Bank Reconciliation

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We have already seen that Reconciliation is an activity which ensures that the two sets of accounting record/balances are matching. It is an act of validating recorded balance with source documents.

Now we will move ahead to see the use of reconciliation in term of bank transactions.
When any organization/individual transact with the bank they keep all their transaction record in cash book. Similarly, bank presents its transaction record in the form of statement/passbook print.
But most of the time these both records won’t match due to timing constraint or lack of information passed from both the ends.

Every time as a customer, organization/individual never inform the bank that they are issuing any cheque or every time bank never inform their customer that they are charging certain fees for agreed services.
for example, the bank provides SMS alert service and for that, it charges a certain amount on every quarter but the customer will come to know about these charges only when he/she get their bank statement.

Bank Reconciliation Statement (BRS) –
In these advance days, for any organization, it’s a day to day practice to do their payment or receipts through the bank by online transactions or by cheque. While doing all these transactions, on a regular interval business/individual needs to do reconciliation of their cash book and bank statement as a control point to find out whether there is any difference.
On the basis of this reconciliation (between Bank Statement and Cashbook) business/individual prepare a statement, that statement is called as Bank Reconciliation Statement.

Need and Importance of Bank Reconciliation Statement –
·        It reflects the real position of the balances in our record.
·        It shows the actual payable and receivable by showing the unclear/cleared cheque status.
·        It helps to prevent fraud.
·        It helps to identify the mistake made in Statement or in Cashbook
·        It gives a message to the business not to keep both the functions (Bank reconciliation and Cash Book) with one person for strong control
·        It also helps to find out the reasons for the difference between cash book and statement/Passbook

Reasons for Differences –
Following three points are the major reasons for the differences in the reconciliation statement.
1) Timing difference – This difference is due to the gap between the recording of a transaction in a party’s book and bank’s book. For example, when the customer issues any check, it immediately gets recorded in the customer’s book whereas in the bank it will get recorded at the time that check will be presented for clearing.
2) Bank Actions – Some differences may come due to bank activity. For example, bank record interest in the customer’s account and the customer will come to know once he/she receives the statement.
3) Errors by both the party – Sometimes there may be the possibility that the bank statement may not be correct or sometime there may be error committed by the person responsible for maintaining the cash book.

Above three major difference causing reasons are followed by below points –
4) Check deposited but not processed by the bank – When customer deposit any check in the bank he debits bank account and credit debtor’s account but at the same time bank will not credit that customer’s account until the check clearing process complete. This causes a difference in reconciliation.
5) Check issued but not submitted by party – When any person issues check to the third party, he credits his bank account at that moment but until the third party submits that check into the bank, the bank will not debit customer’s account because of which there will be a difference in reconciliation.
6) Bank Charges debited by Bank but not recorded by party – In some cases, bank charge customer’s account for fees (like SMS charges) and debit customer’s account but these kinds of charges will not be in customer’s knowledge until he receives bank statement so while preparing reconciliation this will be the cause of difference.
7) Standing Instructions
8) Bank interest credited by the bank – Bank gives interest as per terms and condition and credit customer account with interest amount during the period
9) Direct deposit by customers/debtors
10) Direct Debit

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