Bank reconciliation

• A bank statement is the bank’s copy of the business’s account, written from the bank’s point of view.
• Update the cash book for items first seen on the statement: bank charges, interest paid and received, credit transfers, direct debits, standing orders, dividends, and cash book errors.
• Then prepare a bank reconciliation statement for the timing differences and bank errors: unpresented cheques, uncredited deposits, errors by the bank.
• Purpose: to explain the difference, find errors and fraud, and confirm the correct bank balance for the statement of financial position.

Same account, opposite view

The bank statement lists the payments into and out of the account with a running balance. Because the business’s money is a liability of the bank, money in the account is shown as a credit balance on the statement, while the business shows it as a debit balance in its cash book. An overdraft is a debit balance on the statement and a credit balance in the cash book.

The two balances differ because of timing (items in one record but not yet in the other) and errors (by the business or by the bank).

Bring the business’s own record up to date first

Anything the bank has done that the business has not yet recorded is entered in the cash book, which is then re-balanced. Receipts go on the debit side, payments on the credit side. A cash book error is corrected by the difference.

Worked example

On 31 March 2025 Sami’s cash book showed a bank balance of $2,860 (debit). The bank statement showed: bank charges $45; a standing order for insurance $210; a direct debit for electricity $185; a credit transfer from a customer, J Musa, $640; dividends received $120. Sami also found that a cheque paid to a supplier for $378 had been entered in the cash book as $387. Update the cash book.

The updated balance of $3,189 is the figure for bank in the statement of financial position.

Explain the remaining difference

statement add deduct

Worked example