Fundamentals of Financial and Cost Accounting · Cash Book, Bank Book, Petty Cash Book, Bank Reconciliation Statement

How to Prepare a Bank Reconciliation Statement Step by Step

Updated 10 October 2026 · Fact-checked

A bank reconciliation statement (BRS) explains the difference between the cash book bank balance and the passbook balance on one date. To prepare it, start with one balance, check each item, add or subtract it based on its effect, and end at the other balance. Always note whether the starting balance is favourable or an overdraft.

Understand Preparation of Bank Reconciliation Statement

Your business records bank transactions in its cash book. The bank records the same transactions in your passbook (bank statement). The two balances often differ on the same date. The reason is usually timing or an entry made by only one side.

A bank reconciliation statement is a statement that lists the reasons for the difference and ties the two balances together. It is not an account. It does not change the books by itself.

There are two kinds of items. Timing items are recorded by one side and will be recorded by the other later, such as cheques issued but not yet presented, and cheques deposited but not yet credited. Items needing a cash book entry are known only from the passbook, such as bank charges, interest, direct deposits, direct payments and dishonoured cheques. Errors in the cash book also belong here.

The key skill is knowing which balance you start from and what each item does to it. If you start from the cash book, you move towards the passbook. If you start from the passbook, you move towards the cash book. If the cash book is updated first, you get the adjusted cash book balance, and then reconcile it with the passbook using only timing items.

An overdraft means the bank has lent you money. In the cash book it appears as a credit balance. In the passbook it appears as a debit balance. Every item then works in the opposite direction from a favourable balance. This reversal is where most marks are lost.

Key formulas to remember

Starting from cash book (favourable balance): Passbook balance = Cash book balance + Cheques issued not yet presented + Cheques/ amounts credited by bank not in cash book (direct deposits, interest) − Cheques deposited not yet credited − Amounts debited by bank not in cash book (charges, direct payments, dishonour); Use this when the starting balance is a debit (favourable) balance.
Starting from passbook (favourable balance): Cash book balance = Passbook balance + Cheques deposited not yet credited + Amounts debited by bank not in cash book − Cheques issued not yet presented − Amounts credited by bank not in cash book; Each item is the reverse of the cash book starting case.
Overdraft rule: For an overdraft balance, reverse every plus and minus used for a favourable balance; Cheques issued not presented are deducted from an overdraft figure when you work from the cash book overdraft. Cheques deposited not credited are added.
Adjusted cash book: Adjusted cash book balance = Old cash book balance + Items credited by bank not in cash book − Items debited by bank not in cash book (± errors); After adjusting, only timing items remain between the adjusted balance and the passbook.
Items that never appear in the BRS: Items recorded by both sides on the same date need no adjustment; Only differences are listed.

How to solve Preparation of Bank Reconciliation Statement questions

Use this order for any BRS question. It works whether you start from the cash book, the passbook or an adjusted cash book.

1Read the question and note the date, the starting balance, and whether it is a favourable balance or an overdraft. Also note whether the starting figure is from the cash book or passbook.
2Decide the target. If you start from the cash book, you are finding the passbook balance, and the other way round.
3List every item and classify it: timing item, or item known only from the bank, or error in the cash book.
4For each item, ask whether it makes the starting balance larger or smaller to reach the target. Tick it only after deciding the sign.
5For a favourable balance, use the standard signs. For an overdraft, reverse every sign.
6Write the statement in a clean list: starting balance, then additions, then deductions, then the final balance.
7Check the answer is sensible: the final figure should match the other balance given or the one asked, and if it is an overdraft, say so in the answer.

Quickest way: Effect-on-balance method

When to use it: Use in MCQs where you must find one balance from the other and time is short.

Write the starting balance with a sign: favourable as positive, overdraft as negative.
Imagine the bank is the correct record when going from the cash book. Ask: does this item raise the bank's balance above mine or lower it?
Cheques issued but not presented: bank balance is higher than the cash book, so add to a favourable cash book balance.
Cheques deposited but not credited: bank balance is lower, so subtract.
Bank charges and dishonour: bank balance is lower than the cash book, so subtract. Interest and direct deposits received: bank balance is higher, so add.
Using signed numbers, an overdraft is handled automatically. Add all signed effects, then read the result: a negative answer is an overdraft.
Reverse every effect if you go from the passbook to the cash book.

