UNIT

05 Bank Reconciliation Statement

Names of Sub-Units

Introduction to Bank Reconciliation Statement, Need for a Reconciliation Statement, Preparation of a

Bank Reconciliation Statement.

Overview

This unit begins with the meaning of bank reconciliation statement, it discusses the need for a
reconciliation statement. The unit explains the preparation of a bank reconciliation statement.

Learning Objectives

In this unit, you will learn to:

 Explain the bank reconciliation statement
 State the need for a reconciliation statement
 Identify the preparation of a bank reconciliation statement

Learning Outcomes

At the end of this unit, you would:

 Examine the need for a reconciliation statement
 Analyse the preparation of a bank reconciliation statement
JGI JAIN
DEEMED-T O-BE UNIVERSI TY
Accounting and Finance

5.1 INTRODUCTION
Business organisations record all the cash and bank transactions in the cash book of the company.
The Bank also maintains an account for each customer in its book. A copy of this account is regularly
sent to the customer by the bank which is called ‘Pass Book’ or ’Bank statement’. It is usually to tally the
firm’s bank transactions as recorded by the bank with the cash book but sometimes the bank balances
as shown by the cash book and that shown by the bank statement do not match. If the balance shown
by the passbook is different from the balance shown by bank column of the cash book, the business
firm will identify the causes for such difference. It becomes necessary to reconcile them. To reconcile
the balances of Cash Book and Pass Book a statement is prepared. This statement is called the ‘Bank
Reconciliation Statement’.
Bank Reconciliation Statement is a record book of the transactions of a bank account. This statement
helps the account holders to check and keep track of their funds and update the transaction record that
they have made.
The balance mentioned in the bank passbook of the statement must tally with the balance mentioned
in the cash book. In the statement, all the deposits will be shown in the credit column and withdrawals
will be shown in the debit column. However, if the withdrawal exceeds the deposit, it will show a debit
balance (overdraft).

5.2 CONCEPT OF BANK RECONCILIATION STATEMENT

A bank reconciliation statement is a summary of banking and business activity that reconciles an
entity’s bank account with its financial records. The statement outlines the deposits, withdrawals, and
other activities affecting a bank account for a specific period. A bank reconciliation statement is a useful
financial internal control tool used to thwart fraud.
Bank reconciliation statements ensure payments have been processed and cash collections have been
deposited into the bank. The reconciliation statement helps identify differences between the bank
balance and book balance, in order to process necessary adjustments or corrections. An accountant
typically processes reconciliation statements once a month.
The accountant adjusts the ending balance of the bank statement to reflect outstanding checks or
withdrawals. These are transactions in which payment is route but the cash has not yet been accepted
by the recipient. An example is a check mailed on Oct. 30. When preparing the Oct. 31 bank reconciliation
statement, the check mailed the previous day is unlikely to have been cashed, so the accountant deducts
the amount from the bank balance. There may also be collected payments that have not yet been
processed by the bank, which requires a positive adjustment.

5.2.1 Need for a Reconciliation Statement

The reconciliation statement is the most common tool used by organizations for reconciling the balance
as per books of company with the bank statement and is made at the end of every month. The main
objective of reconciliation is to ascertain if the discrepancy is due to error rather than timing. It is
prepared from time to time to check that all transactions relating to the bank are properly recorded by
the businessman in the bank column of the cash book and by the bank in its ledger account. Thus, it is
prepared to reconcile the bank balances shown by the cash book and by the bank statement. It helps in
detecting, if there is any error in recording the transactions and ascertaining the correct bank balance

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on a particular date. The need and importance of the bank reconciliation statement may be given as
follows:
1. The reconciliation process helps in bringing out the errors committed either in Cash Book or Pass
Book.
2. Bank reconciliation statement may also show any undue delay in the clearance of cheques.
3. Sometimes, the cashier may have the tendency of cheating, like he makes entries in the Cash Book,
but does not deposit the cash into bank. These types of frauds by the entrepreneur’s staff or bank
staff may be detected only through bank reconciliation statements. So, the bank reconciliation
statement acts as a control technique too.

5.2.2 Preparation of a Bank Reconciliation Statement

Step 1: Check for Uncleared Dues
First of all, compare the opening balances of both the bank column of the cash book as well as the bank
statement. The two can be different in terms of uncleared dues like un-presented or un-credited cheques
from the previous month.
Step 2: Compare Debit and Credit Sides
Start by comparing the credit side of the bank statement to the debit side of the bank statement. Also,
compare the credit side of the cash book to the debit side of the cash book. The two must be equal in both
documents. Tick the columns if you can’t find any error.
Step 3: Check for Missed Entries
Analyse entries in the bank column of the cash book as well as in checkbook. Look for records that have
been missed to be posted in the bank column of the cash book. Make a separate list of all such items and
list them in the cash book.
Step 4: Correct them
Correct the errors present in the cash book, if any.
Step 5: Revise the Entries
Calculate the balance after revising the updated cash book’s bank column.
Step 6: Make BRS Accordingly
Prepare Bank Reconciliation Statement accordingly. Make sure to add the updated version of records.
Step 7: Add Unpresented Cheques and Deduct Uncredited Cheques
Banks are not aware of Un-presented cheques because the beneficiary doesn’t get the cheque. It is the
case when the business firm forgets to deliver the signed cheque to the issued name.
This situation leads to the addition of the cheque amount in the bank statement.
On the other hand, cheques which beneficiary has not yet collected are called un -credited cheques.
These must be deducted.

