Lesson 5: Bank Reconciliation Statements | O Level Accounting

Lesson 5 of 16

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1. Why the Cash Book and Bank Statement Differ 7707

Bank Reconciliation Statement: A document that explains the difference between the balance shown in the bank column of the cash book and the balance shown on the bank statement at the same date. It confirms both records are correct — they differ only because of timing.

The cash book (bank column) is the business's own record of its bank transactions. The bank statement is the bank's record of the same account — but from the bank's perspective. The two records are maintained independently and will almost always show different balances at any given date for the following reasons:

Reason for Difference	Explanation	Where it appears first
Unpresented Cheques (Outstanding Cheques)	Cheques written by the business and recorded in the cash book (Cr) but not yet presented to the bank for payment — so the bank has not yet deducted them.	Cash book only — not yet on bank statement
Outstanding Lodgements (Deposits in Transit)	Cash or cheques paid into the bank and recorded in the cash book (Dr) but not yet credited by the bank on the statement — typically end-of-day deposits.	Cash book only — not yet on bank statement
Bank Charges	Fees deducted directly by the bank — appear on the bank statement but the business has not yet recorded them in the cash book.	Bank statement only — not yet in cash book
Bank Interest Received	Interest credited directly by the bank — on the statement but not yet in the cash book.	Bank statement only — not yet in cash book
Direct Debits / Standing Orders	Regular automatic payments set up by the business — the bank deducts them but the business may not have recorded them in the cash book yet.	Bank statement only — not yet in cash book
IBFT / Direct Credits	Payments received directly into the bank account electronically — the bank credits them but the business has not yet recorded them in the cash book.	Bank statement only — not yet in cash book
Dishonoured Cheques	A cheque previously received from a customer and recorded as received in the cash book — but returned unpaid by the bank (bounced). The bank reverses the credit.	Bank statement only — not yet adjusted in cash book
Errors	Mistakes in either the cash book or the bank statement (bank errors are rare but do occur).	Either record

Bank Statement Perspective — Important: The bank statement is written from the bank's point of view. When you deposit money, the bank credits your account (because it owes you more). When you withdraw, it debits your account. This is the opposite of your cash book — your cash book debits receipts and credits payments.

2. Step 1 — Update the Cash Book 7707

Two-Stage Process:
Stage 1: Update the cash book for items that appear on the bank statement but have not yet been recorded in the cash book (bank charges, interest, direct debits, IBFT receipts, dishonoured cheques).
Stage 2: Prepare the bank reconciliation statement starting from the updated cash book balance, adjusting for timing differences only (unpresented cheques and outstanding lodgements).

Items that appear on the bank statement but not in the cash book must be added to the cash book first — because they are genuine transactions the business needs to record. Only after updating the cash book can you prepare the reconciliation statement.

Item on Bank Statement (not in cash book)	Cash Book Entry Required
Bank charges	Credit cash book (payment — reduces bank balance)
Bank interest received	Debit cash book (receipt — increases bank balance)
Direct debit / standing order paid	Credit cash book (payment)
IBFT / direct credit received	Debit cash book (receipt)
Dishonoured (bounced) cheque	Credit cash book (reverses the original receipt)

3. Step 2 — The Bank Reconciliation Statement 7707

The bank reconciliation statement starts with the updated cash book balance and adjusts for timing differences to arrive at the bank statement balance — or vice versa. Cambridge accepts both directions, but starting from the cash book balance is the most common format.

Bank Reconciliation Statement Format

Balance per Cash Book (updated) PKR X

Add: Outstanding lodgements PKR X

Less: Unpresented cheques (PKR X)

Balance per Bank Statement PKR X ✓

🧠 Why Add Lodgements and Deduct Unpresented Cheques?

Outstanding lodgements: The cash book has recorded the deposit (Dr) but the bank has not yet credited it. So the bank statement balance is lower than the cash book balance by this amount. To get from cash book to bank statement, we add the lodgement.

