Q. 4 Define Bank Reconciliation, highlight its benefits and show how it is carried out.

Answer: Bank Reconciliation:

• Definition: Bank reconciliation is the process of comparing a company’s internal cash records (cash book) with the information on its bank statement. The goal is to identify differences and adjust accounting records as needed.
• Benefits:
  • Accuracy: Ensures that recorded cash balances match actual bank balances.
  • Fraud Detection: Helps detect discrepancies, errors, or fraudulent activities.
  • Financial Reporting: Provides accurate financial statements.
  • Internal Controls: Strengthens internal controls over cash management.
• Process:
  1. Compare Deposits and Checks: Match deposits and checks in the cash book with those on the bank statement.
  2. Adjust Bank Statement: Add deposits in transit, deduct outstanding checks, and account for bank errors.
  3. Adjust Company Cash Balance: Add interest earned, deduct bank fees, penalties, and NSF checks.
  4. Reconcile: Ensure the adjusted bank balance matches the company’s adjusted cash balance.