A cash book is one of the important tools for handling finance, and it acts as both a journal and a ledger. The cash book records all the cash transactions, which include payments and receipts. This helps the business with tracking the cash flow and also ensures accuracy in tasks of accounting and ease of reconciliation with the bank statements. Discrepancies can occur while maintaining a cash book, like missing entries or faulty entries that affect the bank balance and financial reporting.
What is Cashbook?
A cash book is a type of subsidiary book used to record bank and cash transactions. A cash book is a ledger as well as a journal.
A cash book records both cash payments and cash receipts. As part of internal audits, the cash book and bank statements are routinely reconciled. Cash books are essential to a firm because they must be properly maintained and reconciled with bank statements.
Instead of keeping cash receipts and cash payments diaries, some firms keep cash books.
This is due to the fact that every cash payment and receipt is documented in a cash book. The monetary account kept in the ledger is similar to it.
In reality, a cash account in the ledger is not necessary when a cash book is kept independently. A cash book is regarded as a cash account (i.e., a section of the ledger) for all purposes.
Payments are recorded on the credit side of the ledger account, while receipts are recorded on the debit side of the cash book.
There are two purposes for this book. Since all currency transactions are entered into it as soon as they happen, it serves as a diary or book of prime entry.
Because it includes bank accounts and currency, it also functions as a component of the ledger.
Errors That Increase the Cash Book’s Bank Balance
Some of examples of errors and neglects that as listed below that results in a more bank balance in the cash book.
(1) The bank did not receive the check for collection
When the bank receives checks from debtors, it records them in the cash book, but occasionally, the bank does not receive the checks. Because of this neglection in the cash book, a greater bank balance is displayed; on the other hand, the bank balance shows a comparatively low balance.
(2) Issued Check Not entered into the cash book or entered incorrectly in the cash column
Payments are made via checks on a regular basis to creditors. The problem occurs when mistakenly the check gets issued to the creditor is not documented in the cash book or it is documented incorrectly in the cash column. This results in more bank balance in the statement of the bank record.
(3) Incorrect Bank Column Casting in the Cash Book
It is possible to make mistakes while casting (totaling) the cash book’s bank column. The cash book will display a larger bank balance than the bank statement if the bank column (debit side) is overcast or if the credit side is undercast.
(4) The deposited check was either not recorded by the bank or was incorrectly recorded in the bank statement’s debit column
Bank employees occasionally make mistakes or leave things out. Let’s say we receive a check from a debtor and record it in the cash book before depositing it at the bank. The bank either fails to include it in the bank statement or records it incorrectly in the statement’s debit column. This inaccuracy will result in a higher bank balance in the cash book and a lower bank balance on the bank statement.
(e) The bank incorrectly debited the account
The cash book will display a larger bank balance than what is seen on the bank statement if the bank has incorrectly debited the account.
Errors That Cause the Cash Book’s Bank Balance to Drop
Below are some examples of errors and neglect that lower the cash book’s bank balance.
(1) The deposited check was not noted in the cash book.
Every day, companies get checks from creditors and deposit them in the bank. A check from a debtor may occasionally be deposited at the bank without being noted in the cash book (on the debit side of the bank column). The cash book displays a smaller bank balance than the bank statement as a result of this inaccuracy.
(2) Inaccurate Bank Column Casting in Cash Book
The cash book will display a lower bank balance than the bank statement if the bank column (debit side) is undercast or if the credit side is overcast.
(3) The bank did not record the issued check.
Every day, a company entity issues and pays checks to its debtors. Sometimes we write a check to our creditor, and the bank pays the check amount but neglects to include it in the withdrawal’s column of the bank statement. The cash book displays a lower bank balance than the bank statement due to such errors.
(4) The bank has incorrectly credited the account.
The cash book will indicate a lower bank balance and the bank statement will show a higher bank balance if the bank has incorrectly credited the bank account.
Questions to Understand your ability
1. What’s the main purpose of a cash book?
A) To only track cash payments
B) To keep track of both bank and cash transactions
C) To record inventory items
D) To store final financial statements
Answer: B) To keep track of both bank and cash transactions
2. What happens if a check issued to a creditor isn’t recorded in the cash book?
A) The cash book will show a bigger bank balance than the actual bank balance
B) The cash book will show a smaller bank balance than the actual bank balance
C) It won’t affect the bank balance at all
D) The check will be canceled automatically
Answer: A) The cash book will show a bigger bank balance than the actual bank balance
3. Which mistake would cause the cash book to show a lower bank balance than it actually is?
A) A deposited check wasn’t recorded in the cash book
B) The bank credited the account by mistake
C) The check payment was recorded wrongly on the credit side
D) The cash book’s bank column was overcast
Answer: A) A deposited check wasn’t recorded in the cash book
4. What error would lead to the cash book showing more money than the bank statement?
A) The bank failed to collect a check
B) The bank made an incorrect debit
C) The bank column in the cash book was undercast
D) A check to a creditor was wrongly entered on the debit side
Answer: A) The bank failed to collect a check
5. If the bank column in the cash book is overcast, what happens?
A) The cash book will show a lower bank balance than the bank statement
B) The cash book will show the correct bank balance
C) The cash book will show a higher bank balance than the bank statement
D) The bank balance in the statement will be artificially inflated
Answer: C) The cash book will show a higher bank balance than the bank statement
Conclusion
A discrepancy between the cashbook and bank statement balances might arise from improper account recording and deletion, which would be damaging to the company’s financial standing. In order to fulfill their aims and goals of maintaining correct records and to increase client confidence in the accounting systems of the enterprises, businesses must promptly resolve such errors.
FAQ's
A cash book’s basically a combo of a journal and ledger. It keeps track of all your cash and bank transactions—everything you pay out and everything you receive.
Simple. A cash book IS your cash account. If you’re using it, you don’t need a separate cash account in the ledger because it already covers all the cash and bank records.
First, it’s your daily record (prime entry book) for all cash transactions. Second, it’s part of your ledger, helping you keep tabs on cash and bank balances.
If the bank misses a check, your cash book shows more money than your actual bank balance. The bank balance in the statement is lower.
If a check’s issued but you forget to enter it in the cash book—or mess it up—it’ll make your bank balance look bigger in the cash book than it really is.
Overcast the debit side or undercast the credit side? You’ll end up with a higher bank balance in the cash book than what’s actually in the bank statement.
If the bank doesn’t record your deposited check, or messes it up in their statement, your cash book balance will be higher than what the bank shows.
If the bank messes with your account, whether they incorrectly credit or debit it, your cash book’s balance will be off—higher or lower than the bank’s actual balance.
