Financial Accounting · Cash

Bank Reconciliation Statements: Step-by-Step Method

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 but you have not. Then reconcile the updated cash book to the bank statement using unpresented cheques and outstanding lodgements.

Understand Bank Reconciliation Statements

Your cash book is your own record of money in the bank. The bank statement is the bank's record of the same account. The two balances are often different, even when nobody has made a mistake.

There are two reasons for a difference. The first is timing differences. You record a cheque paid or a receipt banked on the day you do it. The bank records it only when the cheque clears. The second is items one side has not recorded yet, such as bank charges, interest, direct debits, standing orders, direct credits and errors.

The two groups are treated differently. Timing differences are not corrected in the cash book, because your records are right and the bank will catch up. They appear only in the reconciliation. Unrecorded items and errors in the cash book must be corrected in the cash book, because your records are wrong or incomplete.

The two main timing items are unpresented cheques (cheques you issued that have not yet cleared the bank) and outstanding lodgements (receipts you banked that the bank has not yet credited). After the cash book is updated, the reconciliation proves that the corrected cash book balance is the figure for the statement of financial position.

In the exam, the balance in the corrected cash book is what you report as cash at bank (or a bank overdraft). The bank statement balance is not reported.

Key formulas to remember

Reconciliation from bank statement to cash book: Balance per bank statement − unpresented cheques + outstanding lodgements = Corrected cash book balance; Use this when the balances are shown as positive (in hand) amounts. Reverse the signs for an overdraft.
Updating the cash book: bank items not yet recorded: Debit cash book: direct credits, interest received. Credit cash book: bank charges, direct debits, standing orders, dishonoured customer cheques. Cash book errors: debit the cash book if the error understated the balance, credit it if the error overstated the balance.; These are corrected in the cash book, not listed in the reconciliation.
Unpresented cheque: Cheque paid by you, in cash book, not yet on bank statement → deduct from bank statement balance; The bank balance is too high compared with your true position.
Outstanding lodgement: Receipt banked by you, in cash book, not yet on bank statement → add to bank statement balance; The bank balance is too low compared with your true position.
Dishonoured cheque: Dishonoured customer cheque received: Dr Receivables, Cr Bank (cash book); A customer's cheque was returned unpaid. The earlier receipt is reversed and the debt is owed again.

How to solve Bank Reconciliation Statements questions

Use this order for any bank reconciliation question. It keeps cash book items and timing items apart.

1Write down the opening cash book balance and the bank statement balance. Note whether each is a positive balance or an overdraft.
2Tick the cash book against the bank statement line by line. Items on one side only are your differences.
3Sort each difference: cash book error or bank item not yet recorded (correct the cash book), or timing difference (reconciliation only).
4Update the cash book: add or deduct the items from the sorted group, and find the corrected cash book balance.
5Start the reconciliation with the bank statement balance. Deduct unpresented cheques and add outstanding lodgements.
6Check that the result equals the corrected cash book balance. If not, look for a missed item or a sign error.
7Use the corrected cash book balance for the answer, such as cash at bank in the statement of financial position.
8If the bank made an error, correct it in the reconciliation, not in the cash book.

Quickest way: Update first, then reconcile

When to use it: Use this under time pressure in objective test questions where you need only the corrected cash book balance or one adjusting entry.

Ignore unpresented cheques and outstanding lodgements if the question asks for the corrected cash book balance. They never change it.
Take the cash book balance and adjust only for bank items you had not recorded and for cash book errors.
Receipts and credits to you increase the balance. Charges, direct debits and dishonoured cheques reduce it.
If asked for the bank statement balance, start from the corrected cash book balance and reverse the reconciliation: bank statement balance = corrected cash book balance + unpresented cheques − outstanding lodgements.
Check the sign for an overdraft before you choose an answer.

