Cash Book vs Passbook: why the two bank balances differ
- Explain what a passbook or bank statement is and why it is a mirror image of the bank column of the cash book
- Tell a favourable balance from an overdraft in both the cash book and the passbook
- List the timing differences that make the two balances differ, with examples
- Identify errors by the firm or the bank as a cause of difference and say which balance each item makes higher
Welcome to Chapter 5! In Chapter 4 you kept a double column cash book and found your bank balance at the end of the month. Now a surprise: open the bank’s statement for the same account on the same date, and the balance is almost never the same! Did someone steal money? Did the bank make a mistake? Usually, nothing is wrong at all. The two records were simply written by two different people at two different times. Today we become detectives. We will learn to read a bank statement, find every reason for the difference, and understand which balance each reason pushes up or down. In the next lesson we will use these clues to prepare a Bank Reconciliation Statement.
1. Two records of the same bank account
Ramesh Sharma runs Sharma Traders, a wholesale kirana business in Khurja. On 30 April 2026 his cash book says: “Balance at bank ₹20,000”. The same evening his accountant downloads the bank statement from net banking. It says: “Closing balance ₹23,150 Cr.” Ramesh is happy for a second (“₹3,150 extra!”) and then worried (“Is something wrong?”). His accountant smiles: “Sir, both are correct for now. The bank does not yet know some things we know, and we do not yet know some things the bank knows. Let me show you.”
Every business that has a bank account has two records of it:
- Bank column of the cash book: kept by the business itself. Deposits are written on the debit (receipts) side and payments by cheque, UPI or NEFT on the credit (payments) side.
- Passbook or bank statement: kept by the bank. It is a copy of the customer’s account as it appears in the bank’s books.
Passbook / Bank statement: a copy of the customer’s account in the books of the bank, showing every deposit, every withdrawal and the balance after each entry. Savings accounts usually get a small booklet (passbook); current accounts get a printed or downloadable statement.
A bank statement looks like this (current account of Sharma Traders for April 2026):
| Date | Particulars | Cheque No. | Withdrawals (Dr.) ₹ | Deposits (Cr.) ₹ | Balance ₹ |
|---|---|---|---|---|---|
| Apr 1 | Opening balance | 30,000 Cr. | |||
| Apr 8 | To Anand Properties (rent) | 101 | 9,000 | 21,000 Cr. | |
| Apr 13 | By clearing: Mehta & Sons | 12,000 | 33,000 Cr. | ||
| Apr 22 | To Kapoor Suppliers | 102 | 15,000 | 18,000 Cr. | |
| Apr 25 | By NEFT: Rao Brothers | 5,000 | 23,000 Cr. | ||
| Apr 30 | To service charges | 250 | 22,750 Cr. | ||
| Apr 30 | By interest | 400 | 23,150 Cr. |
Notice two things. First, deposits are in the credit column and withdrawals in the debit column. Second, the balance is marked Cr. Why credit? Let us see.
2. The mirror image: why the bank says “credit”
For Sharma Traders, money in the bank is an asset, so its Bank Account (bank column) shows a debit balance. For the bank, the same money is money it owes to Sharma Traders. In the bank’s books, Sharma Traders is a creditor, so its account shows a credit balance.
| Event | Cash book (bank column) | Passbook / bank statement |
|---|---|---|
| Money deposited | Debit side (receipts) | Credit column (deposits) |
| Money withdrawn / cheque paid | Credit side (payments) | Debit column (withdrawals) |
| Money is in the bank (normal case) | Debit balance | Credit balance |
| More withdrawn than deposited (overdraft) | Credit balance | Debit balance (marked Dr. or OD) |
Passbook = mirror of the bank column. Whatever is on the left in your cash book is on the right in the bank’s book. So a debit balance in the cash book should equal a credit balance in the passbook.
2.1 Favourable balance and overdraft
Favourable balance: there is money in the bank. It is a debit balance in the cash book and a credit balance in the passbook.
Unfavourable balance (Overdraft): the business has withdrawn more than it deposited, so it has, in effect, borrowed from the bank. It is a credit balance in the cash book and a debit balance in the passbook.
Students often write “debit balance as per passbook = money in bank”. Wrong! A debit balance in the passbook means overdraft. Always ask: whose book am I reading, the firm’s or the bank’s?
- Gupta Stores has ₹8,000 in the bank
- the cash book must show ₹8,000 debit balance
- Gupta Stores has an overdraft of ₹8,000
- the bank owes ₹8,000 to Gupta Stores
3. So why are the two balances different?
If both books record the same account, and both are correct, the balances should match. In real life they rarely do on any given date. NCERT groups all the reasons into just two families:
- Timing differences: a transaction has been recorded in one book but not yet in the other.
