Financial Accounting · Bank reconciliations

Bank Overdrafts and the Corrected Cash Book Balance in the Accounts

Updated 11 October 2026 · Fact-checked

A bank overdraft is a credit balance in your cash book and a debit balance on the bank statement. To reconcile, update the cash book for unrecorded items, then reconcile the statement to that corrected figure. The corrected cash book balance is what you show in the statement of financial position: a current liability if it is an overdraft.

Understand Overdrafts and Corrected Cash Book Balance in the Accounts

A bank reconciliation compares two records of the same cash: your cash book and the bank statement. They are mirror images. The bank statement is written from the bank's point of view. If you have money in the bank, the bank owes you, so the statement shows a credit balance. Your cash book shows the same money as a debit balance.

An overdraft flips this. If you owe the bank, your cash book shows a credit balance. The bank statement shows a debit balance, because you are a receivable of the bank. This is the main trap: the same word (debit or credit) means opposite things on the two records.

Differences between the two balances arise for two reasons. First, timing differences: unpresented cheques (you have paid, the bank has not yet processed) and outstanding lodgements (you have banked, the bank has not yet credited). Second, items the bank knows about and you do not: bank charges, interest, direct debits, standing orders, direct credits and dishonoured cheques. You fix the second group by updating the cash book. Timing differences do not change the cash book.

After the cash book is updated, its balance is the corrected cash book balance. This is the figure for the financial statements. If it is a debit, show it as cash and cash equivalents within current assets. If it is a credit, show it as a bank overdraft within current liabilities. Do not net it off against other balances unless an offsetting right exists, and in this exam show it as a liability.

The bank statement balance is not the figure for the accounts. It is only a starting point for proving the reconciliation. The adjusted bank statement balance should equal the corrected cash book balance.

Key formulas to remember

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.

How to solve Overdrafts and Corrected Cash Book Balance in the Accounts questions

Use this order for any question on overdrafts and the corrected balance. Work in positive and negative numbers to avoid debit and credit confusion.

1Write the cash book balance with a sign: positive if a debit (in funds), negative if a credit (overdrawn). Do the same for the bank statement: positive if credit, negative if debit.
2Compare each list item to the cash book. Ask: has the bank recorded it but I have not? If yes, it needs a cash book adjustment.
3Adjust the cash book: add unrecorded receipts (direct credits, interest received) and subtract unrecorded payments (charges, direct debits, dishonoured cheques).
4Read the new cash book balance. This is the corrected balance. A negative figure is an overdraft.
5Reconcile the bank statement balance using only timing items: add outstanding lodgements, subtract unpresented cheques.
6Check that the adjusted statement balance equals the corrected cash book balance. If not, look for a missed or wrongly signed item.
7State the answer with its classification: cash within current assets, or bank overdraft within current liabilities.

Quickest way: Signed-number shortcut

When to use it: Use in objective test questions asking for the balance to report, when options differ only by sign or by whether timing items were included.

Convert the cash book to a signed number first (credit balance = negative).
Apply only the items the bank has recorded and you have not. Ignore unpresented cheques and outstanding lodgements.
Read the sign of the result: negative means overdraft in liabilities.
Eliminate options that include timing items or that give the right size with the wrong sign.

Common mistakes in Overdrafts and Corrected Cash Book Balance in the Accounts

Treating a debit balance on the bank statement as money in the bank
Students assume debit always means asset, as in the cash book.
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
These items appear in the reconciliation, so students think they need entries.
Fix: Both are already in your cash book. They only reconcile the bank statement balance to it.
Reporting the bank statement balance in the statement of financial position
It looks like the official figure from a third party.
Fix: Report the corrected cash book balance. It includes items the bank has not yet processed.
Adding bank charges to an overdraft in the wrong direction
Students mix up the sign when starting from a credit balance.
Fix: Charges are payments. They make the cash book more negative, so the overdraft gets larger.
Showing an overdraft as a negative current asset or as non-current
Students keep the balance within cash because it came from the cash book.
Fix: Present an overdraft as a current liability, separate from cash assets.
Deducting a dishonoured customer cheque as a bank charge only, or forgetting it altogether
It arrives on the statement as a debit without a clear description.
Fix: Credit the cash book to reverse the earlier receipt, and reinstate the receivable.

