A business frequently needs to pay funds into and out of the bank account for the purpose of making and receiving payments. Business records these transactions in its cash book while at the same time bank also records these inflow and outflows of cash.
If all transactions recorded in cash book are same as entered by bank in its records, the balance in business’s account as shown by cash book and the balance in the account of business shown by bank would be same. But that is not, generally, the case. Usually there are items which have not been recorded by business in its cash book and there may be items which have not been entered in records held by bank. Therefore, there is difference of balances appearing in cash book and bank statement (Generally, in the case of current Account).
The bank statement
The statement issued by bank and sent it to the customer (business) showing the customer’s account balance and detail of transactions through bank
The most common causes of different balances appearing on cash book and shown by bank statement
1) Errors or mistakes
Mistakes in calculation or in recording receipts and payments of cash which are most likely made by the business in its cash book, but banks make mistakes as well.
Bank might deduct charges and fee for its service and interest on overdraft which you are not informed about until you receive the bank statement
3) Time difference
There are cheques that you have received and deposited into your bank account but bank has not yet cleared these cheques (banks need time to process cheques). So, though your record shows that cash has been received but it is not being shown in bank statement prepared by bank
Similarly, you made payment via cheque and you have deduced some cash from cash book but the person that received the cheque have not yet banked this cheque for a while. Therefore, it has not been deducted by bank and bank statement didn’t show that deduction. Even that person has banked the cheque, the bank needs some time to clear it
The bank reconciliation statement
Bank reconciliation statement is the comparison of a bank statement (sent by bank) with the cash book (prepared by the business).
The difference between the balance in the cash book and balance appearing on bank statement will be due to the errors or mistakes, omissions, and timing difference. So, we need to explain and identify reasons for difference in balances
Why is the bank statement so important to prepare?
A bank statement is needed to explore, identify, explain and to account for the difference between the cash book and bank statement balances