IGCSE Accounting Ch 8: Bank Reconciliation

Chapter 8

Bank Reconciliation

Bank reconciliation explains why the bank balance in the business's cash book may differ from the balance shown by the bank statement. This chapter focuses on comparing the two records, updating the cash book first, and then preparing the bank reconciliation statement.

Bank statementUpdate cash bookDirect debitStanding orderUnpresented chequesUncredited depositsBank overdraftErrors

Bank reconciliation process showing compare, update cash book, identify timing differences and prepare reconciliation

Topic 1: Bank statement and reconciliation purpose

Start by understanding the two records being compared and why they may not agree.

1. Bank Statement

A bank statement is a copy of the business's bank account as shown in the bank's records.

It shows transactions such as:

money deposited
cheques paid
bank charges
interest
direct debits
standing orders
bank transfers

The bank normally sends statements to customers at regular intervals.

2. Why Do the Cash Book and Bank Statement Differ?

The bank balance in the cash book may not agree with the balance on the bank statement because:

the bank has recorded transactions that the business has not yet recorded
the business has recorded transactions that the bank has not yet recorded
errors may have been made by the business or the bank

This is why a bank reconciliation is prepared.

3. Bank Reconciliation

A bank reconciliation statement explains the difference between:

the balance in the updated cash book
the balance on the bank statement

Important Order

Step 1 → Update the cash book

Step 2 → Prepare the bank reconciliation statement

Topic 2: Updating the cash book

Before preparing the reconciliation statement, bank statement items not yet recorded by the business must be entered in the cash book.

4. Items Used to Update the Cash Book

The bank statement may contain transactions that the business has not yet entered. These must first be entered in the cash book.

Items that DECREASE the bank balance

Enter on the credit side of the cash book:

bank charges
bank interest paid
direct debits
standing orders
dishonoured cheques

Items that INCREASE the bank balance

Enter on the debit side:

interest received
dividends received
credit transfers received

Example:
Cash book balance = $4,000
Bank statement shows:

Interest received = $100
Bank charges = $50
Direct debit = $300

Updated balance:
$4,000 + $100 − $50 − $300 = $3,750

Items that increase and decrease the cash book bank balance

5. Direct Debit and Standing Order

Direct Debit

An arrangement allowing another organisation to take money from the business bank account.

The amount may change.

Example:
Monthly electricity bill:

January = $300
February = $340
March = $280

Standing Order

An instruction to the bank to pay a fixed amount regularly.

Example:
Loan repayment of $500 every month.

Standing order = fixed amount
Direct debit = amount may vary

6. Dishonoured Cheque

A dishonoured cheque is a cheque received from a customer which the bank refuses to pay.

Example:
Ali owes the business $600 and pays by cheque.
The cheque is deposited but later dishonoured.

The bank balance must be reduced:

CrBank$600

Ali once again owes the business:

DrAli$600

Topic 3: Timing differences and reconciliation statement

Some items are already correct in the cash book but have not yet appeared in the bank statement.

7. Unpresented Cheques

An unpresented cheque is a cheque issued by the business which has already been recorded in the cash book but has not yet been presented to the bank for payment.

Example:
The business sends a supplier a cheque for $800 on 30 June.
The business records the payment immediately.
However, the supplier does not present the cheque to the bank until July.

Therefore:

Cash book already includes the $800 payment
Bank statement does not yet include it

8. Uncredited Deposits

An uncredited deposit is money or a cheque already entered in the cash book and deposited into the bank, but which has not yet appeared on the bank statement.

Example:
A cheque for $1,000 is received from a customer and deposited on 31 December.
The business records the $1,000 immediately.
The bank does not process it until 2 January.

Therefore:

Cash book includes $1,000
Bank statement does not yet include $1,000

Unpresented cheques and uncredited deposits as timing differences

9. Do Unpresented Cheques and Uncredited Deposits Update the Cash Book?

No.
They have already been entered correctly in the cash book.

