A bank reconciliation explains why the cash book balance and the bank statement balance differ. You update the cash book for items the bank already knows about, then list the timing items that only one record has.
This lesson is part of SPM Accounting controls. The next lesson, tracing unmatched items without double counting, builds the sorting habit that keeps this method accurate.
Which records are being compared?
The cash book is the business’s own record of money going in and out of the bank. The bank statement is the bank’s record of the same account. A debit balance in the cash book means the business has money in the bank, and on the statement the same money shows as a credit balance.
The two records will differ whenever one of them has recorded an event that the other has not recorded yet.
Worked example: a gap of RM390
At the end of the month the cash book shows a balance of RM4 820. The bank statement shows RM5 210. These items explain the difference.
| Item | In cash book? | On statement? |
|---|---|---|
| Cheque RM640 to a supplier, not yet presented | Yes | No |
| Deposit RM300 made on the last day, not yet credited | Yes | No |
| Insurance direct debit RM120 | No | Yes |
| Customer credit transfer RM205 | No | Yes |
| RM35 for bank charges | No | Yes |
Step 1: update the cash book. Start with items the statement has but the cash book lacks. RM4 820 − RM35 − RM120 + RM205 = RM4 870.
Step 2: prepare the reconciliation statement. Begin with the updated cash book balance and adjust for the timing items.
| Bank reconciliation statement at month end | RM |
|---|---|
| Balance per updated cash book | 4 870 |
| Add: unpresented cheque | 640 |
| Less: deposit not yet credited | (300) |
| Balance per bank statement | 5 210 |
The result, RM5 210, matches the printed statement, so every difference is explained. The original gap was 5 210 − 4 820 = RM390. After the cash book update the two balances still differ by RM340 (5 210 − 4 870), and the timing items of 640 − 300 explain exactly that.
Why does each item go where it does?
The cheque has already left the business, so the cash book is right. The bank will deduct RM640 later, so the bank’s balance is RM640 higher than the cash book, and you add RM640 to the cash book figure.
The deposit works the other way. The cash book already counts the RM300, but the bank has not, so the bank’s balance is RM300 lower, and you deduct RM300. The bank charges, direct debit and credit transfer are already in the bank’s records, so the cash book is the one that is out of date and you correct it first.
The mistake that loses marks
The common slip is to adjust the cash book for the unpresented cheque and the uncredited deposit. The working looks tidy, but the cash book was right about both. Timing items never change the cash book.
Use one rule. If the bank statement has an item the cash book lacks, record it in the cash book. If the cash book has an item the statement lacks, it goes on the reconciliation statement only.
Check yourself
The cash book shows RM2 150 and the bank statement shows RM2 480. A dishonoured customer cheque of RM180 and RM25 of bank charges are on the statement only. The cash book has an uncredited deposit of RM200 and unpresented cheques totalling RM735. Find the updated cash book balance and show that the statement reconciles.
Answer
Updated cash book: RM2 150 − RM25 − RM180 = RM1 945. Both the charges and the dishonoured cheque are on the statement only, so the cash book is reduced.
Reconciliation: RM1 945 + RM735 (unpresented cheques) − RM200 (deposit not credited) = RM2 480. This agrees with the statement balance.
What to study next
Continue with preparing receivables and payables control accounts, which uses the same matching idea on ledger totals. Practise the direction of each entry with the debit-credit transaction trainer.
If you want a teacher to check your layout and reasoning question by question, see online one-to-one Accounting tuition.