Causes of Difference Between Cash Book and Pass Book Balances

The two balances differ almost every month, for a small, well-defined set of recurring reasons. Every genuine cause of difference falls under one of the following heads.

A. Timing differences — recorded in one book, not yet in the other

• Cheques issued by the firm but not yet presented for payment — the firm credits its Cash Book the moment a cheque is issued, but the bank debits the Pass Book only when the payee actually presents that cheque for payment, which can take several days.
• Cheques/amounts deposited into the bank but not yet collected or credited — the firm debits its Cash Book the moment a cheque is paid in for collection, but the bank credits the Pass Book only once the cheque is actually realised (cleared), which can also take a few days, longer for an outstation cheque.

B. Transactions recorded by the bank directly, not yet known to the firm

• Bank charges, commission or locker rent debited by the bank — entered in the Pass Book as soon as the bank levies them, but reaching the firm's Cash Book only once the firm actually notices the debit (usually while reconciling).
• Interest allowed by the bank on a credit balance, or interest charged by the bank on an overdraft — both entered by the bank in the Pass Book but not yet known to, or recorded by, the firm.
• Direct payments made by the bank under a standing instruction (insurance premium, an instalment of a loan, a subscription, etc.) — debited by the bank the moment they fall due.
• Direct receipts collected by the bank on the firm's behalf (interest or dividend on investments, a bill of exchange or a cheque sent for collection, rent collected on the firm's behalf) — credited by the bank as soon as it actually collects them.
• Amounts directly deposited into the firm's bank account by a customer or other party — credited by the bank immediately, but known to the firm only later.
• A cheque deposited by the firm and originally credited, later dishonoured (returned unpaid) by the paying bank — the Pass Book is debited again to reverse the earlier credit, but the firm may not yet have recorded this dishonour in its Cash Book.

C. Errors …