- Errors: a mistake made by the business in its cash book, or by the bank in the passbook.
Timing differences are not mistakes. They correct themselves in a few days, when the second book catches up. Errors do not correct themselves; someone has to find and fix them.
4. Timing differences: seven common causes
For each cause, ask one question: “Which book has recorded it, and which book is still waiting?” Then you will know which balance is higher.
4.1 Cheques issued but not yet presented for payment
Sharma Traders gives cheque no. 103 of ₹6,000 to Verma Traders on 27 April. The cash book immediately records it on the payments side, so the cash book balance goes down at once. But Verma Traders deposits it only on 3 May. Until the bank actually pays the cheque, the bank balance does not go down.
Effect: passbook balance is higher than the cash book balance.
4.2 Cheques deposited but not yet collected (credited) by the bank
On 28 April, Sharma Traders deposits a cheque of ₹8,000 received from Gupta Stores. The cash book records it on the receipts side at once. But the bank credits the account only after the cheque is cleared (the money actually comes from Gupta Stores’ bank). Clearing takes time, and longer for outstation cheques.
Effect: passbook balance is lower than the cash book balance.
A cheque recorded in the cash book but not even sent to the bank has the same effect: the cash book shows it, the passbook does not.
4.3 Direct debits by the bank (bank charges, interest on overdraft)
Banks deduct money for their services on their own: cheque-book charges, SMS alert charges, cheque collection charges, interest on overdraft. The business comes to know only when it sees the statement. In our example, “service charges ₹250”.
Effect: passbook balance is lower.
4.4 Amounts deposited directly into the bank account
A customer, Rao Brothers, pays ₹5,000 by NEFT straight into Sharma Traders’ account. Today, UPI and NEFT payments made directly by customers are very common. The bank records it at once, but the business may not have entered it in its cash book yet.
Effect: passbook balance is higher.
4.5 Interest and dividends collected by the bank
The bank may credit interest to the account, or collect dividend on the owner’s investments on his behalf. The bank credits it at once; the business records it only after seeing the statement. In our example, “interest ₹400”.
Effect: passbook balance is higher.
4.6 Direct payments by the bank on standing instructions
A business can give the bank a standing instruction (or an auto-debit mandate) to pay certain bills on fixed dates: insurance premium, loan instalment, telephone bill, rent. The bank pays and debits the account. The business may record it only later.
Effect: passbook balance is lower.
4.7 Cheques or bills dishonoured
A customer’s cheque deposited by the business bounces (for example, not enough money in his account). The bank cancels the credit it gave, that is, debits the business’s account. The same happens when a bill of exchange that the business had discounted with the bank is not paid on maturity. The business usually learns about it later.
Effect: passbook balance is lower.
Only-in-passbook items: “Bank gives” (interest, dividend, direct deposit) → passbook higher. “Bank takes” (charges, interest on overdraft, standing instructions, dishonour) → passbook lower.
Only-in-cash-book items: cheque issued, not presented → passbook higher. Cheque deposited, not collected → passbook lower.
Cash book, receipts side: Apr 1 Balance b/d ₹30,000; Apr 10 Mehta & Sons (cheque deposited) ₹12,000; Apr 28 Gupta Stores (cheque deposited) ₹8,000.
Cash book, payments side: Apr 6 Rent, cheque 101 ₹9,000; Apr 20 Kapoor Suppliers, cheque 102 ₹15,000; Apr 27 Verma Traders, cheque 103 ₹6,000.
- Cash book balance: receipts 30,000 + 12,000 + 8,000 = 50,000; payments 9,000 + 15,000 + 6,000 = 30,000; balance = ₹20,000 (debit).
- Tick every item that appears in both books: opening ₹30,000, Mehta & Sons ₹12,000, cheque 101 ₹9,000, cheque 102 ₹15,000. These cause no difference.
- Unticked in the cash book: Gupta Stores’ cheque ₹8,000 (deposited, not yet collected) → passbook lower. Cheque 103 ₹6,000 (issued, not yet presented) → passbook higher.
- Unticked in the passbook: NEFT from Rao Brothers ₹5,000 → passbook higher. Service charges ₹250 → passbook lower. Interest ₹400 → passbook higher.
- Check: 20,000 + 6,000 + 5,000 + 400 − 8,000 − 250 = 23,150. This is exactly the bank statement balance.
| Item | Recorded only in | Effect on passbook balance | ₹ |
|---|---|---|---|
| Cheque 103 issued, not presented | Cash book | Higher | 6,000 |
| NEFT received directly from Rao Brothers | Passbook | Higher | 5,000 |
| Interest credited by bank | Passbook | Higher | 400 |
| Gupta Stores’ cheque deposited, not collected | Cash book | Lower | 8,000 |
| Service charges debited by bank | Passbook | Lower | 250 |
Do not tick by amount alone. Two cheques of ₹5,000 may be different cheques. Match the cheque number, party name and amount together.
