Why do You Prepare a Bank Reconciliation Statement?

What is a Bank reconciliation statement?

Every business maintains a cash book to record its cash and bank balances. A Cashbook consists of cash columns and bank columns to record the cash balance with the business and available balance at the bank. The bank also sends the statements regularly to its account holders. Sometimes the bank balance as per the cash books doesn’t match with the bank balances. Thus, the business needs to reconcile the difference between the bank balances in the cash book with the cash balance as per the bank’s passbook. The statement prepared to reconcile the difference is the Bank reconciliation statement or BRS. BRS can be prepared at any point in time.

Importance of Bank Reconciliation:

Reviewing your accounts frequently helps in the early detection of errors before things go out of your reach.

Early detection of fraud:

Looking out for fraud must be on top of your list when reconciling your bank accounts. You should verify:

1. Checks issued without an authorization.
2. Are there any missing deposits?
3.  If any unauthorized transfer and cash withdrawals.
4. Is there any change in the authorized check issued by you? and more amount debited from your bank accounts?
5. Is there any duplication of checks issued?

Identifying the administrative errors:

Reconciliation helps to identify the internal administrative issue that needs attention. Let’s reconsider your record-keeping system, accounting process, or cash flows and accounts receivable. Proper handling of transaction with banks helps to know:

1. Cash balance available in your bank accounts.
2. Scope of banking errors.
3. Unnecessary bank fees for insufficient funds or due to lines of credit when you don’t need them.
4. Outstanding checks and follow-up procedure.
5. Avoid checking bounce or failure of e-transfer to partners and suppliers.
6. Proper accountability of every business transaction.

Why BRS? Why do you need it?

As a business owner, you have several reasons to prepare a Bank Reconciliation Statement:

1. BRS improves the existing internal control over the company cash balance; if it is prepared by a third person rather than one who is in charge of handling receipts and payments. Entrusting an additional person to prepare the BRS reduces the chance of mishandling of the company’s cash. Thus, it protects the company’s cash funds from misappropriation and mishandling.
2. Businesses mostly practice a double-entry system of accounting. Thus, any error or omission in the general ledger Cash account will have a corresponding omission or errors in other general ledger accounts. Suppose a company uses its funds in the bank for emergency maintenance and has not credited the Cash account. And also have not debited the Repair and maintenance account expense. A BRS helps to identify such omissions.
3. It helps to boost the overall accuracy of the cash balance stated in the company’s balance sheet. Addition and Reduction on the bank statements are matched with items entered in the Cash Ledger account. Some differences in balances on account of outstanding checks and deposits in transits are simply because of the timing difference.

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