## **Learning Outcomes**

After reading this article, you will be able to explain the adjusted cash book approach in bank reconciliations, identify errors and omissions in the cash at bank general ledger account, recognise timing differences between the ledger and the bank statement, perform corrections using the adjusted cash book, and determine the correct cash balance to report in the financial statements for the ACCA FA2 exam.

## **ACCA Maintaining Financial Records (FA2) Syllabus**

For ACCA Maintaining Financial Records (FA2), you are required to understand why bank reconciliation is performed, how to identify and correct differences between the bank statement and the cash at bank ledger account, and how to use the adjusted cash book to ensure accurate reporting.

- Explain the purpose of bank reconciliation and the adjusted cash book approach
- Identify errors and omissions in the bank general ledger account and bank statement
- Distinguish between timing differences and actual errors
- Update the cash at bank ledger account using the adjusted cash book
- Prepare a reconciliation statement between the general ledger and the bank statement balances
- Determine the correct cash at bank balance for financial statements

## **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 the main purpose of preparing an adjusted cash book during bank reconciliation?
2. Which of the following items would be entered in the adjusted cash book, not the bank reconciliation statement?
   a) Outstanding cheques  
   b) Bank interest received, not yet in the ledger  
   c) Deposits in transit  
   d) Unpresented cheques
3. True or false? Only timing differences, not errors, are corrected in the adjusted cash book.
4. Briefly explain why the bank statement balance might differ from the cash at bank ledger account at the period end.

## **Introduction**

Bank reconciliation ensures the cash at bank general ledger account matches the bank statement, after allowing for timing differences. Sometimes, items such as bank charges, direct debits, or interest are included by the bank but not yet entered in the ledger. The adjusted cash book approach first corrects the general ledger for these missing or incorrect entries before preparing the final reconciliation statement.

This article explains each step in the adjusted cash book approach, so you can identify errors and omissions, update the cash at bank ledger balance, and prepare a correct bank reconciliation for ACCA FA2 exams.

> **Key Term: cash at bank general ledger account**
> The main accounting record used by a business to track all receipts and payments through its bank account.
>
> **Key Term: adjusted cash book**
> A version of the cash at bank ledger account updated for errors and omissions identified during the reconciliation process, reflecting the true closing balance.
>
> **Key Term: timing difference**
> A transaction recorded in the business's accounting records but not yet processed by the bank, or vice versa; it will appear in the bank statement or ledger in a later period but has not yet been reflected in both.

## Understanding the Adjusted Cash Book Approach

### Why Use the Adjusted Cash Book?

The cash at bank ledger and the bank statement rarely match exactly at any given date. This is mostly due to:

- Transactions recorded by the bank before the business updates its accounting records (e.g. bank charges, direct debits, interest credited)
- Errors or omissions in either the ledger or by the bank
- Timing differences (e.g. cheques issued but not yet cleared, or receipts paid in but not yet credited by the bank)

The adjusted cash book is used to:

1. Update the cash at bank ledger balance for any missing or incorrect entries.
2. Ensure only _timing differences_ remain when preparing the final bank reconciliation statement.

### Items Included in the Adjusted Cash Book

The adjusted cash book should include all items on the bank statement that:

- Have not been entered in the cash at bank ledger account, and
- Are not timing differences (i.e., they are errors or omissions).

Common items to update are:

- Bank charges and interest debited by the bank but not recorded in the ledger
- Standing orders and direct debits initiated by the bank
- Direct credits and interest income credited by the bank but missing from the ledger
- Receipts paid directly into the bank, such as customer payments, not yet posted

### What Should _Not_ Be Entered?

Do not adjust the cash book for unreconciled cheques (issued or deposited but not cleared at the statement date) or for genuine timing differences; these are listed separately in the reconciliation statement.

### Calculating the Adjusted Cash Book Balance

To update the cash at bank balance:

1. Start with the last balance brought down in the cash at bank account.
2. Add items credited by the bank but not yet in the ledger (e.g. interest received).
3. Subtract items debited by the bank but not yet in the ledger (e.g. bank charges).
4. After all corrections, the closing balance is the _adjusted_ cash book balance—this should be reported in the financial statements.

### **Worked Example 1.1**

On 30 June, the cash at bank ledger account shows a debit balance of \$2,400. The bank statement shows a balance of \$2,000. Upon review, you find:

- Bank charges of \$50 shown on the statement, not in the ledger.
- A standing order payment of \$200 in the statement, not in the ledger.
- Interest income of \$20 credited by the bank, not in the ledger.
- Cheques issued totaling \$400 have not been presented.
- \$100 of customer deposits has not yet appeared on the bank statement.

**Required:** Calculate the adjusted cash book balance.

> **Answer:**
> Start with the ledger balance: \$2,400
>
> - Deduct bank charges: \$2,400 – \$50 = \$2,350
> - Deduct standing order: \$2,350 – \$200 = \$2,150
> - Add interest income: \$2,150 + \$20 = \$2,170
>   The adjusted cash book balance is \$2,170. This balance will appear in the financial statements and is used to prepare the bank reconciliation.

### Preparing the Bank Reconciliation Statement

After updating the cash book, compare the **adjusted cash book balance** to the **bank statement balance**, listing only _timing differences_:

- Add any outstanding deposits (recorded in the cash book, not in the bank yet)
- Deduct any unpresented cheques (issued and recorded, not yet processed by the bank)

### **Worked Example 1.2**

Continuing from the previous example, the adjusted cash book balance is \$2,170, and the bank statement is \$2,000. The only outstanding items are:

- Unpresented cheques: \$400
- Outstanding deposits: \$100

**Required:** Prepare a bank reconciliation statement as at 30 June.

> **Answer:**
> Start with the bank statement balance: \$2,000
> Add:
>
> - Outstanding deposits: \$100
>   Less:
> - Unpresented cheques: \$400
>   \$2,000 + \$100 – \$400 = \$1,700
>   The reconciled figure (\$1,700) does not match the adjusted cash book balance (\$2,170). Go back and check calculations and ensure all updates have been made. If all items are correctly posted, the balances should agree after timing differences are considered.

### Identifying and Correcting Errors

Common types of errors identified during bank reconciliation:

- Recording errors in the cash at bank ledger (wrong amount or omission)
- Bank errors (incorrect postings)
- Double recording of receipts or payments

Always correct these errors in the adjusted cash book before finalising the reconciliation.

### **Exam Warning**

> Do not include timing differences like outstanding cheques in the adjusted cash book—they belong only in the reconciliation statement. Only actual errors or omissions from the accounting records must be corrected in the adjusted cash book.

### **Revision Tip**

> Always update your cash at bank ledger account for all items missing or incorrect before beginning your bank reconciliation. This ensures your reconciliation statement only contains genuine timing differences.

## **Summary**

The adjusted cash book approach ensures the cash at bank ledger reflects all transactions recorded by the bank. After correcting all errors and omissions, the difference to the bank statement is solely due to timing differences. This process is essential to accurately report cash balances in the financial statements and is often tested in ACCA FA2.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Explain why bank reconciliation is necessary and the role of the adjusted cash book
- Identify errors, omissions, and bank-initiated transactions missing from the ledger
- Update the cash at bank ledger using the adjusted cash book approach
- Distinguish between timing differences and errors or omissions
- Prepare a bank reconciliation statement using the adjusted cash book balance
- Determine the correct cash at bank balance to report in the financial statements

## **Key Terms and Concepts**

- cash at bank general ledger account
- adjusted cash book
- timing difference

Bank reconciliation - Adjusted cash book approach