Year: 2020

University of Mumbai BMS Notes

Strategic Recruitment and Selection Meaning and Need

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The strategic recruitment is a distinctive part of the recruitment process. Not all the job positions in the company are strategic; they are not crucial for the business operation. The strategic recruitment is focused purely on the key job positions in the organization. It is focused on the hiring of the job positions needed for the accelerated growth of the business. The strategic recruitment can be a separate process from the usual recruitment process for the mass job positions. The difference between the tactical and strategic recruitment exists.

The recruitment strategy defines the different recruitment channels and different recruitment measures. The strategic recruitment is usually reported to the top management. It is designed to react quickly on the changed circumstances on the job market, and it supports the growth of the organization in key business areas. The recruitment KPIs are adjusted for the key job positions as measures reflect the importance (shorter recruitment cycle time and higher recruitment costs accepted).

The recruitment strategy is a steering wheel for the strategic recruitment. The managers tend to mark all job vacancies as the strategic ones. The HR Recruiters have to face them with the real story. The organization defines the strategic recruitment, not the line management. The line managers have to accept the fact of not being as strategic as another department can be.

It is the key secret of the strategic recruitment. It is extremely selective. The part of the strategic recruitment can be up to 5% – 10% of all job vacancies in the organization. They are different every year. They depend on the business strategy. The organization grows, and it changes its strategic imperatives and initiatives. The strategic recruitment sources those initiatives.

There is no manager in the organization, who drives the strategic initiatives all the time. The initiatives change. The priorities change. The job positions to be considered strategic has to be re-evaluating at least twice a year.

HR has to act independently. The selection of strategic job positions to be hired is not easy. Managers push to demonstrate their strategic role in the organization. HR has to demonstrate support for the daily operational recruitment, and it has to point the strategic job positions with the special care.

HR cannot hire all job positions as strategic ones. The costs would exceed the recruitment budget quickly. The strategic recruitment is expensive. The top management closely monitors it. It can be monitored as the top managers can recognize the importance of the job positions for the organization. They can lose the commitment, when all job positions are strategic.

Because the rotation of employees is easily eliminated, facilitating the election of the candidate who not only possesses the necessary competences to fulfill the position, but also possesses the core values ​​of the Company.

The main objective of Recruitment and Selection is an organized, transparent and fair recruitment process to incorporate the right people in the Company.

The strategic importance of the Recruitment and Selection Process gives to the Companies the following benefits:

  • Help build your brand as an employer. When a Company begins to hire, the public, potential candidates and the Market observe it.
  • Reduces turnover and increases employee morale. When an Organization hires the right people, the end result is happier workers doing meaningful work.
  • Attracts important group of applicants. A planned recruitment effort includes identifying the best methods to surch the most qualified candidates.
  • Hiring speed. A well-designed Recruitment and Selection Process quickly resolves a vacancy. Therefore, the interruption in production or services due to lack of personnel, can be completely controlled or eliminated.
  • The success of a Company is guaranteed with the best employees, when they are happy and doing a meaningful job.

Identifying Needs

Strategic management begins with identifying the needs of your organization as they relate to current and future labor demands. Accomplishing this task requires the ability to identify the various jobs and roles needed within your organization to meet current and future goals related to production and growth, and speaking with other leadership personnel within your company, according to Lever. Once these roles are identified, clear and concise job descriptions and duties can help ensure that recruitment remains streamlined and aimed at efficient recruitment and hiring.

Recruitment Activities

Hiring managers should focus on recruiting activities aimed at attracting the right candidates for the job. Recruiting activities can include internal efforts, college hiring fairs, technical and vocational events, and traditional newspaper advertisements. Based on the needs of current openings and forecasts for future needs, a hiring manager will need to direct efforts toward the best option for recruiting the right candidates. For instance, focusing on college hiring fairs and traditional newspaper advertisements is appropriate for entry-level positions with your company.

Selection Process

Selecting the right candidate requires identifying the specific skills, knowledge and qualities you seek and desire in an employee. This can pertain to the necessary skills and knowledge for the position itself, such as a specific degree or certification, and the desired personal qualities, such as a preference to hire employees with good moral and ethical standards. Other important parts of the selection process include conducting any necessary aptitude tests and conducting a thorough background check to ensure the employee meets the basic qualifications of both the position and the company.

The role of the HR manager in the recruitment and selection process is to help run the day-to-day of recruitment. Consult with her to make sure you are on the same page with what you are looking for; use her for insights from her perspective. The relationship between recruitment and selection should be smooth and efficient with proper communication.

