How to prepare a bank reconciliation statement

Step by step

1. Update the cash book. Record items that are on the bank statement but missing from your cash book. Subtract bank charges and direct debits. Add bank interest and direct credits. This gives the corrected cash book balance.
2. Start from the corrected balance. Begin the bank reconciliation statement with the corrected cash book balance, not the original one.
3. Add unpresented cheques. Add cheques you have written and recorded, but which the bank has not yet paid out.
4. Subtract uncredited lodgements. Subtract amounts you have paid in and recorded, but which the bank has not yet added.
5. Compare with the bank statement. The final figure should equal the balance on the bank statement. If it does, the account reconciles.

Worked example

The corrected cash book balance is RM1,170. Unpresented cheques are RM300 and uncredited lodgements are RM500. The statement gives 1,170 + 300 − 500 = RM970, which should match the bank statement.

Understanding the method

The cash book is the business's own record of money in and out of the bank. The bank statement is the bank's record of the same account. They describe the same money, but they are written up at different times, so they rarely agree.

The reason is timing, not dishonesty. The business knows about a cheque the moment it writes it.

The bank only knows once the cheque is presented. In the same way, the bank knows about its charges at once, but the business learns of them when the statement arrives.

This gives two groups of items. The first group is already on the bank statement but not in the cash book: bank charges, interest, direct debits, standing orders, dishonoured cheques and credit transfers. These are real transactions, so you post them to the cash book first.

The second group is already in the cash book but not yet on the statement. It is made up of unpresented cheques and uncredited lodgements (money paid in but not yet added by the bank).

These are correct in the cash book, so you never change the cash book for them. They only appear on the reconciliation statement.

Here is a full example. The cash book shows a debit balance of RM4,280 and the bank statement shows RM3,650.

The statement includes bank charges of RM90 and a standing order of RM250 that the cash book lacks. It also shows a customer's credit transfer of RM520 that the cash book lacks.

Updated cash book: 4,280 − 90 − 250 + 520 = RM4,460. The bank statement is RM810 lower, so timing items must explain RM810. Suppose unpresented cheques are RM610 and an uncredited lodgement is RM1,420.

Start from the bank statement and work towards the cash book: 3,650 + 1,420 − 610 = RM4,460. This matches the updated cash book, so the account reconciles. If the figures had not matched, you would look for an error rather than force a balance.

Exam questions sometimes give you the bank statement balance and ask for the cash book balance. Then you travel the other way, so every addition and subtraction reverses. An overdraft just means the starting balance is a negative figure, so label each balance clearly.

Common mistakes include adjusting the cash book for unpresented cheques or uncredited lodgements, which are already correct. Another is treating a dishonoured cheque as a receipt that still stands. It must be removed, because the money never arrived.

If your reconciliation will not agree, check the direction of each item before looking for anything else. A good test for each item is whether it makes the bank's balance higher or lower than the business's balance.

If you are unsure which items to add and which to subtract, one of our teachers can work through a past-paper reconciliation with you step by step. Book a trial class

Related skills

• How to prepare a two-column cash book

The methods here are standard accounting practice, with original figures. For your exam board's exact requirements, see exam boards and Sources.