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Bank Reconciliation

What is a bank reconciliation statement?

A Bank reconciliation statement is a report which compares the bank balance as according to the company’s accounting records with the balance shown on the bank statement.

Why is bank reconciliation necessary?

It is normal for a company’s bank balance according to its accounting records to differ from the balance as on the bank statement due to timing differences. Certain transactions are recorded by the business that are updated in the bank’s system after a certain time lag.  Some transactions are accounted for in the bank’s financial system before the company uses them in its own accounting system. Such timing differences appear as reconciling items in the Bank Reconciliation Statement.

The purpose of preparing a Bank Reconciliation Statement is to detect any inconsistencies between the accounting records of the business and the bank in addition to those due to normal timing differences. Such inconsistencies might exist due to an error on the part of the company or the bank.

Importance of Bank Reconciliation

  • Preparation of bank reconciliation helps to identify the errors in the accounting records of the company or the bank.
  • Cash is the most vulnerable asset of a business. Bank reconciliation provides the necessary control mechanism to help protect the valuable resource through uncovering irregularities such as unauthorized bank withdrawals.  In order for the control process to work effectively, it is necessary to divide the duties of persons responsible for accounting and authorizing of bank transactions and those responsible for preparing and monitoring the company’s bank reconciliation statements.
  • If the bank balance appearing in the accounting records can be confirmed to be correct by comparing it with the bank statement balance, it provides an added form of trust that the bank transactions have been recorded correctly in the company records.
  • Monthly preparation of bank reconciliation assists in the regular monitoring of the cash flow of a business.