Cheques,deposite Issued but not yet Presented for Payment

Cheques Issued but not yet Presented for Payment

Whenever a payment is made by cheque, the businessmen immediately records it in his cash book. But, the bank debit's the firm's account only when the cheques are presented for payments. You know that there is always a time lag between the issue of cheques and its presentation for payment and so the date on which it will be recorded by the bank will always be later than the date of its recording in the cash book. It is quite possible that on a particular date when the bank submits the statement of account, there may be some cheques which have been issued but not yet presented for payment and so not recorded by the bank. Consequently, the balance shown by the pass book or bank statement will be higher than the balance shown by the cash book.

 For example, a firm issued a cheque for N3000.00 in favour of a creditor on December 28, 1987 which is presented to the bank for payment on January, 2, 1988. the firm would record it in the cash book on December 28, 1987 whereas the bank would record it on January, 2 1988. When the firm would receive the pass book or the bank statement completed up to December 31, 1987 they would find the balance shown by the pass book or bank statement is different from the balance shown by the cash book. The pass book or bank balance statement would be higher by N3000.

Cheques Deposited into the Bank but not yet collected 

When payment is received by cheque, the firm sends it to the bank for collection and records it immediately on the debit side of the cash book. This increases the bank balance as per cash book. But the bank will not credit the firm's account till the cheque is actually collected. So the balance in the pass book or bank statement remains unaffected till the proceeds of the cheque are collected and credited.

Thus, on a particular date, it is possible that certain cheques which were sent for collection might not have been collected by the bank and so not  shown in the pass book or the bank statement. All such cheques pending collection would make the cash book or bank statement balances different from that of the cash book. For example the firm sends a cheque of 442000 on June 28 to bank for collection. The cheque is collected on July 6, now if the balance as on June 30 are compared, they will be different because the credit of 442000 will not appear in the pass book or bank statement. 

Bank Charges

The bank usually charges some amount from their customers for various services provided by them. They may charge for collection of outstanding cheques, for making or collecting payments on standing instructions, and so on. The bank debits the customers account for such charges from time to time. However, the firm will know about these charges only when it goes through the pass book or bank statement. So, on the date of reconciliation the pass book or statement may differs from the balance as per cash book. 

Interest Allowed by the Bank

The banks normally do not allow any interest on the current account balances. But if such interest is allowed, the bank credits it to the customer's account. This increases the balance in the pass book. The bank would pass the corresponding entry in the pass book only when it receives the instruction from the bank or when it notices it in the pass book or the bank statement. Hence, the cash book balance will be lower till such entry is made or pass.

Interest on Overdraft

When the businessman requires more funds he may request the bank for overdraft facility which means permitting him to draw more than the amount available in his account. When the businessman actually withdraws more than the available amount, he is said to have utilized the overdraft facility.

The bank charges interest on the amount overdrawn and debits the same to his account periodically. The firm records the corresponding entry on overdraft only when the pass book is received. Hence, the balance in the two books would differ till the entry is passed in the cash book.

Amount Collected by Bank on Standing Instructions 

The businessman often issues standing instructions authorizing his banker to collect on his behalf certain amount due to him such as  interest, dividends, etc. the bank credits the customer's account as at when he collect such amounts and sends the necessary instructions to him. The firm will pass the corresponding entry in the cash book when it receives such instructions or when it notices it in the pass book. Thus, as on the date of reconciliation, the balance as per cash book may be lower than the balance as per pass book.

Payments Made by the Bank as Per Standing Instructions 

The businessman may also issue standing instructions to his banker to make certain payments on his behalf such as insurance premium, rent, etc. When the banker makes such payments, he would immediately debit the customers account. So, the balance in the pass book would get reduced. If the corresponding entries for such payments have not been recorded in the cash book, the balance as per cash book would remain unchanged.

Direct Payments into the Bank Made by Firm's Customers 

Sometimes, a customer may directly deposit an amount into the firm's account. The firm shall record it in the cash book only when it learns about such deposit. But, the pass book would show the entry on the date of deposit itself if by the date of reconciliation, such entry has not been passed in the cash book, the balance shown by pass book will be higher than the balance as per cash book.

Dishonour of Cheques or Bills

As already stated when cheques are sent to the bank for collection, they are entered in the cash book immediately. But no entry appears in the pass book, till they are collected by the bank. Sometimes, for one reason or the other, the cheques are dishonoured. In that case the bank will not make any entry in its books and returns such cheques to the firm. The same thing applies to the bills receivable sent for collection to the bank. On receiving the dishonoured cheques or bills the firm has to pass reverse entry in the cash book. But, till such entry is passed the balance show by the cash book and the pass book would differ.

Errors

It is quit possible that while recording the transactions in the cash book some errors might have been committed by the firm. For example, a cheque deposited in the bank may not be recorded at all, or is recorded on the wrong side in the cash book. Similarly, the bank may also commit some errors while recording entries in the customer's account. For example, a cheque collected on behalf of a customer is entered in some other account. Such errors would also lead to the disagreement of the balances in the cash book and the pass book.