What Is a Bank Reconciliation Statement? The Need and Importance of a Bank Reconciliation Statement

Bank Reconciliation Statement Meaning

A businessman maintains a Cash Book with a bank column to record all banking transactions. This bank column represents the bank's current account. Meanwhile, the bank records these transactions in their ledger, known as the Pass Book. When the businessman deposits money or a cheque into the bank, it is recorded in the Cash Book on the debit or receipt side, while the bank records this on the credit or receipt side of the Pass Book. Conversely, when the businessman issues a cheque for payment, it is recorded on the credit or payment side of the Cash Book, and the bank records this transaction on the debit or payment side of the Pass Book.

Ideally, the balances in the Cash Book and the Pass Book should match. However, in reality, these balances often differ. A Bank Reconciliation Statement is prepared to reconcile these differences. The bank periodically issues a statement to the account holder, which is then compared with the Cash Book to identify and analyze any discrepancies.

Bank Reconciliation Statement Definition

A Bank Reconciliation Statement reconciles the bank balance as per the Cash Book with the balance as per the Pass Book. It shows all the reasons for any differences between the two balances at the end of a specific period or month.

Need and Importance of Bank Reconciliation Statement

1. Explains and Clarifies Discrepancies: It explains and clarifies the causes of disagreement between the bank balance as per the Cash Book and the Pass Book.
2. Detects Errors and Omissions: It helps in detecting errors and omissions made in both the Pass Book and the Cash Book.
3. Reduces Fraud: It reduces the chance of fraud by the staff dealing with cash.
4. Ensures Accurate Bank Entries: It helps to check whether the bank makes proper entries for banking transactions.
5. Maintains Accurate Records: It helps to have a moral check on the staff of business organizations to keep the Cash Book up to date.
6. Internal Check Mechanism: It is an important mechanism of internal check and provides information on cash inflow and outflow.

What are some common reasons for differences between the Cash Book balance and the Pass Book balance?

1. Time Difference: Transactions cannot be recorded in the Cash Book and Pass Book simultaneously. For instance, when a businessman deposits a cheque into the bank for collection, it is immediately recorded in the Cash Book. However, the bank will record it in the Pass Book only after collecting the cheque amount. This creates a temporary difference between the balances of the two books.
2. Errors and Omissions: Differences may also arise due to errors made by either the bank or the businessman. For example, if bank charges of ₹540 are recorded as ₹450 in the Cash Book, both books will show different amounts for the same transaction, causing a discrepancy.

Preparation of Bank Reconciliation Statement

Procedure for Finding the Causes of Difference and Effects Thereof

When there is a difference between the balance as per the Pass Book and the Cash Book, follow these steps to identify the causes:

1. Compare the items on the debit side of the Cash Book with those on the credit side of the Pass Book (deposit column) and tick mark the items appearing in both books.
2. Compare the items on the credit side of the Cash Book with those on the debit side of the Pass Book (withdrawal column) and tick mark the items appearing in both books.
3. Make a list of the unticked items in both books. These items are responsible for the difference in balances.
4. Analyze the causes of the differences.
5. Select a date for preparing the Bank Reconciliation Statement, typically the last day of the month, as the Cash Book balance and Pass Book balance are readily available on that date.
6. Prepare the Bank Reconciliation Statement by taking the balance as per the Cash Book or Pass Book as the starting point.
7. Adjust the starting point by adding or subtracting the unticked items identified in step 3. If the starting point is the balance as per the Cash Book, adjust it according to the entries in the Pass Book, and vice versa.
8. Implement the principles of adding and subtracting amounts.
• When the balance as per Cash Book is given: Add credits and subtract debits from both books.
• When the balance as per Pass Book is given: Add debits and subtract credits from both books.
• When an overdraft as per Cash Book is given: Add debits and subtract credits from both books.
• When an overdraft as per Pass Book is given: Add credits and subtract debits from both books.

By following these steps, the Bank Reconciliation Statement can accurately reconcile the balances, ensuring that both books reflect the correct amounts and identifying any discrepancies that need to be addressed.