Financial Accounting · Bank reconciliations

Purpose of Bank Reconciliations in ACCA Financial Accounting

Updated 11 October 2026 · Fact-checked

A bank reconciliation compares your cash book balance with the bank statement balance and explains every difference. Differences come from timing items (unpresented cheques, outstanding lodgements) and items the cash book has not yet recorded (charges, interest, direct debits). Its purpose is to find errors and confirm the true cash balance.

Understand Purpose of Bank Reconciliations

Your business keeps a record of its bank account: the cash book. The bank keeps its own record of the same account: the bank statement. Both should show the same money. In practice, the two balances often differ on any given date.

The differences are not usually mistakes. Most arise because the two records are updated at different times or by different people. You write a cheque and record it in the cash book today. The bank only deducts it when the payee banks it, which may be days later. You record a receipt banked on the last day of the month. The bank may only credit it the next working day.

The second cause is items the bank knows about first. The bank deducts charges and overdraft interest, pays direct debits and standing orders, and receives direct credits from customers. Until you see the statement, your cash book does not show these.

The third cause is error. You or the bank may record an amount wrongly, or a cheque may be dishonoured (bounced). The bank statement is an independent record, so comparing it with your cash book helps you spot these.

So the purpose of a bank reconciliation is to: (1) check that the cash book is accurate and complete, (2) identify items that need entering in the cash book, (3) explain timing differences so the two balances agree, (4) detect errors and fraud, and (5) confirm the correct bank figure for the statement of financial position.

The cash book balance, once updated, is the figure that goes in the financial statements. The bank statement balance is only used as a check.

Key formulas to remember

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.

How to solve Purpose of Bank Reconciliations questions

Use this method for any question on the purpose of a reconciliation or the cause of a difference between the cash book and the bank statement.

1Identify the two balances: the cash book balance and the bank statement balance. Note whether each is a positive balance or an overdraft.
2Compare the items in the cash book with those on the statement, one by one.
3Sort each difference into one of two groups: timing differences (in the cash book, not yet on the statement) or items not yet in the cash book (on the statement only).
4Update the cash book for the second group: add credits received, deduct charges, interest, direct debits, standing orders and dishonoured cheques. Correct any cash book errors.
5Adjust the bank statement balance for the timing differences: add outstanding lodgements and deduct unpresented cheques.
6Check that the adjusted statement balance equals the updated cash book balance. If it does not, look for a missed item or an error.
7Use the updated cash book balance in the financial statements.

Quickest way: Where is the item recorded?

When to use it: Use it in multiple choice questions that ask why the balances differ or what entry is needed.

Ask: is the item already in the cash book? If yes, it is a timing difference and needs no cash book entry.
If it is only on the bank statement, the cash book must be updated.
If a cash book entry is needed, decide the direction: money in increases the cash book balance; money out decreases it.
If the question asks about the statement of financial position, use the updated cash book balance, not the bank statement balance.

Common mistakes in Purpose of Bank Reconciliations

Adjusting the cash book for unpresented cheques or outstanding lodgements.
Students see a difference and assume the cash book must change.
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.
The bank is an outside party, so its figure seems more reliable.
Fix: Report the updated cash book balance. The statement balance is just the check.
Mixing up the bank's viewpoint with yours.
On the bank statement, a credit balance means you have money. In your cash book, a debit balance means you have money.
Fix: Decide first whether you hold money or are overdrawn, then think in terms of money in or out.
Adding bank charges to the cash book balance.
The wrong direction is applied when the entry is rushed.
Fix: Charges, interest paid and direct debits are money out, so reduce the cash book balance.
Saying the purpose is only to find errors.
Students think a difference always means a mistake.
Fix: Remember that most differences are timing or unrecorded items. The purpose also includes updating the cash book and verifying the balance.

Worked examples

Example 1

At 31 March a business's cash book shows a bank balance of $4,200. The bank statement shows $5,000. Cheques of $1,100 written have not yet been presented. A lodgement of $300 made on 31 March has not yet been credited by the bank. There are no other differences. Reconcile and state the cash book balance.

Show the solution

Start with the bank statement balance: $5,000.
Deduct unpresented cheques: 5,000 − 1,100 = 3,900.
Add outstanding lodgement: 3,900 + 300 = 4,200.
Compare with the cash book balance of $4,200. They agree.
No cash book adjustment is needed because both items are timing differences.

Answer: The adjusted bank balance is $4,200, which agrees with the cash book. No cash book entry is needed.

Example 2

A business's cash book shows a balance of $2,650. The bank statement shows bank charges of $40 and a direct debit of $210 that are not in the cash book, and a customer transfer of $500 not in the cash book. An unpresented cheque of $320 exists. What is the updated cash book balance and the bank statement balance?

Show the solution

Update the cash book: 2,650 − 40 − 210 + 500.
2,650 − 40 = 2,610.
2,610 − 210 = 2,400.
2,400 + 500 = 2,900.
Updated cash book balance = $2,900.
The bank statement balance must satisfy: statement balance − 320 = 2,900.
So statement balance = 2,900 + 320 = 3,220.

Answer: The updated cash book balance is $2,900 and the bank statement balance is $3,220.

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.

Practice questions from Bank reconciliations

Purpose of Bank Reconciliations in other exams

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

Purpose of Bank Reconciliations: frequently asked questions

Why do the cash book and bank statement differ?

Mostly because of timing: cheques written but not yet presented, and lodgements not yet credited. Differences also arise from items the bank recorded first, such as charges, interest and direct debits, and from errors on either side.

Why prepare a bank reconciliation?

It checks that the cash book is complete and accurate, shows which items need entering, and helps detect errors and fraud. It also confirms the correct bank balance to report.

Which balance goes in the statement of financial position?

The updated cash book balance. The bank statement balance is only used to check and explain the difference.

Do unpresented cheques need a journal entry?

No. They are already recorded in the cash book. They are just a reconciling item between the cash book and the statement.