What is the meaning of unfavourable balance as per cash book?

Unfavorable balance as per cash book generally means credit balance in the cash book. This is also known as bank overdraft.

Making the above definition more clear, unfavorable balance or bank overdraft means an excessive amount of cash withdrawn than what is deposited in the bank. Simply it is the loan taken from the bank. When there is an overdraft balance the treatment is just the opposite of that of favorable balance.

Generally for business overdraft occurs when there is immediate or emergency funding for the short term. This can be seen for small and medium-sized businesses. This is considered to be convenient for these businesses because there is no requirement to pay interest on the lump-sum loan, only have to pay interest on the fund you use. Generally linked to an existing transaction account.

To reconcile this we need to prepare a Bank reconciliation statement. The procedure of preparing BRS under unfavorable conditions is as follows

• If we start from the cash book balance then “ADD” all the transactions resulting in an increase in the passbook. “DEDUCT” all the transactions that resulted in a decrease in the balance of the passbook. Then the net overdraft balance should be the same as in the passbook.
• If we start from the balance as per the passbook then “ADD” all the transactions resulting in an increase in the balance of the cashbook and “DEDUCT” all the transactions related to a decrease in the balance of the cash book. The net overdraft balance as per the passbook should reconcile with the cash book.

Let us take one example considering one of the above conditions.

The cash book of M/s Alfa ltd shows a credit balance of Rs 6,500.

• A Cheque of Rs 3,500 was deposited but not collected by the bank.
• The firm issued a cheque of Rs 1,000 but was not presented for payment.
• There was a debit balance in the passbook of Rs 200 and Rs 400 for interest and bank charges.

Bank Reconciliation Statement