A bank reconciliation statement is a statement that explains the difference between the balance at the bank as per the cashbook and balance at the bank as per the bank statement . Simply put it is a statement that explains the difference between the cashbook balance and the bank statement. The functions of a bank reconciliation statement are:
The differences between the bank statement and the cash book often arise from either timing of the transaction recording or from errors made by the bank or by the business.
a. Timing differences: This gives rise to items that:
i) Are recorded in the cashbook but do not appear in the bank statement e.g.
Deposits in transit i.e. amount that have already been recorded by the company, but are yet to be recorded by the bank.
Outstanding checks i.e. checks written and recorded by the company in its cashbook, but are yet to be cleared by the bank. Most checks written in the last days of the month are likely to be outstanding checks.
ii) Are recorded in the bank statement but they are not reflected in the cashbook e.g.
Bank charges i.e. fees that is deducted by the bank as service charge and reflected in the bank statement but if the company has not been notified this will not be reflected in the cash book.
Interest earned will be reflected in the bank statement but the company gets to know of it upon receipt of the bank statement.
Notes receivable: In cases where the bank collects such notes for the company, they will be reflected in the bank statement but not in the cashbook.
b. Differences caused by errors: The Company or the bank could make errors in posting entries to the cashbook or bank statement respectively. The errors could be for example entering an incorrect amount or omitting a transaction.
I had an experience with Barclays Bank last year. I had opened an account with them, at that point they told me the particular account I had opened did not attract monthly charges. I deposited $100 to the account. The bank emailed me my bank statement at the end of the first month and in it there was a bank charge of $5 which to my knowledge was not supposed to be charged. I went to the bank to inquire why there was a bank charge yet the particular account I had opened was not meant to attract such charges. I was told the attendant had made an error and opened a different category of the account, hence the charge. My account was then changed to the right category the transaction reversed.
The bank reconciliation Process:
i) Identify the items that appear both in the cashbook and the bank statement by ticking them.
ii) The items not ticked on the bank statement are posted to the bank columns of the cash book to bring the cash book up to date.
iii) The cashbook’s bank columns are now balanced to find the revised figure.
iv) The items not ticked in the cash book are timing differences.
v) The timing differences are used in the preparation of the reconciliation statement.
Objectives of Internal Control:
Internal control is a process put in place by top management by which the structures of the organization, information systems and authority are designed in a way as to help the organization meet its goals . It a means, by which the organization’s resources are measured, allocated, monitored and directed. The main objective of such controls is to establish an organizational structure with sufficient checks and balances among the various departments as part of the day to day business process management and they include the following:
This is the main reason for having internal control structures. Internal control structures are set up to ensure that monetary transactions as carried out by the company are all in sync with the company’s operational activities. Internal control ensures that funds are properly accounted for, fraud is identified early enough and any errors in posting entries in the books of accounts are identified and corrected. Reliability also includes the reliability of information and timelines. Top management need to be provided with accurate information, as they make critical decisions based on the data presented to them.
Confirming to Regulations
Internal controls are necessary to ensure that the organization adheres to the applicable rules and regulations as may be set by the government of the day. This will ensure the organization voids legal consequences, hence avoiding any litigation costs.
By ensuring there are checks and balances in the business processes, Internal controls help avoiding wastage of the organization’s scarce resources and also increases efficiency of the available resources.
Safety of Information and Material
Internal controls help in maintain safety measures of material and information of the organization. This important especially in safeguarding confidential information of the organization. This is important especially in financial institutions which are in custody of valuable assets. Several physical controls such as keeping valuables under lock and key to prevent theft of valuables.
Bhattacharyya, M. (2010, August 7th). Objectives of Internal Control. Retrieved Nov 11, 2012, from Buzzle: http://www.buzzle.com/articles/objectives-of-internal-control.html
Bragg., S. M. (2006). Accounting control best practices. New Jersey : John Wiley & Sons, Inc.