Fundamentals of Financial and Cost Accounting · Cash Book, Bank Book, Petty Cash Book, Bank Reconciliation Statement

Bank Book and Bank Transactions in the Cash Book

Updated 10 October 2026 · Fact-checked

A bank book records all money paid into and out of your bank account. Receipts go on the debit side, payments on the credit side. Enter deposits, cheques issued, direct credits, bank charges, interest and dishonoured cheques when you know of them. A credit balance means an overdraft.

Understand Bank Book and Bank Transactions

A bank book is the record a business keeps of its own bank account. In a double column cash book, it is simply the bank column. The cash book, including its bank column, acts as both a journal (book of original entry) and a ledger account, so no separate ledger account for bank is needed.

The rule is the same as for any asset account. When money comes into the bank, debit the bank column. When money goes out, credit the bank column. A normal balance is a debit balance, meaning you have money in the bank.

What gets recorded? Cash deposited, cheques received and banked, cheques issued, and amounts the bank handles directly for you, such as direct credits (customer paying through NEFT or RTGS), interest earned, bank charges, standing instructions and dishonoured cheques. You record each one when you learn of it, usually from the bank statement or an advice.

If the bank column shows a credit balance, the account is overdrawn. You owe the bank. This is a liability, called a bank overdraft, and it appears on the liabilities side of the balance sheet.

The bank also keeps its own record of your account, called the passbook or bank statement. It shows the same account from the bank's side, so debit and credit are reversed. Your bank book and the passbook often differ for timing reasons. That is the base for the Bank Reconciliation Statement.

Key formulas to remember

Receipt in bank: Debit Bank column; Deposits, cheques banked, direct credits, interest received, cash deposited.
Payment from bank: Credit Bank column; Cheques issued, bank charges, direct debits, standing instructions, cash withdrawn.
Dishonoured cheque received: Credit Bank column, Debit Customer (Debtor) account; The customer's debt revives. Add any bank charge for dishonour as a further credit to bank.
Cash deposited into bank (contra): Debit Bank column, Credit Cash column; Entered on opposite sides of the cash book, in different columns (Bank debit, Cash credit). It needs no ledger posting.
Cash withdrawn from bank (contra): Debit Cash column, Credit Bank column; Another contra entry marked C. It appears on opposite sides in different columns. No ledger posting.
Overdraft: Credit balance in bank column = Bank overdraft; Show as a liability. Do not treat as an asset.
Bank book vs passbook: Bank book debit = Passbook credit; The bank sees your deposit as a liability to you, so sides are reversed.

How to solve Bank Book and Bank Transactions questions

Use this method for any question that asks you to record bank transactions or find the bank balance.

1Note the opening balance. A favourable balance goes on the debit side. An overdraft goes on the credit side.
2Read each transaction and ask: did money come into the bank or go out of it?
3Put inflows on the debit side of the bank column and outflows on the credit side.
4Treat cash deposits and withdrawals as contra entries. Show the amount on both sides in different columns.
5Handle cheque items carefully. A cheque received but not yet banked is not a bank entry yet. A dishonoured cheque is a credit to bank.
6Include bank charges, interest and direct credits only when the question says the business knows of them.
7Total each side and find the closing balance. If credits exceed debits, it is an overdraft.
8Check that the balance matches what the question asks for (bank column, not cash column).

Quickest way: Plus and minus tally for the bank column

When to use it: Use when the question asks only for the closing bank balance and not for the full cash book.

Start with the opening balance as plus if favourable, minus if overdraft.
Go through the list once. Add inflows to the bank. Subtract outflows.
Ignore cash sales, cash purchases and cheques not yet banked.
Treat dishonoured cheques and bank charges as subtractions. Treat interest and direct credits as additions.
A negative final figure means overdraft. Pick the option showing the right amount and the right label.