Worked examples

Example 1

At 31 December the cash book shows a credit balance of $4,200. The bank statement shows a debit balance of $5,150. Unpresented cheques total $2,300 and outstanding lodgements total $2,750. Bank charges of $300 and a direct debit of $200 appear on the statement only. Find the corrected cash book balance and reconcile it to the bank statement.

Show the solution

Cash book balance as a signed number: −$4,200 (overdrawn).
Bank charges and the direct debit are unrecorded payments: −$300 − $200 = −$500.
Corrected cash book: −$4,200 − $500 = −$4,700, an overdraft of $4,700.
Bank statement as a signed number: −$5,150.
Add outstanding lodgements: −$5,150 + $2,750 = −$2,400.
Subtract unpresented cheques: −$2,400 − $2,300 = −$4,700.
Check: the adjusted statement balance of −$4,700 equals the corrected cash book balance of −$4,700, so the reconciliation works. The unpresented cheques will still be paid by the bank, so the bank balance falls further. That is why they are subtracted.

Answer: The corrected cash book balance is an overdraft of $4,700, shown as a current liability. The bank statement reconciles to it: −$5,150 + $2,750 − $2,300 = −$4,700.

Example 2

At 30 June the cash book shows a debit balance of $1,800. The bank statement shows a credit balance of $2,750. Bank interest paid of $120 and a direct debit of $480 are on the statement only. A customer cheque for $350 was dishonoured and appears only on the statement. Unpresented cheques are $1,900 and there are no outstanding lodgements. What figure appears in the statement of financial position?

Show the solution

Start with the cash book: +$1,800.
Subtract unrecorded payments: interest $120, direct debit $480, dishonoured cheque $350. Total = $950.
Corrected cash book: $1,800 − $950 = $850.
Check using the statement: $2,750 + $0 lodgements − unpresented cheques $1,900 = $850.
The check agrees with the corrected cash book balance of $850 debit.
The reportable figure is the corrected cash book balance, not the statement balance: $850 debit.

Answer: Show cash at bank of $850 as a current asset. The bank statement reconciles to it: $2,750 − $1,900 = $850.

Exam tips

In multiple choice, look at the sign first. Distractors often have the right number as a debit when it should be an overdraft.
Read each item: does it say per bank statement only? If so, update the cash book. If it is a cheque issued or banked but not cleared, it is a timing item.
In number entry, include a minus sign or the word overdraft only if the question asks for it. Check the instruction before typing.
Where a question asks for the figure for the statement of financial position, choose the corrected cash book balance, never the bank statement balance.
Do a quick proof: the adjusted statement balance should equal the corrected cash book. If it does not, you have missed an item.

Practice questions from Bank reconciliations

Overdrafts and Corrected Cash Book Balance in the Accounts: frequently asked questions

Is a bank overdraft a debit or credit in the cash book?

It is a credit balance in the cash book, because you owe the bank money. On the bank statement the same overdraft appears as a debit balance. The two records are mirror images.

Which balance goes in the statement of financial position after reconciliation?

The corrected cash book balance. This is the cash book after updating for items such as bank charges and direct debits. A positive figure is cash within current assets and a negative figure is an overdraft within current liabilities.

Do unpresented cheques change the cash book balance?

No. You have already recorded them in the cash book when you issued them. They only explain why the bank statement balance differs from the cash book.

Can a reconciliation turn an overdraft into a positive balance?

Yes. If the unrecorded items are mainly receipts such as direct credits, the corrected cash book can move from a credit to a debit balance. Always read the sign after the adjustments and classify it then.