Bank Reconciliation Statement Questions and Answers [With PDF]
Ever compared your cash book with your bank statement and found two different balances? Don’t worry, that is completely normal. A bank reconciliation statement (BRS) is the simple tool accountants use to explain exactly why the two numbers differ.
Below are 25 of the most asked questions on this chapter, answered in plain language, with a full worked example you can copy in your exam. If you are new to this topic, it helps to revise the Cash Book and Trial Balance chapters first.
Basics of Bank Reconciliation
Q1. What is a bank reconciliation statement?
It is a statement prepared on a particular date to explain the difference between the bank balance shown in the firm’s cash book and the balance shown in the bank’s pass book (bank statement). It does not change any account. It only matches two records and explains the gap.
Q2. Why do we prepare it?
We prepare it to find out why the two balances differ, to catch mistakes in either record, to spot delays or fraud, and to know the true bank balance that is available to the business.
Q3. What is a pass book (bank statement)?
It is a copy of the customer’s account kept by the bank. The bank sends it regularly and it shows every deposit, withdrawal, charge and interest entry made in the account.
Q4. What is the difference between the cash book (bank column) and the pass book?
| Point | Cash book (bank column) | Pass book |
|---|---|---|
| Kept by | The business | The bank |
| Point of view | The business’s own record | The bank’s record of the customer |
| Money in the bank shows as | Debit balance | Credit balance |
| Entry made when | A cheque is issued or deposited | A cheque is actually paid or collected |
Q5. Why is a favourable balance a debit in the cash book but a credit in the pass book?
Because the two books are written from different points of view. For the business, money in the bank is an asset (debit). For the bank, the same money is owed to the customer, so it is a liability (credit).
Q6. Why do the two balances differ?
There are three main reasons: (1) timing differences, where one record is updated earlier than the other, (2) items the bank has recorded that the business has not yet entered, and (3) mistakes made in either book.
Reasons for the Difference
Q7. What are cheques issued but not yet presented?
These are cheques the business has written and already deducted in its cash book, but the receiver has not yet taken them to the bank. The bank has not paid them, so the pass book balance is still higher than the cash book balance.
Q8. What are cheques deposited but not yet collected?
These are cheques the business has already added to its cash book, but the bank is still clearing them. Until the bank credits the amount, the pass book balance stays lower than the cash book balance.
Q9. What are bank charges and how do they cause a difference?
Banks deduct fees for things like account maintenance, cheque books and SMS alerts. The business usually finds out only when the statement arrives, so the pass book balance is lower until the cash book is updated.
Q10. What about interest credited by the bank?
Interest on deposits is added to the account by the bank. The business has not recorded it yet, so the pass book balance is higher than the cash book balance.
Q11. What is interest charged on an overdraft?
When an account is overdrawn, the bank charges interest and debits it to the account. Like bank charges, it reduces the pass book balance until the business records it.
Q12. What are direct deposits by customers?
Sometimes a customer pays straight into the firm’s bank account by transfer. The bank credits it at once, but the firm does not know until it checks the statement, so the pass book shows a higher balance.
Q13. What are direct payments made by the bank?
These are payments the bank makes on the customer’s instructions, such as insurance premiums, loan instalments or standing orders. They reduce the pass book balance before the business records them.
Q14. What is a dishonoured cheque?
It is a cheque deposited by the business that the bank could not collect, for example because the payer had too little money. The bank reverses the credit, so the pass book falls. The business must also correct its cash book and show the customer as a debtor again.
Q15. What are items collected by the bank on behalf of the customer?
Banks can collect rent, dividends or bills for their customers. The amount is credited to the account straight away, but it appears in the cash book only after the business learns about it.
Q16. Can mistakes cause a difference too?
Yes. A wrong amount, a wrong total, an entry on the wrong side or an omitted entry in the cash book can all make the balances differ. The bank can make errors as well, though that is rare. Errors should be corrected, not hidden inside the statement.
How to Prepare the Statement
Q17. What are the steps to prepare a bank reconciliation statement?
