The purpose and process of bank reconciliation statements

¶ … Bank Reconciliation Statement

What is a Bank Reconciliation Statement?

Accounting entries are made at different times in different places. This is most evident in the entries made at the bank and by individuals or businesses in their personal cash registers. This leads to discrepancies at the end of the accounting term and the balance at the bank and cash books do not tally. To avoid this discrepancy, certain adjustment entries are made.

In most cases, a statement or form is prepared to reconcile the differences that exist between the bank pass book and the personal cash book and this statement is known as Bank Reconciliation Statement. "The statement which is prepared for reconciling the balances of cash book and pass book is called a Bank Reconciliation Statement" (Sofat & Hiro, p.333).

The Bank Reconciliation Statement is prepared to show the differences that exist between the bank pass book and the bank column of the personal cash book. It is usually prepared after the bank sends the pass book back to the owner or business with the updated entries. In some cases, it is done after the account holder receives the bank statement at the end of a financial period or cycle.

Purpose of a Bank Reconciliation Statement

A Bank Reconciliation Statement is prepared to understand the causes of differences between the bank pass book and the bank column of the cash book. The purpose of a bank reconciliation statement has increased in importance during the last few decades and this is primarily due to the accounting procedures involved in the handling of a dishonored check. This makes the Bank Reconciliation Statement important for businesses that routinely use checks to make deposits and payments. It helps these businesses to identify the errors and discrepancies that take place over a short period of time, such as one month and this is easier than reconciling all the entries at the end of the financial year. It is particularly useful in the following situations:

To avoid manual errors and frauds

Another reason for the preparation of a bank reconciliation statement is to identify any frauds committed by the accounting staff. A staff could make an entry in the bank column of the cash book, but may fail to deposit the check in the bank due to negligence or with an intent to fraud. This statement also helps to keep a watch over the activities of the accounting staff and ensure that they are honest towards the business. Any manual errors made by the staff can also be identified and corrected with the help of a bank reconciliation statement.

Formulation of credit policy

An analysis of the bank reconciliation statement can provide a better idea to the business about the payments to suppliers and creditors. It can help the owner to understand a pattern when it comes to deposits and collections and based on this information, the business is in a better position to formulate its credit and other financial policies.

Conclusion

In short, a bank reconciliation statement is a useful form for businesses to help them to balance their accounting books and to get a better idea of their financial position and policies at any given time.