They are used in the bank reconciliation statement, not entered again.

This is a very important examination point.

10. Preparing a Bank Reconciliation Statement

When starting with a normal debit balance in the updated cash book:

Balance as per updated cash book+ Unpresented cheques− Uncredited deposits= Balance as per bank statement

Example:
Updated cash book balance = $5,000
Unpresented cheques = $800
Uncredited deposits = $300
Bank statement balance:
$5,000 + $800 − $300 = $5,500

Bank Reconciliation Statement
Details	$
Balance as per updated cash book	5,000
Add: Unpresented cheques	800
Subtotal	5,800
Less: Uncredited deposits	(300)
Balance as per bank statement	5,500

This is the format demonstrated in the chapter.

11. Starting with the Bank Statement Balance

The reconciliation can also work backwards.

Balance as per bank statement+ Uncredited deposits− Unpresented cheques= Balance as per updated cash book

Example:
Bank statement = $5,500
Add uncredited deposits = $300
Less unpresented cheques = $800
Updated cash book:
$5,500 + $300 − $800 = $5,000

Bank reconciliation formulas from updated cash book and from bank statement

Topic 4: Opposite sides, overdrafts and errors

Students must recognise how the cash book and bank statement show the same balance from opposite viewpoints.

12. Cash Book vs Bank Statement – Opposite Sides

An important point:
A debit in the business's cash book normally appears as a credit on the bank statement.
A credit in the cash book normally appears as a debit on the bank statement.

Why?

The business sees money in the bank as an asset.

The bank sees that same money as an amount it owes to the business.

Cash book Dr ↔ Bank statement Cr
Cash book Cr ↔ Bank statement Dr

13. Bank Overdraft

A bank overdraft occurs when the business withdraws more money than it has in its bank account.

Example:
Bank balance = $500
Cheque payment = $900
New position:
$500 − $900 = −$400
The business therefore has an overdraft of $400.

An overdraft appears as:

credit balance in the cash book
debit balance on the bank statement

14. Errors

Error made by the business

The business must correct its cash book.

Example:
Cash received was actually $200, but the business entered $500.
Bank balance is overstated by:
$500 − $200 = $300
The cash book must be reduced by $300.

Error made by the bank

The business does not alter its cash book simply to copy the bank's mistake.

The bank should be informed, and the error is considered when reconciling the balances.

15. Quick Guide: Where Does Each Item Go?

Item	Update Cash Book?	Bank Reconciliation?
Bank charges	Yes	No
Direct debit	Yes	No
Standing order	Yes	No
Interest received	Yes	No
Dividends received	Yes	No
Credit transfer received	Yes	No
Dishonoured cheque	Yes	No
Business cash-book error	Yes	No
Unpresented cheque	No	Yes
Uncredited deposit	No	Yes
Bank error	No cash-book correction	Yes

Quick guide showing whether bank reconciliation items update the cash book or the reconciliation statement

Topic 5: Key terms and process to remember

Finish the chapter by memorising the definitions and the exact reconciliation process.

Key Terms

Bank statement

Copy of the business's account in the bank's records.

Bank reconciliation statement

Statement explaining the difference between the updated cash book and bank statement balances.

Unpresented cheque

Cheque issued but not yet presented to the bank.

Uncredited deposit

Deposit recorded in the cash book but not yet recorded by the bank.

Direct debit

Payment taken from the bank account, often for a variable amount.

Standing order

Regular payment of a fixed amount.

Dishonoured cheque

Cheque rejected by the bank.

Bank overdraft

Amount withdrawn beyond the available bank balance.

Remember the Process

Compare cash book with bank statement.
Update the cash book for bank charges, direct debits, standing orders, interest, dividends, transfers, dishonoured cheques and cash-book errors.
Find the new cash book balance.
Prepare the bank reconciliation using mainly unpresented cheques, uncredited deposits and bank errors.

For a normal positive balance:Updated Cash Book + Unpresented Cheques − Uncredited Deposits = Bank Statement