In simple terms
A friendly intro before the formal notes — no formulas yet.
Bank reconciliation statements
9706 P2 — updating cash book, unpresented cheques, uncredited deposits, reconciliation format.
- 1
It is a statement, not an account in the double-entry system.
- 2
It explains differences between the cash book and the bank statement.
- 3
Key causes of difference are unrecorded items (for cash book update) and timing differences (for reconciliation statement).
- 4
It acts as a control to detect errors and potential fraud.
What this topic covers
The official Cambridge syllabus points this lesson works through.
- 1.4.3.1
Updating of cash books
- 1.4.3.2
How to prepare bank reconciliation statements
- 1.4.3.3
The benefits and limitations of preparing a bank reconciliation statement
Explore the concept
Use the live diagram and synced steps — play it or tap a step card to walk through.
At a glance — side by side
Compare key properties side by side — ideal for exam contrasts.
Comparison of Adjustments
| Feature | Updated Cash Book | Bank Reconciliation Statement |
|---|---|---|
| Purpose | To correct the business's own records and find the true cash balance. | To explain the difference between the true cash balance and the bank statement balance. |
| Items Included | Bank charges, interest, standing orders, direct debits, dishonoured cheques, credit transfers. | Unpresented cheques, uncredited deposits, bank errors. |
| Nature of Items | Items the business was unaware of until seeing the bank statement. | Mainly timing differences and bank errors; items already correctly recorded by the business (or incorrectly by the bank). |
| End Result | The cash balance for the Statement of Financial Position. | Proof that the two balances (updated cash book and bank statement) are reconciled. |
Purpose
Updated Cash Book
Bank Reconciliation Statement
Items Included
Updated Cash Book
Bank Reconciliation Statement
Nature of Items
Updated Cash Book
Bank Reconciliation Statement
End Result
Updated Cash Book
Bank Reconciliation Statement
Full topic notes
Formal explanation with the rigour you need for the exam.
The Purpose of Bank Reconciliation
A bank reconciliation statement is a crucial internal control document that explains any differences between the bank balance shown in a business's cash book and the balance shown on its bank statement. These two records are prepared by different parties (the business and the bank) and are rarely identical at a specific date. Discrepancies arise from two main sources: timing differences, such as cheques issued but not yet presented for payment, and items recorded by the bank but not yet by the business, like bank charges or direct debits. The primary purpose of the reconciliation is to identify and account for these differences, detect any errors made by either the business or the bank, and ultimately determine the correct cash balance to be reported in the statement of financial position.
It is a statement, not an account in the double-entry system.
It explains differences between the cash book and the bank statement.
Key causes of difference are unrecorded items (for cash book update) and timing differences (for reconciliation statement).
It acts as a control to detect errors and potential fraud.
Step 1: Updating the Cash Book
Before preparing the reconciliation statement, the business's cash book must be brought up to date. This is a non-negotiable first step. By comparing the bank statement with the cash book, you identify transactions the bank knows about but the business has not yet recorded. These items must be entered into the cash book to reflect the true cash position. Once all such items are posted, the cash book is balanced to find the 'updated cash book balance'. This updated balance is the figure that will be reported as 'Cash and cash equivalents' in the statement of financial position.
Bank Charges: Fees charged by the bank. CR in cash book.
Direct Debits/Standing Orders: Automatic payments. CR in cash book.
Credit Transfers/BACS receipts: Direct payments from customers. DR in cash book.
Bank Interest: Interest earned (DR) or paid on overdraft (CR) in cash book.
Dishonoured Cheques: A customer's cheque that bounced. CR in cash book to reverse the original receipt.
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.
Step 2: Preparing the Bank Reconciliation Statement
After updating the cash book, any remaining differences are typically timing differences or errors. These are items that create a temporary discrepancy between the two records. The reconciliation statement systematically lists these items to prove that the two balances are in agreement, once these differences are accounted for.
Unpresented cheques: Recorded as a payment by the business, but not yet paid by the bank. The bank balance is therefore higher than it should be.
Uncredited deposits/lodgements: Recorded as a receipt by the business, but not yet shown on the bank statement. The bank balance is therefore lower than it should be.
Bank errors: Mistakes made by the bank (e.g., debiting the wrong account). These are adjusted on the reconciliation statement, not in the cash book.
Reconciliation Statement Formats
There are two common formats. Both are acceptable in exams unless a specific starting point is requested.
Format 1: Starting with the Cash Book Balance This format adjusts the updated cash book balance to arrive at the bank statement balance.
- Balance as per updated cash book
- Add: Unpresented cheques
- Less: Uncredited deposits
- Result: Balance as per bank statement
Format 2: Starting with the Bank Statement Balance This format adjusts the bank statement balance to arrive at the updated cash book balance. This is often considered more logical as it adjusts the bank's figure to the 'true' figure.
- Balance as per bank statement
- Add: Uncredited deposits
- Less: Unpresented cheques
- Result: Balance as per updated cash book
(Note: Bank errors are also included, added or subtracted as necessary to correct the bank statement balance).
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.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
On 31 May, a business's cash book showed a bank balance of $5,280. The bank statement on the same date showed a balance of $6,145. The following discrepancies were found:
- Bank charges of $55 had not been entered in the cash book.
- Cheques issued to suppliers totalling $1,320 were unpresented.
- A deposit of $400 made on 31 May was not yet credited by the bank.
Prepare the updated cash book extract and a bank reconciliation statement as at 31 May.
- 1
Step 1 — Update the Cash Book We must record the bank charges that are on the statement but not yet in our books.
On 30 June, the cash book of Phoenix Ltd has a debit balance of $1,200. The bank statement for the same date shows a credit balance of $2,050. Upon investigation, you find the following:
- Bank charges of $300 are on the bank statement but not in the cash book.
- Interest received of $100 has been credited by the bank but not entered in the cash book.
- Cheques paid to suppliers amounting to $1,500 have not yet been presented for payment.
- A deposit of $450 made on 30 June does not appear on the bank statement.
You are required to: (a) Prepare the updated Bank account in the cash book. (b) Prepare a bank reconciliation statement as at 30 June.
- 1
(a) Updated Cash Book (Bank Account) First, we update the cash book for items the business was unaware of.
How it all connects
The big idea sits in the middle — tap a linked idea to explore the link.
Tap a linked idea to see how it connects back to the main topic — that connection is what examiners reward.
Glossary
Try to recall each definition before you reveal it.
Quick check
Answer in your head first — then tap to check. No pressure.
Revision flashcards
Flip the card. Test yourself before the exam.
Unpresented cheque?
A cheque issued by the business and recorded as a payment in its cash book, but which has not yet been presented to the bank by the payee and therefore has not been deducted from the bank account.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
- ✓
It is a statement, not an account in the double-entry system.
- ✓
It explains differences between the cash book and the bank statement.
- ✓
Key causes of difference are unrecorded items (for cash book update) and timing differences (for reconciliation statement).
- ✓
It acts as a control to detect errors and potential fraud.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Mark a bank reconciliation question
Mark a bank reconciliation question
Extra simulations & links
PhET, GeoGebra and other curated tools — open in a new tab.
Frequently asked
Checkpoint
One marked question is worth ten re-reads — close the loop before you move on.
Reading it isn’t knowing it — prove it.
Before you move on: do Mark a bank reconciliation question on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.