Before reconciling, which items must be entered in the cash book because the business only learns of them from the bank statement?
Update the cash book for items shown on the bank statement before preparing a reconciliation
A focused answer to the O-Level Principles of Accounts outcome on updating the cash book. Bank charges, interest, standing orders, direct debits, dishonoured cheques, and why these are entered before reconciling.
Reviewed by: AI editorial process; not yet individually human-reviewed
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What this dot point is asking
SEAB wants you to update the cash book for items shown on the bank statement before preparing a bank reconciliation. The central insight is the split between two kinds of difference: items the business did not know about (bank charges, interest, standing orders, dishonoured cheques) are genuinely missing from the cash book and must be entered to correct it, whereas timing differences are left for the reconciliation statement.
The answer
Two kinds of difference
When the cash book and the bank statement disagree, the differences fall into two groups:
| Group | Cause | Where it is dealt with |
|---|---|---|
| Missing from cash book | Business did not know until it saw the statement | Entered in the cash book |
| Timing differences | Both records will agree eventually | The reconciliation statement |
Items entered in the cash book
These are transactions the business learns of only from the bank statement, so the cash book is wrong without them:
- Bank charges - credit the cash book (money out).
- Interest received - debit the cash book (money in).
- Interest charged (on an overdraft) - credit the cash book (money out).
- Standing orders and direct debits - credit the cash book (money out).
- Credit transfers received (money paid in directly by a customer) - debit the cash book (money in).
- Dishonoured cheque - credit the cash book (a receipt is reversed because the cheque bounced).
After these entries, the cash book shows the corrected (updated) balance.
Why this comes first
The cash book is the business's own record. If it is missing genuine transactions, it is simply wrong, and no reconciliation can fix that. So the cash book is corrected first; only then are the remaining timing differences (unpresented cheques and uncredited deposits) handled in the reconciliation statement.
Examples in context
Example 1. A surprise on the statement. A trader's cash book looks right until the bank statement arrives showing \60\ standing order for a subscription. Neither was in the cash book, so the trader enters both (credits, money out), lowering the cash book balance to its true figure before any reconciliation is attempted.
Example 2. A cheque that bounced. A customer's \400\, reversing the earlier receipt, and the customer once again becomes a receivable. Only the updated cash book is then reconciled.
Try this
Q1. State whether each is debited or credited in the cash book when updating: bank charges, interest received, a dishonoured cheque. [3 marks]
- Cue. Bank charges - credit; interest received - debit; dishonoured cheque - credit.
Q2. A cash book debit balance is \1,500\ and interest received is \20$. State the corrected balance. [2 marks]
- Cue. Corrected balance = 1\,500 + 20 - 50 = \1,470$ (debit).
Q3. Explain why a standing order is entered in the cash book rather than the reconciliation statement. [2 marks]
- Cue. It is a payment the business made through the bank but may not have recorded, so it is missing from the cash book and must be entered to correct it, not a timing difference.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original7 marksA cash book shows a debit balance of \2\,400\; interest received \30\; a customer's cheque for \300$ dishonoured. Update the cash book and state the corrected balance.Show worked answer →
Items not yet in the cash book must be entered:
- Bank charges \50$: credit the cash book (money out).
- Interest received \30$: debit the cash book (money in).
- Standing order \200$: credit the cash book (money out).
- Dishonoured cheque \300$: credit the cash book (the receipt is reversed).
| Cash book (updating) | $\
| --- | --- | --- | --- |
| Balance b/d | 2,400 | Bank charges | 50 |
| Interest received | 30 | Standing order | 200 |
| | | Dishonoured cheque | 300 |
| | | Balance c/d | 1,880 |
| | 2,430 | | 2,430 |
| Balance b/d | 1,880 | | |
Corrected balance = 2\,400 + 30 - 50 - 200 - 300 = \1,880$ (debit).
Markers reward debiting interest received, crediting the charges, standing order and dishonoured cheque, and the corrected balance of \1,880$.
Original4 marksExplain why bank charges and a dishonoured cheque are entered in the cash book rather than treated as timing differences in the bank reconciliation statement.Show worked answer →
Bank charges and a dishonoured cheque are items the business did not previously know about: it only learns of them when it sees the bank statement. They are not timing differences (where both records will eventually agree); they are transactions genuinely missing from the cash book.
Because the cash book is the business's own record and is wrong without them, they must be entered in the cash book to correct it. Only after the cash book is updated are the remaining differences (unpresented cheques and uncredited deposits, which are timing differences) dealt with in the reconciliation statement.
Markers reward explaining that these are items missing from the cash book (not timing differences), so they correct the cash book itself before the reconciliation.
Related dot points
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