How is closing inventory valued?

Closing inventory is valued at the lower of cost and net realisable value, applied to each line of inventory separately. Cost is what was paid for the goods; net realisable value is the expected selling price less any costs to sell. Taking the lower follows the prudence concept, recognising likely losses early and never overstating assets or profit. Because closing inventory reduces cost of sales, overvaluing it would overstate profit.

Why does the cash book balance differ from the bank statement?

The two differ for two main reasons. First, some items appear on the bank statement before they reach the cash book, such as bank charges, standing orders, direct debits, interest and dishonoured cheques; these are corrected by updating the cash book. Second, timing differences remain, such as unpresented cheques the business has written but the bank has not yet paid, and uncredited deposits the business has banked but the bank has not yet processed.

What is updating the cash book?

Before reconciling, the cash book is brought up to date for items the bank recorded first. Bank charges, standing orders and direct debits are payments, entered on the credit side. Interest received and direct credits are receipts, entered on the debit side. A dishonoured cheque is credited to reverse the receipt that was originally recorded. This gives the corrected cash book balance, which starts the bank reconciliation statement.

What is a bank reconciliation statement?

A bank reconciliation statement explains the remaining difference between the corrected cash book balance and the bank statement balance, caused by timing. Starting from the corrected cash book balance, you add unpresented cheques and subtract uncredited deposits to arrive at the bank statement balance. These are temporary differences, not errors, and they clear once the bank catches up.

What are unpresented cheques and uncredited deposits?

An unpresented cheque is one the business has written and recorded but the recipient has not yet paid into their bank, so the bank balance is temporarily higher than the cash book. An uncredited deposit is money the business has banked and recorded but the bank has not yet processed, so the bank balance is temporarily lower. Both are timing differences that appear on the bank reconciliation statement.

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Inventory valuation and bank reconciliation: N(A)-Level Principles of Accounts (SEAB 7086), covering valuing closing inventory at the lower of cost and net realisable value, updating the cash book, and preparing a bank reconciliation statement

An N(A)-Level Principles of Accounts (SEAB 7086) overview of inventory valuation and bank reconciliation: valuing closing inventory at the lower of cost and net realisable value under the prudence concept, updating the cash book for items the bank recorded first, and preparing a bank reconciliation statement for unpresented cheques and uncredited deposits.

Generated by Claude Opus 4.87 min readSEAB-7086Updated 2026-06-13

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this module trains
Inventory valuation
Updating the cash book
The bank reconciliation statement
Check your knowledge

What this module trains

Two practical checks keep a sole trader's accounts honest: valuing the goods left unsold sensibly, and proving that the cash book agrees with the bank. N(A)-Level Principles of Accounts (SEAB 7086) tests both. This module shows you how to value closing inventory under the prudence concept, how to update the cash book for items the bank saw first, and how to prepare a bank reconciliation statement for the timing differences that remain.

This guide links the three dot points of the module, each with its own page and practice, and connects back to the books of prime entry and ledgers where the cash book is introduced. The subject hub is at /sg-n-level/accounting and the syllabus index at /sg-n-level/accounting/syllabus.

Inventory valuation

The inventory valuation dot point shows how to value closing inventory at the lower of cost and net realisable value, line by line, following the prudence concept. Because closing inventory reduces cost of sales, getting this figure right keeps profit honest.

Updating the cash book

The updating the cash book dot point covers the items the bank records first: bank charges, standing orders and direct debits (payments, credit side), interest and direct credits (receipts, debit side), and dishonoured cheques (credited to reverse the original receipt). Updating these gives the corrected cash book balance.

The bank reconciliation statement

The bank reconciliation statement dot point explains the remaining timing differences and how to lay them out.

Updating the cash book, then reconciling

step 1: start with the cash book balance

The cash book shows a debit balance of $\text{S\textdollar}3{,}000$ at the bank before any adjustment.

step 2: update for items on the bank statement

The bank statement shows bank charges of $\text{S\textdollar}50$ (a payment, credit the cash book) and interest received of $\text{S\textdollar}30$ (a receipt, debit the cash book).
Corrected cash book balance $= \text{S\textdollar}3{,}000 - \text{S\textdollar}50 + \text{S\textdollar}30 = \text{S\textdollar}2{,}980$ .

step 3: identify the timing differences

An unpresented cheque of $\text{S\textdollar}400$ has been written but not yet paid by the bank, and an uncredited deposit of $\text{S\textdollar}200$ has been banked but not yet processed.

step 4: prepare the reconciliation

Start from the corrected cash book balance $\text{S\textdollar}2{,}980$ ; add the unpresented cheque $\text{S\textdollar}400$ ; subtract the uncredited deposit $\text{S\textdollar}200$ . Bank statement balance $= \text{S\textdollar}2{,}980 + \text{S\textdollar}400 - \text{S\textdollar}200 = \text{S\textdollar}3{,}180$ . The statement now agrees with the bank.

Inventory valuation and bank reconciliation are two practical checks in N(A)-Level Principles of Accounts (SEAB 7086). Closing inventory is valued at the lower of cost and net realisable value, line by line, following the prudence concept, because it reduces cost of sales and overvaluing it overstates profit. The cash book is first updated for items the bank recorded earlier: bank charges, standing orders and direct debits as payments, interest and direct credits as receipts, and dishonoured cheques credited to reverse the receipt, giving the corrected cash book balance. The bank reconciliation statement then explains the remaining timing differences: starting from the corrected cash book balance, add unpresented cheques and subtract uncredited deposits to reach the bank statement balance. These differences clear once the bank catches up.

Check your knowledge

A mix of recall and calculation questions across the module. Work each fully, then check against the solutions.

State the rule for valuing closing inventory and the concept it follows. (2 marks)
A line of inventory cost $\text{S\textdollar}700$ but can now be sold for only $\text{S\textdollar}500$ . State the value to use and why. (2 marks)
State whether each updates the cash book on the debit or credit side: bank charges; interest received; a standing order. (3 marks)
Explain the effect of an unpresented cheque on the bank balance compared with the cash book. (2 marks)
A corrected cash book balance is $\text{S\textdollar}4{,}000$ . Unpresented cheques are $\text{S\textdollar}600$ and uncredited deposits are $\text{S\textdollar}250$ . Calculate the bank statement balance. (3 marks)
Explain why a dishonoured cheque is credited in the cash book. (2 marks)

Solutions

Q1: Closing inventory is valued at the lower of cost and net realisable value, applied to each line separately. It follows the prudence concept.
Q2: Value the line at $\text{S\textdollar}500$ , its net realisable value, because it is lower than the cost of $\text{S\textdollar}700$ . The prudence concept means the likely loss is recognised now and the asset is not overstated.
Q3: Bank charges: credit side (a payment). Interest received: debit side (a receipt). A standing order: credit side (a payment).
Q4: An unpresented cheque has been recorded in the cash book but not yet paid by the bank, so the bank balance is temporarily higher than the cash book balance until the cheque is presented.
Q5: Bank statement balance $= \text{S\textdollar}4{,}000 + \text{S\textdollar}600 - \text{S\textdollar}250 = \text{S\textdollar}4{,}350$ (add unpresented cheques, subtract uncredited deposits).
Q6: A dishonoured cheque is one that was received and recorded as a receipt (a debit) but then bounced. Crediting the cash book reverses that receipt, because the money was never actually received.

Sources & how we know this

Principles of Accounts (Syllabus 7086) — Singapore Examinations and Assessment Board (2026)