Chapter 6 Bank Reconciliation Statement
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A Bank Reconciliation Statement (BRS) is a document that
helps businesses and individuals reconcile their bank account balance as per
their financial records with the balance stated on the bank statement. The
primary purpose of a BRS is to identify and explain any discrepancies between
these two balances.
Key
Concepts in Bank Reconciliation:
1. Bank Balance vs. Book Balance:
• Bank
Balance: The balance shown in the bank statement provided by the bank.
• Book
Balance: The balance shown in the company’s accounting records or ledger.
2. Common Reasons for Discrepancies:
• Outstanding
Checks: Checks issued by the company that have not yet been cleared by the
bank.
• Deposits
in Transit: Deposits made by the company that have not yet been recorded by the
bank.
• Bank Fees
and Charges: Fees deducted by the bank that the company may not have recorded.
• Interest
Earned: Interest added by the bank that the company may not have recorded.
• Errors:
Mistakes either in the company’s books or the bank statement.
Steps in
Preparing a Bank Reconciliation Statement:
1. Gather Information:
• Obtain
the bank statement for the relevant period.
• Obtain
the company's cash book or ledger for the same period.
2. Compare
Balances:
• Note the
ending balance from the bank statement.
• Note the
ending balance from the company’s ledger.
3. Identify Adjustments:
• List and
adjust for any outstanding checks.
• List and
adjust for any deposits in transit.
• Note any
bank charges or fees and adjust the book balance.
• Note any
interest earned or other credits and adjust the book balance.
• Identify
and correct any errors found in either record.
4. Prepare the Statement:
• Start
with the balance as per the bank statement.
• Add
deposits in transit.
• Deduct
outstanding checks.
• Adjust
for any bank errors if applicable.
• This
should give the adjusted bank balance.
• Start
with the balance as per the company’s ledger.
• Add any
interest earned and other credits not yet recorded.
• Deduct
any bank charges and fees not yet recorded.
• Adjust
for any errors in the company’s records.
• This
should give the adjusted book balance.
5. Ensure
Both Adjusted Balances Match:
• The
adjusted bank balance should equal the adjusted book balance.
Example:
Bank Statement Balance: $10,000
Cash Book Balance: $9,500
Reconciling Items:
• Outstanding
Checks: $1,200
• Deposits
in Transit: $800
• Bank
Fees: $50
• Interest
Earned: $50
Bank Reconciliation Statement:
Particulars Amount
Bank Statement Balance $10,000
Add: Deposits in Transit $800
Less: Outstanding Checks $1,200
Adjusted Bank Balance $9,600
Cash Book Balance $9,500
Add: Interest Earned $50
Less: Bank Fees $50
Adjusted Cash Book Balance $9,500
Adjusted Balances Match $9,600
Importance
of Bank Reconciliation:
• Accuracy:
Ensures the accuracy of financial records.
• Fraud
Prevention: Helps detect and prevent fraud.
• Cash
Management: Improves management of cash flow.
• Error Detection:
Identifies errors in either the bank records or company records.
• Compliance:
Ensures compliance with accounting standards and practices.
By regularly preparing a Bank Reconciliation Statement, businesses can maintain accurate financial records and ensure that their cash balances are correctly reported.