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If there is a dispute between two friends,
or they fail to agree about some matter, the
disagreement may temporarily end the
friendship between them. When they become
friends again we say they have 'reconciled'
with one another. Reconciliation is,
therefore, resuming of friendly relations as
a result of reasonable explanations between
them. In business, we often have sets of
figures (balances of cash book and pass
book) which apparently disagree with one
another, but reasonable explanations for the
disagreement will reconcile the two sets of
figures and show that, in fact both are
right.
There are three reasons why the balances
of cash book and pass book do not agree.
These are given below:
- One party may lack the knowledge of
the transactions recorded by the other.
- There is always an unavoidable
delay between one party doing something
and the other party knowing about it.
- Errors and mistakes often occur.
Any discrepancy between the balance of cash
book and that of pass book, the depositor
prepares a statement to explain the causes
of discrepancies and to reconcile the two
balances. This statement of explanation is
called bank reconciliation statement.
The purpose of this statement is to discover
the various things the bank has done in the
pass book which the cashier was not aware
of, put right any thing that is wrong and
draw up a logical explanation of the
remaining differences, which are not wrong,
but are delayed from being right by the time
lag.
Bank reconciliation statement is
generally prepared at the end of the month
or the year and it is not necessary when
there is no disagreement between the pass
book balance and the cash book balance. One
copy of this statement is also sent to the
bank if the bank has made some errors or
mistakes in the pass book.
The great advantage of preparing this
statement is, if by mistake the pass book
balance is shown less, the bank may wrongly
dishonor our checks for insufficiency of
funds. As a result, the goodwill of the
business will be suffered and our creditors
will refuse to accept our checks in future.
By preparing this statement true bank
balance can be ascertained.
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