Principles of Accounting — Cash and Trade Receivables: Bank Reconciliation and Expected Credit Losses

Cash and trade receivables are the assets at the last stage of operations. Cash looks unambiguous, yet the company’s books and the bank balance easily diverge; receivables carry no guarantee of full collection. This chapter covers how to present the two assets at their correct balance and at the amount expected to be collected.

1. The scope of cash and cash equivalents

Cash and cash equivalents in the statement of financial position include cash on hand, demand deposits and cash equivalents: assets readily convertible to known amounts of cash without significant transaction costs and subject to an insignificant risk of changes in value. Typically these are debt securities or time deposits with a maturity of three months or less from the date of acquisition (K-IFRS 1007, IAS 7).

A time deposit with two months to maturity when acquired: a cash equivalent.
A time deposit with one year to maturity when acquired and two months left at the reporting date: not a cash equivalent but a short-term financial instrument. The test is maturity from the date of acquisition.
Equity instruments (shares): in principle not cash equivalents, because their prices fluctuate.
Restricted deposits (such as deposits pledged as collateral): classified separately according to the restriction period and disclosed in the notes.

2. Bank reconciliation

It is common for the deposit balance in the company’s books at month-end to differ from the bank statement. A bank reconciliation adjusts each balance to the correct balance so that the two agree.

A. Causes of differences

Causes of differences and the side to adjust
Cause	Example	Side to adjust
Deposits in transit	Deposited at month-end but processed by the bank next month	Add to bank balance
Outstanding cheques	Cheques issued by the company but not yet presented to the bank	Deduct from bank balance
Bank charges	Charges withdrawn without notice to the company	Deduct from book balance
Collections and interest	Notes collected by the bank, deposit interest	Add to book balance
Dishonoured cheques	A customer's cheque recorded as deposited bounces	Deduct from book balance
Recording errors	An amount miscopied	The side where the error arose

B. Reconciling with numbers

At the end of September, the company’s book balance is ₩45.2 million and the bank balance ₩48 million. On checking, there are deposits in transit of ₩3 million, outstanding cheques of ₩4.5 million, bank charges of ₩20,000, a collection of ₩1.2 million and a customer’s dishonoured cheque of ₩380,000. The company also finds that a cheque of ₩3.3 million issued to a supplier was recorded in the books as ₩3.8 million.

Bank reconciliation (unit: ₩10,000)
Bank side	Amount	Book side	Amount
Balance per bank	4,800	Balance per books	4,520
+ Deposits in transit	300	+ Collection	120
− Outstanding cheques	(450)	+ Correction of cheque error	50
		− Bank charges	(2)
		− Dishonoured cheque	(38)
Correct balance	4,650	Correct balance	4,650

The cheque error overstated a payment by ₩500,000, so the book balance was understated by ₩500,000; hence ₩500,000 is added on the book side. Before the recording error was found, the two sides stood at 4,650 and 4,600, a difference of ₩500,000. The size and direction of a remaining difference are clues for finding errors: if the book side is lower, suspect a missing deposit or an overstated payment first.

Once reconciled, the company journalizes only the book-side items: the collection 120, the error correction 50, the charges 2 and the dishonoured cheque 38. The dishonoured cheque is recorded as Dr trade receivables 38 / Cr deposits 38, reinstating the claim on the customer. Bank-side items (deposits in transit, outstanding cheques) are not journalized, because the bank will reflect them in time.

3. Trade receivables and expected credit losses

A. The principle of the loss allowance

Trade receivables are presented at the amount expected to be collected. K-IFRS 1109 (IFRS 9) uses an expected credit loss model: an allowance is built for losses expected in the future, not only those already incurred. For trade receivables without a significant financing component, the simplified approach measures lifetime expected credit losses from the start.

B. The provision matrix

In practice, loss rates by ageing band are set from historical collection experience adjusted for current conditions and forecasts, and applied to the balance in each band.

Loss allowance by ageing analysis (31 December, unit: ₩10,000)
Days past due	Balance	Expected loss rate	Expected credit loss
Not past due	6,000	1%	60
1–30 days	2,000	4%	80
31–90 days	1,200	10%	120
91–180 days	500	30%	150
Over 180 days	300	60%	180
Total	10,000		590

Impairment loss (bad debt expense) for the year

\text{Impairment loss} = \text{Required closing allowance} - (\text{Opening allowance} - \text{Write-offs} + \text{Recoveries of amounts written off})

With an opening allowance of ₩5 million, write-offs of ₩3.2 million and recoveries of ₩200,000, the balance before provision is ₩2 million. The ₩3.9 million difference from the required ₩5.9 million is recognized as impairment loss.

4. Entries for write-offs and recoveries

Write-off: when a customer’s bankruptcy makes ₩3.2 million of receivables uncollectible, Dr loss allowance 320 / Cr trade receivables 320. This uses an amount already estimated as an expense, so profit does not change at this point.
Recovery of an amount written off: if ₩200,000 is later received, Dr cash 20 / Cr loss allowance 20. The allowance is reinstated and reflected in the year-end provision.
Year-end provision: Dr impairment loss 390 / Cr loss allowance 390.

The statement of financial position presents receivables of ₩100 million less a loss allowance of ₩5.9 million, a net ₩94.1 million expected to be collected.

Check your understanding

Company B’s closing receivables are ₩40 million not past due (loss rate 2%), ₩10 million 60 days past due (10%) and ₩5 million 200 days past due (50%). The opening loss allowance was ₩3 million, ₩1.5 million was written off during the year, and there were no recoveries. What are this year’s impairment loss and the net receivables at year-end?

The required allowance is $4{,}000 \times 2\% + 1{,}000 \times 10\% + 500 \times 50\% = 80 + 100 + 250 = 430$ (₩10,000), i.e. ₩4.3 million. The allowance before provision is $300 - 150 = 150$ , so the impairment loss is $430 - 150 = 280$ , i.e. ₩2.8 million. Net receivables are the gross ₩55 million less ₩4.3 million, or ₩50.7 million.

References

Korea Accounting Standards Board, K-IFRS 1007 Statement of Cash Flows (cash equivalents)
Korea Accounting Standards Board, K-IFRS 1109 Financial Instruments (5.5 Impairment, simplified approach)
Jerry Weygandt, Paul Kimmel and Donald Kieso, Financial Accounting with International Financial Reporting Standards, ch. 7–8