Unrecorded direct deposits cause cash book to understate the balance

Steps:

• Compare cash book (company's record) to bank statement (bank's record) for discrepancies.
• Identify items affecting one but not the other: deposits increase balance, payments decrease it.
• For cash book < bank statement, look for unrecorded increases in bank or unrecorded decreases in cash book.
• Option B fits: direct payment adds to bank but misses in cash book, lowering cash book relative to bank.

Why B is correct:

• Direct deposits to the bank are credits on the statement not yet entered in the cash book, reducing the cash book balance relative to the true bank balance per reconciliation principles.

Why the others are wrong:

• A: Deposit in transit increases cash book but not bank, making cash book higher.
• C: Unrecorded dishonour deducts from bank but not cash book, making cash book higher.
• D: Unrecorded standing order deducts from bank but not cash book, making cash book higher.

Final answer: B