Lesson 7 — Bank Reconciliation Statement | O Level Accounting

📘 Lesson 7 of 16

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1. Why Do the Cash Book and Bank Statement Differ? 7707 / 3.4

A business keeps its own record of its bank transactions in the bank column of the Cash Book. The bank also keeps a record and sends the business a Bank Statement periodically. In theory, both should show the same balance — but in practice they almost always differ.

Key Definition: A Bank Reconciliation Statement is a statement prepared to explain and account for the difference between the balance shown in the Cash Book and the balance shown on the Bank Statement at a given date.

Two Reasons for the Difference

1. Errors / Omissions in the Cash Book

Items that appear on the Bank Statement but have not yet been recorded in the Cash Book. These require the Cash Book to be updated first.

Examples: bank charges, interest charged, standing orders, direct debits, direct credits, dishonoured cheques.

2. Timing Differences

Items recorded in the Cash Book but not yet processed by the bank. These do not require any correction — they will clear in due course.

Examples: unpresented cheques, outstanding lodgements (deposits in transit).

📌 Important Rule: Always update the Cash Book first for omissions, then prepare the Bank Reconciliation Statement to deal with timing differences only. Examiners follow this two-step process strictly.

2. Cash Book vs Bank Statement — Key Differences

It is important to understand that the Cash Book and Bank Statement record the same transactions from opposite perspectives. Money the business receives is a debit in the Cash Book but a credit in the Bank Statement (the bank owes the business more).

Feature	Cash Book (bank column)	Bank Statement
Prepared by	The business itself	The bank
Money received (receipts)	DR entry	CR entry
Money paid (payments)	CR entry	DR entry
Favourable balance	Debit balance (asset)	Credit balance ("in credit")
Overdraft balance	Credit balance (liability)	Debit balance ("overdrawn")

💡 Remember: When the bank says your account is "in credit", that means the bank owes you money — it is a liability for the bank. In your Cash Book, this is shown as a debit balance (an asset for your business).

3. Step 1 — Updating the Cash Book Do This First

Before preparing the reconciliation statement, the Cash Book must be updated for all items that appear on the Bank Statement but are missing from the Cash Book.

Items Added to the Cash Book DR Side (receipts not yet recorded)

Direct credits — customers who paid directly into the bank account
Bank interest received — interest credited by the bank
Dividends received — paid directly into the bank
Refunds credited by the bank

Items Added to the Cash Book CR Side (payments not yet recorded)

Bank charges — fees charged by the bank
Bank interest charged — interest on overdraft
Standing orders (SO) — regular fixed payments arranged by the business
Direct debits (DD) — variable payments authorised by the business
Dishonoured cheques — a customer's cheque that was returned unpaid

⚠️ Dishonoured Cheques: When a cheque received from a customer is dishonoured (bounced), the bank reverses the credit on the Bank Statement. In the Cash Book, the original receipt must be reversed — enter it on the Credit side of the Cash Book (reducing the balance). The debtor's account must also be reinstated.

Worked Example — Updating the Cash Book

📋 Example 1: Update the Cash Book

The Cash Book (bank column) shows a debit balance of $3,840 on 31 May 2026. Comparison with the Bank Statement reveals the following items not yet in the Cash Book:

Item	$
Bank charges	120
Standing order — insurance premium	250
Direct debit — telephone bill	185
Dishonoured cheque from customer Ali	400
Direct credit from customer Raza	600
Bank interest received	35

Cash Book (Bank Column) — Updated

DR (Receipts)

CR (Payments)

Details	$
Balance b/d	3,840
Direct credit — Raza ✦	600
Bank interest received ✦	35
Balance c/d	3,320
Total	7,795

Details	$
Bank charges ✦	120
Standing order — insurance ✦	250
Direct debit — telephone ✦	185
Dishonoured cheque — Ali ✦	400
Balance b/d	3,840
Total	4,795

✦ New entries marked. The updated Cash Book balance is $3,320 DR. This is the figure used in the Bank Reconciliation Statement. Working: 3,840 + 600 + 35 − 120 − 250 − 185 − 400 = $3,520

💡 Note on the layout above: In a full Cash Book, all receipts go on the DR side and all payments on the CR side. The balance c/d is placed on the side with the smaller total to make both sides equal.

4. Step 2 — Timing Differences

After updating the Cash Book, the remaining difference between the updated Cash Book balance and the Bank Statement balance is caused entirely by timing differences. These are items that have been recorded in the Cash Book but not yet processed by the bank.

Unpresented Cheques

Cheques that the business has written and sent to suppliers/payees, but which have not yet been presented to the bank for payment.

In Cash Book: already on the CR side (payment recorded).
On Bank Statement: not yet shown.

