Bank reconciliation statements — common mistakes

Always update the cash book before starting the bank reconciliation statement. The closing balance of your updated cash book is the starting figure for one format of the reconciliation and the final figure for the statement of financial position.

Be very careful with overdrafts. A cash book overdraft is a credit balance (shown as a negative figure or in brackets). A bank statement overdraft is a debit balance (also shown as negative or DR). The logic of adding/subtracting reconciling items remains the same, but you must be precise with your signs.

The reconciliation aims to explain the difference between two balances. We start with the updated cash book balance, which has already been reduced by the cheque payment. The bank statement balance is higher because it has not yet been reduced by this payment. To get from our lower cash book balance to the higher bank statement balance, we must add back the value of the unpresented cheques.

No. The business's records in the cash book are correct. The error was made by the bank. Therefore, the correction is shown as an adjustment on the bank reconciliation statement itself (usually by adjusting the bank statement balance). You would then contact the bank to have them rectify their error in the next statement period.

This is a common point of confusion. In the business's cash book (which is an asset account), a normal positive balance is a debit balance, so an overdraft is a credit balance. On the bank statement (which shows the bank's liability to the business), a positive balance is a credit balance, so an overdraft is a debit balance (often shown as 'DR' or a negative figure).

Both are automatic payments. A standing order is an instruction to the bank to pay a fixed amount at regular intervals (e.g., rent). A direct debit gives a company permission to collect variable amounts from your account, provided they give you advance notice (e.g., a utility bill).