Principles of Accounting (AKU-ACC)
Topic 4 of 7Aga Khan Board

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.

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