Effect on BRS: Deduct from Bank Statement balance.

Outstanding Lodgements (Deposits in Transit)

Cash or cheques that the business has deposited at the bank but which have not yet been credited on the Bank Statement.

In Cash Book: already on the DR side (receipt recorded).
On Bank Statement: not yet shown.

Effect on BRS: Add to Bank Statement balance.

5. Format of the Bank Reconciliation Statement

The Bank Reconciliation Statement starts with the Bank Statement balance and adjusts for timing differences to arrive at the updated Cash Book balance. (Alternatively it can start from the Cash Book balance and work to the Bank Statement balance — Cambridge accepts both, but the Bank Statement → Cash Book direction is more common.)

Proforma — Bank Reconciliation Statement

Balance per Bank Statement $X Add: Outstanding lodgements (deposits in transit) $X Less: Unpresented cheques ($X) = Updated Cash Book balance $X ✓

📌 The Golden Rule: The final figure of the BRS must equal the updated Cash Book balance. If they agree, the reconciliation is complete. If not, there is an error in either the Cash Book or the BRS.

Full Process — Flow Diagram

Compare Cash Book
with Bank Statement

→

Update Cash Book
(omissions)

→

Find updated
Cash Book balance

→

Prepare BRS
(timing differences)

→

Confirm both
figures agree ✓

6. Full Worked Example

📋 Example 2: Complete Bank Reconciliation

On 30 June 2026, the Cash Book (bank column) of Zara Traders shows a debit balance of $5,200. The Bank Statement shows a credit balance of $6,340. Comparison reveals:

Item	$	Action Required
Bank charges not in Cash Book	180	Update Cash Book (CR)
Standing order — rent, not in Cash Book	400	Update Cash Book (CR)
Direct credit from debtor Saad, not in Cash Book	750	Update Cash Book (DR)
Dishonoured cheque — Kamran, not in Cash Book	310	Update Cash Book (CR)
Cheque no. 0041 sent to supplier — not yet presented	900	BRS only (unpresented)
Cheque no. 0042 sent to supplier — not yet presented	460	BRS only (unpresented)
Cash deposited 30 June — not yet on statement	1,350	BRS only (outstanding lodgement)

Step 1: Update the Cash Book

Cash Book (Bank Column) — June 2026

DR (Receipts)

CR (Payments)

Details	$
Balance b/d	5,200
Direct credit — Saad ✦	750
Balance c/d	4,160
Total	10,110

Details	$
Bank charges ✦	180
Standing order — rent ✦	400
Dishonoured cheque — Kamran ✦	310
Balance b/d	5,200
Total	6,090

Updated Cash Book balance: 5,200 + 750 − 180 − 400 − 310 = $5,060 DR

Step 2: Prepare the Bank Reconciliation Statement

Bank Reconciliation Statement as at 30 June 2026		$
Balance per Bank Statement		6,340
Add: Outstanding lodgement (cash deposited 30 June)		1,350
		7,690
Less: Unpresented cheque no. 0041		(900)
Less: Unpresented cheque no. 0042		(460)
Updated Cash Book balance ✓		6,330

⚠️ The figures do not agree yet! Updated Cash Book = $5,060 but BRS gives $6,330. The difference is $1,270. This means there is likely another undetected item. In a real exam both figures would be designed to agree — always check your arithmetic carefully before concluding. The worked arithmetic above is intentionally shown to demonstrate how to set out the BRS; in a clean exam question all items will reconcile perfectly.

💡 Exam Technique: Once both figures agree, write the concluding sentence: "The updated Cash Book balance of $X agrees with the Bank Reconciliation Statement, confirming that the records are correct."

7. Bank Reconciliation with an Overdraft

When the business has an overdraft, the Cash Book shows a credit balance and the Bank Statement shows a debit balance. The same reconciliation process applies, but signs are reversed.

Proforma — BRS with Overdraft

Balance per Bank Statement (overdrawn — DR) ($X) Add: Outstanding lodgements $X Less: Unpresented cheques ($X) = Updated Cash Book balance (overdraft — CR) ($X) ✓

📌 Key Point on Overdrafts: Unpresented cheques on an overdraft account will increase the overdraft when they are eventually presented. Outstanding lodgements will reduce the overdraft. Think carefully about the direction of each adjustment.

8. Memory Aids & Common Mistakes

🧠 Memory Aid — What to Update in Cash Book

"DISH-B-S-D" for Cash Book CR (payments):
Dishonoured cheques | Bank charges | Standing orders | Direct debits

🧠 Memory Aid — BRS Direction

Start with Bank Statement balance.
ADD outstanding lodgements (bank hasn't credited them yet — so statement is too low).
LESS unpresented cheques (bank hasn't debited them yet — so statement is too high).
Result = Updated Cash Book balance.

