Financial AccountingBank Statements

Why do businesses need regular Bank Statements?

Bank Statements
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Almost every business has a bank account and most of the transactions are carried out through banking instruments e.g. cheques, pay orders, direct transfers, etc. Payments and receipts are made through cheques or even online transfers, which reduces the need to carry actual cash.

It is a common practice that banks to send a periodic bank statement of accounts to their account holders. This statement presents every transaction carried by the account holder with the bank. Banks send monthly, half-yearly and annual statements of account to their account holder through the mail. However, nowadays, a bank statement can be accessed anytime through the digital portals provided by the banks to its account holders.

This bank statement (issued by the bank) is matched with the records in the bank book to ensure that every transaction has been properly recorded in the bank book. In case of any difference or discrepancy found, these differences are further investigated and a bank reconciliation statement is prepared.

How to Read a Bank Statement

Cash and cheques deposited in the business bank account are entered on the left side (Dr.) of the bank book. Similarly, the amount withdrawn through cash and cheques is entered on the right side (Cr. Side) of the bank book being maintained by the business.

Read Bank statements exactly opposite to what is recorded in the business books.

On the other hand, Banks with which business accounts are being maintained are also commercial entities and have already established bookkeeping systems. A comprehensive record of transactions for each individual account is maintained. However, the basic rules for recording accounting transactions are the same as those we learned previously.

Banks treat the amount deposited in an individual account as a loan from account holders and classify them as payable in their book of accounts. Such entries are entered on the right (Cr.) side of the payable ledger of the bank. This is exactly the opposite of what a business will record transactions in their books.

Similarly, amounts withdrawn from the bank by individual account holders are considered as a reduction in payable of the bank and the amount is entered on the left (debit) of the payable ledger of the bank.

Both transactions narrated above, show that for every deposit in the bank account of the business, a debit entry is recorded in the business’s books whereas a credit entry is recorded in the Bank’s book of accounts.

Similarly, for an amount that is drawn from the bank account, a credit entry is recorded in the business’s books of account showing a decrease in assets (Bank), and a debit entry is recorded in the bank’s books implying a decrease in liability (payable to accounts holders).

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Here it is very important that you understand various terms used in banking and reflected in bank statements.

Standing Order– this is the request for regular payments made by the bank on behalf of the Account holder. For example, a company pays a regular monthly rent of a fixed amount. Hence, instead of writing a cheque for the owner every month, the company can request a standing order from the bank to make regular monthly payments to the landlord.

Direct Debit. It is an instrument that a vendor or supplier can present to the bank upon fulfilling certain conditions and withdrawing cash from your account. Direct Debit

Bank Overdraft- Bank gives businesses a short-term loan to meet their trade deficit. This means that the Bank account of the company availing of the overdraft facility may become negative up to a specific limit.

Dishonored Cheques- Cheques received from customers but not realized (honored) by their respective banks. There can be numerous reasons for dishonoring a cheque by the bank:

1. If there is any typing error on the cheque, the bank teller may not accept it and will return the cheque unpaid.

2. If the cheque is presented after six months of the date written on it, Banks usually do not accept it for payment.

3. In case the account balance of the payer is not sufficient to honor the amount of the cheque issued, the bank will return the cheque unpaid. For example, a customer gave you a cheque amounting to $5,000. At the time of writing the cheque, your customer had enough in his/her bank account to pay this cheque however you could not en-cashed it for more than a month. After a month his/her bank did not allow her to overdraft and the balance became less than $5,000 and the cheque will return unpaid.

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