INTRODUCTION

In bookkeeping, a bank reconciliation is the process by which the bank account balance in

an entity’s books of account is reconciled to the balance reported by the financial institution

in the most recent bank statement. Any difference between the two figures needs to be

examined and, if appropriate, rectified.[1]

Bank statements are commonly routinely produced by the financial institution and used by

account holders to perform their bank reconciliations. To assist in reconciliations, many

financial institutions now also offer direct downloads of financial transaction information into

the account holders accounting software, typically using the .csv file format.

Differences between an entity’s books of account and the bank’s records may arise,for mainly

three reasons,they are as follows 1)Difference due to timing in recording entries.

2)Transactions being recorded by the bank but not by the account holder. 3)Errors in

recording entries.

Sometimes it may be easy to reconcile the difference by looking at the transactions in the

bank statement since the last reconciliation and the entity's own accounting records (cash

book) to see if some combination of them tally with the difference to be explained. Otherwise

it may be necessary to go through and match every transaction in both sets of records since

the last reconciliation, and identify which transactions remain unmatched. The necessary

adjustments should then be made in the cash book, or reported to the bank if necessary, or

any timing differences recorded to assist with future reconciliations.

For this reason, and to minimise the amount of work involved, it is good practice to carry out

reconciliations at reasonably frequent intervals.

A bank reconciliation statement is a statement prepared by the entity as part of

the reconciliation process' which sets out the entries which have caused the difference
between the two balances. It would, for example, list outstanding cheques (ie., issued cheques

that have still not been presented at the bank for payment).

The entries in the entity’s books to rectify the discovered discrepancies (except for the

outstanding cheques) would typically be made in a subsequent date or period, not backdated.

When cheques become stale (ie., out of date), they would typically be reversed, not cancelled.

The world is now a global village; as a result, there is increase in the volume of trades and

investments. Due to numerous transactions and the problem of insecurity in the system, using

cash in the daily transactions creates a very challenging situation. This calls for the use of

cheques for buying and selling of goods and services because dealing with banks in business

activities seems to be better the option. Hence, Institute of Chartered Accountants of India

said that the Bank is an essential institution in a modern society. With the increase in the

modern of trade, commerce and business, business entities face difficulties in transacting in

cash for each business activity. Although, banks introduced the use of ATM and other

electronic devices in the monetary transactions the devices have their own limitations. To

confirm this, Jegede C.A (2014) said that the relationship between banking efficiency and the

use of ATM (Automated Teller Machine) is a complex one. This is because the overall levels

of efficiency and productivity influence an organization overall success. People who have

current accounts in the banks use cheques as a medium of exchange in settlement of debts,

paying for the goods and services received or supplied. Use of cheques enhances proper

accountability and record keeping; reduce high theft rate as a result of the use of cash for

transactions, mismanagement of fund, insider abuse, and poor corporate governance.

However, some organizations that operate bank accounts fail to understand the implications

of reconciling bank and cash balances. Banks debit numerous charges to the customers’

accounts; the charges consist of commission on turnover, service charges, administrative

charges, commission and as well credit interests, investment income and dividends to
customers’ accounts. Anaeto E (2013) said that the excess charges or undercuts are so small

that they go almost undetected or ignored by the victims. But when the fragments are pulled

together, it not only amounts to huge income to the banks but also a huge loss to affected

customers over a period of time. Banks debit or credit customers’ accounts without intimation

to the customers neither do the bank inform the customers about the transactions, until the

customers receive statement of account from the bank at the end of month. The result is that

these transactions cause the bank and cash balances to differ. Customers may deposit cheques

received from another persons and bank may delay in crediting the cheques to customers’

account. Customer may on the other hand collect cheque from another person and fail to

present it to the bank for payment by the time the issuer of the cheque will prepare his

account. All these charges can only be clearly shown when the customer is reconciling the

account. Some customers that received loan or overdraft from the bank pay interest more that

the initial loan or overdraft and can be sorted out during reconciliation. The problem of many

business organizations is finance, yet many find it difficult to account for what comes in or

goes out of their businesses. Banking is expected to enable the organizations to keep accurate

records. Unfortunately, however, many, especially small firms fail to maintain accurate

records of their transactions. Bank reconciliation statement is a statement prepared to

reconcile the difference between the balances as per the bank and the cash book on any given

date. The major causes of bank and cash imbalances are the various bank charges and other

transactions. Therefore, the researchers wish to evaluate bank reconciliation and the

accountability of the small business organizations and the impact on the profitability of

business firms.

Need for Reconciliation

It is generally experienced that when a comparison is made between the bank balance as

shown in the firm’s cash book, the two balances do not tally. Hence, we have to first ascertain
the causes of difference thereof and then reflect them in a statement called Bank

Reconciliation Statement to reconcile (tally) the two balances. In order to prepare a bank

reconciliation statement we need to have a bank balance as per the cash book and a bank

statement as on a particular day along with details of both the books. If the two balances

differ, the entries in both the books are compared and the items on account of which the

difference has arisen are ascertained with the respective amounts involved so that the bank

reconciliation statement may be prepared.

The following steps may be initiated to prepare the bank reconciliation statement:

(i) The date on which the statement is prepared is written at the top, as part of the

heading.

(ii) The first item in the statement is generally the balance as shown by the cash book.

Alternatively, the starting point can also be the balance as per passbook.

(iii) The cheques deposited but not yet collected are deducted.

(iv) All the cheques issued but not yet presented for payment, amounts directly

deposited in the bank account are added.

(v) All the items of charges such as interest on overdraft, payment by bank on

standing instructions and debited by the bank in the passbook but not entered in

cash book, bills and cheques dishonoured etc. are deducted.

(vi) All the credits given by the bank such as interest on dividends collected, etc. and

direct deposits in the bank are added.

