The majority of commercial transactions are conducted through bank accounts. Transactions with banks are recorded in the bank columns of the cash book by businesses. Likewise, the bank also keeps customer accounts in its ledger, which it provides to customers in the form of a statement or a book called a Pass Book. As a result, it is necessary to compare and verify the transactions made with the bank and those recorded in the organization’s books of account. In this blog, we discuss the differences between Cash Book and Pass Book.
Cash Book and its bank balance
The cash book is a kind of subsidiary book in which all business transactions relating to cash receipts and cash payments are recorded. When a transaction involving cash takes place, the first book where the inflow or outflow of cash resulting from such transaction gets recorded is the cash book. All cash receipts are to be recorded on the debit side and all cash payments are to be recorded on the credit side.
The features of a cash book are as follows:
- In the cash book, only cash transactions are documented in chronological order.
- It can serve as both a journal and a ledger at the same time.
- The debit side records all cash receipts, while the credit side records all cash payments.
- It just keeps track of one aspect of the transaction, which is the cash. The other aspect is recorded in the concerned ledger account.
- Details or narration of transactions is provided in the cash book.
A cash book may be prepared with a single column, double column (for cash and discount), or triple column (for cash, bank entries, and discount). The cash column is used to track cash transactions and payments, whereas the discount column is used to track discounts received and allowed. In addition, when a triple column cash book is used, there is no need to have a separate bank account in the ledger.
Thus, the record of money deposited and withdrawn from the bank is kept by a firm in its cash book with a bank column. This bank column cash book can be balanced on any date and its balance is known as bank balance as per cash book.
The debit & credit rule applicable to personal accounts should be followed when recording transactions in the bank column of the cash book, i.e., debit the recipient and credit the giver. When cash is deposited with a bank, the bank becomes the recipient and the amount is debited in the cash book’s bank column. In the same way, when money is withdrawn from a bank, the bank is the giver, and the amount is credited to the bank column of the cash book.
Bank Pass Book
The bank, for its part, keeps track of its customers’ accounts in its ledger. A copy of the client’s account in the bank’s ledger is maintained in the form of a Pass Book. The client receives a Pass Book from the bank and it is the client’s responsibility to provide it to the bank at regular intervals so that transactions can be updated accurately. It displays the balance or overdraft reported by the customer’s account at the bank, as well as the transactions already entered into by the bank and the client (such as cheques or cash deposited, amounts withdrawn, cheques paid by the bank, collections & payments made by the bank on behalf of the client).
From the point of view of the bank, the money the customer deposits into the bank is credited to his account, while the money he withdraws from the bank is debited to his account. The bank balance shown as per Pass Book is the balance as per the bank ledger as reflected in the customer’s account.
Is reconciliation necessary?
The same transactions are recorded in the Bank Pass Book and the bank columns of the cash book. The transactions in the Pass Book are recorded from the perspective of the bank, whereas the transactions in the cash book are recorded from the perspective of the client. As a result, the bank balance as shown by the Pass Book is supposed to be equal to the bank balance as revealed by the cash book. However, due to the time lag of a few days between the entries made by the client in the cash book and the bank in the Pass Book, the two balances rarely agree in practice. As a result, a comparison is required to determine the things that have caused the difference and it is important to reconcile the two balances. For this, a bank reconciliation statement is prepared on a regular basis.
Why do differences occur between the two statements?
Some of the common reasons that cause a difference between the balance as per cash book and pass book are as under:
- When a cheque is drawn or issued in the name of a third party, it is promptly recorded in the cash book by debiting the party and crediting the bank, which reduces the cash book bank balance. The bank, however, will not debit the client’s account until the cheque is presented for payment and accepted. The balance indicated in the Pass Book is thus greater than the balance shown in the cash book as long as it is not presented.
- Usually, a client debits the bank column of the cash book as soon as he deposits cheques with the bank for collection, while the bank credits the client’s account only after it has received cash on the deposited cheque. As a result, the bank balance in the cash book is greater than the balance in the Pass Book.
- The bank charges each customer a fee for incidental costs, collection fees, and so on, and debits his account for this purpose on a regular basis. When this fee is charged, the bank debits the customer’s account in its own books, reducing the bank balance. However, the customer will not be aware of such charges until he receives a statement of account from the bank; until then, the bank balance in the Pass Book will be less than the bank balance in the cash book.
- When a bank allows interest on deposits to a customer, the bank credits the customer’s account, and his bank balance as shown on his Pass Book increases. However, the customer will not make the entry in the cash book until he is certain of the fact, therefore the balances will differ. Similarly, interest on overdrafts is debited to the customer’s account and will result in a difference in the balances as long as it is not noted in the cash book.
- A banker may receive sums owing to the client in the form of dividends, rent, interest, and so on directly from the persons concerned as a result of the client’s standing instructions to such persons. Debtors may also deposit the funds directly with the bank. As soon as such payments are received, the bank credits the customer’s account for such collections. However, this will not be recorded in the cash book until the customer receives his or her bank statement. As a result, the balances differ.
- Standing instructions are sometimes sent to the bank for certain payments to be made, such as insurance premiums, loan interest, electricity bills, and so on. The bank debits the customer’s Pass Book while making payments, although the customer is unaware of this until he is informed. This also causes the balances to differ.
- Further, when a cheque is received, it is recorded in the cash book, but it is not always deposited in the bank right away. This will result in a mismatch between the two balances.
- Differences in the balance of cash book and pass book may also occur due to errors. There may be inaccuracies in the client’s or the bank’s accounts. An incorrect debit or credit entry by the client or the bank results in a mismatch in the balances.
|Basis||Cash Book||Pass Book|
|Meaning||A record of transactions concerning cash receipts and cash payments||A copy of the client’s account in the bank’s ledger|
|Prepared by whom||By the customer||By the bank|
|Deposit of money in the bank||Debit in the bank column of Cash Book||Credited by the bank to the customer’s account|
|Withdrawal from bank||Credit in the bank column of Cash Book||Debited by the bank from the customer’s account|
|Balance||Debit balance depicts Cash at Bank and Credit balance depicts overdraft||Debit balance depicts overdraft and Credit balance depicts Cash at Bank|
|Cheques issued but not presented||Reduces the cash book bank balance||The bank will not debit the client’s account until the cheque is presented|
|Cheques deposited but not collected||The bank balance in the cash book will be greater than the balance in the Pass Book||The bank credits the client’s account only after it has received cash|
|Bank charges||The balance in the cash book will be greater until the customer is informed||The bank debits the customer’s account|
|Interest on deposits||The customer will not make the entry in Cash Book until he is aware||The balance as shown in the Pass Book increases|
|Direct collections on behalf of customers||Not recorded in the cash book until the customer receives his bank statement||The bank credits the customer’s account on such collections|
|Direct payment by bank||Not recorded in the cash book until the information is received||The bank debits the customer’s Pass Book|
|Cheques omitted to be deposited into the bank||Cheques received are recorded in the cash book immediately||Not always deposited in the bank right away|
Thank you for reading!
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