Recording Bank Transactions in Cash Book & Pass Book :: Comparative Analysis

... From Page 2

Some bank transactions relating to the organistion M/s Manzil Enzymes.

  1. Aug 1st :: Paid Cash into bank (new account opened) Rs. 18,000.
  2. Aug 5th:: Issued a cheque (No. AS01) to Sam Rs. 5,400 in full settlement of Rs. 5,500 due.
  3. Aug 8th :: Received a cheque (No. MG41) for Rs. 12,000 towards sale proceeds and deposited the same into bank.
  4. Aug 13th :: Withdrawn for Mr. Rao's personal use by cheque (No. AS02) Rs. 5,000
  5. Aug 14th :: Mr. Rao, issued a cheque (No. TR82) for Rs. 50,000 towards additional capital Rs. 50,000.
  6. Aug 15th :: Issued a cheque (No. AS03) for Rs. 24,000 towards purchase of Furniture.

Recording in M/s Manzil Enzymes Books

We assume that the organisation maintains a Triple Column Cash Book (subsidiary book).
DrCash BookCr
Date Particulars J/F D/A
(Rs)
Cash
(in Rs)
Bank
(in Rs)
Date Particulars J/F D/R
(Rs)
Cash
(in Rs)
Bank
(in Rs)
1/8
8/8
14/8
To Cash a/c
To Sales a/c
To Capital a/c
C



18,000
12,000
50,000
1/8
5/8
13/8
15/8
15/8
By Bank a/c
By Sam a/c
By Drawings a/c
By Furniture a/c
By Balance c/d
C

100
18,000

5,400
5,000
24,000
45,600
  Total       80,000   Total       80,000
16/8 To Balance b/d     45,600            

Recording in Bank Books (Pass Book)

We assume that the cheques received by the organisation have been deposited into the bank account and the cheques issued to outsiders have been presented for payment to the bank.
M/S Mazil Enzymes
Date Particulars Cheque No Withdrawl [Debit] Deposit [Credit] Balance Initial
Aug 1st
Aug 5th
Aug 12th
Aug 13th
Aug 17th
Aug 18th
Aug 18th
By Deposit (Cash )
To Sam (cheque)
By Deposit (Cheque)
To Self (Cheque)
To Pine Wood Traders (Cheque)
By Deposit (Cheque)
To Collection Charges
 

AS01
MG41
AS02
AS03
TR82

5,400

5,000
24,000

120
18,000

12,000


50,000
18,000
12,600
24,600
19,600
−4,400
45,600
45,480

Comparative analysis of recording in both books

Let us analyse (with regard to aspects other than the debit and credit) the recording of the above transactions in both the books.
  1. Cash Paid into Bank

    The transaction results in amount being paid into the bank. This transaction is recorded in M/s Manzil Enzyme books and the Bank books on the same date. Therefore, after the transaction is complete, you can notice that the balance in the Bank a/c (in cash book) and the customer (M/s Manzil Enzymes a/c) in the bank books is the same.

    However, we should note that the bank a/c (in cash book) shows a debit balance whereas the customer (M/s Manzil Enzymes a/c) in the bank books shows a credit balance. The organisations money is with the bank. For the organisation, the bank is a debtor (and therefore a debit balance) and for the bank the organisation (M/s Manzil Enzymes) is a creditor (and therefore a credit balance).

  2. Cheques Issued

    It is a general practice that, money can be withdrawn from the bank using a withdrawl form, if the withdrawl form is accompanied by the pass book. This is generally done in case of personal accounts.

    With regard to bank accounts maintained by business organisations, let us assume that this is not done. Even the cash, the business organisation needs is withdrawn using a cheque. Therefore, we can say that the organisation issues cheques either for withdrawing cash from the bank or to the customers of the business towards the amounts payable to them.

    Bearer Cheques

    Cheques which are capable of being presented at the bank by individuals and payable by the bank across the counter are called bearer cheques. Therefore, if an organisation has issued a bearer cheque it is capable of being presented and encashed immediately on the day it is issued.

    The cheque (No: AS01) issued to Mr. Sam on Aug 5th is paid by the bank on the same date. On the assumption that this is a bearer cheque, it can be identified that it has been presented for payment across the counter on the same day i.e. Aug 5th.

    The cheque issued for the amount drawn by Mr. Rao for personal purposes is also a similar cheque and as such has been paid by the bank on the same date the cheque has been issued.

    Account payee Cheques

    Cheques which are payable only to a bank are account payee cheques. These cheques are typically crossed with parallel lines on the top left edge of the instrument indicating that they are crossed. They are not paid across the counter of the bank. They are to be presented to the bank through the banker of the person/organisation who is mentioned as the payee of the cheque.

    Therefore, an account payee cheque is handed over to the payees banker (deposited in the bank) for collection. The banker would send this cheque to the relevant bank and collect the amount for the payee who is its customer.