University of Mumbai BMS Notes

Strategies for Enhancing Employee Work Performance

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  1. Make Clear Goals and Expectations

Are your team members aware of what their goals and expectations are? Do they know when you expect goals to be met? How do you know?

Involve individual employees in their own goal-setting process to give them autonomy over their goals. A work environment that actively involves employees in goal-setting can also improve employee engagement and motivation.

If you are dealing with performance issues with a particular team member, make sure to be specific. For example, if you discover a direct report is frequently taking two-hour lunches, don’t tell them to take ‘shorter lunches.’ Tell him or her to keep their lunch break to an hour and consider making them document their lunch breaks or clock in and out of work.

  1. Empower Employees to Do Their Best Work

People do their best work when they are engaged and motivated. Invest in your employees’ long-term career in the organisation. Develop a plan for moving up within the company and provide the resources and training that will develop staff into talented leaders in the long run.

Your team members will need new skills and habits as they advance. Help employees secure those skills by allocating budget dollars towards workshops, professional development courses, conferences and certifications so they can reach their full potential.

  1. Hold Team Members Accountable to Goals

Imagine someone asks a direct report to do something even if it’s a clear goal with a set deadline and they don’t do it, but receive no consequence.

What happens next?

Over time, the employee will learn it doesn’t matter if they slack off or have to be reminded. Performance is likely to suffer.

Team members require crystal clear communication about their responsibilities and need to be held accountable. Be sure to communicate with your employees and don’t be afraid to dole out warnings and consequences when they are earned. If certain employees fail to deliver, consider implementing a performance improvement plan. If they don’t improve, it may be time to show them the door.

  1. Reward High Performance

A common problem in many organisations is that leaders spend their time trying to get low-performing team members to improve and recruiting new talent, ignoring high performers because they don’t cause problems. This is a dangerous oversight!

Over time, high performers will become disengaged and less motivated if they don’t feel like their efforts are appreciated. Furthermore, high performers are in high demand! You could lose them to competitors if you don’t recognise their hard work.

There’s no shortage of ways to reward an employee and thank them for a job well done. Gifts, bonuses, promotions, extra time off, public praise and extra benefits are all effective ways to reward high performers and keep them motivated.

  1. Foster a Fun, Positive Work Environment

It’s no secret that happy employees are more engaged, productive and motivated team members. Be sure employees get to let loose occasionally and have some fun. Sponsor a monthly potluck, host ‘get to know you’ activities outside of the office or plan a trivia event at work to let team members develop a rapport and relationship with one another.

Encourage an organisational culture where employees feel safe to speak up and voice their opinions, regardless of their rank or position in the company. When people feel their ideas and opinions are valued, they are more likely to participate and be engaged with the mission of the organisation.

  1. Increase Job Satisfaction

Do a market analysis to see how your organisation stacks up to your competitors. Do you offer competitive benefits and perks? Are your salaries higher or lower than other businesses in your industry? What kind of office environment do you have?

The best way to find out if your benefits and perks are affecting employee performance and motivation is to ask your teams. Have employees complete an anonymous survey to determine what is most important to them.

  1. Consider Remote Working Options

In today’s society, flexible schedules matter more than ever for busy business professionals. Contrary to popular belief, giving team members the ability to work from home won’t make them less productive.

Research shows that employees who work remotely are 13 percent more productive than their office-working counterparts, and they spend the time would they spend commuting focusing on work.

For example, if one of your team members doesn’t feel well enough to come to the office (and doesn’t care to spread their germs) but they can still get work done, let them work from home rather than take a sick day and accomplish nothing. If someone has a home delivery or repair, they need to be home for, let them work remotely so they can stay productive and not use all of their paid time off.

  1. Use the Right Technologies

A big part of employee performance is measuring performance. While many companies still rely on annual performance reviews and performance management systems to assess performance, new technologies are available that help measure performance more accurately on an ongoing basis.

Social performance management software that harnesses the power of Promise-Based Management to help teams create and track progress towards goals and collaborate more effectively. Employees make promises to one another in a transparent place so everyone knows who is responsible for what and when it should be accomplished.

Techniques to Improve Employee Performance

Once you get a handle on what is causing employees to underperform, you can target solutions to address those issues. Here are six ideas to help you manage and improve employee performance in your organization.

  1. Communicate clear expectations.

Making sure employees are clear about their work assignments means communicating those expectations well. Continue to manage what is expected through frequent communications.

