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Financial Accounting · Cash

Cash Flow Items and Bank Adjustments in the Cash Book

Updated 11 October 2026 · Fact-checked

Cash book adjustments record items the bank has processed that you have not yet entered. Bank charges, direct debits, standing orders and dishonoured cheques reduce the cash book. Interest received and direct credits increase it. Bank errors are not entered in the cash book. Update the cash book first, then reconcile to the bank statement.

Understand Cash Flow Items and Bank Adjustments

Your cash book is your own record of the bank account. The bank statement is the bank's record of the same account. They rarely agree on a given date, for two reasons: timing differences and items you have not yet recorded.

This topic is about the second reason. The bank often does things without telling you first. It charges fees, pays your direct debits, receives money from customers, and credits interest. You only find out when the statement arrives. Until then your cash book is out of date.

The fix is to update the cash book. Compare the statement with the cash book line by line. Any item on the statement but not in the cash book needs a cash book entry, with a matching double entry elsewhere. Payments out of the bank go on the credit side. Receipts go on the debit side.

A standing order is a fixed amount paid on fixed dates, set up by you. A direct debit is collected by the payee, and the amount or date can vary. In the cash book both are treated the same way: credit the bank, debit the expense or liability.

A dishonoured cheque is a customer's cheque that the bank would not pay, often because the customer lacked funds. You already debited the bank when you banked it. So you reverse it: credit the bank and debit receivables, because the customer owes you again. Bank errors are different. The bank made the mistake, so you do not change your cash book. You list them as reconciling items on the bank reconciliation.

Key formulas to remember

Bank charges and fees
Dr Bank charges (expense); Cr Bank
Reduces the cash book balance.
Overdraft interest charged by the bank
Dr Finance cost; Cr Bank
Reduces the cash book balance. Use Finance cost for interest, not the bank charges account.
Interest received from the bank
Dr Bank; Cr Interest income
Increases the cash book balance.
Direct debit or standing order paid
Dr Relevant expense or payable; Cr Bank
Same accounting for both. Use the expense account that matches the payment, such as insurance or rent.
Direct credit or bank transfer received
Dr Bank; Cr Receivables (or income)
Customer paid directly into the bank. Credit receivables if it settles an invoice.
Dishonoured cheque from a customer
Dr Receivables; Cr Bank
Reverses the original receipt. The customer owes you again.
Your own cheque to a supplier that bounced or was stopped
Dr Bank; Cr Payables
Reverses your earlier payment. Rare in exams.
Bank errors
No cash book entry
Show only on the reconciliation. Correct the bank balance, not the cash book.
Updated cash book balance
Unadjusted cash book balance + unrecorded bank receipts − unrecorded bank payments (including dishonoured customer cheques)
Include only items the bank has processed but the cash book does not yet show. Use this figure in the statement of financial position as cash or overdraft.

How to solve Cash Flow Items and Bank Adjustments questions

Use this method for any question that asks for an updated cash book balance or a journal for a bank item.

  1. 1Write down the cash book balance given, and note whether it is a debit (money in the bank) or a credit (overdraft).
  2. 2Go through the bank statement or the list of items. Mark each item as already in the cash book, a timing difference, a bank error, or not yet recorded.
  3. 3Ignore timing differences (unpresented cheques, outstanding lodgements). They do not change the cash book.
  4. 4Ignore bank errors. They do not change the cash book.
  5. 5For each unrecorded item, decide if money left or entered the bank. Money out reduces the balance. Money in increases it.
  6. 6Apply the entries and compute the new balance. Be careful with overdrafts: a payment makes an overdraft bigger.
  7. 7Check the other side of each entry is sensible: expense, income, receivables or payables.
  8. 8If asked, carry on to reconcile to the bank statement and confirm the difference is explained.

Quickest way: Plus and minus list

When to use it: Use this for multiple choice and number entry questions that ask only for the adjusted cash book balance.

  1. Write the starting balance with a sign: positive for money in the bank, negative for an overdraft.
  2. Take each item in turn and write only an item that is unrecorded in the cash book.
  3. Charges, direct debits, standing orders and dishonoured customer cheques are minus.
  4. Interest received and direct credits are plus.
  5. Skip unpresented cheques, outstanding lodgements and bank errors.
  6. Add everything up. A negative total means an overdraft.
  7. Match your result to the options. If two options differ only by sign, recheck the starting balance.

