Unit-3 Cash Book And Bank Reconciliation

In this unit you will learn about the most important subsidiary book called Cash Book.

State various causes of disagreement between the balances shown by the cash book and the pass book?

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Learning Pundits Content Team

Written on Apr 16, 2019 1:13:53 PM

  1. Cheques issued but not yet presented for payment: Whenever a payment is made by cheque, the businessmen immediately records it in his cash book. But, the bank debits the firms account only when the cheque is presented for payment. You know that there is always a time lag between the issue of cheques and its presentation for payment and so the date on which it will be recorded by the bank will always be later than the date of its recording in the cash book. It is quite possible that on a particular date when the bank submits the statement of account, there maybe some cheques which have been issued but not yet presented for payment and so not recorded by the bank. Consequently, the balance shown by the pass book will be higher than the balance shown by the cash book. For example a firm issued a cheque for Rs. 3000 in favour of a creditor on December 28, 1987 which is presented to he bank for payment on January 2, 1988. The firm would record it in the cash book on December 28, 1987 whereas the bank would record it on January 2, 1988. When the firm would receive the pass book completed up to December 31, 1987 they would find the balance shown by the pass book in different from the balance shown by the cash book. The pass book balance would be higher by Rs. 3000.
  2. Cheques deposited into the bank but not yet collected: When a payment is received by cheque, the firm sends it to the bank for collection and records it immediately the debit side of the cash bank. This increases the bank balances as per cash book. But the bank will not credit the firms account till the cheque is actually collected. So, the balance, in the pass book remains unaffected till the proceeds of the cheque are collected and credited. Thus, on a particular date, it is possible that certain cheques which were sent for collection might hot have been collected by the bank and so not shown in the pass book. All such cheques pending collection would make the cash book balance different from the pass book balance, For example, the firm sends a cheque of Rs, 2,000 un June 28 to the bank for collection. The cheque is collected on July 6. Now, if the balances as on June 30 are compared, they will be different because the credit of Rs. 2,000 will not appear in the pass book.
  3. Bank Charges: The bank usually charges some amount from their customers For various services provided by them. They may charge for collection of outstation cheques, for making or collecting payments on standing instructions, and so on. The bank debits the customer's account for such charges from time to time. However, the firm will know about these charges only when it goes through the pass book. So, on the date of reconciliation the pass book balance may differ from the balance as per cash bonk.
  4. Interest allowed by the bank : The banks normally do not allow any interest on the current account balances. But if such interest is allowed, the bank credits it to the customer’s account. This increases the balance in the pass book. The firm would pass the corresponding entry in the cash book only when it receives the intimation from the bank or when it notices it in the pass book. Hence, the cash book balance will be lower till such entry is made.
  5. Interest on overdraft: When the businessman requires more funds he may request the bank for overdraft facility which means permitting him to draw more than the amount available in his account. When the businessman actually withdraws more than the available amount, he is said to have utilized the overdraft facility. The bank charges interest on the amount overdrawn and debits the same to his account periodically. The firm records the corresponding entry for interest on overdraft only when the pass book is received. Hence, the balance in the two books would differ till the entry is passed in the cash book.
  6. Amount collected by bank on standing Instructions: The businessman often issues standing instructions authorizing his banker to collect on his behalf certain amounts due to him such as interest, dividends, etc. The book credits the customer's account as and when it collects such amounts and sends the necessary intimation to him. The firm will pass the corresponding entry in the cash book when it receives such intimation or when it notices it in the pass book. Thus, as on the date of reconciliation, the balance as per cash book may be lower than the balance as per pass book.
  7. Payment made by the bank as per the standing instructions: The businessman may also issue standing instructions to his banker to make certain payments on his behalf such as insurance premium, rent, etc. When the banker makes such payments, he would immediately debit the customer's account. So, the balance in the pass book would get reduced. If the corresponding entries for such payments have not been recorded in the cash book, the Balance as per cash book would remain unchanged.
  8. Direct payments into the bank made by firm's customers: Sometimes, a customer may directly deposit an amount into the firm's account. The firm shall record it in the cash book only when it learns about such deposit. But, the pass book would show the entry on the date of deposit itself. If, by the date of reconciliation, such entry has not been passed in the cash book, the balance shown by pass book will be higher than the balance as per cash book.
  9. Dishonor of cheques or bills: As already stated when cheques are sent to the bank for Collection they are entered in the cash book immediately. But no entry appears in the pass book till they are collected by the bank. Sometimes, for one reason or the other, the cheques are dishonored. In that case the bank will not make any entry in its books and returns such cheques to the firm. The same thing applies to the bills receivable sent for collection to the bank. On receiving the dishonored cheques or bills the firm has to pass a reverse entry in the cash book. But, till such entry is passed the balances shown by the cash book and the pass book would differ.
  10. Errors: It is quite possible that while recording the transactions in the cash book some errors Might have been committed by the firm. For example, a cheque deposited in the bank may not be recorded at all, or is recorded on the wrong side in the cash book. Similarly, the bank may also commit some errors while recording entries in the customer's account. For example, a cheque collected on behalf of a customer is entered in some other account. Such errors would also lead to the disagreement of the balances in the cash book and the pass book.