Bank Reconciliation Statement and Cash Book: Step by Step

Quick Answer: To reconcile the cash book with the bank statement or passbook, first update the bank column of the cash book for everything the bank has recorded and you have not (charges, standing orders, credit transfers, dishonoured cheques, interest) and correct your own errors. That gives the adjusted cash book balance. Then prepare the bank reconciliation statement from that balance, using only unpresented cheques, uncredited lodgements and bank errors to arrive at the bank statement balance.

Reconciling the cash book to the bank statement is a two-stage job. Stage one corrects the cash book so its bank balance is true. Stage two, the bank reconciliation statement, explains why that true balance still differs from the bank's figure on the same date. Separating the two stages keeps correcting entries out of the statement and makes every remaining difference a timing item.

The two records you are reconciling

The cash book is the book of prime entry for cash and bank transactions. In a two- or three-column cash book, the bank column records every cheque written, every lodgement paid in, and every transfer, on the day the business makes it. A debit balance on the bank column means money in the bank; a credit balance means an overdraft.

The bank statement, or the passbook that many banks in India and elsewhere still issue for savings and current accounts, is the bank's copy of the same account. Because the bank owes the money to you, its entries mirror yours: your receipts appear as credits, your payments as debits, and a healthy balance appears as a credit balance. A balance marked "Dr" or "OD" on the statement is an overdraft.

Remembering that mirror image prevents the most common exam slip, which is treating a "credit" on the passbook as if it meant the same thing as a credit in the cash book.

Why reconcile the cash book before preparing the statement?

You can prepare a bank reconciliation statement without touching the cash book. Some school exercises do exactly that, listing bank charges and direct credits on the statement itself. The trouble is that the cash book is still wrong afterwards, and the ledger, trial balance and final accounts that draw on it inherit the error.

India's NCERT Class 11 textbook describes both approaches and notes that "in practice, the bank reconciliation statement is prepared after adjusting the cash book balance" (NCERT Accountancy, Chapter 5). UK A-level and international AS-level questions usually expect the same order: write up an updated (adjusted) cash book, then the statement.

The rule for deciding where each item belongs is short:

• Goes in the adjusted cash book: anything the business has not yet recorded but should have, plus errors the business made.
• Goes on the bank reconciliation statement: anything the bank has not yet recorded but will, plus errors the bank made.

What goes in the adjusted cash book?

Typical items, grouped by which side of the bank column they hit:

Debit side (increase the balance)

• Credit transfers or BACS receipts paid directly into the account by customers
• Interest or dividends credited by the bank
• Correction of a receipt you under-recorded, or of a payment you over-recorded

Credit side (decrease the balance)

• Bank charges, commission and overdraft interest
• Standing orders and direct debits (insurance, rent, loan repayments)
• Customer cheques returned unpaid (dishonoured), which also reinstate the debtor
• Correction of a payment you under-recorded, or of a receipt you over-recorded

Each of these needs a double entry elsewhere in the books, for example bank charges to an expense account, or a dishonoured cheque back to the customer's receivable account.

Worked example: adjusted cash book, then the statement

Pembroke Supplies, a fictional trader, has a debit balance of £3,462 on the bank column of its cash book at 31 March. The bank statement for March closes at £3,119 in credit. Comparing the two reveals:

1. Bank charges of £27, not in the cash book
2. A standing order for insurance of £180, not in the cash book
3. A credit transfer of £640 from a customer, not in the cash book
4. A cheque for £215 from R. Okafor, paid in during March, returned dishonoured
5. A cheque to a supplier for £396 entered in the cash book as £369
6. Bank interest received of £8, not in the cash book
7. Cheques 1047 (£520) and 1051 (£188) sent to suppliers but not yet presented
8. Takings of £1,250 lodged on 31 March, credited by the bank on 2 April

Items 1 to 6 are things the business must record or correct. Items 7 and 8 are timing differences the bank will catch up on.

Stage one: the adjusted cash book (bank column)

The adjusted balance of £3,661 is the figure that goes into the trial balance and onto the statement of financial position.

Stage two: the bank reconciliation statement

The final line equals the bank's closing figure, so the records are reconciled. Notice how short the statement is once the cash book has been corrected: only items 7 and 8 appear.

How does the format change when you start from the passbook?

Some questions give you the passbook or bank statement balance and ask for the balance as per cash book. The method is the same, but every adjustment runs the other way. Using the Pembroke figures:

If the account is overdrawn, treat the overdraft as a negative number throughout. An overdraft of £900 per cash book with £300 of unpresented cheques becomes an overdraft of £600 per bank statement, because the bank has not yet paid those cheques.

Common mistakes in cash book reconciliation

• Putting bank charges on the statement as well as in the cash book. Once an item is in the adjusted cash book, it must not appear again on the statement.
• Forgetting last month's timing items. Unpresented cheques from February that cleared in March are ticked against March's statement, not left floating.
• Reversing the sign of an error correction. Work out the effect on the balance: £396 recorded as £369 means £27 too little was paid out, so the balance is overstated and must come down.
• Using the wrong date. Both balances must be at the same date as the statement heading.
• Treating a dishonoured cheque as a timing item. It is not going to clear; it must be written back in the cash book.

Getting the bank side into a form you can tick

Students work from a printed statement in the exam room. In practice, it is faster to tick items in a spreadsheet, sorted by amount, alongside the cash book. If your bank only gives you PDFs, a converter such as QuickBankConvert lists each statement line as a row and shows the statement period and the opening and closing balances above the preview, so you can confirm you are reconciling against the right figure before you start. Banks that offer a CSV download from online banking are just as good a source. For converting a statement yourself, see the PDF to Excel format page.

Related guides

• What is a bank reconciliation statement?: the document, its types and layouts.
• Book to bank reconciliation: the US "adjusted balance" framing of the same idea.
• Bank reconciliation example: a second worked case with practice question.
• Bank statement reconciliation guide: the procedure in accounting software.