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

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 misappropria­tion 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.

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