Common mistakes in Bank Reconciliation Statements

Adjusting the cash book for unpresented cheques or outstanding lodgements.
They look like differences, so students assume they need correcting.
Fix: They are already in the cash book. Use them only in the reconciliation.
Adding unpresented cheques to the bank statement balance.
Students mix up which side needs to move.
Fix: Unpresented cheques are still to leave the bank, so deduct them from the bank statement balance. Outstanding lodgements are added.
Putting bank charges or direct debits in the reconciliation instead of the cash book.
The item appears on the bank statement, so students treat it as the bank's issue.
Fix: If the bank has recorded it and you have not, update your cash book.
Getting the wrong direction for a dishonoured cheque.
Students think of the receipt rather than the reversal.
Fix: A dishonoured customer cheque reduces the cash book. Dr Receivables, Cr Bank.
Ignoring that a balance is an overdraft.
Students treat every figure as positive.
Fix: Write overdrafts in brackets and carry the sign through every line.
Reporting the bank statement balance in the statement of financial position.
It is the figure printed on a formal document.
Fix: Report the corrected cash book balance.

Worked examples

Example 1

At 31 March the cash book shows a balance at bank of $4,650. The bank statement shows $5,070. Differences: unpresented cheques $1,300; outstanding lodgements $950; bank charges $80 not yet in the cash book; a standing order of $200 not yet in the cash book; a direct credit from a customer of $350 not yet in the cash book. Prepare the updated cash book balance and the bank reconciliation.

Show the solution

Sort the items. Bank charges, standing order and direct credit are not in the cash book, so update the cash book. Unpresented cheques and outstanding lodgements are timing differences.
Update the cash book: $4,650 − $80 − $200 + $350 = $4,720.
Start the reconciliation with the bank statement balance: $5,070.
Deduct unpresented cheques: $5,070 − $1,300 = $3,770.
Add outstanding lodgements: $3,770 + $950 = $4,720.
Compare: $4,720 equals the corrected cash book balance, so the reconciliation agrees.

Answer: The corrected cash book balance is $4,720. The bank statement balance of $5,070 reconciles to it: $5,070 − $1,300 + $950 = $4,720.

Example 2

At 30 June the cash book shows a balance at bank of $3,200. The bank statement shows a balance of $4,280. Differences: unpresented cheques $1,500; outstanding lodgements $600; bank charges $70 not in the cash book; a direct debit of $150 not in the cash book; a customer paid $400 directly into the bank and the cash book has not recorded it. Find the corrected cash book balance and reconcile it to the bank statement.

Show the solution

Items to correct in the cash book: bank charges, direct debit and the direct payment from the customer.
Corrected cash book: $3,200 − $70 − $150 + $400 = $3,380.
Reconciliation: start with the bank statement balance of $4,280.
Deduct unpresented cheques of $1,500: $4,280 − $1,500 = $2,780.
Add outstanding lodgements of $600: $2,780 + $600 = $3,380.
Compare with the corrected cash book balance of $3,380. They agree.

Answer: The corrected cash book balance is $3,380. The reconciliation agrees: $4,280 − $1,500 + $600 = $3,380.

Exam tips

Read the requirement first. Many objective questions ask only for the corrected cash book balance, which never includes timing items.
In multiple response questions, select the items that need a cash book adjustment, and leave out timing differences.
In number entry questions, check whether the answer is an overdraft and enter it as the question asks.
Check the direction of each item against the bank statement. Items on the bank statement only mean update the cash book.
Always test your final answer by reconciling it back to the bank statement if time allows.

Practice questions from Cash

Bank Reconciliation Statements in other exams

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

Bank Reconciliation Statements: frequently asked questions

What is the difference between unpresented cheques and outstanding lodgements?

An unpresented cheque is one you have issued and recorded but the bank has not yet paid. An outstanding lodgement is money you have banked and recorded but the bank has not yet credited. Both are timing differences.

Do I need to update the cash book before a bank reconciliation?

Yes, for items the bank has recorded and you have not, and for cash book errors. These include bank charges, interest, direct debits and standing orders. After updating you reconcile the new balance to the bank statement.

Which balance goes in the statement of financial position?

Use the corrected cash book balance. It is a positive balance in current assets or an overdraft in current liabilities. The bank statement balance is never used.

Why do the two balances still differ after I update the cash book?

Timing differences remain. These are unpresented cheques and outstanding lodgements. They explain the gap and do not need any correcting entry.