List and explain any ten reasons for disagreement between cash book and bank statement

Syllabus E4b)

Identify the main reasons for differences between the cash book and the bank statement.

The main reasons for differences between the cash book and the bank statement

The balance on the cash account (which should be the same as the balance in the cash book) is compared to the balance on the bank statements at a given date. 

However, these two balances may not agree. 

There are various reasons

1. Time lag between writing a cheque and the payment appearing on the bank statement (unpresented cheques)

2. Time lag between depositing amounts into the bank account and these appearing on the bank statement (unrecorded lodgements)

3. Direct debits and standing orders are not yet recorded in the cash account (or cash book)

4. Bank charges not recorded in the cash account (or cash book)

5. Errors, such as transposition errors, or casting errors in the cash account (or cash book)

6. Errors made by the bank on the bank statement

Differences between the cash book and the bank statement

Therefore, differences between the cash book and the bank statement arise for 3 reasons

• Errors – usually in the cash book

• Omissions – such as bank charges, standing orders and direct debits not posted in the cash book

• Timing differences – such as unpresented cheques and unrecorded lodgements

Always remember

In our cash book, 
A debit bank balance indicates an asset

but

In the bank statement,
A debit balance indicates a bank overdraft (we owe money to the bank – an asset for the bank)

In our cash book,

A credit bank balance indicates a liability (overdraft)

but

In the bank statement,

A credit balance indicates a positive balance (the bank owes us money)

Learning objectives of this article:

• What are the causes of disagreement between cash book and pass book?

Contents:

• Checks issued or drawn to creditors but not paid by bank
• Checks deposited for collection but not yet collected and credited by the bank
• Amount deposited directly into the bank by debtors
• Income collected by the bank
• Interest on deposits
• Expenses paid by the bank directly
• The bank charges
• Errors and omissions

Checks Issued or Drawn to Creditors But Not Paid by Bank:

When a check is issued to a creditor, it is recorded on the credit side of the cash book in bank column. The bank will record it on the date when it is paid. In most of the cases a check cannot be presented for the payment by the creditor on the date on which it is drawn. So long the check is not presented to the bank, the cash book balance and the pass book balance will differ.

Checks Deposited for Collection But Not Yet Collected and Credited by the Bank:

When a check is received from a debtor, it is recorded in the cash book on the date when it is deposited with the bank for collection. But the bank will record it in depositor's account on the ate when it is actually collected by the bank from the concerned bank. So long the bank cannot collect the amount, the cash book balance and pass book balance will disagree.

Amount Deposited Directly into the Bank by Debtors:

Sometimes the debtors deposit the amount directly to our bank a/c instead of paying cash to us. In such a case the bank will transfer the amount to our account and sends us an intimation of this transaction. But usually, there is some delay in receiving this information from the bank. So long the intimation is not received by us, the cash book balance and the pass book balance will disagree. For this, the cash book will show less balance and the pass book will show more balance.

Income Collected by the Bank:

Sometimes the bank collects and credits our account with dividend on shares, interest on govt. securities etc. as per our instructions and sends an intimation to us. But it takes a few days to receive this intimation from the bank and we record it in cash book on the date of receipt of this intimation. For this, the cash book will show less balance and the pass book will show more balance.

Interest on Deposits:

The bank allows us interest on our deposits and credits the amount of interest to our account and sends intimation to us On receipt of the intimation, we record it in the cash book. So long the information is not received by us, the cash book balance and the pass book balance will not agree. For this, the cash book will show less balance and pass book will show more balance.

Expenses Paid by the Bank Directly:

Sometimes the bank pays insurance premium, factory rent, interest on debentures, trade subscription etc. on our behalf as per standing order. The bank debits our accounts and sends intimation to us. On receipt of intimation for the bank, we record it in our cash book. For this, there will be a disagreement between cash book and pass book.

The Bank Charges:

Our account is debited with bank charges and interest on overdraft and intimation is sent to us by the bank. On receiving the intimation from the bank, we record them in the cash book. For this the cash book will show more balance and the pass book will show less balance.

Errors and Omissions:

In business, errors and omissions are very common. Someone may forget to record something or record it but in a wrong way. The cash book balance and the pass book balance can also disagree if there is an error or mistake in the cash book or in the pass book.

What are the reasons for disagreement between cashbook and bank statement?

What are the differences between cashbook and bank statement?