8 CAUSES OF DIFFERENCE IN CASH BALANCES AND BANK STATEMENT

Post a Comment

Cash book, as you might probably know, is a subsidiary book used for recording receipt and payment of cash by the organization.

The bank statement is a statement prepared by a bank detailing records of a customer transactions for a specific time period.

It is expected that the said period, the balance in the cash book equals the balance in the bank statement. 

However, this is not always the case. The major causes of disagreement between the cash book and bank statement balance are as follows:

1. Uncredited cheques: An uncredited cheque is a cheque received by a company and lodged to the bank, but the bank has not included it in the bank balance as at the time the bank statement is generated.

Because uncredited cheque was received by the company, it will be found in the debit side of the cash book.

However, because it is yet to be credited to the company account, uncredited cheque will not appear in the credit column of the bank statement.

An uncredited cheque is a cheque receipt that has been posted to the debit side of the cash book, but not to the credit column of the bank statement.

The effect of an uncredited cheque is that the balance in the cash book will be larger than the balance in the bank statement.

2. Outstanding checks: A cheque that has been recorded by the business and deducted from its cash account but not deducted by the bank from the bank balance shown on the bank statement because the customer has not yet presented the cheque for clearance is called an outstanding cheque.

In other words, outstanding cheques are those that have been issued by a business but have not yet been presented for payment as of the time the bank statements was prepared.

An Outstanding cheque  is also called unpresented cheque. 

Due to the lag between the time of issuance and presentation, unpresented cheques cause discrepancies between the cash balance and bank statement balance.

An unpresented cheque would be found in the credit side of the cash book, but not on the debit side of the bank statement. 

The resulting effect is that the bank statement balance will be greater than the cash book balance. 

3. Dishonoured cheque: On occasion, a bank would decline to pay a customer's checks for a variety of reasons, most notably insufficient funds in the customer account. 

This is called dishonoured cheque. More specifically, dishonoured cheques are cheques that are not honored by the bank on which they are drawn because of a low balance or for any other reason.

Because the entry will appear on the debit side of the bank statement but not on the credit side of the cash book, dishonored checks cause the cash book balance to be higher than the bank statement balance.

4. Bank charges: Banks frequently charges customers for use of their services.

When banks deduct interest and charges from a customer account, the cash book balance and bank statement balance disagree because such change will be only reflected in the bank statement, and not the cash book of the business.

So, Therefore, bank charges will appear on the debit side of the bank statement but not on the credit side of the cash book. 

The result is that that the cash book balance will be greater than the bank statement balance

5. Direct transfer: Business debtors occasionally transfer funds directly to the business' account without first telling the business.

Because the firm is unaware that the customer has paid, such transactions will only be recorded in the bank statement and not the cash book in this situation, causing the balances of the cash book balance and bank statement balance not to tally

It is only after it receives its bank statement that it will gets to know of the direct debit by the customer.

6. Standing orders: A standing order is an instruction a bank customer gives to a bank to pay a particular amount of money periodically into an account of a named person or business.

Standing order is common with business that have expenses that must be paid every month.

However, standing orders can cause the cash book balance and bank balance not to tally because the bank may paid the money as instructed by the customer but the customer may fail or forget to record the transaction in the cash book.

Therefore, the effect of standing order is that the cash book balance will be greater than the bank statement balance because the standing order entry will be found in the debit column of the bank statement but not on the credit column of the cash book.

7. Errors in the cash book: These include any mistakes the company makes while recording transactions in the cash books.

These mistakes could include understating figures, overstating figures, complete omission, debiting instead of crediting, and vice versa

Errors made in the cash book can either increase or decrease the cash book balance depending on the type of errors made.

8. Errors in the bank: These includes all errors made by the bank when recording transaction in the bank statement.

Examples are omissions, overstating or understating of amount. However the advance of technology has reduce these errors dramatically.  

To summarize, the eight causes of difference between the bank statement balance and cash book balance are uncredited cheques, outstanding cheques, dishonoured cheques, standing orders, bank charges, direct transfers, errors made in the cash book and errors made in the bank statement.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter