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Bank Reconciliation Statement- Rules, Importance

A bank account's transactions are detailed in a record book called a bank reconciliation statement. Read the complete blog to learn more!
authorImageIzhar Ahmad23 Nov, 2023
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Bank Reconciliation Statement- Rules, Importance

The Bank Reconciliation Statement functions as a transaction log for a bank account, helping account users track and controlling their funds by balancing and changing their transaction records. Commonly known as a bank passbook, this statement should match the amount stated in the cash book. It serves the vital purpose of confirming the accuracy of business and bank transactions, showing gaps in writing that may occur during periodic preparation, thus ensuring a thorough review of financial records.

Rules for Bank Reconciliation Statement

To guarantee accuracy in making a bank balance statement, sticking to specific rules offers a basic foundation for the process. Following these rules is crucial for building a precise account. Here are key tips to keep in mind during the making of a bank balancing statement:
  • Any bad amount found in the cash book shows the business entity's payments.
  • The debit entries in the cash book should match the credit entries in the passbook.
  • A credit amount in the cash book shows a negative balance.
  • Conversely, a debit amount in the cash book suggests a positive balance.
  • Adjustments in the cash book are made for given cheques that haven't been presented.

How to Prepare a Bank Reconciliation Statement

The process of making a bank balance statement is simple, involving the identification and recording of activities in the company's passbook and comparing them with the bank's records. To deal with differences, appropriate changes and adjustments are made to ensure a uniform balance in both passbooks. After finding the reasons for differences in bank accounts, a bank reconciling statement is created using one of two methods:
  • Without changing the cash book balance.
  • After changes have been made to the cash book amount.
Typically, the bank reconciling account is created following changes to the company's cash book balance.

Steps to Prepare a Bank Reconciliation Statement:

Step 1: Determine both the adjusted and unadjusted amounts as per the cash book by comparing credits and payments in the company's passbook with debits and credits in the bank account. Step 2: Make necessary changes to the cash book amount based on things in the company's passbook. It is advisable to take care of problems such as unpaid bills and payments not yet received before starting the accounting process. Step 3: Adjust for differences by accounting for things that may lead to mistakes or gaps due to time problems. For example, cheques issued but not given are added back to the adjusted cash book total, while cheques placed but not yet received are removed. Step 4: Determine the net amount as per the cash book. After adjusting for the aforementioned things, the net cash book balance should match the passbook balance.

Importance of Bank Reconciliation Statements

Understanding the importance of bank balance accounts can be simplified through the following key points: I dentification and Rectification of mistakes: A bank balance statement serves to show mistakes in both customer and bank records, enabling their repair. Enhanced Transaction Security: The assurance in the accuracy of the cash book balance, given by a bank balancing statement, adds to safe future transactions with the bank. Preparation of Revised Cash Book: The statement helps in preparing an updated cash book by adding items such as bank charges and interest, recorded in the passbook and included in the cashbook in future transactions. Detection of Fraud: Bank reconciled accounts play a crucial role in uncovering any false actions committed by the bank or other parties. Monitoring check Collections: By keeping track of cheques given to the bank for collection, the statement shows any delays in the bank's handling of cheque transactions.

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Effects of Time Interval on Bank Reconciliation Statements

  • When preparing monthly bank reconciliation statements, consistent entries help avoid discrepancies over time.
  • Best practice involves referring to the previous month's Bank Reconciliation Statement for comparison.
  • Compare items from the previous statement with the new one to determine if they've been cleared.
  • If entries are already cleared, exclude them from the current month's Bank Reconciliation Statement.
  • Emphasize that the statement serves to reconcile discrepancies and rectify errors, not as an independent accounting record.

Bank Reconciliation Statement Format Example .

Given below is a bank reconciliation statement format for a firm ABC for the year 2022:

Bank Reconciliation Statement for ABC Firm

Particulars Amount (Rs.)
Balance as per bank statement 3,00,000
Add: Cheques deposited but not cleared 20,000
Less: Cheques issued but not cleared 50,000
Adjusted balance 2,70,000
Balance as per company books 2,70,000
Add: Amount credited in bank but not recorded 9,800
Interest received 200
Less: Other charges not recorded in books 750
Adjusted bank balance in books 2,79,250

Benefits of Bank Reconciliation Statement

The benefits of making a Bank Reconciliation Statement for companies are multiple:
  • Unearths possible cases of theft Minimizes the occurrence of errors
  • Easily finds financial discrepancies
  • Distinguishes between bank-cleared and ongoing deals
  • Facilitates the discovery and revision of fees and charges
  • Acts as a protection against possible fake actions
  • Simplifies the tracking of debts
  • Enables frequent monitoring of transactions
Read Related Topics
Appointment of Directors Unit Trust of India Applied Economics Sale of Goods Act
What is Financial Institution? Accounting Concepts Visual Communication Acceptance

Bank Reconciliation Statement FAQs

What is reconciliation process?

It is a methodical comparison of financial records to ensure consistency and accuracy, often involving identifying and rectifying discrepancies.

What is a minimum balance?

The minimum amount required to be maintained in a bank account to avoid fees or penalties.

What is daily balance in bank?

The amount in an account at the end of each business day, reflecting transactions processed that day.

What is CD in finance?

In finance, CD commonly refers to a Certificate of Deposit, a time deposit with a fixed interest rate and maturity date.

What is a salary account?

A specialized bank account used by employers to deposit employees' salaries through direct transfers.
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