Common mistakes in Cash Flow Items and Bank Adjustments

  • Adjusting the cash book for unpresented cheques or outstanding lodgements

    They appear in the same reconciliation list as other items.

    Fix: These are already in the cash book. Only the bank has not processed them yet. Leave the cash book alone.

  • Debiting the bank for a dishonoured cheque

    Students remember that a cheque from a customer is a receipt.

    Fix: The cheque failed, so the money never arrived. Credit bank and debit receivables.

  • Changing the cash book for a bank error

    Any difference feels like it needs a correction.

    Fix: If the bank made the mistake, your cash book is right. Adjust only the bank statement balance in the reconciliation.

  • Treating standing orders and direct debits differently

    The names suggest different accounting.

    Fix: Both are payments the bank made. Credit bank and debit the expense. The difference is only who sets the amount and date.

  • Adding bank charges when the cash book is overdrawn

    Students lose track of the sign.

    Fix: A charge always makes the cash book worse. An overdraft of $500 with a $20 charge becomes an overdraft of $520.

  • Debiting interest received to an expense account

    Students link interest with finance costs.

    Fix: Interest the bank pays you is income. Debit bank and credit interest income.

Worked examples

Example 1

The cash book shows a debit balance of $8,450. The bank statement shows: bank charges $60, a direct debit for insurance $240, interest received $35, and a customer's cheque for $500 returned unpaid. None is in the cash book. What is the adjusted cash book balance?

Show the solution
  1. Start with $8,450 debit (positive).
  2. Bank charges $60 reduce the balance: 8,450 − 60 = 8,390.
  3. Direct debit $240 reduces it: 8,390 − 240 = 8,150.
  4. Interest received $35 increases it: 8,150 + 35 = 8,185.
  5. Dishonoured cheque $500 reduces it: 8,185 − 500 = 7,685.
  6. Journal 1: Dr Bank charges 60, Dr Insurance 240, Dr Receivables 500; Cr Bank 800 (60 + 240 + 500).
  7. Journal 2: Dr Bank 35; Cr Interest income 35.

Answer: The adjusted cash book balance is a debit of $7,685.

Example 2

The cash book shows a credit balance (overdraft) of $1,200. The bank statement shows a standing order for rent of $900, a direct credit from a customer of $1,500, and bank interest on the overdraft of $40. The bank also credited $300 to the account in error that belongs to another customer. What is the adjusted cash book balance?

Show the solution
  1. Start with an overdraft: −1,200.
  2. The standing order for rent $900 is unrecorded and reduces the balance: −1,200 − 900 = −2,100.
  3. The direct credit $1,500 increases it: −2,100 + 1,500 = −600.
  4. Overdraft interest $40 reduces it: −600 − 40 = −640.
  5. The $300 is a bank error. Do not change the cash book.

Answer: The adjusted cash book balance is an overdraft (credit) of $640.

Exam tips

  • Read the question for the starting balance type. Many marks are lost by treating an overdraft as a positive balance.
  • Before calculating, sort every item into three groups: update the cash book, timing difference, or bank error. Only the first group changes the cash book.
  • For multiple response questions, select only the items that need a cash book entry. Expect timing differences and errors to be included as distractors.
  • Check the sign of a dishonoured cheque. It always reduces the cash book when it is a customer's cheque.
  • In number entry questions, enter the figure only. Do not add a currency symbol or comma unless the question says so.

Practice questions from Cash

Cash Flow Items and Bank Adjustments in other exams

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

Cash Flow Items and Bank Adjustments: frequently asked questions

How do I treat a dishonoured cheque in the cash book?

Credit the bank account and debit receivables with the cheque amount. The original receipt is reversed and the customer owes you the money again. The cash book balance falls.

What is the difference between a standing order and a direct debit in accounting?

There is none in the entries. Both are credited to the bank and debited to the relevant expense or liability. A standing order is a fixed amount set by the payer. A direct debit is collected by the payee and can vary.

Do bank errors go in the cash book?

No. The bank made the mistake, so your cash book is correct. Show the error as a reconciling item against the bank statement balance. Ask the bank to correct it.

Are bank charges and interest treated the same way?

They use the same logic but different accounts. Bank charges and overdraft interest are expenses, so you debit the expense and credit bank. Interest earned is income, so you debit bank and credit interest income.