Bank Reconciliation
Comparing cash book with bank statement and identifying differences
A bank reconciliation statement explains differences between the cash book balance (business records) and the bank statement balance (bank's records). Differences are normal — not errors.
Why differences occur:
- Unpresented cheques (Outstanding cheques): Business issued a cheque, recorded it in cash book, but recipient hasn't yet presented it to bank → bank statement still shows higher balance.
- Outstanding lodgements (Deposits in transit): Business deposited cash/cheques, recorded in cash book, but bank hasn't yet processed → cash book shows higher balance.
- Bank charges/fees: Bank deducts charges not yet recorded in cash book → cash book balance higher.
- Bank interest received: Bank credits interest, not yet recorded in cash book.
- Direct debits/standing orders: Automatic payments from bank account not yet recorded in cash book.
- Dishonoured cheques: Cheque bounced — cash book needs reversing entry.
Format — Reconciliation starting from cash book balance:
Cash book balance (adjusted) Rs. X
Add: Unpresented cheques Rs. X
Less: Outstanding lodgements Rs. (X)
= Bank statement balance Rs. X
Steps:
- Update the cash book for bank charges, interest, direct debits (items bank recorded, business hasn't)
- Prepare reconciliation for timing differences (unpresented cheques, outstanding lodgements)
Key Points to Remember
- 1Unpresented cheques: issued but not cleared at bank yet
- 2Outstanding lodgements: deposited but not processed by bank
- 3Bank charges must be added to cash book first
- 4Reconciliation: adjusted cash book balance → explains bank statement balance
Pakistan Example
FESCO Electricity Direct Debit — Bank Reconciliation in Pakistan
Many Pakistani businesses set up direct debits with FESCO, LESCO, or KESC (K-Electric) for electricity bills. When the bank pays the direct debit, the business's cash book may not yet show it — creating a difference. A Karachi textile factory accountant must reconcile their MCB or HBL bank statement monthly to catch such items. AKU-EB Accounting always includes a bank reconciliation question worth 10-15 marks.
Quick Revision Infographic
Principles of Accounting — Quick Revision
Bank Reconciliation
Key Concepts
Formulas to Know
Reconciliation: adjusted cash book balance → explains bank statement balanceFESCO Electricity Direct Debit — Bank Reconciliation in Pakistan
Many Pakistani businesses set up direct debits with FESCO, LESCO, or KESC (K-Electric) for electricity bills. When the bank pays the direct debit, the business's cash book may not yet show it — creating a difference. A Karachi textile factory accountant must reconcile their MCB or HBL bank statement monthly to catch such items. AKU-EB Accounting always includes a bank reconciliation question worth 10-15 marks.