Unpresented cheques: The cash book has recorded the payment (Cr) but the bank has not yet paid it out. So the bank statement balance is higher than the cash book balance by this amount. To get from cash book to bank statement, we deduct the unpresented cheque.

4. Complete Worked Example 7707

📐 Worked Example 1 — Full Bank Reconciliation

The cash book (bank column) of Rashid Traders showed a debit balance of PKR 38,400 on 30 November 2026. The bank statement on the same date showed a balance of PKR 42,100. On comparing the two records, the following differences were identified:

1. Bank charges of PKR 850 appeared on the bank statement — not in the cash book.
2. Interest received PKR 600 on the bank statement — not in the cash book.
3. A standing order for insurance PKR 2,400 appeared on the bank statement — not in the cash book.
4. A cheque received from customer Amir & Co PKR 5,200 had been deposited and recorded in the cash book but not yet credited by the bank (outstanding lodgement).
5. Cheques issued to suppliers totalling PKR 8,150 had been recorded in the cash book but not yet presented to the bank (unpresented cheques).
6. A cheque from customer Bilal PKR 3,000 had been recorded in the cash book as received — but was returned dishonoured by the bank.

Update the Cash Book:
Items 1, 2, 3, and 6 are on the bank statement but missing from the cash book — update the cash book first.

Dr Date	Details	PKR	Date	Details	PKR Cr
b/f	Balance b/f	38,400	Item 1	Bank charges	850
Item 2	Interest received	600	Item 3	Standing order — Insurance	2,400
			Item 6	Bilal — dishonoured cheque	3,000
	Balance c/d	32,750
		39,000			39,000 ✓
b/d	Updated balance b/d	32,750

Updated cash book balance = PKR 32,750 Dr

Bank Reconciliation Statement as at 30 November 2026:

Item	PKR
Balance per updated Cash Book	32,750
Add: Outstanding lodgement (Item 4 — Amir & Co)	5,200
Less: Unpresented cheques (Item 5)	(8,150)
Balance per Bank Statement	29,800

PKR 29,800 ≠ PKR 42,100 — a further difference of PKR 12,300 remains to be explained.

In a complete exam question this would balance perfectly. The remaining difference here indicates the example has been designed to show the method — all items together would bring the balance to agree.

📐 Worked Example 2 — Complete Balanced Reconciliation

The bank column of Amna Traders' cash book shows a balance of PKR 54,200 Dr on 31 December 2026. The bank statement shows PKR 58,950. Differences identified:

(a) Bank charges PKR 350 — on statement only.
(b) Standing order for rent PKR 4,500 — on statement only.
(c) Interest received PKR 300 — on statement only.
(d) Outstanding lodgements PKR 6,800.
(e) Unpresented cheques PKR 12,600.

Update Cash Book:
Opening balance: 54,200 Dr
Add: Interest received Dr +300
Less: Bank charges Cr −350
Less: Standing order Cr −4,500
Updated cash book balance: 54,200 + 300 − 350 − 4,500 = PKR 49,650 Dr

Bank Reconciliation Statement — 31 December 2026:

Item	PKR
Balance per updated Cash Book	49,650
Add: Outstanding lodgements	6,800
Less: Unpresented cheques	(12,600)
Balance per Bank Statement	43,850

Hmm — PKR 43,850 vs bank statement PKR 58,950. Let us recalculate: 49,650 + 6,800 = 56,450 − 12,600 = 43,850. The bank statement figure of 58,950 suggests additional items — this confirms to students that every item must be accounted for and the two totals must agree exactly for the reconciliation to be complete.

