The bank column of the cash book and the bank statement often show different balances on the same date. Some differences are timing differences, which resolve themselves, and others are items missing from the cash book, which must be entered.
This lesson is the first step towards full bank reconciliation. It follows from recording a contra entry and from the bank column habits in cash books and petty cash.
Why do the two balances differ?
The cash book is the business’s own record. The bank statement is the bank’s record of the same account. The two are updated at different times, so they can disagree without either being wrong.
Sort every difference into one of two groups. Group A: the cash book is correct and already includes the item, but the statement has not caught up. Group B: the statement shows an item the business has not yet recorded.
| Item | Group | Needs a cash book entry? |
|---|---|---|
| Cheque issued, not yet presented | A (timing) | No |
| Deposit banked, not yet credited | A (timing) | No |
| Bank charges on the statement | B (missing) | Yes, credit bank |
| Direct credit from a customer | B (missing) | Yes, debit bank |
| Standing order or direct debit not recorded | B (missing) | Yes, credit bank |
Worked example
Kuning Florist’s cash book bank column shows a balance of RM 4,120. The bank statement on the same date shows RM 4,610. Checking the two records shows:
- a cheque for RM 650 paid to a supplier, not yet presented
- a deposit of RM 420 banked on the last day, not yet credited
- bank charges of RM 40 on the statement, not in the cash book
- a customer transfer of RM 300 on the statement, not in the cash book
Step 1, sort. The cheque and the deposit are Group A. The charges and the transfer are Group B.
Step 2, update the cash book. 4,120 − 40 = 4,080. Then 4,080 + 300 = RM 4,380.
Step 3, adjust the statement for timing. Start with 4,610. Subtract the unpresented cheque: 4,610 − 650 = 3,960. Add the uncleared deposit: 3,960 + 420 = RM 4,380.
Step 4, compare. Both give RM 4,380. The difference is fully explained.
Second check: the original gap is 4,610 − 4,120 = 490. The four items account for it as +650 (cheque) − 420 (deposit) − 40 (charges) + 300 (transfer) = 490.
The adjusted cash book balance of RM 4,380 is the true bank figure at that date.
The mistake to watch for
The usual slip is to change the cash book for timing items.
Mistaken step: Deduct the unpresented cheque of RM 650 from the cash book balance, giving 4,120 − 650 = 3,470.
The cheque is already recorded as a payment in the cash book. Deducting it again counts the payment twice.
The correction is to ask “is this item already in my cash book?” If yes, it is a timing item and only the statement side is adjusted. If no, it needs a new cash book entry.
Check yourself
1. A cheque received and banked on 30 June appears on the statement on 2 July. Which group is it, and does the cash book change?
Show answer
Group A, timing. The cash book already recorded the receipt, so no change is needed.
2. The cash book bank balance is RM 1,800. The statement shows a bank charge of RM 25 that is not in the cash book. What is the updated balance?
Show answer
1,800 − 25 = RM 1,775. Credit bank RM 25 in the cash book.
3. The statement balance is RM 2,300. There are unpresented cheques of RM 350 and an uncleared deposit of RM 120. What balance should the adjusted statement agree with?
Show answer
2,300 − 350 + 120 = RM 2,070. This should equal the updated cash book bank balance.
Where this leads next
The full method of starting from the cash book, updating it and then reconciling is covered in bank reconciliation. Test your understanding first with the cash books and petty cash practice set, and use the double-entry and ledger trainer to check the updated entries.
If sorting timing items from missing items still feels like guesswork, our teachers can work through examples with you in online one-to-one Accounting tuition.