Why do the balances differ?
The bank balance in a business's cash book is rarely the same as the balance on the bank statement at the same date. A bank reconciliation statement is the document that explains the difference so the two records can be matched. Differences arise from timing and from entries known to only one party.
Both records are correct in their own way; they simply capture events at slightly different times. The reconciliation therefore does not change the true bank balance — it explains the gap and confirms that no receipt or payment has been lost, duplicated or entered wrongly by either the business or the bank.
Common causes
- Unpresented cheques — cheques written and recorded in the cash book but not yet cashed by the payee.
- Deposits in transit (uncredited deposits) — money banked and recorded but not yet credited by the bank.
- Bank charges and overdraft interest — deducted by the bank but not yet in the cash book.
- Standing orders and direct debits — automatic payments made by the bank.
- Direct credits — receipts collected straight by the bank (e.g. rent, interest).
- Dishonoured cheques — a customer's cheque rejected by the bank.
Key idea
The first step is to update the cash book for items only the bank knew about (charges, direct credits, standing orders, dishonoured cheques). The reconciliation statement then deals with timing items (unpresented cheques and deposits in transit).
Worked example
Example
Updated cash book balance RM3,500 (debit/positive). Unpresented cheques RM800; deposits in transit RM500.
Bank statement balance = RM3,500 + RM800 − RM500 = RM3,800.
Updating the cash book first
Before the statement is drawn up, the cash book must be corrected for every item the business had not yet recorded. Bank charges, standing orders and dishonoured cheques are entered on the credit side; direct credits and interest received are entered on the debit side. This corrected (adjusted) balance is the figure that should appear in the statement of financial position.
Remember
Moving from the cash book balance to the bank statement balance: add unpresented cheques, subtract deposits in transit. The direction reverses if you start from the bank balance.