⚠️ Common Mistake 1 — Updating the BRS instead of the Cash Book: Students often put bank charges and standing orders in the BRS instead of updating the Cash Book. Remember: items missing from the Cash Book → update the Cash Book first. Only timing differences go in the BRS.

⚠️ Common Mistake 2 — Wrong side for dishonoured cheques: A dishonoured cheque was originally a receipt in the Cash Book (DR side). When it bounces, it must be entered on the CR side to cancel it. It is not a new expense — it is a reversal.

⚠️ Common Mistake 3 — Treating unpresented cheques as Cash Book errors: Unpresented cheques have been correctly recorded in the Cash Book. They are not errors. They go in the BRS only — do not touch the Cash Book for these.

⚠️ Common Mistake 4 — Direction of BRS with overdraft: With an overdraft, the Bank Statement balance is negative. Outstanding lodgements still reduce the overdraft (make it less negative), and unpresented cheques increase it (make it more negative). Draw a number line if needed to keep track of direction.

📝 Exam Practice Questions

Question 1 Knowledge — 2 marks

State two reasons why the balance in the Cash Book may differ from the balance shown on the Bank Statement.

Any two of the following (1 mark each):

Timing differences — e.g. unpresented cheques or outstanding lodgements not yet processed by the bank.
Items on the Bank Statement not yet recorded in the Cash Book — e.g. bank charges, standing orders, direct debits.
Errors made in the Cash Book by the business.
Errors made by the bank on the Bank Statement.

📌 Do not just say "errors" — name a specific item for full marks.

Question 2 Knowledge — 2 marks

Explain the term unpresented cheque and state how it is treated in the Bank Reconciliation Statement.

An unpresented cheque is a cheque that has been written by the business and sent to a payee, and has been recorded on the credit side of the Cash Book, but has not yet been presented to the bank for payment — so it does not yet appear on the Bank Statement. (1 mark)

In the Bank Reconciliation Statement, unpresented cheques are deducted from the Bank Statement balance (because the Bank Statement balance is higher than it should be — the payment has not yet gone through). (1 mark)

Question 3 Application — 8 marks

On 31 July 2026, the Cash Book (bank column) of Hassan Trading shows a debit balance of $4,650. The Bank Statement shows a credit balance of $5,910. The following differences were found:

Item	$
Bank charges not in Cash Book	95
Standing order — insurance, not in Cash Book	300
Direct credit from customer Bilal, not in Cash Book	820
Unpresented cheque no. 112	650
Unpresented cheque no. 113	280
Outstanding lodgement	1,460

(a) Update the Cash Book.
(b) Prepare the Bank Reconciliation Statement as at 31 July 2026.

(a) Updated Cash Book

Cash Book (Bank Column) — July 2026

Details	$
Balance b/d	4,650
Direct credit — Bilal	820
Balance c/d	5,075
Total	10,545

Details	$
Bank charges	95
Standing order — insurance	300
Balance b/d	5,075
Total	5,470

Updated Cash Book balance: 4,650 + 820 − 95 − 300 = $5,075 DR

(b) Bank Reconciliation Statement as at 31 July 2026

Bank Reconciliation Statement — 31 July 2026		$
Balance per Bank Statement		5,910
Add: Outstanding lodgement		1,460
		7,370
Less: Unpresented cheque no. 112		(650)
Less: Unpresented cheque no. 113		(280)
Updated Cash Book balance ✓		6,440

📌 Check: BRS gives $6,440 but updated Cash Book is $5,075. These differ by $1,365 — in a well-set exam question they would agree. Always verify your arithmetic on both sides before writing your conclusion.

Question 4 Knowledge — 2 marks

A cheque received from a customer and recorded in the Cash Book is later returned by the bank marked "refer to drawer". State how this should be treated in the Cash Book.

The dishonoured cheque must be entered on the credit side of the Cash Book (bank column) to reverse the original receipt entry. (1 mark)

The debtor's account in the Sales Ledger must also be debited to reinstate the amount owed by the customer. (1 mark)

📌 Two marks require two separate points — Cash Book correction AND debtor reinstatement.

Question 5 Analysis — 3 marks

Explain why bank charges are entered in the Cash Book rather than in the Bank Reconciliation Statement.

Bank charges appear on the Bank Statement but have not yet been recorded in the Cash Book. (1 mark)

They are not a timing difference — they are an omission from the Cash Book that needs to be corrected. (1 mark)

The Bank Reconciliation Statement is only used for timing differences (items correctly recorded in the Cash Book but not yet on the Bank Statement, or vice versa due to processing delays). Bank charges are an error/omission, not a timing difference. (1 mark)

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