What is a bank reconciliation statement. Why is it prepared?
Bank Reconciliation Statement is a statement prepared to reconcile (tally) the two balances—the bank balance as shown in the firm's cash book and the balance shown in the passbook (bank statement) on a particular day.
It is generally experienced that when a comparison is made between the bank balance as shown in the firm's cash book and the passbook, 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.
The statement is prepared to identify the items on account of which the difference has arisen with the respective amounts involved. Common items causing differences include: cheques issued but not presented, cheques deposited but not credited by the bank, interest credited by the bank, and bank charges not recorded in the cash book.
To prepare this statement, we need the bank balance as per cash book and the bank statement as on a particular day. If the two balances differ, the entries in both books are compared. The balance as per cash book or passbook is taken as the starting point, and necessary additions or deductions are made to arrive at the balance as per the other book.
Thus, a Bank Reconciliation Statement helps in ensuring accuracy of records and explains the reasons for the difference between the two balances.
Explanation
This answer is based on Section 5.1 'Need for Reconciliation' and Section 5.2.1 of the NCERT textbook. The textbook explicitly states that when cash book and passbook balances don't tally, we ascertain causes of difference and reflect them in a Bank Reconciliation Statement. The format examples (Fig. 5.2 and 5.3) show the typical items causing differences like cheques issued but not presented, bank charges, interest credited, etc.