance sheet at 31 March 2026 is correct. The stock figure at that date is right, and the capital figure is right as well, because the ₹1,20,000 overstatement of 2024-25 profit and the ₹1,20,000 understatement of 2025-26 profit cancel exactly in accumulated capital.

Position at 31 March 2026 and action required.

The error is self-correcting over the two years taken together. The aggregate profit of the two years is right, total assets are right, and capital is right. What is wrong is the allocation of profit between the two years — 2024-25 was overstated and 2025-26 understated by the same ₹1,20,000.

Consequently no correcting entry is required in the books in March 2027; there is no misstated balance to correct. What is affected is the comparability of the reported results, and the consequences that followed from them: tax may have been paid a year early, and any profit-linked distribution, bonus or performance measure based on the 2024-25 figure was computed on an overstated profit. Where the amount is material, disclosure of the error and its effect on the comparative figures is appropriate.

This two-year self-reversing pattern is the characteristic signature of a closing stock error, and recognising it is what the question tests.

Question 14

A firm's accountant insists that because the bank statement is prepared by a bank, it must be correct, and that any difference should be resolved by adjusting the cash book to agree with it. Evaluate this position and explain what a bank reconciliation is actually for.

Accepted Answer

The position is wrong on three separate grounds, and stating all three is what a full answer requires.

First, most differences reflect nothing wrong in either record. Cheques issued but not yet presented, and cheques deposited but not yet cleared, are timing differences: both parties have recorded the transaction correctly, on different dates, because they learn of it at different moments. Adjusting the cash book to agree with the bank would mean deleting a correctly recorded cheque simply because the payee has not yet presented it — which would then leave the firm free to spend money it has already committed. The cash book is deliberately maintained on the firm's own knowledge, and that is a feature rather than a defect.

Second, banks do make errors. A cheque may be debited to the wrong account, an amount may be posted incorrectly, or a standing instruction may be executed twice. These are genuine errors requiring correction by the bank, not adjustment by the firm. Forcing the cash book to agree would conceal the bank's error and permanently absorb the loss.

Third, and most seriously, forcing agreement destroys the control the reconciliation exists to provide. An unexplained difference is a signal. Misappropriation of receipts and unauthorised payments are classically discovered because the two records disagree and the disagreement cannot be accounted for by legitimate items. An accountant who resolves every difference by adjusting the cash book to the bank statement has converted a detection mechanism into a rubber stamp — and has removed the one routine check that would reveal a fraud committed by whoever controls the books.

What the reconciliation is actually for.

It explains the difference rather than eliminating it. Each item is classified as a timing difference, a transaction entered by the bank and not yet by the firm, or an error. That classification determines what happens next, and the distinction is the substance of the exercise.

Timing differences require no entry and resolve themselves.

Bank-only transactions — charges, interest credited, direct collections, standing instructions executed, dishonoured cheques — must be entered in the cash book, because these are real transactions the firm did not know about. This is the only category that changes the firm's books.

Errors must be corrected by whichever party made them.

The reconciliation also establishes the true bank position, which the cash book balance alone can misrepresent when large cheques have been issued but not presented — exactly the circumstance in which a firm risks issuing further cheques it cannot honour. It is prepared periodically, usually monthly, by someone other than the person who maintains the cash book, since a reconciliation performed by the person capable of manipulating the records provides no assurance at all.

Question 15

Explain how prudence, matching and going concern each operate in the three topics of this chapter, using one specific rule from each topic as evidence.

Accepted Answer

The three concepts are not decorative theory attached to these chapters; each supplies the justification for a specific operating rule, and the rules cannot be derived without them.

Proudence in inventory valuation. The rule that inventory is carried at the lower of cost and net realisable value, compared item by item, is prudence made operational. Where realisable value has fallen below cost, the fall is recognised at once and an unrealised loss enters the accounts; where realisable value exceeds cost, the excess is ignored and no unrealised gain is recognised. The asymmetry is deliberate and its justification is the asymmetry of consequences: overstated profit leads to distributions that cannot be recovered, so the enterprise's capital is eroded, whereas understated profit defers recognition without permitting anything irrecoverable to leave. The requirement to compare item by item rather than in aggregate exists for the same reason, since aggregation would let an anticipated gain offset a known loss.

Matching in depreciation. The entire existence of depreciation follows from matching. An asset is bought once but earns revenue across several periods. Charging its whole cost to the year of purchase would burden that year with a cost incurred for the benefit of many, and would leave later years reporting revenue with no charge for the asset that produced it — so both years' profits would be wrong. Depreciation spreads the depreciable amount across the periods that benefit. Matching also explains the choice between methods: where repair costs rise with age, the declining charge under WDV offsets the rising repairs, so the total annual cost of using the asset is more evenly matched against the revenue it generates than the constant charge of SLM would achieve.

Going concern in depreciation and inventory together. Going concern is the assumption that makes both of the above coherent. Depreciation carries the unexpired portion of an asset's cost forward as an asset, which is only meaningful if the enterprise will continue and use it; in a liquidation the relevant figure would be what the asset would fetch, not what remains unrecovered of its cost. Similarly, inventory is carried at cost when cost is lower than realisable value, on the assumption that it will be sold in the ordinary course of business at a normal margin — not in a forced sale. If going concern failed, both would move to a realisation basis, and a specialised machine or slow-moving stock might be worth very little.

Bank reconciliation and the accrual basis. Reconciliation is where the accrual basis meets the cash record. The cash book records transactions when the firm commits to them — a cheque is entered when issued, not when presented — because the commitment is what matters for the firm's own decisions. The bank records when it acts. Reconciliation exists precisely because two defensible timing conventions are applied to the same transactions, and the statement explains rather than eliminates the resulting difference.

The general lesson is that each rule in these three chapters is the answer to a question about measurement, and can be reconstructed from the concept rather than memorised — which is also why examiners ask for the justification as often as the rule.

Practice — Bank Reconciliation, Inventories & Depreciation

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