What are the reasons for the differences between the balance of the bank statement and the bank column of the cash book?

Here are some of the reasons which results in mismatch between bank passbook balance and bank column of cash book.

I. Timing Differences:

1. Cheques issued by the firm but not yet presented for payment: Cheques issued by the firm to the suppliers or creditors are immediately recorded on the credit side of the cashbook. However, there will be a time gap when the receiving party presents it to the bank. So the bank cannot debit the amount. It will result in changes in the balance amount between two books.

2. Cheques are deposited into the bank but not yet collected: A firm receives cheques from its debtors/customers, which are then immediately recorded in the debit side of the cashbook. However, when those cheques are deposited into the bank, the bank credits the firm’s account only after the cheques are actually realised. It creates a difference between the two balances.

3. Direct debits made by the bank on behalf of the customer: Bank deducts various charges like cheque collection charges, interest on overdraft, check bounce charges, the firm will not be aware of such debits and hence these changes will not be reflected in the firm’s cash book. Due to this reason the cashbook will not be in sync with the passbook.

4. Amounts directly deposited in the bank account: When debtors or customers directly deposit money into the firm’s bank account, the firm will not be aware of such deposits. Due to this, these entries will not be recorded into the cashbook. This will also create an imbalance between the bank passbook and firm’s cashbook.

5. Interest and dividends collected by the bank: The banks collects interest and dividend on behalf of the customer. It will not be known to the customer and hence will not be recorded into the firm’s cash book. This creates an imbalance between the bank passbook and firm’s cashbook.

6. Direct payments made by bank on behalf of customers: When the customers give standing instructions to the bank for making payments to the third parities like telephone bill, insurance premium, rent taxes etc., the firm will not be aware of these payments and hence such transactions will not be recorded into the firm’s cashbook. It is also a reason for imbalance.

7. Cheques deposited and bills dishonoured: A cheque deposited by the firm if dishonoured or a bill of exchange drawn by the business firm which is discounted with the bank is dishonoured on the date of maturity, the same is debited to customer’s account by the bank. This information is not available to the firm immediately, and it will not be recorded in the firm’s cashbook. This will also create an imbalance between the bank passbook and the firm’s cashbook.

II. Differences due to recording Errors: The difference between the two balances could be due to an error of human nature. The following types of error can occur

1. Errors committed in recording transaction by the firm: When wrong recording of transactions relating to incorrect totalling, cheques issued, and cheques deposited etc. are committed by the firm in the cashbook. It will create an imbalance between the bank passbook and the firm’s cashbook.

2. Errors committed in recording transactions by the bank: When wrong recording of transactions related to cheques issued, wrong totalling, and cheques deposited etc. are committed by the bank in the passbook. It will create an imbalance between the bank passbook and the firm’s cashbook.

The need for reconciliation arises only when there are differences in entries recorded in the cash book and bank statement.

Reasons why bank column of cash book and bank statement may differ

The need for reconciliation arises only when there are differences in entries recorded in the cash book and bank statement. Sometimes, the bank balance as per both the records may be the same, but the entries may not match. In such cases also, bank reconciliation statement is to be prepared. But, before preparing the bank reconciliation statement, it is necessary to find out the reasons for the disagreement.

Difference between the two records (bank column of cash book and bank statement) generally occur because of the following reasons:

·        Timing differences – The different times at which the same items are entered

·        Errors in recording - Difference arising due to errors in recording the entries

Timing differences

·        cheques issued but not yet presented for payment

·        cheques deposited into bank but not yet credited

·        bank charges and interest on loan and overdraft

·        interest and dividends collected by the bank

·        dishonour of cheques and bills

·        amount paid by parties directly into the bank

·        payment made directly by the bank to others

·        bills collected by the bank on behalf of its customer

Errors in recording

·        errors committed in recording the transactions by the business in the cash book

·        errors committed in recording the transactions by the bank.

1. Timing differences

(a)  Cheques issued but not yet presented for payment

When the cheques are issued by the business, it is immediately entered on the credit side of the cash book by the business. But, this may not be entered in the bank statement on the same day. It will be entered in the bank statement only after it is presented with the bank.

For example, the balances as per cash book and bank statement are Rs. 20,000 for X & Co. X & Co. issued a cheque in favour of Y & Co for Rs. 10,000, on 27th March 2017. So, X & Co’s cash book is credited with Rs. 10,000 on 27th March 2017. But, the cheque is presented to bank on 2nd April 2017. In case, bank sends a statement to X & Co, upto 31st March 2017, it will not contain this transaction. As a result, there will be a difference of Rs. 10,000, between balance shown as per cash book and balance as per bank statement. As a result of this,

(b) Cheques deposited into bank but not yet credited

When the cheques are deposited into bank, the amount is debited in the cash book on the same day. But, these may not be shown in the bank pass book on the same day because these will be entered in the bank statement only after the collection of the cheques.

