ACCA Applied Knowledge · Financial Accounting

Bank reconciliations: formula sheet

Full chapter guide

Key formulas

Reconciliation principle: Updated cash book balance = Bank statement balance + outstanding lodgements − unpresented cheques; Use this when the bank statement shows a positive (favourable) balance. For an overdraft, treat figures as negative.
Cash book adjustments: Adjusted cash book = Original cash book balance + items on the statement not in the cash book (credits) − items on the statement not in the cash book (debits); Direct credits, interest received and customer transfers increase it. Charges, interest paid, direct debits, standing orders and dishonoured cheques decrease it.
Timing differences: Unpresented cheques and outstanding lodgements need no cash book entry; They are already in the cash book. They appear only in the reconciliation.
Reconciling from the bank statement (asset balance): Adjusted bank balance = Balance per bank statement − Unpresented cheques + Outstanding lodgements; Use when the statement shows a positive (credit) balance, meaning the business has money at the bank.
Reconciling from the bank statement (overdraft): Adjusted overdraft = Overdraft per statement + Unpresented cheques − Outstanding lodgements; Treat the overdraft as a negative number and apply the same rule: subtract cheques, add lodgements. Then state the result as an overdraft if it is negative.
Timing difference rule: Unpresented cheques and outstanding lodgements need no cash book adjustment; They are already in the cash book. Only bank-side items such as charges, interest, direct debits and dishonoured cheques need cash book entries.
Result check: Adjusted statement balance = Updated cash book balance; After all adjustments the two balances must agree. If they do not, you have missed or mishandled an item.
Corrected cash book balance: Corrected balance = Original cash book balance + unrecorded receipts − unrecorded payments ± error corrections; This works for both a favourable (debit) balance and an overdrawn balance, as long as you enter an overdraft as a negative number.
Bank charges and interest paid: Dr Bank charges (or Interest expense); Cr Bank; Reduces the cash book balance. Charged by the bank and unrecorded until the statement arrives.
Direct debit or standing order paid out: Dr Relevant expense or payable; Cr Bank; Reduces the cash book balance. Use the expense account for items such as insurance, or payables if it settles a liability.
Direct credit, bank transfer or interest received: Dr Bank; Cr Receivables (or Interest income or other income); Increases the cash book balance. A customer paying direct by transfer credits receivables.
Dishonoured (bounced) cheque from a customer: Dr Receivables; Cr Bank; The cheque was already recorded as a receipt. Reverse it, and the customer owes you the money again. Also called a refer to drawer item.
Cash book error corrections: Transposition or wrong amount: adjust Bank by the difference only; If receipts were recorded too low, debit Bank by the difference. If payments were recorded too low, credit Bank by the difference. If receipts were recorded too high, credit Bank by the difference. If payments were recorded too high, debit Bank by the difference.
Updated cash book balance: Opening cash book balance + items on the bank statement not in the cash book (receipts) − items on the bank statement not in the cash book (payments) ± cash book errors; Bank charges, interest paid, direct debits, standing orders and dishonoured cheques reduce the balance. Direct credits and interest received increase it.
Reconciliation to bank statement: Updated cash book balance = Bank statement balance + outstanding lodgements − unpresented cheques; This works for any balance, provided you enter overdrafts as negative figures. If the bank statement shows an overdraft, treat it as a negative figure.
Bank statement balance (rearranged): Bank statement balance = Updated cash book balance − outstanding lodgements + unpresented cheques; Use this if the question asks you to find the bank statement balance.
Direction of adjustments: Timing differences adjust the bank statement. Everything else adjusts the cash book.; The key sorting rule for every item in the question.
Mirror rule: Cash book debit = bank statement credit (money in bank); cash book credit = bank statement debit (overdraft); Always decide which record you are looking at before reading debit or credit.
Updated cash book balance: Corrected cash book = original cash book balance + unrecorded receipts − unrecorded payments; Treat an overdraft as a negative figure. Receipts reduce an overdraft; payments increase it.
Reconciling the bank statement: Corrected cash book balance = bank statement balance + outstanding lodgements − unpresented cheques; Use bank statement balance as positive if in credit and negative if overdrawn.
Statement of financial position presentation: Positive corrected balance = current asset (cash); negative corrected balance = current liability (bank overdraft); The sign after correction decides the classification, not the original sign.

Quick revision

A bank reconciliation compares the cash book with the bank statement and explains the difference.
Bank statement items missing from the cash book, such as charges, interest and direct debits, are posted to the cash book.
Unpresented cheques are cheques you have paid out that the bank has not yet processed. They reduce the bank statement balance.
Outstanding lodgements are receipts you have banked that are not yet on the statement. They increase the bank statement balance.
Timing differences never need a ledger entry.
A dishonoured cheque reduces the cash book balance and is debited back to the customer.
Bank charges and interest paid reduce the cash book. Interest received increases it.
Standing orders and direct debits not yet recorded are payments in the cash book.
A negative bank balance is an overdraft and is shown as a current liability.
The updated cash book balance is the figure used in the statement of financial position.
Check your answer by making both sides agree to the same adjusted figure.

Common mistakes

Adjusting the cash book for unpresented cheques or outstanding lodgements. Fix: These are already in the cash book. Adjust only the bank statement side in the reconciliation.
Treating the bank statement balance as the figure for the financial statements. Fix: Report the updated cash book balance. The statement balance is just the check.
Adding unpresented cheques to the statement balance. Fix: Remember the bank will deduct the cheque later. So deduct it now from the statement balance to reach the true balance.
Posting unpresented cheques or outstanding lodgements to the cash book. Fix: Check whether the item is already in the cash book. Timing differences are, so they never need a cash book entry.
Adjusting the cash book for unpresented cheques or outstanding lodgements. Fix: They are already in the cash book. Only the bank statement is missing them. Use them in the bank reconciliation, not in the cash book update.
Treating a dishonoured customer cheque as an increase in the bank balance. Fix: The cheque was already added when received. When it bounces, reverse it: Dr Receivables, Cr Bank. The bank balance falls.
Adjusting the cash book for unpresented cheques or outstanding lodgements. Fix: Remember these are already in the cash book. Only the bank statement figure is adjusted for them.
Adding unpresented cheques to the bank statement balance. Fix: The bank has not yet paid it out, so the true balance is lower. Deduct unpresented cheques from the bank statement balance.
Treating a debit balance on the bank statement as money in the bank Fix: Remember the statement is the bank's record. A debit there means you owe the bank, so it is an overdraft.
Adjusting the cash book for unpresented cheques or outstanding lodgements Fix: Both are already in your cash book. They only reconcile the bank statement balance to it.

Exam tips

Read whether the question asks for the updated cash book balance or the statement balance. They are different answers.
For multiple response questions, check each statement against the test: is the item already in the cash book?
In number entry questions, write down each adjustment with its sign before totalling.
Know the purposes: check accuracy, find errors and fraud, explain differences, and confirm the balance for the financial statements.
Check whether the starting balance is an overdraft, since this reverses the signs.
Read the question for the starting balance. Many marks are lost by working from the wrong side.
Sort items into two lists before calculating: cash book entries and timing differences. Only the second list belongs in the reconciliation.
In multiple response questions, pick items that are already in the cash book as timing differences. Bank charges and dishonoured cheques are not timing differences.