A bank statement is a record the bank sends showing all the money that has moved through a business’s account over a period. Reading one with confidence is a useful real-world skill. It is also the foundation for bank reconciliation, a topic you will meet in more detail later in the course.
Before a business can explain why its own records disagree with the bank, it must be able to read what the bank is saying. That is the skill we build here.
What is on a bank statement
A statement lists each transaction in date order. Each line shows a date, a short description, an amount and a running balance. Most layouts use two amount columns, one for money paid out of the account and one for money paid in.
After that comes the balance the account stood at just after that transaction. The description tells you what the entry was, such as a cheque number, a standing order, a direct debit, a card payment, interest or a bank charge.
Read the running balance line by line, not just the total at the bottom. The running balance tells the story of the account.
It rises when money comes in and falls when money goes out. Following it lets you spot the exact point where a large payment left the account or the balance dipped close to zero.
A worked example
Imagine a small trading business. Its statement for one week might read like this (all figures in RM, invented for teaching):
- Opening balance: RM4,000 in the account.
- A customer’s cheque paid in of RM1,500: the balance rises to RM5,500.
- A cheque paid out to a supplier of RM2,000: the balance falls to RM3,500.
- A direct debit for insurance of RM300: the balance falls to RM3,200.
- A bank charge of RM50: the closing balance is RM3,150.
Each line changes the running balance, and the closing balance carries forward as the opening balance of the next period. If you can follow those five lines, you can follow a statement that runs to fifty.
A confusing point: the bank’s point of view
This trips up almost every beginner. On a bank statement, money you pay in often appears as a credit, and money you take out as a debit.
That is the opposite of how you record cash in your own books. In the business’s cash book, receipts are debits and payments are credits, because cash is an asset and an asset increases on the debit side.
Why the reversal? The statement is written from the bank’s point of view. When you deposit money, the bank owes that money back to you.
Your account is a liability in the bank’s records, and liabilities increase on the credit side. When you withdraw, you reduce what the bank owes you, so the bank debits your account. Once you see that the statement is the bank’s book and not yours, the labels stop feeling backwards.
Hold on to one rule: do not let the bank’s wording change your own bookkeeping. Keep recording receipts as debits and payments as credits in your cash book.
Why the balances can differ
The balance on the bank statement often differs from the balance in the business’s cash book. This is normal and not a sign of error. Most differences come down to timing: the two records are up to date to different moments.
- Unpresented cheques. You have written and recorded a cheque, but the person you paid has not yet banked it. The money has left your cash book but not yet the statement.
- Uncredited lodgements. You have paid money in and recorded it, but the bank has not finished processing it. It is in your book before it is on the statement.
- Bank charges and interest. These often appear on the statement first, because the business only learns the exact amount when the statement arrives.
- Standing orders and direct debits. Automatic payments can be recorded by the bank on a date the business forgot to enter, or on a slightly different day.
- Errors. Occasionally one side has recorded a wrong figure, and comparing the two records shows it.
Neither record is “wrong”. They are two honest accounts of the same money, taken at slightly different times, from two angles.
From statement to reconciliation
A bank reconciliation explains these differences in an organised way. You start from one balance, adjust for the timing differences one by one, and show that the two records agree once those items are included. You will practise this later, but it rests on the reading you are learning now.
If you cannot read a statement and see why an item might not yet be in your own books, a reconciliation is just mechanical steps. If you can, it becomes obvious.
Careful reading is also useful in itself. It is how a business catches a payment taken twice, a charge it did not expect or a customer’s cheque that bounced. In real bookkeeping, the statement is one of the main checks that the cash book is telling the truth.
Try it yourself
Exercise: On a bank statement, would a cheque you received and paid in usually appear as a debit or a credit?
Show the answer
A credit. From the bank’s point of view, your deposit increases what the bank owes you, and a liability increases on the credit side.
Where this fits in your course
This topic sits between two others. It builds on business documents, because a cheque, a paying-in slip and a bank statement are source documents. And it leads into bank reconciliation, where the reading skill becomes a full method.
If a statement still feels confusing, that is normal at this stage. One of our teachers can walk you through a real-looking statement line by line. They will show how it lines up with a cash book, so the debit and credit reversal never catches you out again.
Book a trial class. When you are ready for the formal method, see how to prepare a bank reconciliation statement.