For example, the balances as per cash book and bank statement are Rs. 20,000 for X & Co. X & Co. receives a cheque on 25th March 2016, from ABC Limited for Rs. 5,000. On the same day, X & Co, debits its cash book with Rs. 5,000. But bank credits X & Co’s account only when the cheque is collected from ABC Limited’s bank. This shows that is a time gap between depositing the cheque by the customer (X & Co) and collection of cheque by the bank. As a result of this,

(c) Bank charges and interest on loan and overdraft charged by the bank

The bank has to cover the cost of running the customer’s account. So debit is given to the account of the business towards bank charges. Also, if the business had taken any loan or overdrawn, interest has to be paid by the business. These entries for bank charges and interest are made in the bank statement. But, the entry is made in the cash book only when the bank statement is received by the business. Till then, the cash book shows more balance than bank statement.

For example, the opening balance as per cash book and the bank statement as on 1st March 2017 is Rs. 7,000. Bank debits for bank charges Rs. 300 as on 27th March 2017. But there is no entry for the same in the cash book as on such date. As a result of this,

(d) Interest and dividends collected by the bank

The bank may collect dividends on its customer’s investment in shares and also interest on any investment. The entry for this will be made in the bank statement on the date of collection. But the entry is made in the cash book only when the bank statement is received by the customer. Till then, the cash book shows less balance than the bank statement.

For example, the balances as per cash book and bank statement are Rs.15,000. The bank has collected dividends of Rs.1,000. As a result of this, the balance as per bank statement is increased to Rs.16,000, whereas until the customer receives such information and records the same, balance as per cash book is lesser by Rs.1000. As a result of this,

(e) Dishonour of cheques and bills

When the cheque is received from outside parties, it is deposited with the bank and debited in the cash book. If the cheque is dishonoured, the bank cannot collect the amount of such cheque from outside parties’ bank. It is not credited in the bank statement. As a result of this, the two records would differ.

While discounting the bills receivables, in the cash book it is entered in the debit side and in the bank statement it is credited. When the bill is presented by the bank to the drawee of the bill and the payment is not received, the bank debits the same to cancel the credit. But, credit is made in the cash book only when the customer gets the entries made in the bank statement is received. The bank may also charge some amount for such dishonour.

For example, opening balance as per cash book and bank statement is Rs. 5,000 as on 1st January, 2017. A cheque for Rs. 1,000 deposited by the business into bank on 25th January, 2017 is dishonoured and no entry for such transaction is made in the cash book as on that date. As a result of this,

(f) Amount paid by parties directly into the bank

Sometimes, debtors or the customers of the business may directly deposit the money into bank account of the business. It may be done by directly visiting the branch of the bank by paying cash (including NEFT, RTGS) or swiping debit or credit or business card or depositing the money in cash deposit machine or transfer through online banking facility. This will be credited in the banker’s book. But the entry is made in the cash book only when the bank statement is received by the customer. Until then, the cash book shows less balance than bank statement.

For example, as on 1st January, 2017, the balance as per cash book and the balance as per bank statement show the same balance of Rs. 10,000, but on 22nd January, a debtor directly deposits 5,000 into the bank account of the business. But no entry is made in the cash book as on that date. As a result of this,

(g) Amount paid directly by the bank to others

Sometimes the bank may be instructed to make payments such as, insurance premium, instalment of loan, etc., as an agent of the customer on behalf of its customer. In all such cases, debit is made in bank statement. But, the entry is made in the cash book only when the bank statement is received by the customer. Till then, the cash book shows more balance than bank statement.

For example, on 1st, March, 2017, balance as per cash book and balance as per bank statement show the same amount of Rs.12,000. But, as per the standing instruction of its customer the bank pays Rs. 2,000 as insurance premium as on 28th March, 2017. But, no entry for such transaction is made in the cash book as on such date. As a result of this,

(h) Bills collected by the bank on behalf of its customers

When goods are sold by the business, the documents may be sent through the bank. When the bank collects the amount, it is credited in bank records. But, the entry is made in the cash book only when the bank statement is received by the business. Till then, the bank statement shows more balance than cash book.

2. Errors in recording

(a) Errors committed in recording the transactions by the business in the cash book

Sometimes, errors may be committed in the cash book. For example, omission or wrong recording of transaction relating to cheques deposited or issued, wrong balancing, etc. In these cases, obviously, there will be differences between bank balance as per bank statement and bank balance as per cash book.

For example, the cheque received for Rs. 10, 000 is not entered in the cash book, but has been deposited with the bank. As a result, on collecting the money the balance as per bank statement will be more by Rs. 10, 000.

(b) Errors committed in recording the transactions by the bank

Sometimes errors may be committed in the banker’s book. For example, omission or wrong recording of transaction relating to cheques deposited and wrong balancing. In these cases, obviously, there will be differences between bank balance as per bank statement and bank balance as per cash book.

For example, the cheque deposited for Rs. 50000, wrongly entered by the bank as Rs. 15, 000. This will lead to a difference of Rs. 35, 000 between the cash book balance and the balance as per bank statement.

In a nutshell, based on the differences,

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11th Accountancy : Chapter 8 : Bank Reconciliation Statement : Reasons why bank column of cash book and bank statement may differ |

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