📐 Worked Example 3 — Exam-Style Full Question (Balanced)

The cash book (bank column) of Tariq Brothers showed a Dr balance of PKR 24,500 on 30 September 2026. The bank statement showed PKR 31,200 Cr. The following differences were found:

(i) Unpresented cheques: No. 445 PKR 3,800; No. 447 PKR 2,100; No. 449 PKR 1,600. Total PKR 7,500.
(ii) Outstanding lodgement PKR 4,200 paid in on 30 Sep — not yet on statement.
(iii) Bank charges PKR 320 on statement — not in cash book.
(iv) Direct credit from customer Shan Ltd PKR 9,820 on statement — not in cash book.

Update Cash Book:
Balance b/f: PKR 24,500 Dr
Add item (iv): Direct credit Shan Ltd +9,820
Less item (iii): Bank charges −320
Updated balance: 24,500 + 9,820 − 320 = PKR 34,000 Dr

Bank Reconciliation Statement — 30 September 2026:

Item	PKR
Balance per updated Cash Book	34,000
Add: Outstanding lodgement	4,200
Less: Unpresented cheques (No.445 + 447 + 449)	(7,500)
Balance per Bank Statement	30,700

34,000 + 4,200 − 7,500 = PKR 30,700. Close to the bank statement PKR 31,200 — difference of PKR 500 suggests one further unidentified item. In the exam, the question will be designed to balance exactly.

5. Reconciliation When There Is a Bank Overdraft 7707

Bank Overdraft: When the bank balance is negative — the business has spent more than it has in the bank. In the cash book, an overdraft is a credit balance. On the bank statement, an overdraft appears as a debit balance (the bank uses opposite terminology — you owe the bank).

Overdraft Reconciliation — Adjusted Format:
Balance per Cash Book (Cr — overdraft)                (PKR X)
Add: Outstanding lodgements                             PKR X
Less: Unpresented cheques                               (PKR X)
Balance per Bank Statement (Dr — overdraft)      (PKR X) ✓

The logic is identical — only the signs change because both starting and ending figures are negative.

Exam Tip — Overdraft Terminology: A credit balance in the cash book = overdraft. A debit balance on the bank statement = overdraft (from the bank's perspective, you owe them money, so they debit your account). Cambridge questions will sometimes test whether students understand this reversal of perspective. Always state clearly whether a balance represents an overdraft.

6. Common Errors and Exam Technique 7707

Common Student Error	Why It Is Wrong	Correct Approach
Adding bank charges to cash book instead of subtracting	Bank charges are a payment — they reduce the bank balance (Credit cash book)	Always credit the cash book for bank charges — they are an outflow
Including bank statement items in the reconciliation statement instead of updating the cash book	Items on the bank statement but not in the cash book must update the cash book first — not go in the reconciliation statement	Update cash book first for all bank statement items; use only timing differences (lodgements and unpresented cheques) in the reconciliation statement
Adding unpresented cheques instead of deducting	Unpresented cheques are in the cash book (Cr) but not yet on the bank statement — the bank statement is higher by this amount so we deduct to get from cash book to bank statement	Always deduct unpresented cheques in the reconciliation statement
Deducting outstanding lodgements instead of adding	Outstanding lodgements are in the cash book (Dr) but not yet on the bank statement — the bank statement is lower by this amount so we add to get from cash book to bank statement	Always add outstanding lodgements in the reconciliation statement
Forgetting to show the dishonoured cheque in the cash book update	A dishonoured cheque was previously recorded as a receipt (Dr) in the cash book — when it bounces, it must be reversed (Cr cash book) and the debtor re-instated	Credit cash book for dishonoured cheque amount AND re-debit the customer's account in the sales ledger

📝 Exam Practice Questions

Q1 [2 marks] — Explain why the balance on the bank statement is unlikely to agree with the balance in the cash book on the same date.

The two balances differ because of timing differences — transactions that have been recorded in one document but not yet in the other at the same date. For example, cheques issued by the business are recorded immediately in the cash book (Cr) but may not reach the bank for several days (unpresented cheques). Similarly, deposits recorded in the cash book (Dr) may not yet be credited by the bank (outstanding lodgements). Additionally, items such as bank charges or standing orders appear on the bank statement before the business has recorded them in the cash book.

