A bank reconciliation statement is a statement that gives a comparison between the balance in the bank as per the accounting records of the company and the balance reflected in the bank statement. Because of the differences in time, the bank balance of a company according to its accounting records normally differ with the balance as per the bank statement.
The entity records some transactions at a certain time and the bank updates them into its system at a later date, creating a time lag. In the same way, the bank’s financial system accounts for record some transactions before they are incorporated into the bank’s financial system. This timing difference is what brings the necessity of having a bank reconciliation statement to compare the difference.
The main purpose of preparing this statement is to identify any discrepancies arising between the accounting records of the bank and those of the entity. An error is a normal cause of these discrepancies on either party.
Bank reconciliation statements are important because they act as a control mechanism to help in protecting valuable resources by uncovering all irregularities, such as illegal bank withdrawals. When the bank balance in the accounting records is confirmed to be the same as that in the bank statement, there is comfort on the side of the entity knowing that the records are correct.