What are the causes of differences between bank balance as per cash book and bank balance as per pass book?

CAUSES OF DIFFERENCE BETWEEN BANK BALANCE SHOWN BY CASH BOOK AND THAT SHOWN BY PASS BOOK :

The following are the reasons for the difference between the balances shown by the cash book and the pass book.

(i) Cheques issued but not presented for payment:

When a cheque is drawn or issued in favour of a third party, it is immediately recorded in the cash book by  debiting the party and crediting the bank and this has the effect of reducing the bank balance in the cash book. But the bank will not debit client’s account until that cheque is presented for payment, and honoured. So long as it is not presented, the balance shown in the pass book is more than the balance shown by the cash book.
(ii) Cheques deposited for collection but not yet collected:

The client debits bank column of cash book as soon as he deposits cheques with the bank for collection, but the bank credits client’s account only when it has collected cash on the cheque so deposited. It results in bank balance as per cash book being higher than the balance as per pass book.

(iii) Bank charges not entered in the cash book:

The bank charges some amount from each customer by way of incidental charges, collection charges, etc. and debits his account for this reason from time to time. As soon as these charges are made, the bank debits the customer’s account in its own books and this reduces the bank balance. But the customer will know such charges only when he receives a statement of account from the bank, until then, bank balance as per pass book will be less than bank balance as per cash book.

(iv) Interest credited or debited by bank, not entered in the cash book:

When bank allows interest to a customer for deposits, it will credit customer’s account and his bank balance as per pass book will increase. But the customer will not pass the entry in cash book simultaneously till he knows the fact, thus the balances will differ. Likewise, interest on overdraft is debited to the customers’ account and till the same is not entered in the cash book, it will result in a difference in the balances.

(v) Direct collections on behalf of customers:

A banker may receive amounts due to the customer by way of dividends, rent, interests etc. directly from the persons concerned on account of standing instructions of the customer to such persons. Similarly, debtors may also deposit the amounts directly to the bank. The bank credits the account of the customer for such collections as soon as it gets such payments. But same will be entered in the cash book only when customer receives the statement from the bank. Thus the balances differ.

(vi) Direct payment by bank:

Usually, the bank is given standing instructions for certain payments to be made, such as payment of insurance premium, interest on loan, electricity bill etc. Bank, while making payments, debits pass book but the customer has no information of the same till he is informed. It results in a difference in balances.

(vii) Dishonour of cheques/bills: When cheque or bill of exchange discounted with the bank is dishonoured, the same is debited in the pass book but not given effect in the cash book until the intimation is received. It will cause a difference in the two balances.

 (viii) Cheques received and entered in the cash book but omitted to be deposited into the bank.

When cheque is received, the same is entered in the cash book but it may not be deposited into the bank immediately. This will cause a difference in the two balances.

(ix) Errors:
There may be errors in the accounts maintained by the customer or/ and by the bank. A wrong debit or credit given by the customer or the bank leads to a difference in the balances.

There are many reasons because of which there is always some difference in passbook and cashbook balances:-

1. Cheques issued but not yet presented for payment in the bank

When a cheque is issued to a creditor by the firm, it is immediately recorded on the credit side of the bank column of the cash book. But the bank will debit the firm’s account only when this cheque is actually presented to the bank for payment. Generally, there is a gap of some days between the issue of a cheque and its presentation to the bank.

When a firm receives cheques, drafts etc. from its customers, they are immediately deposited into the bank for collection and an entry is made on the debit side of the bank column of the cash book. But the bank will credit the firm’s account only when it has actually collected the payment of these cheques from other banks. Again there will be a gap of some days between the depositing of the cheques into the bank and credit given by the bank

3. Cheques paid into the bank for collection but dishonoured by the bank

When cheque received from outside parties are deposited with the bank, these are immediately recorded on the debit side of the bank column of the cash book, but if the cheques are dishonoured, the bank will not make any entry in the credit of the customer’s account. As a result, the cash book will show an increased balance in comparison to the passbook.

4. Interest allowed by the bank

Interest allowed by the bank is credited to the firm, but unless intimation is received by the firm from the bank to this effect, no entry is recorded in the bank column of the cash book. The difference in these balances may arise because of the following reasons.

5. Interest and dividend collected by the bank

If the bank collects dividend on shares, interest on investments, etc on behalf of its customer, it credits the amount in the passbook. This will increase the balance in the passbook and a difference in the two balances will exits unless a corresponding entry is recorded in the cash book by the firm.

6. Direct payment through bank

An account holder can instruct the bank to make certain payments such as insurance premium, rent of the shop, electricity and mobile bills, loan instalment, etc. on the behalf. The bank will debit the party’s account on making the payment.

7. Direct payment into the bank by a customer

If any customer of the firm directly deposits the amount of payment into the bank account of the firm, then credit entry in the passbook will be recorded by the bank. Unless the corresponding entry is recorded in the cash book, the balance of cash book and pass book will differ.

8. Advancement in technology

Today, there is a great impact of technology on the banking sector. This is the era of internet banking as well as mobile banking. The funds are transferred from one branch to another branch or from one bank to the other bank electronically. The electronic transfer will change the balance as passbook but balance as per cash book will remain unaffected.

9. Demat Services

Today, shares, debentures and bonds are purchased and sold in Demat form. Demat means shares and debentures exist in electronic form, not in paper form. If a businessman applies for shares and debentures from his business account and he is given partial allotment; the refund is directly transferred to his account. The transaction increases the balance as per pass book on a particular day but the balance as per cash book will be short by that amount.

There may be errors in the account maintained by the customer or bank. The two balances, therefore, may not tally.

11. Retiring a bill under rebate

When the bills are sent to the bank for making payment of the bill before its due date and earn some rebate for customers the bank will debit the customer’s account with fewer amounts. Until the information is received from the bank regarding the retirement of the bill under rebate, the balances as per passbook will be more than the balance as per cash book

12. Bank charges and commission charged by the bank

Bank provides several services to its customers. It collects their outstation cheques, dividends on their shares, pays some expenses on their behalf etc. bank charges commission in lieu of the services provided to the customer. Such charges and commission are debited in the passbook but no entry is recorded in the cash book unless the firm obtains the passbook from the bank and record these entries. This will cause the difference between the two balances.

13. Interest on bank overdraft charged by the bank

Generally, the bank allows the overdraft facility to traders on current accounts. If the bank charges interest on the overdraft, an entry will be made in the debit side of the passbook but no entry will be recorded in the cash book unless the firm receives information about the interest charged by the bank. This causes the difference in the two balances.