If employees can explain objectives in their own words, it is a good chance that they know what to do and how to get it done.

  1. Make sure performance appraisals are consistent.

Regular and timely appraisals ensure employees know where they stand at all times. Conducting performance appraisals regularly also keeps goals in the forefront of daily tasks.

  1. Make employee development a priority.

“Where do you see yourself in five years?” This is a common interview question. Now that five years have passed, has your employee’s career goals been achieved? Or, are they still striving to reach their full potential within the organization?

If they are, maybe this is a good time to readdress those goals and plan accordingly. Work to close any skills gaps that will not only help them achieve long-term goals but will also benefit your company when their skills help you fulfill business objectives.

  1. Take steps toward improving morale.

Employees perform better when they are satisfied with their job. Review things such as:

  • Work environment
  • Benefits
  • Salary level
  • Employee understanding of the mission and vision

Employees who understand how their role helps the company succeed are often more willing to do their very best.

  1. Empower employees to do their jobs well.

Empowering employees can take on many forms as they gain the authority to make decisions that have a huge impact on their success.

Whether it is giving them input on goals and objectives, or allowing them to access their data without going to HR, minor roadblocks will not impede their progress. They have the resources they need, yet know they are held accountable without being micromanaged.

  1. Utilize the right technologies.

Implement technology platforms that drive performance and engagement daily. Technology is crucial in today’s workforce, especially if you have a decentralized staff.

Mobile employees remain part of the team through powerful communication channels to keep everyone on the same page.

Organizational success thrives when the right rules and systems are in place. Simply wanting to know how to improve employee performance without including employee considerations may not help you achieve set goals.

Create times to have regular meetings and discussions perhaps not waiting until performance appraisal day to talk about areas of concern.

Waiting until your company experiences massive losses is the worst time to swing into action. Begin early, at the first sign of trouble, to determine the most effective ways to change an underperforming workforce into a solid team.

Management Notes

Difference between Depreciation, Amortization and Depletion

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Depreciation

Depreciation is the accounting term used for assets such as buildings, furniture and fittings, equipment etc. Companies use this to record the diminishing value of their assets as they are used in the business from the time of purchase of such assets. Hence cost is allocated periodically as value lost due to usage (as expense affecting the business’s net income) and the declining value of assets is recorded (affecting the value of business). Different methods exist in calculating the depreciation amount and these are different depending on the asset type. The depreciation is calculated from the time an asset is used / placed for service and the depreciation is recorded periodically. Depreciation is calculated taking the cost of the asset, the expected useful life of the asset, residual value of the asset and percentage where necessary. Depreciation is not taken into account once the full cost of the asset is recovered / the asset is no longer in the company’s possession (i.e. sold, stolen and fully depreciated). Two main ways exist in calculating depreciation and they are the straight line (which allows deducting the same amount each year over the life of the asset) and reducing balance method / declining balance method (which provides for a higher charge in the first year and reducing amount throughout the asset life).

Depletion

Depletion is an accounting concept which is used mostly in mining, timber, petroleum or other similar industries. Being similar to depreciation, depletion allows accounting for the reduction of the resource’s reserve. There are two main types of depletion calculation: cost depletion (where cost of the resource allocated over the period) and percentage depletion (the percentage of the property’s gross income where percentage is specified for each mineral).

When dealing with a natural resource also referred as a mineral asset the concept of depreciation or amortization cannot be applied. “Depletion” is a form of a systematic reduction in the value of a natural resource based on the rate at which it is being used.

For example: A coal mine has 10 Million tonnes of coal and the coal extraction is happening at the rate of 1 Million tonnes per year. In this case, depletion rate would be 10% p.a. since at this rate of extraction the coal mine is being depleted at 10% per year.

Though both have similar concepts, difference between depreciation and depletion exist as mentioned below.

  1. Depreciation is on tangible assets whereas depletion is on non-renewable resources.
  2. Depreciation is the deduction of the asset value due to aging, whereas depletion is the actual physical reduction of the company’s natural resources (accounting for consumption).

Amortization

Prorating cost of an “Intangible Asset” over the period during which benefits of this asset are estimated to last is called Amortization. The concept of amortization is also used with leases & debt repayment.

Amortization is for Intangible assets whereas depreciation is for tangible fixed assets. Examples of intangible assets are copyrights, patents, software, goodwill, etc.

