Businesses keep cash books to track cash and bank transactions. On the cashbook, the cash column shows cash available for the firm, whereas the bank column represents cash in the bank. Deposits get recorded on the cashbook’s credit side of the customer’s account, while withdrawals are recorded on the debit side.
In this story let us know in detail about the bank reconciliation statement including its need, benefits, how to prepare it etc.
Bank Reconciliation Statement: Need
Bank Reconciliation Statement is created regularly to ensure that bank-related transactions are appropriately documented in the cash book’s bank column and in the bank’s books. Bank Reconciliation Statement detects inaccuracies in transaction recording and establishes the precise bank balance on a given date. There is no deadline for preparing a Bank Reconciliation Statement.
Bank Reconciliation Statement: Benefits
Bank reconciliations aid in the detection of fraud and the reduction of the risk of transactions resulting in penalties and late fees. Bank Reconciliation Statement provides a firm with various benefits, including:
- Detecting mistakes: A bank reconciliation aids in the detection of accounting errors that occur frequently in all businesses. Addition and subtraction errors, lost payments, and double payments are some examples.
- Interest and fee tracking: Banks may charge you interest, fees or penalties on your account. You can add or deduct such amounts by using monthly bank reconciliation.
- Detecting cheating: You may prevent money theft by employees. You can use a bank reconciliation statement to discover and uncover fraudulent transactions. To avoid your accounting employee manipulating your books and reconciliations, you should hire an independent person to complete the reconciliations.
- Tracking receipts: Bank Reconciliation Statement confirms all of your receipts, preventing unpleasant circumstances and identifying entries for receipts that you did not deposit.
Bank Reconciliation Statement: Preparation
- The first step is to check the opening balances of the cash book’s bank column and the bank statement which may differ due to un-credited or unpresented cheques from a prior period.
- Compare the credit side of the bank statement to the debit side of the bank column of the cash book, and the debit side of the bank statement to the credit side of the cash book. Mark all things that appear in both records with a tick.
- Examine the entries in the bank column of the cash book and the passbook for entries that have been wrongly entered. Make a list of these transactions and make the required changes to the cash book.
- Correct mistakes or inaccuracies in the cashbook.
- Calculate the rectified and amended bank column balance in the cash book.
- Begin the bank reconciliation statement by updating the cash book balance.
- Uncredited cheques (cheques deposited in the bank but not yet collected – income) are subtracted from unpresented cheques (cheques issued by the business firm to its customers or suppliers but not presented for payment – expense).
- Make necessary adjustments to compensate for the bank errors. Add the sums and subtract the amounts erroneously credited by the bank if the bank reconciliation statement starts with the debit balance as per the bank column of the cash book. For a credit balance start, reverse the process.
- The final figure must be equal to the bank statement balance.
Bank Reconciliation Statement: Steps to ensure efficiency
- Ensure that you have necessary paperwork and information to have a greater understanding of the situation.
- Avoid mistakes like:
- Duplicate entries
- Failure to account for a transaction that would result in a discrepancy equal to the amount missing.
- Errors in inputting commas and dots that result in disparities that could be considerable in value.
- Transposition errors.
- Check if there is any mistake from the banks’ side: Banks may deduct the wrong amount from your account or credit deposits that are not yours. If you come across mistakes with no explanation or are unsure, the best thing to do is to contact your bank.
- Items to reconcile: It is conceivable to list discrepancies, reconcile them and then forget about it. If the differences continue to grow without being addressed, your bank reconciliation will become worthless. A regular check on reconciled transactions is required to ensure that they are reported correctly in the bank column of your cash book and on the bank statement.