Why is inventory valued at the lower of cost and net realisable value?

The prudence concept requires that profit and assets are not overstated, so inventory is valued at the lower of its cost and its net realisable value (the expected selling price less any costs to complete and sell it). If net realisable value has fallen below cost, the loss is recognised now rather than carried forward. Overvaluing inventory would overstate both profit and current assets.

What is a control account and what is it used for?

A control account is a summary account that mirrors the total of many personal accounts: the sales ledger control account totals the trade receivables, and the purchases ledger control account totals the trade payables. Its closing balance should equal the sum of the individual personal account balances, so it acts as an arithmetic check on the sales and purchases ledgers and helps locate errors.

Why must the cash book be updated before a bank reconciliation?

Some items appear on the bank statement before the business records them, such as bank charges, interest, direct debits, standing orders, and dishonoured cheques. The business only learns of these from the statement, so they must be entered in the cash book first. Updating the cash book gives the correct, adjusted cash book balance that the reconciliation then explains.

What is a bank reconciliation statement?

A bank reconciliation statement explains the difference between the updated cash book balance and the bank statement balance. It adjusts for timing differences the bank has not yet processed: unpresented cheques (paid by the business but not yet cleared) and uncredited deposits (paid in but not yet credited). After these adjustments the two balances agree.

What is the difference between an unpresented cheque and an uncredited deposit?

An unpresented cheque is one the business has written and recorded in the cash book, but which the payee has not yet presented, so the bank has not yet deducted it. An uncredited deposit (a deposit in transit) is money the business has paid in and recorded, but which the bank has not yet added to the account. Both are timing differences resolved in the bank reconciliation statement.

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Inventory valuation and bank reconciliation: O-Level Principles of Accounts (SEAB/Cambridge 7087), covering valuing inventory at the lower of cost and net realisable value, sales and purchases ledger control accounts, updating the cash book for items on the bank statement, and preparing a bank reconciliation statement

An O-Level Principles of Accounts (SEAB 7087) overview of inventory valuation and bank reconciliation: valuing inventory at the lower of cost and net realisable value, sales and purchases ledger control accounts, updating the cash book, and preparing a bank reconciliation statement.

Generated by Claude Opus 4.87 min readSEAB-7087Updated 2026-06-13

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

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Checking the figures that matter most
Inventory valuation and control accounts
Updating the cash book and reconciling
Check your knowledge

Checking the figures that matter most

Two figures in the accounts are easy to get wrong and important to get right: the value of inventory and the bank balance. This module of O-Level Principles of Accounts (SEAB/Cambridge 7087) covers the controls around them. Inventory is valued prudently, the personal ledgers are checked with control accounts, and the bank balance is verified by updating the cash book and preparing a reconciliation. The 7087 papers test the bank reconciliation and control accounts as standard, so the routines here are well worth drilling.

This guide links the four dot points of the module. The subject hub is at /sg-o-level/accounting and the syllabus index at /sg-o-level/accounting/syllabus.

Inventory valuation and control accounts

The inventory valuation dot point explains the lower of cost and net realisable value rule and its effect on profit. The control accounts dot point shows how the sales ledger and purchases ledger control accounts summarise the personal accounts and check their totals.

Updating the cash book and reconciling

The updating the cash book dot point covers the items (bank charges, interest, direct debits, standing orders and dishonoured cheques) that must be entered before reconciling. The bank reconciliation statement dot point then explains the remaining timing differences (unpresented cheques and uncredited deposits) to make the two balances agree.

Inventory valuation, then a bank reconciliation

step 1: value inventory line by line

Line A: cost $\text{S\textdollar}3{,}000$ , net realisable value $\text{S\textdollar}3{,}500$ , so take cost $\text{S\textdollar}3{,}000$ . Line B: cost $\text{S\textdollar}2{,}000$ , net realisable value $\text{S\textdollar}1{,}600$ , so take net realisable value $\text{S\textdollar}1{,}600$ .
Total inventory $= \text{S\textdollar}3{,}000 + \text{S\textdollar}1{,}600 = \text{S\textdollar}4{,}600$ .

step 2: update the cash book

The cash book balance is $\text{S\textdollar}5{,}200$ . The bank statement shows bank charges of $\text{S\textdollar}80$ not yet recorded.
Updated cash book balance $= \text{S\textdollar}5{,}200 - \text{S\textdollar}80 = \text{S\textdollar}5{,}120$ .

step 3: identify the timing differences

Unpresented cheques total $\text{S\textdollar}300$ ; an uncredited deposit is $\text{S\textdollar}700$ . The bank statement balance is $\text{S\textdollar}5{,}120 - \text{S\textdollar}700 + \text{S\textdollar}300 = \text{S\textdollar}4{,}720$ .

step 4: prepare the reconciliation

Start from the updated cash book balance $\text{S\textdollar}5{,}120$ ; deduct unpresented cheques $\text{S\textdollar}300$ and add the uncredited deposit $\text{S\textdollar}700$ is the wrong direction, so reconcile from the bank statement instead: bank statement balance $\text{S\textdollar}4{,}720$ , add uncredited deposit $\text{S\textdollar}700$ , deduct unpresented cheques $\text{S\textdollar}300$ , giving $\text{S\textdollar}4{,}720 + \text{S\textdollar}700 - \text{S\textdollar}300 = \text{S\textdollar}5{,}120$ , which agrees with the updated cash book. The balances now reconcile.

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 inventory and the concept it follows. (2 marks)
Inventory line X has a cost of $\text{S\textdollar}4{,}000$ and a net realisable value of $\text{S\textdollar}3{,}600$ . State the value to use and why. (2 marks)
State what the closing balance of a sales ledger control account should equal. (2 marks)
Name two items found on a bank statement that must be entered in the cash book before reconciling. (2 marks)
Distinguish between an unpresented cheque and an uncredited deposit. (2 marks)
A cash book balance is $\text{S\textdollar}4{,}000$ . Bank charges of $\text{S\textdollar}60$ and interest received of $\text{S\textdollar}20$ appear only on the bank statement. Calculate the updated cash book balance. (3 marks)

Solutions

Q1: Inventory is valued at the lower of cost and net realisable value, following the prudence concept, so that profit and assets are not overstated.
Q2: Use $\text{S\textdollar}3{,}600$ , the net realisable value, because it is lower than cost. Prudence requires the fall in value to be recognised now.
Q3: It should equal the total of the individual balances in the sales ledger (the total trade receivables).
Q4: Any two of: bank charges, interest, direct debits, standing orders, dishonoured cheques (also credit transfers received).
Q5: An unpresented cheque has been written and recorded by the business but not yet deducted by the bank. An uncredited deposit has been paid in and recorded but not yet added by the bank. Both are timing differences.
Q6: Updated cash book balance $= \text{S\textdollar}4{,}000 - \text{S\textdollar}60 + \text{S\textdollar}20 = \text{S\textdollar}3{,}960$ . Bank charges reduce the balance and interest received increases it.

Sources & how we know this

Principles of Accounts (Syllabus 7087) — Singapore Examinations and Assessment Board (2026)
Singapore-Cambridge GCE Ordinary Level (joint SEAB and Cambridge examination) — Singapore Examinations and Assessment Board / Cambridge Assessment International Education (2026)