Method of Reduction Type of Asset Examples
Depreciation Fixed Assets Building, Machinery etc.
Amortization Intangible Assets Copyright, Patent etc.
Depletion Mineral Assets Mines, Oil fields etc.
Management Notes

Factors affecting depreciation

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  1. Normal Physical Wear and Tear:

Due to normal use of the assets, the assets deteriorate physically, which results in reduction in their value.

  1. Efflux of Time:

Certain intangible assets have fixed life span such as Trade Marks, Patents or Copyrights etc. The value of such assets decreases anyway with the passage of time irrespective of the fact business enterprise is using them or not.

  1. Obsolescence:

Research & Development leads to innovations, in the form of better and technically advanced machines that scrap old machines even though they may be capable of being run physically.

In that case there may be a permanent decrease in the market prices of certain assets like Computers, Motor Cars etc. This results in decline in the value of old machines. Obsolescence is a loss arising from outdating and replacing the existing asset with the new and improved model of that asset.

  1. Accidents:

Destruction or damage caused by an accident may result in reducing the value of assets.

Factors Affecting Depreciation:

As already stated, depreciation is not an attempt to record the changes in the market value of the asset but a systematic allocation of the total cost of depreciable asset (capital expenditure) to expenses (revenue expenditure) over the useful life of the asset because market value of some assets may increase in short run but even then the depreciation process continues. Based on the matching principle a reasonable portion of capital expenditure (i.e. the cost of the asset) should be charged to revenue during the useful life of an asset.

The calculation of amount of depreciation expense for an accounting period is affected by the:

(i) Actual cost of the asset

(ii) Estimated useful life of the asset

(iii) Estimated residual value of the asset.

It is worth mentioning here that out of three factors, two factors are based on just estimation and only one factor is based on actual. Thus, calculation of depreciation expense is just an estimated loss in value of assets and not the real and exact decrease in value of an asset.

Now we shall move on to discuss each of the above factors in detail:

  1. Actual Cost of the Asset:

Actual cost or historical cost means the acquisition cost of the asset and includes all incidental expenses which are necessary to bring the asset to its present condition and location. Examples of such expenses are installation charges, freight inwards or expenses incurred for improvements of such assets and which are of capital nature.

  1. Estimated Useful Life of the Asset:

Estimated useful life of the asset is either:

(i) The period over which a depreciable asset is expected to be used by the enterprise or

(ii) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.

  1. Estimated Residual or Scrap Value of the Asset:

Residual or scrap value is the expected value which may be realized when the asset is sold or exchanged at the end of its estimated useful life. When residual value is significant, it should be taken into consideration for computing depreciation. However, an insignificant residual value can be ignored for computation of depreciation.

Depreciation is a continuous process, but we don’t record depreciation daily. Actually, the total amount of depreciation to be charged on any asset is an advance expenditure which has been paid by the enterprise at the time of acquisition of such asset.

In other words, this expenditure should be treated like deferred expenditure and only adjusting entries, for charging reasonable and appropriate amount of depreciation to revenue in the income statement, are required to be passed every year.

Management Notes

Objectives of providing for depreciation

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  • For the presentation of assets in the balance sheet at their proper value: Depreciation must be charged to each fixed asset for the true and fair presentation of assets in the balance sheet. The depreciation is deducted from the cost or book value of assets each year.
  • For the replacement of assets: The fund equal to the amount of the depreciation is created which will remain in the firm. After the expiry of the life of asset, the same fund can be utilized to replace the new asset.
  • For the determination of correct cost of production: Correct cost of production cannot be ascertained if the depreciation is not charged to the fixed assets. Thus, it is necessary to include amount of depreciation in the calculation of cost of each product.
  • For the determination of true profit or loss: Depreciation is also an expense like repair and maintenance which must be included in profit and loss account to ascertain the correct profit or loss of a business for the year.

Objectives or Need for Providing Depreciation:

(a) To ascertain true profits:

Depreciation is a charge for capital assets used in earning profits and therefore, it should be viewed as business expenditure. Unless proper charge for this expense is made in accounts, the correct profit cannot be ascertained.

(b) To show the assets at their proper values:

Depreciation must be accounted for in order to show the assets at their proper values and thereby present a true and fair view of the financial position of the business. Unless depreciation is provided, the value of the assets will be overstated in the Balance Sheet and it will not reflect the true and fair view of the business.

(c) To create funds for replacement of assets:

Depreciation is non-cash expenditure. Hence, the amount of depreciation charged to Profit and Loss account remains in the business and the amount thus accumulated during the working life of the asset provides funds for its replacement at the end of the working life of the asset.

