Differences between Cash Balances of Bank and Cash Book

Here we detail about the eleven major causes of difference between cash balances of bank and cash book.

(i) Cheques Issued but not yet Presented for Payment:

When the cheque is issued, the cashier/accountant of the business enterprise records this transaction on the credit side of the cash book under the bank column immediately. The effect of this recording is that the bank balance in cash book will be reduced by the amount of cheque issued.

However, bank debit the account of the business enterprise only when the concerned party (to whom cheque has been issued) presents the cheque for payment. It should be noted that there is an inevitable gap between the date of issuance of cheque and date of presentation of cheque to the issuing bank. Sometimes the party intentionally presents the cheque after a considerable delay say after two months.

In this intervening period, the bank statement issued by the bank definitely shows higher bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be lower than the balance shown by the bank statement to the extent of cheques not presented for payment.

(ii) Cheques Paid into the Bank but not yet Collected by the Bank:

The business enterprise immediately debits the bank column of the cash book after depositing the cheques with bank. But the account of the business enterprise will be credited by the bank only after these cheques have been collected through the clearing process. Usually, two to three days are taken in clearing of local cheques and in the case of outstation cheques it takes four to five days for clearing the cheques.

In this intervening period, the bank statement issued by the bank definitely shows lower bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of the cash book would be higher than the balance shown by the bank statement to the extent of amount of cheques not cleared or collected.

(iii) Interest and Dividends Received by the Bank:

Sometimes, the interest on debentures or dividends on shares is given by the companies directly to the accounts of debenture holders or shareholders as the case may be. This system is called Electronic Clearing System (ECS). In this case, the advice regarding the interest or dividend credited by bank has not been communicated to the business enterprise. So, there will be a difference because the bank has credited the amount to the customer’s account but it has not yet been recorded in bank column of cash book.

In this intervening period, the bank statement issued by the bank definitely shows higher bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be lower than the balance shown by the bank statement to the extent of interest and dividend directly received by the bank.

(iv) Direct Deposits Made by the Parties:

Direct payment in the bank account of the business enterprise can be made by the debtors or the customers. As the business enterprise may not be aware of this receipt, so in this case, only bank balance will increase by the amount of direct deposits made by the parties. There will be a difference because the bank has credited the amount to the customer’s account but it has not yet been recorded in bank column of cash book.

In this intervening period, the bank statement issued by the bank definitely shows higher bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be lower than the balance shown by the bank statement to the extent of direct payments received by the bank.

(v) Direct Payments Made by the Bank:

Under the ECS (Electronic Clearing System), bank on behalf of its customers pays a certain payment to the third party. Usually, payment for an insurance premium, periodical membership fees, or any Equated Monthly Installment (EMI) for repaying the loan amount etc. can be made as and when the payment becomes due.

In this case, the bank will debit the party’s account immediately but the business enterprise will record these transactions in the cash book only when the business enterprise receives updated bank statement.

In this intervening period, the bank statement issued by the bank definitely shows lower bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be higher than the balance shown by the bank statement to the extent of direct payments made by the bank.

(vi) Credit Given by the Bank on Account of Interest:

The bank allows interest on the deposits made by the business enterprise periodically and credit the bank account immediately on the date on which interest is due. However, the business enterprise will record this transaction only on receipt of such advice from the bank.

In this intervening period, the bank statement issued by the bank definitely shows higher bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be lower than the balance shown by the bank statement to the extent of amount of interest credited by the bank.

(vii) Debit Given by the Bank on Account of Interest on Overdraft and Bank Charges etc.:

For the services rendered to the customers, the bank charges some amount in the shape of interest on overdraft and commission etc. These bank charges are debited to the customer’s account from time to time. However, the business enterprise records these charges in the bank column of the cash book only after receiving advice from the bank in this regard or after obtaining updated bank statement.

The balance of cash book and balance of pass book will differ. In this intervening period, ; the bank statement issued by the bank definitely shows lower bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be higher than the balance shown by the bank statement to the extent of amount of debit given by the bank.

(viii) Bills Collected by the Bank:

The bank on behalf of its customers can collect the amount due on bills as and when the payment becomes due. The business enterprise record this transaction only on receiving intimation from the bank in this regard.

The balances shown by the bank column of cash book and bank statement in the intervening period will differ. The bank statement issued by the bank definitely shows higher bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be lower than the balance shown by the bank statement to the extent of amount of bills collected by the bank.

(ix) Dishonour of a Bill Discounted with the Bank:

Bank facilitates to discount the bill before its maturity. If the bill discounted by the bank is dishonoured on its due date, the bank will debit the customer’s account with the amount of total bill. The business enterprise will record this transaction only on receiving intimation from the bank in this regard.

In this intervening period, the bank statement issued by the bank definitely shows lower bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be higher than the balance shown by the bank statement to the extent of amount of bill dishonoured.

(x) Dishonour of Cheque Deposited with the Bank:

If the cheque deposited with the bank is dishonoured on presentation, the bank will debit the customer’s account with the total amount of cheque. The business enterprise will record this transaction only on receiving intimation from the bank in this regard.

In this intervening period, the bank statement issued by the bank definitely shows lower bank balance than the balance shown by the bank column of cash book. In other words, the balance shown by the bank column of cash book would be higher than the balance shown by the bank statement to the extent of amount of dishonoured cheque.

(xi) Errors and Omissions:

The difference between the bank balance shown by the cash book and the balance shown by the bank pass book can also be caused due to error or omission either on the part of the customer or the bank. Till the error/omission is detected, the difference on this ground can not be eliminated.

Customer may commit an error such as recording of a cheque twice in the cash book. Sometimes, banks may also commit errors, e.g., wrongly debiting the customer’s account or charging bank charges twice etc. In these cases, the balances appearing in both the books are not the same.