Financial Accounting · Bank reconciliations

How to Prepare a Bank Reconciliation Statement Step by Step

Updated 11 October 2026 · Fact-checked

A bank reconciliation statement explains the difference between the cash book balance and the bank statement balance. First update the cash book for items the bank has recorded. Then start with the bank statement balance, add outstanding lodgements, deduct unpresented cheques, and agree the result to the updated cash book balance.

Understand Preparing the Bank Reconciliation Statement

Your cash book is your record of the business bank account. The bank statement is the bank's record of the same account. They should show the same money, but on any given date they rarely agree.

There are two reasons. First, timing differences. You record a cheque paid when you write it, but the bank only records it when the payee presents it. A cheque written but not yet cleared is an unpresented cheque. In the same way, money you have banked but the bank has not yet credited is an outstanding lodgement (a deposit in transit).

Second, items the bank knows about and you do not yet. Examples are bank charges, interest, direct debits, standing orders, direct credits from customers, and dishonoured cheques. You also may have made errors in the cash book. These must be put into your cash book.

The method has two parts. Part one: update the cash book so it shows the correct balance. Part two: take the bank statement balance and adjust it for the timing differences. If both end at the same figure, you have reconciled. That figure is the amount shown as cash at bank (or overdraft) in the statement of financial position.

A bank statement is written from the bank's point of view, so its debits and credits are the reverse of your cash book. On the bank statement, a credit balance means money in the bank, because the bank owes you that money. A debit balance means an overdraft, because you owe the bank. In your cash book it is the other way round: a debit balance means money in the bank, and a credit balance means an overdraft.

Key formulas to remember

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.

How to solve Preparing the Bank Reconciliation Statement questions

Use this order for any bank reconciliation question. It keeps cash book items and timing items apart, which is where marks are lost.

1Write down the cash book balance and the bank statement balance. Note whether each is positive (in the bank) or an overdraft.
2Compare the cash book to the bank statement item by item. Tick matched items.
3List items on the bank statement but not in the cash book (charges, interest, direct debits, standing orders, direct credits, dishonoured cheques). Also list any cash book errors.
4Update the cash book: start from the cash book balance, add the increases, deduct the decreases, and get the updated balance.
5List items in the cash book but not on the bank statement. Unpresented cheques are payments you have recorded. Outstanding lodgements are receipts you have recorded.
6Start from the bank statement balance. Add outstanding lodgements and deduct unpresented cheques.
7Check the result equals the updated cash book balance. If it does not, recheck signs and omitted items.
8State the final figure clearly as cash at bank, or as a bank overdraft if negative.

Quickest way: Sort-and-adjust method for objective tests

When to use it: Use this for number entry or multiple choice questions that ask for the updated cash book balance or the bank statement balance, with a list of items.

Label each item as either 'cash book fix' or 'timing difference' before calculating anything.
For cash book fixes, ask: does the bank take money out or put money in? Out means subtract from the cash book. In means add.
Ignore timing items when updating the cash book. They never change it.
If the question asks for the corrected cash book balance, stop after the cash book fixes.
If it asks you to reconcile to the bank, add outstanding lodgements and deduct unpresented cheques on the bank statement figure.
If a balance is an overdraft, write it with a minus sign so the arithmetic works, then convert back in the answer.

Common mistakes in Preparing the Bank Reconciliation Statement

Adjusting the cash book for unpresented cheques or outstanding lodgements.
Students see an item that differs between the two records and assume it must be posted.
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.
The cheque is a payment, so students think of it as an increase to something.
Fix: The bank has not yet paid it out, so the true balance is lower. Deduct unpresented cheques from the bank statement balance.
Treating an overdraft as a positive balance.
The word 'balance' suggests money in the account.
Fix: Write overdrafts with a minus sign from the start. Check the wording. On a bank statement a debit balance is an overdraft and a credit balance is money in the bank.
Adjusting the bank statement for a dishonoured cheque instead of the cash book.
It appears on the bank statement, so students keep the adjustment there.
Fix: A dishonoured cheque is a cash book fix. The bank has already reversed the receipt, so credit the cash book (reduce the balance). Do not adjust the bank statement for it.
Transposing figures or getting the direction wrong for cash book errors.
Students rush and correct the error without working out its effect on the cash book.
Fix: Work out what was recorded and what should have been recorded, then adjust the cash book by the difference only.
Forgetting to update the cash book before reporting the balance in the accounts.
Students stop after the reconciliation statement.
Fix: The financial statements use the updated cash book balance, which should equal the reconciled figure.

Worked examples

Example 1

At 31 March the cash book shows a balance of $4,820 at bank. The bank statement shows $5,705. You find: (1) bank charges of $65 not in the cash book; (2) a direct debit of $240 not in the cash book; (3) a customer's direct credit of $500 not in the cash book; (4) unpresented cheques of $1,430; (5) outstanding lodgements of $740. Prepare the updated cash book balance and the reconciliation.

Show the solution

Start with the cash book balance: $4,820.
Deduct bank charges: 4,820 − 65 = 4,755.
Deduct direct debit: 4,755 − 240 = 4,515.
Add direct credit: 4,515 + 500 = 5,015. Updated cash book balance = $5,015.
Start with the bank statement balance: $5,705.
Add outstanding lodgements: 5,705 + 740 = 6,445.
Deduct unpresented cheques: 6,445 − 1,430 = 5,015.
Compare: both sides give $5,015, so the account is reconciled.

Answer: The updated cash book balance is $5,015, and the bank statement reconciles to the same figure. Cash at bank in the statement of financial position is $5,015.

Example 2

At 30 June the cash book shows a bank balance of $3,200. The bank statement shows a balance of $4,140. Differences: (1) bank charges of $80 not in the cash book; (2) a direct credit of $350 from a customer not in the cash book; (3) unpresented cheques of $1,260; (4) outstanding lodgements of $590. Find the updated cash book balance and reconcile it to the bank statement.

Show the solution

Start with the cash book balance: $3,200.
Deduct bank charges: 3,200 − 80 = 3,120.
Add the direct credit: 3,120 + 350 = 3,470. Updated cash book balance = $3,470.
Start with the bank statement balance: $4,140.
Add outstanding lodgements: 4,140 + 590 = 4,730.
Deduct unpresented cheques: 4,730 − 1,260 = 3,470.
Compare: both sides give $3,470, so the account is reconciled.

Answer: The updated cash book balance is $3,470, and the bank statement reconciles to the same figure. Cash at bank is $3,470.

Exam tips

Read each item and decide first whether it is a timing difference or a cash book fix.
Check the sign of the opening balances. Overdrafts are the most common trap.
In multiple response questions, select only items that need posting to the cash book, not timing differences.
Check your answer by reconciling both ways when time allows.
In number entry questions, enter the figure only, with no currency symbol unless the question asks for it.

Practice questions from Bank reconciliations

Preparing the Bank Reconciliation Statement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Preparing the Bank Reconciliation Statement: frequently asked questions

What is the format of a bank reconciliation statement?

Start with the balance per bank statement. Add outstanding lodgements. Deduct unpresented cheques. The total is the balance per the updated cash book.

Why are unpresented cheques deducted from the bank statement?

You have already recorded the payment in the cash book, but the bank has not paid it yet. The bank statement therefore shows too much cash, so you deduct the cheques to get the true balance.

Do I need to update the cash book in every question?

Yes, when there are items such as bank charges, interest or direct debits that the bank has recorded and you have not. Timing differences do not change the cash book.

What if the cash book and bank statement still do not agree?

Recheck signs, whether an item was added or deducted in the right place, and whether any item has been left out. Transposed digits are also common.