In preparing a bank reconciliation statement, how are outstanding cheques (checks issued but not yet presented to the bank) treated?

Introduction / Context:
A bank reconciliation statement explains the difference between the balance shown in the cash book and the balance shown on the bank statement. One common reconciling item is outstanding cheques, which are cheques that the company has issued and recorded in its cash book but which the bank has not yet cleared. This question tests whether you know how these outstanding cheques are treated when adjusting the bank statement balance to arrive at the adjusted cash balance.

Given Data / Assumptions:

• Outstanding cheques have been recorded as payments in the company cash book.
• The bank has not yet debited these cheques in the bank statement.
• The reconciliation is prepared to match the cash book balance and the bank statement balance.
• We assume that cheques are valid and not yet stale or cancelled.

Concept / Approach:
When the company issues a cheque, it reduces its cash book bank balance immediately. However, the bank statement will not show this deduction until the cheque is presented and cleared. Therefore, at the reconciliation date, the bank statement balance will be higher than the cash book balance by the amount of outstanding cheques. To reconcile from the bank statement balance to the corrected cash balance, outstanding cheques must be deducted from the bank statement balance, because the bank will eventually pay them. This logic leads us to the correct treatment.

Step-by-Step Solution:
Step 1: Recognize that an outstanding cheque has already reduced the cash book balance but has not yet reduced the bank statement balance. Step 2: Understand that the bank statement balance therefore appears higher than it should be by the total amount of outstanding cheques. Step 3: To reconcile, start from the bank statement balance and adjust it for items not yet recorded by the bank. Step 4: Deduct the total of outstanding cheques from the bank statement balance to arrive at the adjusted bank balance. Step 5: Confirm that this procedure matches option B, which states that outstanding cheques are deducted from the balance as per bank statement.

Verification / Alternative check:
Use a simple example. Suppose the cash book shows a bank balance of 10000. During the last few days, cheques totaling 2000 were issued and recorded, but the bank has not yet cleared them, so the bank statement shows a balance of 12000. To reconcile, you would take the bank statement balance of 12000 and deduct the outstanding cheques of 2000, giving 10000, which matches the cash book. This supports the rule that outstanding cheques are deducted from the bank statement balance, not added.

Why Other Options Are Wrong:
Option A is wrong because adding outstanding cheques to the bank statement balance would increase the difference instead of eliminating it. Option C is wrong because adding outstanding cheques to the cash book balance would move the cash book in the wrong direction; the cash book has already recorded them. Option D is wrong because outstanding cheques are not ignored; they are a standard and important reconciling item. Only post dated cheques that are not yet effective may be treated differently, but that is not the case described in the question.

Common Pitfalls:
A common error is to lose track of which side has already recorded the item. Remember that the cash book is the company record and the bank statement is the bank record. Another pitfall is to apply the same adjustment to both balances, which is incorrect; the reconciliation adjusts only one side at a time. It can help to visualize the timeline of when cheques are written, presented and cleared to understand why outstanding cheques must be deducted from the bank statement balance in the reconciliation process.

Final Answer:
In a bank reconciliation statement, outstanding cheques are deducted from the balance as per bank statement in order to arrive at the adjusted bank balance that matches the cash book.