(vii) Adjustment for errors are made according to the principles of rectification of

errors.

(viii) Now the net balance shown by the statement should be same as shown by the

passbook. It may be noted that treatment of all items shall be the reverse of the

above if we adjust passbook balance as the starting point.

Objectives, Advantages and Importance of Bank Reconciliation Statement (BRS)

Bank Reconciliation statement is the basic document of the accounting. Preparation of it is

not legally compulsory but by making it, following objects/advantages/importance are

derived and is needed due to following causes:

1. To know the accuracy of entries in the Cash Book and the Pass Book: The basic object

of preparing Bank Reconciliation Statement is to test the acuracy of causes of difference in

the Cash Book and the Pass Book. The trader tests the accuracy on the basis of entries in the

Cash Book and the Bank ori the basis of its own transactions.

2. To know the errors in Cash Book and Pass Book: Cash inflow and outflow must tally

asper, Cash Book with the Bank Pass Book or,Bank Statement. This brings into focus errors

and irregularities in Cash Book and Pass Book as well as in the business.

3. Knowledge of cheques deposited for collection: Bank Reconciliation Statement gives

information about the position of cheques deposited for collection e.g.,

(i) How many cheques were issued and not presented for payment up to the date of

reconciliation?

(ii) How many cheques were not credited up to the reconciliation time or were dishonored,

(iii) Cause of delay, in clearance etc

4. Check on the embezzlement of cash: The continuous comparison of Cash Book with the

Pass Book keeps check on employees trying to indulge in embezzlement and

misappropriation of funds. The cases of embezzlement of cash by employees can be detected

easily.

5. Verification of Bank Balance: The balance of Bank can be known and it becomes

convenient for issuing cheques on its basis in future.

6. Mechanism of Internal control: The preparation of Bank Reconciliation statement is an

important mechanism of internal control on cash inflow and outflow. It checks misappropria-

tion of cheques, bank drafts, malpractices of dishonest employees dealing with cash and bank

etc.

7. Knowledge of interest allowed by bank or Commission and Interest charged by

Bank: The information regarding transaction of interest and other expenses (e.g.,

commission) which are recorded by Bank, but not recorded by customer in his Cash Book is

received by preparation of Bank Reconciliation Statement.

8. Knowledge of Other Facts:

• The knowledge of wrong entries by bank;

• The correct position of cash and bank deposit;

• Dividend directly collected by bank;

• Direct deposit of cash or cheque by a debtor;

• Payment made by the bank on behalf of trader as per standing instructions;

• Position of dishonor of bills receivable.

Reconciliation of the cash book and the bank passbook balances amounts to an explanation of

differences between them. The differences between the cash book and the bank passbook is

caused by:

• timing differences on recording of the transactions.

• errors made by the business or by the bank.

Timing Differences When a business compares the balance of its cash book with the balance

shown by the bank passbook, there is often a difference, which is caused by the time gap in

recording the transactions relating either to payments or receipts.

The factors affecting time gap includes :

(a) Cheques issued by the bank but not yet presented for payment When cheques are issued

by the firm to suppliers or creditors of the firm, these are immediately entered on the credit

side of the cash book. However, the receiving party may not present the cheque to the bank

for payment immediately. The bank will debit the firm’s account only when these cheques

are actually paid by the bank. Hence, there is a time lag between the issue of a cheque and its

presentation to the bank which may cause the difference between the two balances.

(b) Cheques paid into the bank but not yet collected When firm receives cheques from its

customers (debtors), they are immediately recorded in the debit side of the cash book. This

increases the bank balance as per the cash book. However, the bank credits the customer

account only when the amount of cheques are actually realised. The clearing of cheques

generally takes few days especially in case of outstation cheques or when the cheques are

paid-in at a bank branch other than the one at which the account of the firm is maintained.

This leads to a cause of difference between the bank balance shown by the cash book and the

balance shown by the bank passbook.

(c) Direct debits made by the bank on behalf of the customer Sometimes, the bank deducts

amount for various services from the account without the firm’s knowledge. The firm comes

to know about it only when the bank statement arrives. Examples of such deductions include:

cheque collection charges, incidental charges, interest on overdraft, unpaid cheques deducted

by the bank – i.e. stopped or bounced, etc. As a result, the balance as per passbook will be

less than the balance as per cash book.

 METHODOLOGY

This project investigates about the need for a management accounting system in an
organisation. The approach to the topic in this project is quantitative. The data so drawn are
qualitative and are primary, collected with the help of questionnaire.

Sample survey is the technique employed for data collection. Voluntary response sampling
has been carried out, with questionnaire as the tool, on a small population of size 30.
Questionnaire has been formulated and circulated using Google Forms as the medium and the
rate of response from the sample participants was cent percent. Rank, frequency and percentage
analysis are the methods used in this project for analysing and interpreting data.

Topic: A study on the necessity of management accounting in an organization

Methodological approach: Quantitative approach

Data type: Primary > Qualitative

Data collection:

Type: Quantitative

Technique: Survey

Method: Sampling

Sampling type: Voluntary response sampling

Tool: Questionnaire

About sample:

Response rate: 100%

Sample size: 30

About questionnaire:

Medium: Google Forms

Type of questions: Multiple choices

Methods of analysis:

• Frequency analysis
• Rank analysis
• Percentage analysis
 SYNOPSIS

(Is management accounting necessary?)

DATA COLLECTION CRITERIA FOR DATA

COLLECTION

(Sample survey) (Sampling type, sample size)

CHOICE OF DATA COLLECTION TOOL AND MEDIUM

(Questionnaire and Google Forms)

ANALYSIS AND INTERPRETATION

(Rank, percentage and frequency analysis and pie charts)

CONCLUSION

(Answer for the synopsis)