Bank reconciliation is performed to identify, detect and correct any discrepancies (differences) between cashbook and bank statement.
Bank reconciliations are performed as a part of internal control activity. Bank reconciliations are performed to ensure the cashbook contains accurate and complete accounting data.
Difference can arise for following reasons:
- Timing difference, such as outstanding such as clearing cheques, demand drafts, stale (expired) cheques etc at the end of month. Usually, bank statements are issued monthly basis. However, it can also be issued at any time on client request.
- Mistakes such as omission, transposition error, deposit wrongly credited to cashbook and issue wrongly debited to cashbook.
- Fraud such as dishonoured cheques due to insufficient balance, cheque stolen by xyz after receiving from customer.
- Deposits made by customer such as direct debits, bank transfer etc.
- Cash payments made by customer, which subsequently not deposited to bank.
Cash is an asset for the entity. However, it is liability for the bank. Therefore, entity debits increase in cash and credits decrease in cash. On the other hand, back credits increase in cash and debits decrease in cash. Therefore, credit balance as per bank statement must be equal to debit balance as per cashbook.