Explain the causes/reasons for the disagreement between the cash book balance and the passbook balance.
Reasons: Difference between Balances as per Cash Book and Bank Pass Book
i. Difference due to timing
There is always a difference in the time gap between recording the transactions in the books of account and those recorded by the bank.
• Cheques issued but not yet presented for payment
In a cash book, the cheques issued for payment are recorded without any delay. But the bank records the entry only when the cheque is presented to them for payment. Hence, there is a time gap between the entry made in the cash book and the one made in the bank passbook. While preparing the bank reconciliation statement, the date of issue of cheque and presentation of the cheque to the bank for payment will vary. For example, a cheque of Rs.10,000 was issued on 4th June 2016 and presented to the bank on 12th July 2016. This information will be recorded in the cash book on 4th June while the bank will record it on 12th July 2016. Hence, the cash book balance will be lesser by Rs.10,000 on 30th June 2016.
• Cheques deposited in the bank but not yet cleared
Cheques deposited in the bank are entered on the debit side of the bank column of the cash book on the date of deposit. But the bank credits the account holder’s account only when it receives the payment from the other bank. Hence, there is a time gap between the deposit of cheques and the credit given by the bank. The bank balances will differ on a particular date as per the cash book and the bank passbook. For example, a cheque of Rs.10,000 deposited in the bank on 4th June 2016 and presented to the bank on 12th July 2016. This information will be recorded in the cash book on 4th June while the bank will record the cheque collected on 12th July 2016. Hence, the cash book balance will be higher by Rs.10,000 on 30th June 2016.
ii. Transactions recorded by the bank
• Interest credited by the bank but not recorded in the cash book
Bank allows interest on the amount deposited by the account holder and credits the account holder’s account. Thus, the balance of her/his account will increase in the books of the bank. But the account holder will record it only when she/he is realized about the interest allowed by the bank. Hence, the balance as per bank passbook will be higher than the balance as per cash book on a particular date for the time being.
• Interest and dividends collected by the bank
On behalf of the account holder, bank collects interest and dividends and credits the account holder’s account. But the account holder will come to know only when she/he receives the bank statement. Hence, the balance as per bank passbook will be higher than the balance as per cash book for the time being.
• Bank charges and interest charged by the bank are not recorded in the cash book
Bank renders certain services to its customers for which it charges an amount known as bank charges or service charges. Also, bank charges interest for providing overdraft facilities. Bank debits the account holder’s account in its book for the amount being charged. But the account holder will realise it only when she/he receives the bank statement. Hence, the balance as per bank passbook will be lesser than the balance as per cash book for the time being.
• Direct payments by the bank
Sometimes bank may receive standard instruction from an account holder to pay the insurance premium periodically. The bank will then debit the account holder’s account for making payments on his/her behalf. But the account holder will realise it only when she/he receives the bank statement. Hence, the balance as per bank passbook will be lesser than the balance as per cash book for time being.
• Direct deposit into bank by a customer
Bank may sometimes receive payment directly from a customer to credit an account holder’s account. But the account holder will come to know only when she/he receives the bank statement. Hence, the balance as per bank passbook will be higher than the balance as per cash book for the time being.
• Dishonour of a bill discounted with the bank
Sometimes, the bank may not receive payment against bills of exchange or promissory notes discount by it. Bank will debit the account holder’s account along with the charges incurred by it. But the account holder will come to know only when she/he receives the bank statement. Hence, the balance as per cash book will be higher than the balance as per bank passbook for the time being.
• Bills collected by the bank on behalf of the customer
Bank collects the amount for sale of goods on behalf of the account holder and credits the account holder’s account. But the account holder will increase her/his cash balance only when the bank sends her/him the bank statement. Hence, the balance as per bank pass book will be higher than the balance as per cash book for the time being.
iii. Errors and Omissions
There may be some errors or omissions in the cash book or bank passbook. For example, a cheque of Rs.30,000 deposited in the bank is recorded as Rs.3,000 in the cash book i.e. over or under casted the amount in the bank column of the cash book. This is an error committed in the cash book. Similarly, when a cheque of Rs.10,000 collected by bank on behalf of the account holder, say, Mr. Arun, is entered in the account of Mr. Varun. This is an error committed in the bank passbook. In this way, there is a difference in the balances of cash book and that of the bank passbook.