What are Bank Reconciliations - Explore Here

So you have been wondering what are bank reconciliations? Let us explore here this concept. At the end of each month the accountant in the accounting records calculates closing balance of cash in the cash book, which indicates how much cash the entity possesses in the bank account at the end of month. Also the bank where the company has its account and keeps cash provides a statement indicating the balance at the end of month.

Usually the balance in the statement issued by the bank is not equal to the balance calculated in the accounting books of the entity. So this is where bank reconciliations are necessary. Bank reconciliations are made in order to clarify and support by proper reasons the difference between the amount on the bank statement and amount in the cash book of the business. The purpose of bank reconciliations is to identify the difference and by adding or subtracting certain justified amounts make that two amounts are reconciled and difference has a reliable and proper justification.

Why there might be differences between bank statement and cash book:

* Due to the fact that accounting records are performed by the accountant, not machine, there might be mistakes made while recording transactions during the month, which had an impact on the cash in bank. Bank reconciliations help to correct these mistakes.
* At the end of month bank might record charges for services and accrue interest on the balance in the account and without having bank statement such amounts are not yet recorded in the accounting books. After the bank statement is received, the accountant will record these charges and include them into the bank reconciliation.
* Different timing in issuing cash disbursement cheques and clearing these cheques by the bank, which means that the company might issue a cheque and record spending of cash, however the recipient might not yet clear this cheque in the bank by the end of the month, therefore bank statement will not indicate cash spending this month, but will show this transaction only in the next month.

So this was basic coverage of what is bank reconciliations. In my opinion practical examples can be very helpful to understand how bank reconciliation is actually done. Follow the below links to find such examples and learn more about reconciliations.

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