- Write the date and decide whether to start from the cash book balance or the pass book balance.
- Tick the entries that appear in both the cash book and the pass book.
- The entries left without a tick show the reasons for the difference.
- Decide for each item whether to add it or subtract it.
- Work out the final figure and check that it equals the other balance.
Q18. Which items need to be entered in the cash book, and which do not?
Items that the bank has recorded but the business has not (bank charges, interest, direct deposits, direct payments and dishonoured cheques) really need a cash book entry. Timing items (cheques issued but not presented, and cheques deposited but not collected) never need an entry because the cash book is already correct for them.
Q19. What are the add and less rules when starting from the cash book balance?
This rule assumes a favourable balance (money in the bank). The memory trick is to ask yourself, “What will the bank still do, or has already done, that my cash book doesn’t know?”
| Add | Less |
|---|---|
| Cheques issued but not yet presented | Cheques deposited but not yet collected |
| Interest or dividend credited by the bank | Bank charges debited by the bank |
| Direct deposits and amounts collected by the bank | Direct payments made by the bank |
| Dishonoured cheques |
Q20. What changes if I start from the pass book balance?
Every sign reverses. Items you added before are now deducted, and items you deducted before are now added. That is because you are travelling in the opposite direction, from the bank’s record back to the cash book.
Q21. What if the balance is an overdraft?
When the account is overdrawn, all the add and less rules reverse. A simple way to avoid mistakes is to treat the overdraft as a negative number and follow the same steps.
Worked Example
Question: On 31 December, the bank column of a trader’s cash book showed a debit balance of 25,000. Comparing it with the pass book gave these differences: cheques issued but not yet presented 4,000; cheques deposited but not yet collected 6,000; bank charges 150 not yet entered in the cash book; interest of 300 credited by the bank; a customer’s direct deposit of 2,500. Prepare a bank reconciliation statement.
| Bank Reconciliation Statement as on 31 December | Amount |
|---|---|
| Balance as per cash book (debit) | 25,000 |
| Add: Cheques issued but not yet presented | 4,000 |
| Add: Interest credited by the bank | 300 |
| Add: Direct deposit by customer | 2,500 |
| Less: Cheques deposited but not yet collected | (6,000) |
| Less: Bank charges | (150) |
| Balance as per pass book | 25,650 |
Check: 25,000 + 4,000 + 300 + 2,500 – 6,000 – 150 = 25,650. If you start from the pass book balance of 25,650, reverse every sign and you get back to 25,000.
Q22. What is the adjusted cash book balance in this example?
After entering the bank’s items in the cash book (interest +300, direct deposit +2,500, bank charges -150), the cash book balance becomes 25,000 + 300 + 2,500 – 150 = 27,650. This is the true bank balance in the business’s books. The remaining gap with the pass book (25,650) is explained by the two timing items: 6,000 not yet collected and 4,000 not yet presented.
Importance and Exam Tips
Q23. Is the bank reconciliation statement a part of the final accounts?
No. It is only a working statement, like a trial balance. It is not recorded in the books and does not appear in the profit and loss account or the balance sheet.
Q24. What are the advantages of preparing it regularly?
- It shows the true bank balance.
- It helps find errors in the cash book or the bank statement.
- It helps detect fraud, such as altered cheques.
- It keeps track of cheques that have not yet been cleared.
- It helps manage cash and avoid overdrawing the account.
Q25. What mistakes do students often make?
- Adding items that should be deducted, usually because they forgot which book they started from.
- Making a cash book entry for cheques issued but not presented. No entry is needed for timing items.
- Ignoring an overdraft and treating it as a favourable balance.
- Forgetting that a dishonoured cheque lowers the cash book balance.
- Not checking that the final figure matches the other balance.
Final tip: Always write which balance you are starting from and whether it is favourable or an overdraft. Most lost marks in this chapter come from a wrong sign on a single item.
Ready to test yourself? Take the chapter quiz below, then read the next chapter in the series.
