Paper 2 Answering Technique
Paper 2 Answering Technique: Accounting for Internal Control
This chapter tests your skill in accurately preparing the Bank Reconciliation Statement and the Cash Budget in Paper 2. A well-organised answering technique helps you earn format marks and method marks even if there are small calculation slips.
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Understanding what the question asks
- Identify the real task: whether the question asks you to prepare the Bank Reconciliation Statement AFTER first updating the Cash Book, or WITHOUT updating the Cash Book. Key words such as "update the Cash Book" or "adjust" decide your approach.
- Underline the date, the opening balance, and which balance is given (the balance per Cash Book or the balance per Bank Statement), and whether it is a debit balance, credit balance or overdraft.
- Mark items that appear in only one record: unpresented cheques, uncredited deposits, bank charges, dividends or interest received directly, standing-order collections, and dishonoured cheques.
- For the Cash Budget, determine the period (number of months) and separate receipts (money in) from payments (money out) before you start writing.
Planning your answer and layout
- Sketch the correct format before entering figures: the Cash Book in two-column form (debit and credit), the Bank Reconciliation Statement vertically, and the Cash Budget in columns by month.
- Write the full heading of each statement: business name, type of statement, and the date or period. A complete heading often carries format marks.
- For the Bank Reconciliation Statement, state the starting point clearly ("Balance per Cash Book" or "Balance per Bank Statement") and use the labels "Add" and "Less" correctly.
- Arrange receipts and payments in a neat, consistent order for every month so the examiner can follow the flow of figures easily.
Technique: Bank Reconciliation Statement
- Updating method, Step 1: enter into the Cash Book the items the bank has recorded but the business has not. Debit the Cash Book for dividends/interest received directly and direct collections; credit the Cash Book for bank charges, dishonoured cheques and standing-order payments.
- Updating method, Step 2: obtain the updated Cash Book balance, then prepare the Bank Reconciliation Statement for timing differences only (unpresented cheques and uncredited deposits) until you arrive at the Bank Statement balance.
- Without-updating method: start from the original Cash Book balance and adjust ALL differences (unrecorded items and timing differences) in one statement until you reach the Bank Statement balance. Items that increase the Cash Book are added; items that decrease it are subtracted.
- Overdraft: an overdraft is a credit balance in the Cash Book. When starting from an overdraft, the add/less direction for unpresented cheques and uncredited deposits is opposite to that of a normal positive balance. Recheck the signs carefully.
Technique: Cash Budget
- Understand the terms: Receipts are the cash expected to come in; Payments are the cash expected to go out. A Surplus means receipts exceed payments, while a Deficit means payments exceed receipts.
- Include only actual cash flows. Exclude non-cash items such as depreciation, bad debts, and profit or loss on disposal of assets because they involve no movement of money.
- Carry the closing balance of one month forward as the opening balance of the next month. A mistake in carrying the balance is a common cause of losing marks across several months.
- Interpret the results when asked: actual receipts exceeding expected receipts show collections were better than expected; actual payments exceeding expected payments show over-spending that needs control.
Showing working for method marks
- Show short calculations for derived figures, for example receipts from debtors or interest, so that method marks are still awarded even if the final answer is wrong.
- Label every figure with its item; avoid "floating" figures with no description because the examiner must know where each value comes from.
- Write subtotals and carried-down balances clearly in the Cash Budget and make sure the debit and credit sides of the Cash Book balance.
- Keep RM and comma formatting consistent, and place figures in the correct column so vertical totals are easy to check.
Time management and final checking
- Allocate time according to the number of parts in the question and begin by drawing the format and heading to secure structure marks as early as possible.
- Cross-check: the ending balance of the Bank Reconciliation Statement must equal the given Bank Statement balance (or the reverse, depending on your starting point).
- Verify each closing balance of the Cash Budget by recomputing opening balance plus receipts less payments for that month.
- Do not over-erase; strike one line through an error and write the correction beside it so your work stays neat and legible.
| Particulars | RM |
|---|---|
| Balance per Cash Book (updated) | 5,000 |
| Add: Unpresented cheques | 800 |
| Less: Uncredited deposits | 300 |
| Balance per Bank Statement | 5,500 |
Figures are illustrative only. Items labelled "Less" are subtracted from the balance. The final balance must equal the given Bank Statement balance.
| Particulars | January (RM) | February (RM) |
|---|---|---|
| Opening balance (b/f) | 2,000 | 3,500 |
| Receipts | ||
| Cash sales | 3,000 | 3,200 |
| Receipts from debtors | 1,500 | 1,800 |
| Total receipts | 4,500 | 5,000 |
| Total cash available | 6,500 | 8,500 |
| Payments | ||
| Purchases | 2,000 | 2,500 |
| Salaries | 1,000 | 1,000 |
| Total payments | 3,000 | 3,500 |
| Closing balance (c/f) | 3,500 | 5,000 |
Figures are illustrative only. January's closing balance becomes February's opening balance. Non-cash items such as depreciation and bad debts are not included.
When do I use the "with updating" method versus the "without updating" method?
Follow the question's instruction. In the with-updating method, first correct the Cash Book for items the business has not recorded (bank charges, dividends received directly, dishonoured cheques), obtain the updated balance, then adjust timing differences in the Bank Reconciliation Statement. In the without-updating method, start from the original Cash Book balance and adjust all differences in one statement until you reach the Bank Statement balance.
Which items must not be included in the Cash Budget?
The Cash Budget records only actual cash flows. Exclude non-cash items such as depreciation, bad debts, and profit or loss on disposal of assets because they involve no receipt or payment of money.
How do I handle an overdraft in the Bank Reconciliation Statement?
An overdraft is a credit balance in the Cash Book. When you start from an overdraft, the add and less directions for unpresented cheques and uncredited deposits are reversed compared with a normal positive balance. Recheck each sign carefully so the ending balance matches the Bank Statement balance.
Other resources for this chapter
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