What is Bank Reconciliation Statement And Why is It Prepared

What is Bank Reconciliation Statement And Why is It Prepared

A bank reconciliation statement is a summary of banking and business activities and is used to compare an entity's bank account with its financial records. 

The statement includes each deposit, withdrawal, and other action that has an impact on a bank account during a specific time frame. 

A bank reconciliation statement is an effective internal financial control tool for preventing fraud.

Here, we will explain the bank reconciliation statement and why it is prepared. So let's get started.

The Bank Reconciliation Statement: An Overview

The processing of payments and the deposit of cash revenues into the bank are attested by bank reconciliation statements.

A Bank reconciliation statement explains identifying differences between the bank balance and the book balance so that modifications or repairs can be made. 

An accountant prepares a Bank reconciliation statement. An accountant often processes reconciliation statements once each month.

The purpose of creating bank reconciliation statements

You might be asking why brs is prepared in the books of accounts and the bank statement does not match after reading the definition of a bank reconciliation statement. 

There are several causes, some of the more prevalent of which are given below:

  • Issued checks that haven't been cashed at the bank
  • Difference between the deposit and credit dates of a check
  • There is a difference between the date a check is issued for payment and the date it is debited.
  • There is no presentation of the issued or received check to the bank for clearing.
  • Bank interests, fees, etc., are not taken into consideration. Because you won't know unless you reconcile.
  • Additionally, banks are susceptible to errors while debiting or crediting transactions.
  • You may need to correct things while recording financial transactions in books of accounts and other places, just like banks may.

The closing bank balance in your books of accounts and the real bank balance will differ for the reasons mentioned above. 

This indicates that the bank balance you believe to be in your account is not actually there. 

Making decisions based solely on the book balance will make you awkward.

Bank reconciliation is prepared to ensure to prevent of those scenarios. This statement compares the bank transactions recorded in the company books with the bank statement to ensure that the books of accounts always show the correct bank balance.

How to Consolidate Your Bank Accounts

You'll need your company ledger and the current and prior months' bank statements to perform your bank reconciliation effectively. 

Although many internet templates might help you, a straightforward spreadsheet works just as well.

  • Start with the previous month's closing balance. Your starting point will be that number.
  • Checks in transit are subtracted, and any deposits that might not have cleared are added. This is your cash balance after adjustment.
  • You can now add any interest that has accrued or subtract any fees, fines, or cheques returned for insufficient funds (NSF) that may not have been noted in your business after you have your current cash amount in your records.
  • Verify that the sums of your deposits and cleared checks correspond to those that the bank has on file. The final balance then needs to be the same.
  • Investigate any inconsistencies to determine whether there were any mistakes made at the bank or omissions from your recording.

Balance Revision According to Books

Changing the cash account balance in a company's financial records is also necessary. 

For instance, the opening of the account can incur a cost from the bank. The bank normally automatically deducts and processes the fees from the bank account. 

A journal entry must be prepared when creating a bank reconciliation statement to account for any costs deducted from the account.

Another element that needs to be changed is interest earned. After a predetermined amount of time, interest is automatically paid into a bank account. 

In order to increase the amount of cash now indicated in the financial records, the accountant may need to write an entry. 

The balance should match the bank account's closing balance after all bookkeeping corrections have been made. 

A successful bank reconciliation statement has been created if the statistics are equal.

Benefits of preparing BRS with accounting software

Using the manual and traditional approach of bank reconciliation is demanding and prone to error when comparing the two statements with a lengthy list of transactions.

The only way to get around this is to use accounting software to "automate" the bank reconciliation procedure. In daily operations, it saves time and effort. More crucially, the books of accounts provide accurate and nearly real-time information on the bank balance

Automating bank reconciliation in this context means entering business transactions, including bank transactions, into accounting software so that bank reconciliation statements can be generated automatically. 

Additionally, accounting software will enable you to easily and automatically reconcile bank statements.

The advantages of employing accounting software to automate bank reconciliation are as follows.

  • Simple to reconcile: You may use accounting software to prepare a bank reconciliation statement with the least effort automatically.
  • Saves time and effort: Whether there are 50 transactions or 500, reconciliation takes the same amount of time and effort. You will save a lot of time and work because the bank transactions are automatically reconciled.
  • It is simpler to find unaccounted transactions: Learn about new transactions that haven't been accounted for, such as bank fees or interest, and do an easy reconciliation.
  • Fraud detection: You might not be able to stop staff from stealing your money once, but you might be able to stop it in the future. You can identify and spot fraudulent transactions with the aid of bank reconciliation statements. It is advisable to hire an unbiased person to perform the reconciliations in order to prevent the accounting employee from falsifying your records and reconciliations.
  • Receivables Tracking: BRS allows you to confirm all of your receipts, helping you to prevent unpleasant situations and letting you know which entries pertain to receipts you did not deposit.