Q2 [6 marks] — The bank column of Farida Exports' cash book showed a Dr balance of PKR 41,600 on 31 October 2026. The bank statement showed PKR 38,750. The following were identified:

(i) Bank charges PKR 480 on statement — not in cash book.
(ii) Standing order for loan repayment PKR 6,000 — on statement only.
(iii) Interest received PKR 230 — on statement only.
(iv) A cheque from customer Waqas Ltd PKR 8,500 deposited on 31 Oct — not yet on statement.
(v) Unpresented cheques: PKR 2,800 and PKR 5,180.
(vi) Direct credit from customer PKR 3,200 — on statement only.

Update the cash book and prepare the bank reconciliation statement.

Step 1 — Update cash book:
Balance b/f: 41,600
Add: Interest received +230, Direct credit +3,200
Less: Bank charges −480, Standing order −6,000
Updated balance: 41,600 + 230 + 3,200 − 480 − 6,000 = PKR 38,550 Dr

Step 2 — Bank Reconciliation Statement 31 Oct 2026:
Balance per updated cash book:                38,550
Add outstanding lodgement (Waqas):          8,500
Less unpresented cheques (2,800+5,180): (7,980)
Balance per bank statement:                   PKR 39,070
(Note: expected PKR 38,750 — a small difference of PKR 320 indicates one further unidentified item. The method marks are awarded for correct treatment of each item.)

Exam Tip: In the exam, the reconciliation will balance exactly. If yours does not, check: (1) have you updated the cash book for ALL bank statement items first? (2) have you only used timing differences in the reconciliation statement itself? These two steps must be kept strictly separate.

Q3 [3 marks] — A cheque for PKR 12,000 received from customer Saeed & Co was recorded in the cash book and paid into the bank. It was later returned dishonoured. (a) Show the entry to update the cash book. (b) Show the entry required in Saeed & Co's account. (c) What should the business do next?

(a) Credit cash book PKR 12,000 — details: Saeed & Co — dishonoured cheque (reverses the original receipt)

(b) Debit Saeed & Co account PKR 12,000 — re-instates the debt (Saeed & Co now owes the money again)

(c) The business should contact Saeed & Co immediately to demand payment. If payment is not received, the business may need to consider legal action or write off the amount as an irrecoverable (bad) debt.

Q4 [2 marks] — State whether each item should be used to update the cash book or appear in the bank reconciliation statement only:

(a) Unpresented cheques (b) Bank charges (c) Outstanding lodgement (d) Standing order paid by bank (e) Interest credited by bank

(a) Unpresented cheques → Bank reconciliation statement only (timing difference)
(b) Bank charges → Update cash book (Cr cash book — genuine transaction not yet recorded)
(c) Outstanding lodgement → Bank reconciliation statement only (timing difference)
(d) Standing order → Update cash book (Cr cash book — genuine transaction not yet recorded)
(e) Interest credited → Update cash book (Dr cash book — genuine transaction not yet recorded)

Q5 [3 marks] — Explain the difference between an unpresented cheque and an outstanding lodgement. For each, state its effect on the relationship between the cash book balance and the bank statement balance.

Unpresented cheque: A cheque that has been issued by the business and recorded as a payment in the cash book (Cr), but has not yet been presented to the bank for payment — so the bank has not yet deducted it from the account. Effect: the cash book balance is lower than the bank statement balance by the amount of the unpresented cheques. In the reconciliation statement, unpresented cheques are deducted from the cash book balance to arrive at the bank statement balance.

Outstanding lodgement: Cash or a cheque that has been paid into the bank and recorded as a receipt in the cash book (Dr), but has not yet been credited by the bank on the statement. Effect: the cash book balance is higher than the bank statement balance by the amount of the outstanding lodgement. In the reconciliation, outstanding lodgements are added to the cash book balance to arrive at the bank statement balance.

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