(d) To keep the capital in tact:

If depreciation is not charged, the amount of profit will be inflated. If such profits are distributed among the owners, then it will amount to the distribution of fixed capital from the business. In the long run it will affect the financial health of the business.

(e) Statutory Need: Provision of depreciation is a statutory need:

Section 205 of the Indian companies Act has made compulsory for a joint stock company to provide for depreciation before distributing the profits as dividends.

Management Notes

Suspense Account

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A suspense account is an account used temporarily or permanently to carry doubtful entries and discrepancies pending their analysis and permanent classification.

A suspense account is a general ledger account in which amounts are temporarily recorded. The suspense account is used because the appropriate general ledger account could not be determined at the time that the transaction was recorded.

It is useful to have a suspense account, rather than not recording transactions at all until there is sufficient information available to create an entry to the correct accounts. Otherwise, larger unreported transactions may not be recorded by the end of a reporting period, resulting in inaccurate financial results.

It can be a repository for monetary transactions (cash receipts, cash disbursements and journal entries) entered with invalid account numbers. The account specified may not exist, or it may be deleted/frozen. If one of these conditions applies, the transaction should be directed to a suspense account.

In branchless banking (BB): Banking through mobile for unbanked – these accounts are used for ‘money-in-transit’. For example, sender sends payment from US ACH account to a BB mobile number in Japan. The customer receives an alert on their mobile to withdraw this money from a BB agent. Until they withdraw, the remittance stays in a suspense account, earning the financial institute or the BB enabler float/interest on that money. When customer withdrawal is completed, the money moves from the suspense account to the account of the agent who facilitated the cash withdrawal.

A suspense account is an account in the general ledger in which amounts are temporarily recorded. A suspense account is used when the proper account cannot be determined at the time the transaction is recorded. When the proper account is determined, the amount will be moved from the suspense account to the proper account. It can also be used when there is a difference between the debit and credit side of a closing or trial balance, as a holding area until the reason for error is located and corrected.

Suspense accounts should be cleared at some point, because they are for temporary use. Suspense accounts are a control risk.

An accountant was instructed to record a significant number of journal entries written by the controller of a large company. Unfortunately, there was one amount that did not have an account designated. In order to complete the assignment by the deadline, the accountant recorded the “mystery” amount in the general ledger Suspense account. When the controller is available, the accountant will get clarification and will move the amount from the Suspense account to the appropriate account.

Management Notes

Balance Sheet Adjustments

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Adjusting entries are made at the end of an accounting period after a trial balance is prepared to adjust the revenues and expenses for the period in which they occurred.

Adjusting entries must involve two or more accounts and one of those accounts will be a balance sheet account and the other account will be an income statement account. You must calculate the amounts for the adjusting entries and designate which account will be debited and which will be credited. Once you have completed the adjusting entries in all the appropriate accounts, you must enter it into your company’s general ledger.

These entries are posted into the general ledger in the same way as any other accounting journal entry. The purpose of adjusting entries is to show when money changed hands and to convert real-time entries to entries that reflect your accrual accounting.

5 Accounts That Need Adjusting Entries

Adjusting entries are a crucial part of the accounting process and are usually made on the last day of an accounting period. They are made so that financial statements reflect the revenues earned and expenses incurred during the accounting period.

Adjusting entries impact five main accounts.

1) Accrued Revenues

For any service performed in one month but billed in the next month would have adjusting entry showing the revenue in the month you performed the service.

You make the adjusting entry by debiting accounts receivable and crediting service revenue.

2) Accrued Expenses

Wages paid to an employee is a common accrued expense.

To make an adjusting entry for wages paid to an employee at the end of an accounting period, an adjusting journal entry will debit wages expense and credit wages payable.

3) Unearned Revenues

Payments for goods to be delivered in the future or services to be performed is considered an unearned revenue.

For example, if you place an online order in September and that item does not arrive until October, the company who you ordered from would record the cost of that item as unearned revenue. The company would make adjusting entry for September (the month you ordered) debiting unearned revenue and crediting revenue.

4) Prepaid Expenses

Prepaid expenses refer to assets that are paid for and that are gradually used up during the accounting period. A common example of a prepaid expense is a company buying and paying for office supplies.

During the accounting period, the office supplies are used up and as they are used they become an expense. When office supplies are bought and used, an adjusting entry is made to debit office supply expenses and credit prepaid office supplies.

