Bank Reconciliation Statement is a statement prepared to reconcile the balances of cash book maintained by the concern and pass book maintained by the bank at periodical intervals . At the end of every month entries in the cash book are compared with the entries in the pass book. The causes of differences in balances of both the books are identified and then reconciliation statement is prepared.
NEED OF BANK RECONCILIATION STATEMENT
- Preparation of bank reconciliation helps in the identification of errors in the accounting records of the company or the bank.
- Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows of a business.
- It helps in identifying any undue delay in the clearance of cheques.
- It acts as a moral check on the employees so they do not indulge in any misappropriation .
HOW BANK RECONCILIATION WORKS
To reconcile the accounts, compare the internal record of transactions and balances to the monthly bank statement . Verify each transaction individually, making sure the amounts match perfectly, and note any differences that need more investigation.1 If you don’t complete the process monthly, you can perform it daily, quarterly, or for any other period you choose.
In the statement, all the deposit will be shown in the credit column and withdrawals will be shown in the debit column. However, if the withdrawal exceeds deposit it will show a debit balance (overdraft).
REASONS OF DIFFERENCE BETWEEN BANK PASS BOOK AND FIRM’S CASH BOOK
The cash book and the bank passbook differences are caused by:
- Bank-issued cheque but not yet deposited for payment
- Paid cheque in the bank but yet not cleared
- Bank made direct debit from the customer’s side
- Cheque/ amount deposited directly to the bank account
- Bank made direct payment from the customer’s side
- Cheques deposited/bills discounted dishonoured
- Errors made while registering the transaction by the company
- Errors made while registering the transaction by the bank
In simple words, Bank Reconciliation is a statement which is prepared at the end of every month to ascertain the difference in the amount between the company’s cash book and bank balance.
Therefore, before closing the accounting chapter in the banking book, reconciliation checks whether the closing page hits green light i.e. ending is correct and safe.
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