A bank reconciliation statement is the process whereby the transactions from the bank account statement as provided by the bank and the firm’s own records of account are harmonized. Alternatively, it is a form that allows for a comparison between an individual’s personal account records and his bank’s records of the individual in order to detect any possible differences.
Purpose of the bank reconciliation statement
Firstly, the bank reconciliation statement is used to compare one’s personal accounts to those of his or her bank account. Secondly, it is used to see if a customer’s cheques have bounced, altered or even been cashed without the consent of the customer. Thirdly, it is used by auditors in carrying out their testing procedures. In addition, it ensures that the records relating to bank transactions are reliable. Finally, it checks the accuracy of the bank balances in the firm’s ledger to ensure that the bank balance is correctly reported in the final books of accounts.
What are the reasons for differences between the cash reported in the accounting records and the cash balance in the bank statements?
Timing differences: These are transactions which are recorded in each set of records over different periods of time. The differences arise because the entity will record the issue of cheques to the bank at the point at which the transaction is initiated. There is no entry that is required in the ledger although such items are supposed to be included in the reconciliation statement. Also, data entry errors committed by either the cash book or the bank can bring these differences.
Transactions initiated by the bank: In this case a bank may have charged interest or fees on deposits and no communication has reached the customer. Some other reasons for this are: Banks fees appearing on the banks statement have not been recorded in the firm’s accounts, interest allowed by the bank, outstanding cheques, interests and dividends collected by the bank if any, direct payments by the bank, bills and notes collected by the bank on behalf of the customer, rejected cheques discounted by the bank but not yet cleared.
Walther. Principles of Accounting: Volume I. San Diego, CA: Bridgepoint Education, Inc. 2012.