Bank Reconciliation Statement

Why the cash book and the pass book show different bank balances, how each cause moves them, and the reconciliation statement from either book, overdrafts included.

Key ideas

• A favourable bank balance is a debit balance in the cash book and a credit balance in the pass book; an overdraft is the reverse.
• Differences come from timing (cheques not yet presented or not yet credited) and from items the bank records first (charges, interest, direct deposits, standing instructions, dishonoured cheques).
• For each item ask one question: does it make the pass book show more or less than the cash book?
• Starting from the cash book balance, add what makes the pass book more: cheques issued but not presented, interest credited, direct deposits, dividends and bills collected by the bank.
• Starting from the cash book balance, subtract what makes the pass book less: cheques deposited but not credited, bank charges and commission, interest on a loan, standing-instruction payments, dishonoured cheques.
• Starting from the pass book, every sign is reversed; for an overdraft the signs are reversed again.
• Items known only to the bank can first be entered in the cash book to get the corrected balance, leaving only the timing items for the statement.

Remember

Watch out

• Adding cheques deposited but not yet credited: they are subtracted from the cash book balance.
• Forgetting to reverse the signs for an overdraft.
• Reading a credit balance in the pass book as an overdraft.

Worked example