A bank reconciliation statement example

Financial transactions from financial records are compared to those on a bank statement in bank reconciliation statements. Companies are able to locate and fix mistakes where there are differences.

ABC Holding Co., as an illustration, indicated a $480,000 ending balance on its documents. 

Even though $520,000 is shown as the ending balance on the bank statement. 

After further inquiry, ABC Holding discovered that a vendor's $20,000 check had not been presented to the bank and that a client's $20,000 deposit had been accidentally left out of the company's records. 

In order to reflect the missing deposit and the outstanding check, ABC Holding updated its records.

How is a bank reconciliation performed?

Comparing financial record activities to bank statement activities is the first stage in reconciling a bank statement. 

The bank statement balance should be adjusted for any bank errors, unaccounted-for deposits, and unpresented checks. 

Some personal or corporate accounts don't consider bank-related expenses like interest and maintenance fees. For these variations, the cash account records need to be adjusted. 

Compare the balances to verify if they match after corrections and adjustments have been made. If not, try again until the accounts are balanced.

Guidelines for effective BRS

  • First and foremost, having all the necessary paperwork and knowledge is crucial. That implies that you better understand the situation if you have access to the necessary information and paperwork.
  • Avoiding frequent mistakes like: 
  •  A mistake involving duplicate entries.
  • Omitting a transaction that would result in a discrepancy equal to the amount of missed
  • mistakes made when inputting commas and dots might result in inconsistencies that have a big impact. For instance, enter INR 240.13 rather than INR 2,401.30.
  • Errors in transposition when entering figures into the books. For instance, enter INR 212,200 rather than INR 221,200.
  • There's a chance that your bank made a mistake. Banks are human, too. They could credit deposits that aren't yours or debit your account in error. Because of this, it is always better to consult your bank if you discover errors for which there are no apparent causes or where you have any questions.
  • Items should be reconciled: It is conceivable to enumerate disagreements, resolve them, and then forget about them. Your bank reconciliation would have no relevance if disparities continued to grow while no action was taken. For the reconciled transactions to appear correctly in the bank column of the cash book and on the bank statement, a continuous check must be maintained on them.

What typical issues do bank reconciliations run into?

When reconciliations are infrequent, it might be challenging to solve issues because the necessary data may not always be accessible. 

A mismatch might also happen when transactions are not immediately reported and when bank fees and penalties are in effect.

Where do checks marked as "NSF" go on a bank reconciliation

Checks returned for insufficient funds (NSF) are noted on the bank reconciliation statement as an amended book balance line item, with the NSF amount subtracted from its balance.

What makes bank reconciliation crucial?

Errors that may impact tax and financial reporting are easier to find with the aid of bank reconciliation. Additionally, it assists in recognising and preventing fraud.

How frequently should you reconcile your bank accounts?

Bank statements should be reconciled every month or as often as statements are generated in order to discover and correct problems immediately.

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Bank reconciliation statements are helpful check-and-balance tools for finding mistakes, omissions, and fraud. 

They assist businesses in spotting fraud before it causes significant harm and stop errors from multiplying when performed frequently. 

Additionally, it is a straightforward and helpful procedure for managing financial flows. In this article, we have mentioned why bank reconciliation statement is prepared. 

FAQs Related to What is bank reconciliation statement

1. What is a bank reconciliation statement?

A bank reconciliation statement is a document used to reconcile the balance shown in a company's accounting records with the balance shown in its bank statement. The statement is prepared to ensure the balances match and identify and explain any differences.

2. Why is a bank reconciliation statement prepared?

A bank reconciliation statement is prepared to ensure that the company's records are accurate and up-to-date. It is also used to identify and resolve discrepancies between the company's and the bank's records, such as outstanding checks or deposits in transit.

3. What information is included in a bank reconciliation statement?

A bank reconciliation statement typically includes the company's beginning balance, deposits and other credits, checks and other debits, and the ending balance. It also includes any adjustments or corrections to the company's records, such as interest earned or charges by the bank.

4. Who prepares the bank reconciliation statement?

The company's accountant or bookkeeper typically prepares the bank reconciliation statement. The statement may also be prepared by the company's bank, in which case it will be provided to the company for review and verification.

5. How often is a bank reconciliation statement prepared?

The frequency with which a bank reconciliation statement is prepared will vary depending on the size and complexity of the company's finances. It is typically prepared on a monthly basis but may be prepared more or less frequently, depending on the company's needs. The important thing is to ensure that the statement is prepared regularly and that any discrepancies are addressed promptly.

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