Chapter Outline Notes
VI. Controls of Purchases Discounts—Appendix 6B
A. Recording inventory purchases using net method provides
more control than gross method.
B. Gross method in a perpetual inventory system—records
the purchase (debit inventory, credit accounts payable) at
the gross amount and later reduces the inventory account
by the amount of the discount if invoice is paid within the
discount period. If the invoice is not paid within the
discount period the inventory account is not affected.
C. Net method in a perpetual inventory system—records
purchases (debit inventory, credit accounts payable) at net
amount and later records Discount Lost and increases
accounts payable if the invoice not paid within discount
period.
D. Discount Lost is an expense account and is brought to
management’s attention so they can seek to identify the
reason for discounts lost such as oversight, carelessness or
unfavorable terms.
E. Periodic inventory system differs from perpetual (under
either method) in that increases to inventory are recorded
in Purchases account and decreases to inventory for the
discount are recorded in Purchases Discount.
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VISUAL #6-1
BANK RECONCILIATION
Reasons for discrepancies between
bank statement balance and checkbook
balance: Handle as follows:
Unrecorded deposits Add to Bank Balance
Outstanding checks Deduct from Bank Balance
Bank service charges Deduct from Book Balance
Debit memos Deduct from Book Balance
Credit memos Add to Book Balance
NSF checks Deduct from Book Balance
Interest Add to Book Balance
Errors Must analyze individually
(bank errors affect bank
balance and book
errors affect book
balance)
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Alternate Demonstration Problem
Chapter 6
The Betsy Dough Company wants to prepare a bank reconciliation for the
month of June. When the bank statement for the month of June arrives
from the bank, the following steps are performed:
1. The deposits to the bank account, as recorded on the bank statement,
are compared to the deposit slips retained by the company. It is noted
2. Checks returned with the bank statement are compared to the checks
3. The ending balances on the statement and in the company’s books are
4. Other information contained on the bank statement, not previously
known to the company, is determined. This includes the following: (a) a
note of $180 plus $20 interest from a customer for a total of $200 has
5. A bank reconciliation is prepared; it does not balance! The difference is
$18, so a transposition error is looked for (whenever the difference is a
multiple of 9, there is a very good chance that there has been an
Required:
Prepare a bank reconciliation for the Betsy Dough Company at June 30,
20XX.
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Solution: Alternate Demonstration Problem
Chapter 6
BETSY DOUGH COMPANY
Bank Reconciliation
June 30, 20XX
Bank Statement
Bank statement balance………………………….….…….… $10,129
Add:
Deposit of June 30……………..….…….….….….…. 400
Depositor’s Books
Book balance of cash………………….….….….….…….…. $ 9,000
Add:
Proceeds of customer note collected
by bank……………………………………..…….…….….. 200
Error in recording Check No. 141…..….……..... 18
Adjusting entries Based on the Bank Reconciliation (made by depositor)
Cash………………………………………………………………. 218
Notes Receivable …………………………………………. 180
Interest Revenue ………………………………………….. 20
Advertising Expense ……………………………………… 18
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