5) Depreciation

Depreciation is the process of assigning a cost of an asset, such as a building or piece of equipment over the economic or serviceable life of that asset.

Adjusting entries for depreciation are a little bit different than with other accounts. A company has to consider accumulated depreciation.

Accumulated depreciation refers to the accumulated depreciation of a company’s asset over the life of the company. On a company’s balance sheet, accumulated depreciation is called a contra-asset account and it is used to track depreciation expenses.

Adjusting journal entries are accounting journal entries that update the accounts at the end of an accounting period. Each entry impacts at least one income statement account (a revenue or expense account) and one balance sheet account (an asset-liability account) but never impacts cash.

Management Notes

Reasons for differences between Cash book and Pass book balances

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Cash book refers to a business journal in which all the cash transactions of the business are recorded in a sequential manner. The record is helpful in the preparation of the ledger. It is a subsidiary book. However, its cash column and bank column acts like cash account and bank account in which the direct posting to trial balance is possible, so it is a principal book also.

Cash book keeps a record of cash receipts like sales, receivables, etc., disbursements, like purchases, payables, drawings, etc., deposits in bank and withdrawals, etc. Cash book is classified below:

  • Simple cash book: Cash book with cash column only.
  • Double column cash book: Cash book with cash and bank column.
  • Triple column cash book: Cash book with cash, bank and discount columns.
  • Petty cash book: For recording small value transactions, but it i a subsidiary book only.

Bank passbook is a book that records the bank transactions in a savings account. It is the exact copy of the customer’s account in the bank’s book. It records the deposits, withdrawals, interest credited, bank charges, etc. during a financial year.

The passbook is issued by the bank to its customers. The customer has to retain it and periodically update it to enter recent transactions. With the help of Passbook, a customer can keep an eye on the entries made in his account by the bank. As and when the entries are updated in the passbook the customer can check them and inform the bank, if he finds any error regarding the entries made.

Cash book

Passbook
Meaning A book that keeps a record of cash transactions is known as cash book. A book issued by the bank to the account holder that records the deposits and withdrawals is known as passbook.
Prepared by Firms Bank
Side affected Receipts will be shown in the debit side while payments are entered in credit side. Deposits will be shown in credit side while withdrawals are shown in debit side.
Preparation Discretionary Compulsory
Recording of cheque deposited for collection Date of deposit Date on which the amount is actually collected from the debtor’s bank
Recording of cheque issued to the creditor Date of issue. When the amount is paid by the bank to the creditor.
What do the balances reflect? Debit balance shows cash at bank while the credit balance shows overdraft. Debit balance shows overdraft while the credit balance shows cash at bank.

Cheque paid into the bank for collection but not yet credited/collected by the bank

When a firm receives cheques, drafts etc. from its customers, they are immediately deposited into the bank for collection and an entry is made on the debit side of the bank column of the cash book. But the bank will credit the firm’s account only when it has actually collected the payment of these cheques from other banks. Again there will be a gap of some days between the depositing of the cheques into the bank and credit given by the bank

Cheques issued but not yet presented for payment in the bank

When a cheque is issued to a creditor by the firm, it is immediately recorded on the credit side of the bank column of the cash book. But the bank will debit the firm’s account only when this cheque is actually presented to the bank for payment. Generally, there is a gap of some days between the issue of a cheque and its presentation to the bank.

Cheques paid into the bank for collection but dishonoured by the bank

When cheque received from outside parties are deposited with the bank, these are immediately recorded on the debit side of the bank column of the cash book, but if the cheques are dishonoured, the bank will not make any entry in the credit of the customer’s account. As a result, the cash book will show an increased balance in comparison to the passbook.

Interest and dividend collected by the bank

If the bank collects dividend on shares, interest on investments, etc on behalf of its customer, it credits the amount in the passbook. This will increase the balance in the passbook and a difference in the two balances will exits unless a corresponding entry is recorded in the cash book by the firm.

Interest allowed by the bank

Interest allowed by the bank is credited to the firm, but unless intimation is received by the firm from the bank to this effect, no entry is recorded in the bank column of the cash book. The difference in these balances may arise because of the following reasons.

Direct payment through bank

An account holder can instruct the bank to make certain payments such as insurance premium, rent of the shop, electricity and mobile bills, loan instalment, etc. on the behalf. The bank will debit the party’s account on making the payment.