    When an account payee cheque is issued by an organisation, it would have to be deposited by the recepient in his/her/its bank account and the banker should send it to the organisations bank for collection. Thus the date of actual payment of the cheque by the bank would be further to the date of issue of the cheque by the organisation.

    This should explain the reason why, the cheque (No: AS03) issued by M/s Manzil Enzmes, on Aug 15th towards the payment for purchase of furniture is paid by the bank on Aug 17th.

    Validity of a Cheque » Stale Cheque

    A cheque is valid for 6 months from the date of its issue, unless specifically stated otherwise. The cheque which has become invalid on account of becoming out of date is called a stale cheque

    Relevant Provisions from the Negotiable Instruments Act, 1881 Hide/Show

    Sec 5 : "Bill of exchange" : A "bill of exchange" is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.

    A promise or order to pay is not "conditional" within the meaning of Sec 5 and Sec 4, by reason of the time for payment of the amount or any instalment thereof being expressed to be on the lapse of a certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.

    The sum payable may be "certain", within the meaning of Sec 5 and Sec 4, although it includes future interest or is payable at an indicated rate of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an instalment, the balance unpaid shall become due.

    The person to whom it is clear that the direction is given or that payment is to be made may be "certain person", within the meaning of Sec 5 and Sec 4, although he is misnamed or designated by description only.

    Sec 6 : "Cheque" : A "cheque" is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
    Sec 13(1) : "Negotiable instrument" : A "negotiable instrument" means a promissory note, bill of exchange or cheque payable either to order or to bearer.
    Sec 138. Dishonour of cheque for insufficiency, etc., of funds in the accounts
    provisio a : the cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.

  3. Cheques Deposited

    As explained above, a bearer cheque can be collected across the counter and a crossed cheque should be presented through the banker for collection. When you deposit a cheque for collection, the banker would not credit (deposit) the customers account with the amount of the cheque. The banker records the cheques sent for collection in a separate book and would credit the customers account only if the cheque has been collected. If the cheque is dishonoured, no credit would be made.

    Clearing House Hide/Show

    Every district has lead bank. A lead bank is entrusted with the responsibility of coordinating the efforts of all credit institutions (banks and others) in the allotted districts to increase the flow of credit. Generally the bank that has relatively large network of branches within the district, especially the rural areas is appointed the lead banker to the district.

    Lead banks maintain a clearing houses in all locations within a district, where all the bankers meet once or twice every day to clear the cheques that have been deposited by their customers for collection. The representative of each bank brings along with him/her the cheques which have been deposited by their customers for collection and which have been drawn on other branches of their own bank or on other banks. These cheques are exchanged by the banks and only the net amounts are transferred from one bank to another.

    Say Bank "A" has cheques drawn on bank "B" with it worth Rs. 2,00,000 and bank "B" at the same time has cheqes drawn on bank "A" worth Rs. 1,80,000. Both bank "A" and bank "B" would meet at the clearing house and exchange the cheques on the first day and a record of all the cheques is made by each. They go back to their branches, check the accounts of the persons/organisations who issued the cheques to ensure that they have sufficient balance to honour the cheques. After ensuring that the cheques can be paid they would get back the next day and make the final settlement. Bank "B" needs to transfer Rs. 20,000 to bank "A" to settle the transaction. The clearing house eliminates the need for bank "A" to raise a fund of Rs. 1,80,000 and bank "B" to raise of fund of Rs. 2,00,000 to make a settlement in this regard.

    When an account payee cheque is given to the organisation (received by it), it would have to deposit the same in its bank account and the banker should send it to the relevant bank for collection. Thus the date of actual receipt of the cheque and the date on which the amount has been credited by the bank in the organisations account in the bank would be different. The date of credit would be further to the date of receipt of the cheque.

    This should explain the reason why,

    • The cheque (No: MG41) received by M/s Manzil Enzmes, towards sale proceeds on Aug 8th and deposited in the bank is credited by the bank on Aug 12th.
    • The cheque (No: TR82) received by M/s Manzil Enzmes, towards additional capital contribution of the proprietor on Aug 14th and deposited in the bank is credited by the bank on Aug 18th.
  4. Bank Charges

    The bank would collect charges from the customer from time to time for various reasons.

    Issue of new cheque book, Postal charges for sending a cheque book, Collection charges for collecting outstation cheques, Commission/Charges for collecting insurance claims, dividends, interest on securities etc., Transfer charges for transfering funds, Incdiental Charges related to some service provided by the bank to the customer, etc.

    Generally, the bank debits the charges to the customers account and would intimate the customer of the same. The customer would record the information on the day on which it is received. Therefore, it is possible that the date on which the bank has debited these charges and the date on which the customer has recorded the same charges would be different.

    This should explain the reason why the collection charges debited by the bank on Aug 18th, has not yet been recorded in the cash book. The organisation might not have received the information relating to the charges made by the bank.

Author Credit : The Edifier ... Continued Page 4

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