## **Learning Outcomes**

After reading this article, you will be able to explain the adjusted cash book approach in bank reconciliations for ACCA FA1. You will identify the main reasons for differences between the cash book and the bank statement, adjust for unrecorded items, and prepare a reconciliation statement. You will also understand common errors and how to correct them, ensuring accuracy in accounting records.

## **ACCA Recording Financial Transactions (FA1) Syllabus**

For ACCA Recording Financial Transactions (FA1), you are required to understand how to reconcile the cash book with the bank statement as part of internal controls. In particular, this article focuses on:

- The need for periodic bank reconciliation to detect errors and omissions
- Identifying and adjusting for items missing from the cash book
- Recognising and explaining outstanding cheques and deposits
- Preparing an adjusted cash book before bank reconciliation
- Correcting errors in the bank ledger account
- Explaining reasons for discrepancies between the cash book and bank statement

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is an "outstanding cheque" in a bank reconciliation context?
2. A bank statement shows bank charges not yet entered by the business in its cash book. What action must be taken before preparing the reconciliation?
3. List two types of errors that can cause the cash book and bank statement balances to differ.
4. True or false? Uncleared lodgements should be added to the bank statement balance in a reconciliation.

## **Introduction**

Bank reconciliation is a key process to confirm the accuracy of accounting records. It involves matching the balance shown in a business’s cash book (bank ledger account) with the balance on the external bank statement. Occasionally, these two balances differ due to timing delays, omissions, or errors. The adjusted cash book approach ensures that the cash book is first updated for missing items before comparing to the bank statement.

> **Key Term: Bank reconciliation**
> The process of comparing the cash at bank general ledger account to the bank statement to identify and explain differences, so errors and omissions can be corrected.
>
> **Key Term: Adjusted cash book**
> The cash book balance recalculated after accounting for items found on the bank statement but missing from the business’s cash records.

## Why Do Bank Reconciliations?

Differences between the cash book and bank statement are common. These arise due to timing (for example, cheques issued not yet cleared), entries such as bank charges seen only on the statement, and recording errors. Reconciliation is important to:

- Detect and correct mistakes or omissions in the cash book
- Ensure cash records match external evidence
- Identify fraudulent transactions or unexpected charges
- Maintain confidence in reported bank balances

> **Key Term: Outstanding lodgement**
> Money received and entered in the cash book which has been paid into the bank, but not yet cleared and shown on the bank statement.
>
> **Key Term: Unpresented cheque**
> A cheque written by the business, recorded as a payment in the cash book, but not yet cleared or shown on the bank statement.

## The Adjusted Cash Book Approach: Step-by-Step

The adjusted cash book approach is recommended as the first step before preparing a bank reconciliation statement. This ensures all items (especially those that only appear in the bank statement) are reflected in your records.

### Step 1: Identify Items to Adjust

Compare recent cash book entries and the bank statement. Highlight:

- Cash book entries not on the bank statement (timing differences)
- Bank statement items not yet entered in the cash book (to be adjusted)
  - Bank charges
  - Direct debits and standing orders
  - Interest received or paid
  - Unrecorded receipts/lodgements

### Step 2: Update (Adjust) the Cash Book

Record all missing items directly into the cash book to create an "adjusted" balance:

- Enter bank charges, standing orders, direct debits, dishonoured cheques, interest, etc.
- Rectify any errors found (such as mispostings or arithmetic mistakes)

The aim is to ensure the adjusted cash book contains every transaction up to the statement date except for outstanding lodgements and unpresented cheques (timing differences).

### Step 3: Prepare the Bank Reconciliation Statement

After updating, list the timing differences:

- Add: Any outstanding lodgements – deposits recorded in the cash book, not yet shown on the bank statement.
- Subtract: Any unpresented cheques – payments recorded in the cash book, not yet on the bank statement.

Show your working as:

**Adjusted cash book balance + outstanding lodgements – unpresented cheques = bank statement balance**

Alternatively, you can reconcile the other way round, arriving at the adjusted cash book balance.

### **Worked Example 1.1**

A business’s unadjusted cash book shows a balance of \$2,000 at 30 June. The bank statement shows \$1,600. You note:

- Bank charges of \$40 on the bank statement not yet in the cash book
- A direct debit of \$60 on the bank statement not yet recorded
- Cheques issued totalling \$400 have not yet been presented
- Deposits totalling \$100 are outstanding (in cash book, not yet on the bank statement)

What is the adjusted cash book balance, and how do you reconcile to the bank statement?

> **Answer:**
>
> 1. Adjusted cash book:
>
> - Start with \$2,000
> - Less bank charges \$40: \$1,960
> - Less direct debit \$60: \$1,900
>
> 1. Bank reconciliation:
>
> - Adjusted cash book balance \$1,900
> - Add outstanding lodgements \$100: \$2,000
> - Less unpresented cheques \$400: \$1,600
>
> This matches the bank statement.

### **Worked Example 1.2**

The cash book of K Ltd shows a balance of \$3,500. The bank statement shows \$3,770. On checking:

- A standing order \$120 and bank charges \$10 appear on the bank statement only
- A cheque for \$400 issued has not yet been presented
- A cash deposit of \$60 banked late is not on the bank statement

Explain the steps to reconcile the cash book.

> **Answer:**
>
> 1. Adjust the cash book:
>
> - \$3,500 less \$120 (standing order) = \$3,380
> - \$3,380 less \$10 (bank charges) = \$3,370
>
> 1. Add outstanding lodgement (\$60 not yet credited) = \$3,430
> 2. Subtract unpresented cheque (\$400) = \$3,030
>    This does not tie to the bank statement, so double-check for additional items or errors. If the correct cash book adjustments are made, and only these timing differences exist, the reconciliation should balance.

## Common Errors and Omissions

Bank reconciliation helps catch errors and omissions such as:

- Transactions posted to the wrong amount or account
- Failed or missed postings
- Transposition errors in writing numbers
- Omissions or duplicate entries

Correct these in the cash book as part of the adjustment process.

### **Exam Warning**

> Do not adjust for unpresented cheques or outstanding lodgements in the cash book—these are NOT errors or omissions but timing differences. Adjust the cash book for missing entries and actual errors only.

## Summary

The adjusted cash book approach for bank reconciliation ensures your records include all information from the bank statement before identifying timing differences. The reconciliation statement then explains any remaining unexplained items as outstanding cheques or deposits. This method improves control and accuracy, reduces errors, and ensures internal accounting matches external bank records.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define the purpose and process of bank reconciliation
- Identify the reasons for discrepancies between cash book and bank statement balances
- Explain the steps to adjust the cash book before reconciliation
- Distinguish timing differences (unpresented cheques and outstanding lodgements) from errors and omissions
- Prepare an adjusted cash book and reconciliation statement
- Recognise the importance of correcting errors and maintaining accurate cash records

## **Key Terms and Concepts**

- Bank reconciliation
- Adjusted cash book
- Outstanding lodgement
- Unpresented cheque


Bank reconciliation fundamentals - Adjusted cash book approach