Direct payment into the bank by a customer

If any customer of the firm directly deposits the amount of payment into the bank account of the firm, then credit entry in the passbook will be recorded by the bank. Unless the corresponding entry is recorded in the cash book, the balance of cash book and pass book will differ.

Advancement in technology

Today, there is a great impact of technology on the banking sector. This is the era of internet banking as well as mobile banking. The funds are transferred from one branch to another branch or from one bank to the other bank electronically. The electronic transfer will change the balance as passbook but balance as per cash book will remain unaffected.

Errors

There may be errors in the account maintained by the customer or bank. The two balances, therefore, may not tally.

Demat Services

Today, shares, debentures and bonds are purchased and sold in Demat form. Demat means shares and debentures exist in electronic form, not in paper form. If a businessman applies for shares and debentures from his business account and he is given partial allotment; the refund is directly transferred to his account. The transaction increases the balance as per pass book on a particular day but the balance as per cash book will be short by that amount.

Retiring a bill under rebate

When the bills are sent to the bank for making payment of the bill before its due date and earn some rebate for customers the bank will debit the customer’s account with fewer amounts. Until the information is received from the bank regarding the retirement of the bill under rebate, the balances as per passbook will be more than the balance as per cash book

Interest on bank overdraft charged by the bank

Generally, the bank allows the overdraft facility to traders on current accounts. If the bank charges interest on the overdraft, an entry will be made in the debit side of the passbook but no entry will be recorded in the cash book unless the firm receives information about the interest charged by the bank. This causes the difference in the two balances.

Bank charges and commission charged by the bank

Bank provides several services to its customers. It collects their outstation cheques, dividends on their shares, pays some expenses on their behalf etc. bank charges commission in lieu of the services provided to the customer. Such charges and commission are debited in the passbook but no entry is recorded in the cash book unless the firm obtains the passbook from the bank and record these entries. This will cause the difference between the two balances.

Management Notes

Favourable and over Draft balances

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When the total of debit column of the Cash Book (Bank column) is more than the total credit column of Cash Book (Bank column), it is known as debit balance. That is, there is a favourable balance of cash deposited at the bank. When Cash Book balance is given, it is treated as debit balance. When credit balance as per Cash Book is given, it is treated as overdraft.

Bank keeps account for its customer. The amounts deposited by its customer are credited to his account in Bank’s ledger and the amounts withdrawn by customer are debited in his account. When credit balance is more than the debit balance, it is called credit balance as per the Pass Book. When debit balance is more than the credit balance, it is a debit balance/overdraft as per Pass Book.

  • Cash Book Shows Debit Balance = Favourable Balance
  • Pass Book Shows Credit Balance = Favourable Balance
  • Cash Book Shows Credit Balance = Favourable Balance
  • Pass Book Shows Debit Balance = Favourable Balance

“Bank balance means favorable balance unless otherwise stated”

All the entries in the Cash Book (Bank column) are made by the customer/trader and all entries in the Pass Book are made by the bank. Periodically, the customer verifies the entries of the Pass Book with the entries made in the Cash Book (in bank column). When the customer deposits any amount into the bank, his bank balance increases, i.e., Cash Book (bank column) shows a debit balance.

At the same time, when the bank receives the deposit, the customer’s Account is credited, thus the Pass Book shows a credit balance. The balances of Cash Book and the Pass Book must tally. Theoretically speaking, these two balances must agree with each other, because the same transactions are recorded in both the books Cash Book and Pass Book.

An overdraft is an extension of credit from a lending institution that is granted when an account reaches zero. The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal.

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be “overdrawn”. If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include:

  • Intentional loan: The account holder finds themselves short of money and knowingly makes an insufficient-funds debit. They accept the associated fees and cover the overdraft with their next deposit.
  • Failure to maintain an accurate account register: The account holder fails to accurately account for activity on their account and overspends through negligence.
  • ATM overdraft: Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholder’s bank, it may automatically authorize a withdrawal based on limits preset by the authorizing network.
  • Temporary deposit hold: A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees.
  • Unexpected electronic withdrawals: At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment.
  • Merchant error: A merchant may improperly debit a customer’s account due to human error. For example, a customer may authorize a $5.00 purchase which may post to the account for $500.00. The customer has the option to recover these funds through chargeback to the merchant.
  • Chargeback to merchant: A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else’s account in order to “pay” for goods services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant’s account that received the chargeback.
  • Authorization holds: When a customer makes a purchase using their debit card without using their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the customer’s account reducing the customer’s available balance. However, the merchant does not receive the funds until they processes the transaction batch for the period during which the customer’s purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the hold before the merchant collects the funds, thus making these funds available again. If the customer spends these funds, then, barring an interim deposit, the account will overdraw when the merchant collects for the original purchase.
  • Bank fees: The bank charges a fee unexpected to the account holder, creating a negative balance or leaving insufficient funds for a subsequent debit from the same account.
  • Playing the float: The account holder makes a debit while insufficient funds are present in the account believing he will be able to deposit sufficient funds before the debit clears. While many cases of playing the float are done with honest intentions, the time involved in the cheque’s clearing and the difference in the processing of debits and credits are exploited by those committing cheque kiting.
  • Returned cheque deposit: The account holder deposits a cheque or money order and the deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the cheque chargeback and associated fee, an overdraft results or a subsequent debit which was reliant on such funds causes one. This could be due to a deposited item that is known to be bad, or the customer could be a victim of a bad cheque or a counterfeit cheque scam. If the resulting overdraft is too large or cannot be covered in a short period of time, the bank could sue or even press criminal charges.
  • Intentional fraud: An ATM deposit with misrepresented funds is made or a cheque or money order known to be bad is deposited (see above) by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could be perpetrated against one’s own account, another person’s account, or an account set up in another person’s name by an identity thief.
  • Bank error: A cheque debit may post for an improper amount due to human or computer error, so an amount much larger than the maker intended may be removed from the account. Some bank errors can work to the account holder’s detriment, but others could work to their benefit.
  • Victimization: The account may have been a target of identity theft. This could occur as the result of demand draft, ATM card, or debit-card fraud, skimming, cheque forgery, an “account takeover”, or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one. The money or cheques from an ATM deposit could also have been stolen or the envelope lost or stolen, in which case the victim is often denied a remedy.
  • Intraday overdraft: A debit occurs in the customer’s account resulting in an overdraft which is then covered by a credit that posts to the account during the same business day. Whether this actually results in overdraft fees depends on the deposit-account holder agreement of the particular bank.
  • Merchant overdraft: An unsecured overdraft offered by financial institutions to a merchant, and the amount overdrawn is within the authorized overdraft limit, which is usually of very high value.

But it very often happens that the bank balance as shown by the Cash Book does not tally with the balance shown by the bank Pass Book, as written by the bank. The reasons are obvious.

Management Notes

Ascertainment of correct Cash book balance

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The following steps will be followed to ascertain the correct cash book balance

i) The first step is to put the balance of pass book as the starting point Showing balance as per pass book.

ii) The cheques deposited but not yet collected are added.

iii) All the cheques issued but not yet presented for payment, amounts directly deposited in the bank account are deducted.

iv) All the items of charges such as interest on overdraft, payment by bank on standing instructions and debited by the bank in the pass book, but not entered in cash book, bills and cheques, dishonoured etc are added.

v) All the credits given by the bank such as interest on dividends collected etc and direct deposits in the bank are deducted

vi) Adjustments for errors are made according to the principles of rectification of errors.

vii) Now, the net balance shown by the statement should be same as shown by the cash book.

Illustration

From the following particulars, ascertain the Bank balance as per Pass Book as on 31st December.

  1. The Bank balance as per Cash Book on the date was Rs 11,500.
  2. Cheques issued but not cashed before that date amounted to Rs 1,750.
  3. Cheques paid into Bank, but not cleared before December amounted to Rs 2,150.
  4. Interest on Investments collected by the Bank but not entered in the Cash Book amounted to Rs 275.
  5. Local cheque paid in but not entered in the Cash Book Rs 300.
  6. Bank Charges debited in the Pass Book Rs 25.

With adjustment in Cash Book:

If the balance at Bank, as per the Cash Book adjusted, it will be Rs 12,050, thus:

Dr.

Cash Book (Bank Col)

 Cr.
 

Dec 31

“

“

  

To Balance b/d

To Interest on investment

To Cheques omitted

 Rs

11,500

275

300

  

Dec 31    By Bank Charges

        “     By Balance c/d

 

 Rs

25

12050
    12,075   12,075
 

Bank Reconciliation Statement

As on 31st December

  
 

Rs.

 Rs.
Bank balance as per Cash Book     12,050
Add: Cheques issued nut not presented

1750

 (+)1,750
      13,800
Less: Cheques paid in but not collected

2,150

 (-) 2,150
  Bank Balance as per Pass Book   11,650
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