Before you reconcile a bank statement, update the cash book for every item the bank has recorded that your business has not. That means charges, standing orders, direct debits, direct credits, interest and dishonoured cheques. What is left over are timing differences, and those go in the reconciliation statement.
This is the first step in bank reconciliation and it builds on the bank column of the cash book.
Which differences need a cash book entry?
Ask one question about each difference: has my business already recorded this?
- If the bank knows about it but your cash book does not, you must enter it. The cash book is out of date.
- If your cash book has it but the bank has not processed it yet, you leave the cash book alone. That is a timing difference, covered in separating unpresented payments from unrecorded charges.
Items the bank starts, such as charges, are usually the ones missing from your cash book. Items you start, such as cheques you write, are already in it.
How to update, step by step
- Tick the cash book against the statement, line by line.
- List the statement items with no cash book match that the bank started.
- Enter each one in the bank column: money in is a debit, money out is a credit.
- Balance the bank column again. This is the updated cash book balance.
- Make the ledger entry for each (for example, bank charges expense).
Worked example
Aman Hardware’s cash book (bank column) shows a debit balance of RM 5,120 on 31 October. The statement shows these items that are not in the cash book:
| Statement item | Amount (RM) | Direction |
|---|---|---|
| Bank charges | 35 | out |
| Standing order for insurance | 180 | out |
| Direct credit from a customer | 640 | in |
| Dishonoured cheque returned | 250 | out |
Step 1, money out: 35 + 180 + 250 = RM 465.
Step 2, money in: RM 640.
Step 3, updated balance: 5,120 − 465 + 640 = RM 5,295.
Check with a running total: 5,120 − 35 = 5,085, then − 180 = 4,905, then + 640 = 5,545, then − 250 = 5,295. Both ways give the same answer.
The ledger entries follow. Bank charges and insurance are debited to expense accounts. The customer’s account is credited RM 640 and, for the dishonoured cheque, debited RM 250 because the customer owes that money again.
The mistake to watch for
A common slip is to adjust the statement balance instead of the cash book, or to put the charges in the reconciliation list.
Mistaken working: Cash book RM 5,120. Statement balance minus charges, standing order and the other items.
The student changed the bank’s figure, but the bank is already correct about those items.
The correction is to say who is out of date. The bank has recorded the charge, so your book changes. The statement stays as printed, and only unprocessed timing items are used to bridge the two balances.
Check yourself
1. A cash book shows RM 3,400 debit. The statement shows bank charges of RM 28 and a direct debit of RM 90, neither in the cash book. What is the updated balance?
Show answer
3,400 − 28 − 90 = RM 3,282.
2. A cheque you wrote for RM 150 is in your cash book but not on the statement. Do you update the cash book for it?
Show answer
No. You started it and have already recorded it. It is a timing difference, an unpresented cheque, and goes into the reconciliation instead.
3. A customer pays RM 500 directly into the bank. It appears on the statement but not in the cash book. State the entry.
Show answer
Debit the bank column RM 500 and credit the customer’s account RM 500. The cash book was missing a receipt.
Where this leads next
With the cash book updated, move on to reconciling from either starting balance, then try the bank reconciliation walkthrough to test your sorting. The percentage-base explorer helps when a charge is quoted as a percentage.
Some students update the books correctly but are unsure which items belong where when the list gets long. That is the kind of habit our teachers look for in online one-to-one Accounting tuition.