• Unpresented cheque (outstanding cheque): A cheque issued by the business but not yet presented to the bank for payment. It appears in the cash book but not in the bank statement.
• Uncredited cheque (deposit in transit): A cheque received and deposited by the business but not yet cleared by the bank. It appears in the cash book but not yet in the bank statement.
• Direct debit (adjusting item): Items the bank has already recorded but the business has not — such as bank charges, standing orders. These must be entered in the cash book to update it.
• Direct credit (adjusting item): Items the bank has credited to the account but the business has not recorded — such as dividends, interest, or direct deposits by customers.

Compare each entry in the cash book with the bank statement:

The adjusted cash book starts with the unadjusted balance, then adds direct credits and subtracts direct debits.

Worked Example — Bitekerezo Makusaro

The unadjusted cash book balance on 31st December 2021 is TZS 19,648,643 (debit). The bank statement shows:

• Dividend of TZS 65,400 (direct credit) — not in cash book
• Standing order (rent) of TZS 350,000 (direct debit) — not in cash book
• Bank charges of TZS 3,200 (direct debit) — not in cash book

Adjusted Cash Book (Bank Column)

The adjusted balance is TZS 19,360,843. This is the true bank balance to report in the financial statements.

Using the adjusted cash book balance and the reconciling items:

• Add: Unpresented cheques (cheques issued but not yet presented)
• Less: Uncredited cheques (cheques deposited but not yet cleared)

Bank Reconciliation Statement as at 31st December 2021

This matches the bank statement balance, confirming the reconciliation is correct.

You can also start with the bank statement balance and work back to the cash book balance:

You can also prepare the reconciliation without first adjusting the cash book. In this case, all items causing difference are treated as reconciling items:

Bank Reconciliation Statement (using unadjusted balance)

When errors are found in the cash book, correct them in the adjusted cash book:

• Error overstating payments: Reduce the payment entry
• Error understating receipts: Increase the receipt entry
• Dishonored cheque (cheque received but dishonored): Credit the cash book to reverse the original receipt

When the business has an overdraft, the treatment of reconciling items is reversed:

• Unpresented cheques add to the overdraft
• Uncredited cheques subtract from the overdraft

Bank Reconciliation Statement (Overdraft)

1. Balance the cash book (bank column) at the required date
2. Obtain the bank statement for the same period
3. Compare each entry in the cash book with the bank statement
4. Identify adjusting items (direct debits and credits) — update the cash book
5. Identify reconciling items (unpresented and uncredited cheques) — use in reconciliation statement
6. Prepare the adjusted cash book
7. Prepare the bank reconciliation statement starting with either balance

A small shop owner in Iringa who sells soft drinks to local restaurants keeps a cash book recording all money paid into and out of the business bank account. Every month, when they receive the bank statement, they compare it with their cash book to prepare a bank reconciliation. They discover items like bank charges for maintaining the account, standing orders for rent, and any cheques from customers that have not yet cleared. This process helps them know the exact amount of money in the bank for their financial statements and ensures no money is missing due to errors or fraud.