Discuss the cause of the difference between the balances of bank statement and cash book
The difference between the balances of a bank statement and cash book can occur due to a variety of reasons. Some common causes include:
1. Outstanding checks or deposits: If there are checks that have been issued by the company but have not yet cleared the bank, these will result in a difference between the cash book balance (which includes the checks as outgoing payments) and the bank statement balance (which does not yet show these checks as deductions).
2. Bank charges and fees: Sometimes, banks may deduct fees or charges for services directly from the account. These deductions may not have been recorded in the cash book, resulting in a difference between the two balances.
3. Errors in recording transactions: Mistakes in recording transactions in either the cash book or the bank statement can lead to discrepancies between the two balances.
4. Interest earned or charged: Interest earned on deposits or charged on loans by the bank may not have been accounted for in the cash book, leading to a difference in the balances.
5. Deposits in transit: Deposits made by the company that have not yet been processed by the bank can also lead to a difference between the balances.
6. Reconciliation timing differences: The timing of when transactions are recorded in the cash book versus the bank statement can also cause differences in the balances. It is important to ensure that all transactions are recorded in both accounts at the same time to avoid discrepancies.
To address these discrepancies, a reconciliation process needs to be carried out regularly to identify and rectify any differences between the two balances. This involves comparing the transactions in the cash book with the transactions in the bank statement, adjusting for any outstanding checks or deposits, bank charges, errors, and other factors that may have caused the difference.