Common mistakes in Preparation of Bank Reconciliation Statement

Using the same plus and minus signs when the balance is an overdraft
Students memorise signs for a favourable balance and apply them blindly.
Fix: Treat an overdraft as a negative number and use signed arithmetic, or reverse every sign. Then state the answer as an overdraft.
Adding a cheque issued but not presented to the passbook balance
Students forget that the bank has not yet paid, so the passbook balance is higher than the cash book balance.
Fix: When going from the passbook to the cash book, deduct it. When going from the cash book to the passbook, add it.
Adjusting items already recorded in the cash book
Students process every item in the question, even those that are already in both records.
Fix: Check whether each item is already in the cash book. Only adjust items missing from one side.
Treating a dishonoured cheque as a timing item
It looks like a cheque deposit, so students think it is waiting to be credited.
Fix: A dishonoured cheque has been debited by the bank and is missing from the cash book. It reduces the cash book balance.
Ignoring the instruction to start from the adjusted cash book
Students start from the old cash book balance because it is given first.
Fix: If the question asks for an adjusted cash book, first update the cash book for bank-only items and errors, then reconcile with the passbook.
Forgetting to label the final balance as overdraft
Students focus on the number and ignore the nature of the balance.
Fix: Write the answer with the label, for example ₹8,000 overdraft, in the same line as the figure.

Worked examples

Example 1

On 31 March, the cash book of Sharma Traders shows a bank balance of ₹24,000 (debit). Cheques of ₹5,000 were issued but not presented. Cheques of ₹3,000 were deposited but not yet credited by the bank. The bank charged ₹200 not recorded in the cash book. Find the passbook balance.

Show the solution

Start with the cash book balance: ₹24,000 favourable.
Cheques issued but not presented: the bank has not paid them, so add ₹5,000. Balance becomes ₹29,000.
Cheques deposited but not credited: the bank has not received them, so deduct ₹3,000. Balance becomes ₹26,000.
Bank charges ₹200 are already debited in the passbook but not in the cash book, so deduct ₹200. Balance becomes ₹25,800.

Answer: Passbook balance is ₹25,800 (favourable).

Example 2

On 31 December, the cash book of Mehta & Co shows a bank overdraft of ₹15,000. Cheques of ₹6,000 were issued but not yet presented. Cheques of ₹4,000 were deposited but not yet credited. Interest of ₹500 on the overdraft was charged by the bank but not entered in the cash book. Find the passbook balance.

Show the solution

Start with the cash book balance as a negative figure: −₹15,000, an overdraft.
Cheques issued but not presented: the bank has not paid them, so the bank balance is higher. Add ₹6,000. Balance becomes −₹9,000.
Cheques deposited but not credited: the bank balance is lower. Deduct ₹4,000. Balance becomes −₹13,000.
Interest of ₹500 is charged by the bank and not in the cash book, so the bank balance is lower. Deduct ₹500. Balance becomes −₹13,500.
A negative figure means the passbook shows an overdraft.

Answer: Passbook shows an overdraft of ₹13,500.

Exam tips

Read the first line of the question twice. Many errors come from missing words such as overdraft, passbook or adjusted.
In MCQs, convert the starting balance to a signed number and apply each item as a positive or negative effect. This avoids sign confusion.
Ignore items that are already in both records. Questions often add distractors to test this.
Check the direction of the question. If the answer must be the cash book balance, you reverse the effect of every item compared with going to the passbook.
Scan the options. If two options differ only by the label favourable or overdraft, check your sign before choosing.

Practice questions from Cash Book, Bank Book, Petty Cash Book, Bank Reconciliation Statement

Preparation of 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.

Preparation of Bank Reconciliation Statement: frequently asked questions

What is the easiest way to remember plus and minus in a BRS?

Do not memorise signs. Ask whether the item makes the bank balance higher or lower than your starting balance. Then add or subtract accordingly. For overdrafts, treat the balance as negative.

How do I handle an overdraft as per the cash book?

Treat the overdraft as a negative balance. Apply each item with its effect as usual. A final negative figure is an overdraft. Always state the label in your answer.

Do I need to prepare an adjusted cash book first?

Only if the question asks for it or gives bank-only items and errors that the cash book has not recorded. After adjusting, only timing items remain. These are cheques issued not presented and cheques deposited not credited.

Does a BRS change the accounts?

No. A BRS is a statement that explains differences. Only entries needed for items missing from the cash book are recorded in the books.