Maintaining the accounts of any firm is a tedious job that requires the supervision of a trained and experienced accountant. When preparing the accounts of any individual or firm, one of the essential steps undertaken in the preparation of a bank reconciliation statement.
While many contemplate the need for reconciliation, understand that its preparation is imperative, so as to arrive at the correct bank balances in the books of the firm and the bank itself. This is why, while preparing the accounts of any firm or an individual, an accountant will make sure that he prepares a bank reconciliation statement.
What is a Bank Reconciliation Statement?
Vital to the preparation of the accounts of any individual or firm, a bank reconciliation is a preliminary and definitive step towards determining the accuracy of bank balance, stated in the pass book and cash book. When an accountant prepares a bank reconciliation statement, it helps in ensuring no discrepancy remains with respect to the bank balances appearing in the books of the individual and firm.
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Need for Preparing a Bank Reconciliation Statement
Among other reasons, enlisted below are some of the most important reasons why it is important to prepare a bank reconciliation statement:
Each month, the passbook of the bank and the cash book of a firm, display a particular amount, which is the balance in the bank as on that date. However, due to delay in the recording time and period of the same in the respective books, there is a high possibility that on the day of comparison the balances in the two books, would not match.
Hence, having prepared a bank reconciliation statement, one can determine the reasons and amounts by which the two balances differ. This analysis would further help the accountant in recording the missing amounts in each book. Hence, after the preparation of a bank reconciliation statement, the books of accounts would actually display a true and fair position of the firm.
Check on the Entries
In the process of preparing a bank reconciliation statement, an accountant will be able to point out all entries or amounts, recorded incorrectly in either of the books. Thus, it is quite useful to prepare a bank reconciliation statement, which would help in eliminating any entries recorded erroneously.
Rectifying Incorrect Entries
In case an amount or entry has been recorded incorrectly in both, the passbook and the cash book, the accountant will be able to rectify those entries, so as to arrive at the amount of correct bank balance in the passbook and the cash book.
Updated Cash Book
Again, due to the irregularity in posting amount of entries in the cash book and due to the delays in the recording of such amounts, it is quite possible that the cash book would fail to show the updated balance of bank as on a particular date. When compared with the passbook, an accountant would be able to identify such entries and record them in the cash book instantly. This would help in reconciling the balances of both the cash book and the bank book instantly.
Detection of Delays
Due to the preparation of bank reconciliation statement, it is possible to discover any amount of cheques that gets deposited in the bank but have aren’t credited. This difference would be evident because the amount of such deposit would appear in the cash book but not in the bank book, hence giving rise to a difference in the bank balance of both. Thus, cheques deposited but not yet collected can come to notice quickly.
Check on the Dishonest Behavior of Employees
Preparation of regular bank reconciliation statement has several benefits. It would act as a moral check on employees so that they do not indulge in the embezzlement of bank cheques, which would ultimately cause loss to the firm. This is so because even a low-value cheque can come in detection if it has been accepted but not deposited. In this way, a bank reconciliation statement serves a large purpose for a firm’s accounting cycle and people.
Solved Question for You
Question: Is it mandatory for a firm or an individual to prepare a bank reconciliation statement?
Answer: Although bank reconciliation statement serves a very important purpose in a firm, it is not mandatory to prepare as it has not been directed so by any act or legislation, in relation to companies or firms. Preparing and maintaining a bank reconciliation statement is completely voluntary and highly appreciated, owing to the benefits that accrue to the firm in the short and long run. Therefore, in case a firm finds that it is difficult for them to employ the accounting personnel to make such statement, it can avoid doing so.