Common mistakes in Bank Book and Bank Transactions

Debiting the bank column for a cheque issued.
Students link cheques with receipts and forget which way money moves.
Fix: Ask whether money leaves the bank. If yes, credit the bank column.
Recording a dishonoured cheque as a debit to bank.
The cheque was earlier debited, so students repeat the entry.
Fix: Reverse the earlier entry. Credit bank and debit the customer.
Entering a cheque received but not deposited in the bank column.
Students treat any cheque as a bank receipt.
Fix: Record it in the bank column when it is banked, or on receipt if the question treats it as banked. Until it is deposited, do not enter it in the bank column, and do not put it in the cash column either, because a cheque is not cash. Follow the question's direction.
Treating a credit balance as an asset.
Students assume the bank balance is always favourable.
Fix: A credit balance in the bank column is an overdraft. It is a liability.
Posting contra entries to ledger accounts.
Students post every cash book entry out of habit.
Fix: Contra entries involve cash and bank only. Both are in the cash book, so no ledger posting is required.
Copying passbook sides into the bank book.
Passbook shows deposits as credits, which confuses students.
Fix: Your bank book follows your own books: deposits debit, payments credit. Reverse the sides only when comparing with the passbook.

Worked examples

Example 1

On 1 April, Mehta Traders had a bank balance of ₹40,000 (favourable). During April: cheques of ₹25,000 from customers were deposited; a cheque of ₹10,000 was issued to a supplier; cash of ₹5,000 was withdrawn from the bank; bank charges of ₹300 were debited by the bank and the business learnt of them. What is the closing bank balance?

Show the solution

Opening balance: ₹40,000 debit.
Add cheques deposited: 40,000 + 25,000 = ₹65,000.
Subtract cheque issued: 65,000 − 10,000 = ₹55,000.
Subtract cash withdrawn: 55,000 − 5,000 = ₹50,000.
Subtract bank charges: 50,000 − 300 = ₹49,700.

Answer: Closing bank balance is ₹49,700 debit (favourable).

Example 2

Sharma & Co. has an overdraft of ₹12,000 on 1 May. During May: it deposits cheques of ₹30,000; issues cheques of ₹20,000; the bank credits interest of ₹500 and the business learnt of it; and a customer's cheque for ₹4,000, deposited earlier, is dishonoured. Find the closing bank position.

Show the solution

Opening overdraft is shown as −₹12,000.
Add cheques deposited: −12,000 + 30,000 = ₹18,000.
Subtract cheques issued: 18,000 − 20,000 = −₹2,000.
Add interest credited, which the business learnt of: −2,000 + 500 = −₹1,500.
Subtract dishonoured cheque: −1,500 − 4,000 = −₹5,500.

Answer: Closing balance is ₹5,500 credit, which is a bank overdraft. Show it as a liability.

Exam tips

Check whether the opening balance is favourable or an overdraft before you do anything else. This decides the first sign.
Look for the words 'dishonoured', 'bank charges' and 'interest'. Each is a direct hint to a bank column entry.
Contra entries do not go to the ledger. If an MCQ asks which entry needs no posting, think of cash and bank.
If the question asks for the passbook balance, reverse your thinking. A favourable bank book balance is a credit in the passbook.
With no negative marking, never leave an option blank. Eliminate options with the wrong sign first.

Practice questions from Cash Book, Bank Book, Petty Cash Book, Bank Reconciliation Statement

Bank Book and Bank Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Bank Book and Bank Transactions: frequently asked questions

What is the difference between a cash book and a passbook?

The cash book is your own record of cash and bank transactions. The passbook is the bank's record of your account. The sides are reversed. A deposit is a debit in your cash book but a credit in the passbook.

How do you record a dishonoured cheque in the bank column?

Credit the bank column with the cheque amount and debit the customer's account. This cancels the earlier receipt and revives the customer's debt. If the bank charges a fee for the dishonour, credit that too.

How do you record bank charges and interest in the cash book?

Bank charges are payments, so credit the bank column and debit the bank charges expense. Interest received is a receipt, so debit the bank column and credit interest income. Record both when you learn of them.

How do you treat an overdraft balance in the cash book?

A credit balance in the bank column means the bank account is overdrawn. Show it as a current liability on the balance sheet. Do not mix it with cash in hand.