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JGI JAINDEEMED-T O-BE UNIVERSI TY
Accounting and Finance

Step 8: Make Final Changes

Make all the final adjustments and check for bank errors in the bank statement and the firm’s errors
in the cash book. During heavy transaction days, firms or banks may make mistakes in noting entries.
The process removes those errors. Although it consists of fine work, reconciliation becomes a helping
hand at hard times (large transaction days).
Step 9: Left-Hand Side Equal to the Right-Hand Side
The results from both the documents i.e. bank statement and cash book must match with each other.

Conclusion 5.3 CONCLUSION

 Business organisations record all the cash and bank transactions in cash book of the company.
 The Bank also maintains an account for each customer in its book.
 A copy of this account is regularly sent to the customer by the bank which is called ‘Passbook’ or
’Bank statement’.
 To reconcile the balances of Cash Book and Pass Book a statement is prepared. This statement is
called the ‘Bank Reconciliation Statement’.
 A bank reconciliation statement is a summary of banking and business activity that reconciles an
entity’s bank account with its financial records.
 Bank reconciliation statements ensure payments have been processed and cash collections have
been deposited into the bank.
 The accountant adjusts the ending balance of the bank statement to reflect outstanding checks or
withdrawals.
 The reconciliation statement is the most common tool used by organizations for reconciling the
balance as per books of company with the bank statement and is made at the end of every month.

5.4 GLOSSARY

 Bank Overdraft: If the bank statement shows a debit balance at a particular point in time, it is
known as an overdraft. It implies that the account is overdrawn, i.e., withdrawals are more than
deposits. Bank
 Statement: It gives the details of transactions between the bank and the customer. Every bank
provides bank statements to each customer either weekly or monthly.
 Pay-in-Slips: Documents supporting cheques deposited into the bank.

5.5 CASE STUDY: PROBE BLAMES LACK OF INTERNAL CONTROLS

Case Objective
The case study explains the impact of lack of internal controls in an IT giant.

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An independent legal counsel appointed by IT major Wipro has found that lack of internal controls led
to the embezzlement committed by one of the former junior employees between November 2006 and
December 2009.
The legal counsel submitted the probe report last week to the audit committee set up to investigate the
fraud early.
Based on the findings of the legal counsel, Wipro said that if corrections were to be carried out to the
annual financial results of the company in view of the “misstatements identified during the probe
together with other “uncorrected audit adjustments’’, profit-after-tax for 2009-10 would have been
higher by 2.1 per cent (approximately 92 crores). Wipro’s Chief Financial Officer, Mr. Suresh C. Senapaty,
told Business Line that the external legal counsel was appointed on the advice of the SEC. “He formally
submitted the report this month and measures have already been taken to tighten the system,” he said.
Stating that it has been able to recover most of the embezzled amounts, Wipro, which is listed on the
New York Stock Exchange, in its latest disclosure to the US Securities and Exchange Commission, said
its audit panel has concluded that mistakes were committed in certain accounting entries and that they
were also not supported by any documents. “We and our independent registered public accounting firm
also identified the lack of internal controls that gave rise to the embezzlement and financial statement
misstatements as material weaknesses in internal control over financial reporting,” Wipro said in its
disclosure to SEC. The material weaknesses related to sharing of online banking access passwords and
Wipro’s internal accounting system passwords by certain employees within the finance and accounting
departments including those responsible for external financial reporting.
There was a lack of effective controls over recording of journal entries, including inadequate
documentation which resulted in ineffective controls over bank reconciliation statements, exchange
rate fluctuation accounts and outstanding liabilities accounts and also there was a lack of timely and
adequate reconciliation and review of period and end reinstatement of foreign currency inter-company
and unit balances, including recording of appropriate adjustments. Also, segregation of duties with
respect to recording and initiating banking payments was found insufficient.

Questions
1. Why is BRS important for a firm?
(Hint: Reconciliation helps you identify any unusual transactions that might be caused by fraud or
accounting errors, and the practice can also help you spot inefficiencies.)

5.6 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

1. What is bank reconciliation statement?
2. What is the need to prepare bank reconciliation statement?
3. What are the steps in the preparation of a bank reconciliation statement?

5.7 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

1. A bank reconciliation statement is a summary of banking and business activity that reconciles an
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JGI JAINDEEMED-T O-BE UNIVERSI TY
Accounting and Finance
entity’s bank account with its financial records. Refer to Section Concept of Bank Reconciliation
Statement
2. The main objective of reconciliation is to ascertain if the discrepancy is due to error rather than
timing. Refer to Section Concept of Bank Reconciliation Statement
3. There are nine steps in the preparation of a bank reconciliation statement. Refer to Section Concept
of Bank Reconciliation Statement

@ 5.8 POST-UNIT READING MATERIAL

 https://tallysolutions.com/accounting/bank-reconciliation-statement/
 https://cleartax.in/s/bank-reconciliation-statement
 https://corporatefinanceinstitute.com/resources/knowledge/accounting/bank-reconciliation/
 https://corporatefinanceinstitute.com/resources/knowledge/accounting/bank-reconciliation/

5.9 TOPICS FOR DISCUSSION FORUMS

 Discuss with your friends how a bank reconciliation statement is useful for a firm.

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