Bank Reconciliation Statement Need

Introduction 

A bank reconciliation statement is a statement prepared by the business to reconcile or settle the differences arising between the bank balance indicated by the cash book and the balance shown by the passbook through the bank. 

A bank reconciliation statement helps identify the reasons behind the differences between the two. There are specific bank reconciliation statement rules designed to avoid errors and mistakes when starting to prepare a statement. 

A bank reconciliation statement is prepared by the business enterprise or the company’s auditors. There is a significant need for bank reconciliation statements because these statements help in avoiding fraud in transactions. A bank reconciliation is a valuable financial tool. Bank reconciliation statement rules help in controlling the possibilities of malicious intent.

Bank Reconciliation Statement Rules 

Bank reconciliation can be a tricky process involving many variables that can lead to confusion. Thus, while preparing one, specific bank reconciliation statement rules need to be necessary. These rules are as follows. 

1. A bank reconciliation statement is prepared by the company or the business enterprise and not by the bank.
2. The second rule is the starting point when preparing a bank reconciliation statement. If you start with the cash balance, then the treatment of various items will be different compared to a statement beginning with the bank balance amount.
3. If a statement is started with the cash balance, then changes have to be made accordingly in the bank account balance of the company or the business firm. If it is started with the bank balance, then changes have to be made in the company’s cash balance or the firm.

Need for a bank reconciliation statement –

There are various significant reasons why bank reconciliation statements are prepared. Bank reconciliation statements serve a great purpose in maintaining the authenticity of records and how money is dealt. The need for a bank reconciliation statement is summarised as follows – 

1. Accuracy 

Preparing a bank reconciliation statement can help figure out the reasons behind the differences that come to light. Business organizations can work on eradicating these causes, ensuring the accuracy of these financial records.

2. Check on entries 

A bank reconciliation statement helps an accountant keep a check on entries made unnecessarily or fraudulently in the books to modify or change the transactions.

3. Rectifying incorrect entries 

A bank reconciliation statement helps an accountant recognise entries that are recorded incorrectly in both the cashbook and the passbook. The accountant can rectify those entries to achieve the balance in the books.

4. Identifying dishonest behaviour of employees 

Preparing a bank reconciliation statement has many benefits. One of them is to keep an easy check on the fraudulent behaviour of the employees of a business enterprise. Employees who indulge themselves in any malicious transaction can be easily caught by recording every single inaccuracy in the statement.

How is a Bank Reconciliation Statement prepared?

Let us understand the process through; which a simple Bank Reconciliation Statement is prepared. Here are the following steps

• Get both the statements of accounts and check if there are any differences in the final amounts of these two accounts
• If the final amounts tally, there is no need to create a Bank Reconciliation Statement
• Tally the differences of both the statements and identify the transactions that are yet to be recorded in the accounts
• Arrange all the unrecorded transactions in order of their nature
• Some examples of these transactions are –

1. 1. 1. Cheques not yet presented for payment to the bank
      2. Cheques already deposited but not cleared through the bank

• The last step is to start preparing the Bank Reconciliation Statement and getting to know the impact of the pending transactions according to the cashbook requirements and the passbook as the need arises

Example of a Bank Reconciliation Statement 

ABC and Co. have a balance as per the passbook of Rs. 1,000 as of 31st March 2020. It has a balance of Rs. 650 as per the cash book as of 31st March 2020. 

1. A cheque with the sum of Rs. 100 was deposited
2. The bank did not collect it
3. Bank interest of Rs. 300 was recorded in the book but not in the passbook
4. Cheques worth Rs. 200 were issued but were not made for payment
5. Bank charges of Rs. 50 were recorded in the passbook but not in the cashbook

Conclusion

Bank reconciliation statement rules are considered very important while preparing such a statement. These rules assist in avoiding errors and clerical mistakes, which ensures accurate, proper records. The significant need for a bank reconciliation statement lies in these rules, as they help in formulating a coherent reconciliation statement that is thorough in every aspect. These rules enhance the reliability of the financial records of a company.