Common Mistakes

Common Mistakes: Accounting for Internal Control

This chapter brings together cash control, the Bank Reconciliation Statement and the Cash Budget. Candidates most often slip on debit-credit direction and the treatment of items. This guide lists the common mistakes and how to avoid them.

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Cash Control: confusing purpose with methods

Cash Book vs Bank Statement: misplacing items

Updating the Cash Book: debit and credit errors

Bank Reconciliation Statement: direction of signs and overdraft

Cash Budget: non-cash items and timing of flows

Mistake: including non-cash items such as depreciation, provision for doubtful debts, bad debts or discounts in the Cash Budget. Avoid: the Cash Budget records only actual cash inflows and outflows, so leave out all non-cash items.
Mistake: recording credit sales or purchases in the month of the transaction rather than the month cash is received or paid. Avoid: place receipts or payments in the month the cash is received or paid, according to the credit period given.
Mistake: not carrying a month's closing balance forward as the next month's opening balance. Avoid: closing balance = opening balance + total receipts − total payments, and that closing balance becomes the next month's opening balance.
Mistake: confusing the meaning of surplus and deficit and the actual-versus-expected comparison. Avoid: a surplus means receipts exceed payments in the period; actual receipts above expected are favourable, while actual payments above expected need to be controlled.

Item treatment: update the Cash Book or enter the Reconciliation Statement

Item	Update Cash Book?	In Reconciliation Statement?
Dividend / interest received directly by bank	Yes (debit)	No
Bank charges / overdraft interest	Yes (credit)	No
Standing order / direct credit	Yes	No
Dishonoured cheque	Yes (credit)	No
Unpresented cheque	No	Yes
Deposit in transit / uncredited cheque	No	Yes
Error in the Cash Book	Yes (correct it)	No
Error made by the bank	No	Yes

Items that update the Cash Book are not repeated in the Reconciliation Statement; only timing differences and bank errors remain.

How do I know whether to update the Cash Book or put an item into the Reconciliation Statement?

Ask: has the business not yet recorded it? If the item is already known to the bank but not yet in the Cash Book (dividend, bank charges, dishonoured cheque, standing order), update the Cash Book. If both sides will eventually record it but at different times (unpresented cheque, deposit in transit), it only goes into the Reconciliation Statement.

Which items must never be included in a Cash Budget?

All non-cash items: depreciation, provision for doubtful debts, bad debts, discount allowed and discount received, and profit or loss on disposal. A Cash Budget records only cash actually received and paid in the relevant month.

How do I handle an overdraft in the Bank Reconciliation Statement?

Treat the overdraft as a negative balance. If you start from an overdrawn Cash Book balance, reverse the usual operations: a step that normally adds now subtracts and vice versa. Show overdraft figures in brackets so the examiner can see your sign direction clearly.

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