On 31 May 2026, the cash book of Kapoor Mobile Point shows a bank balance of ₹40,000 (debit). The only difference with the passbook is a cheque of ₹6,500 issued to a supplier on 30 May, which the supplier has not yet presented to the bank. What balance does the passbook show (in ₹)?
On 30 June 2026, the passbook of Neha Boutique shows ₹32,000 (credit). The only difference: the bank has debited ₹300 as cheque-book and SMS charges, which Neha has not yet entered in her cash book. What does her cash book show as the bank balance (in ₹)?
5. Differences caused by errors
Sometimes the difference is a genuine mistake.
5.1 Errors made by the business (in the cash book)
- Omission: a cheque issued or deposited is not recorded at all.
- Wrong amount: a cheque of ₹4,500 issued to a supplier is written as ₹5,400.
- Wrong column: a cheque deposited into the bank is written in the cash column instead of the bank column.
- Wrong totalling (casting): the receipts or payments side of the bank column is undercast (totalled short) or overcast (totalled more).
- Wrong balance carried forward: a debit balance brought down as a credit balance, or a wrong figure brought down.
5.2 Errors made by the bank (in the passbook)
- Crediting or debiting the business’s account with an amount that belongs to another customer (for example, two customers with similar names).
- Recording a wrong amount, or recording the same cheque twice.
- Wrong totalling of the deposit or withdrawal column.
5.3 How to judge the effect of an error
Do not memorise errors. Ask: “Compared with the correct figure, has this error made the cash book balance bigger or smaller?” (or the passbook balance, if the bank made the error).
(a) A cheque of ₹4,500 issued to a supplier was recorded as ₹5,400 in the cash book.
(b) A cheque of ₹1,200 deposited into the bank was recorded in the cash column of the cash book.
(c) The bank wrongly debited our account with ₹300 belonging to another customer.
(d) A cheque of ₹2,000 deposited was recorded twice in the cash book.
- (a) The cash book deducted ₹900 extra, so the cash book is ₹900 too small. The bank paid only ₹4,500. So the passbook is higher by ₹900.
- (b) The bank received the cheque and credited it, but the bank column of the cash book never got it. Passbook higher by ₹1,200.
- (c) The bank reduced our balance by mistake. Passbook lower by ₹300.
- (d) The cash book added ₹2,000 once too often, so the cash book is too big. Passbook lower by ₹2,000.
Interest of ₹450 has been credited by the bank but not yet entered in the cash book. Is this difference caused by a time gap or an error?
6. Why reconcile at all?
Comparing the two records and explaining every difference is called reconciliation (from “reconcile” = to bring into agreement). The statement that shows this is the Bank Reconciliation Statement (BRS). It is prepared by the account holder (the business), not by the bank. It helps to:
- find out the true bank balance of the business;
- catch errors in the cash book or in the passbook and get them corrected quickly;
- notice bank charges, interest and dishonoured cheques that the business has not yet recorded;
- spot cheques not presented for a long time, or deposits not credited, and follow them up;
- discourage and detect fraud by employees, since the bank’s independent record is checked against the firm’s.
Bank Reconciliation Statement: a statement prepared on a particular date to reconcile the bank balance as per the cash book with the balance as per the passbook (bank statement), by showing the items that cause the difference.
A BRS is a statement, not an account. It has no debit and credit sides, it is not part of the double entry system, and nothing is posted from it to the ledger.
- Cheque issued but not yet presented for payment
- Insurance premium paid by the bank on standing instructions
- Dividend collected by the bank
- Amount deposited directly by a customer through UPI
7. Exam tips
- In a 3-mark “causes of difference” question, write the two groups (timing differences and errors) and explain at least three causes with a one-line example each.
- Always state the effect clearly: “As a result, the balance as per passbook will be more/less than the balance as per cash book.”
- Remember: the BRS is prepared by the customer; the passbook is a copy of the customer’s account in the bank’s ledger.
📌 Points to remember (Quick Revision)
- The passbook/bank statement is a copy of the customer's account in the bank's books: a mirror image of the bank column of the cash book.
- Favourable balance = debit in cash book = credit in passbook; overdraft = credit in cash book = debit in passbook.
- Differences arise from timing differences (one book has recorded, the other is waiting) and from errors by the firm or the bank.
- Cheques issued not presented, direct deposits, interest/dividend collected → passbook higher.
- Cheques deposited not collected, bank charges, interest on overdraft, standing instruction payments, dishonoured cheques/bills → passbook lower.
- A BRS is prepared by the account holder on a particular date; it is a statement, not an account.
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