Meaning:
A business at times deals with two balances associated with its banks account:
The balance operating in its own Books of accounts and the other the actual cash balance as displayed in books of the bank. The reason for the difference in these two balances can be many. The two most prominent reasons are;
1. Cheques presented by the business but not yet collect
2. Cheques issued by the business but not yet presented by the business
3. The sum total of these two is known as float. The former is known as collection float, and the later as disbursement float.
Collection Float
The collection float is represented by the aggregate of the amounts of the cheques, which have been deposited in the bank, but are in the process of collection by the bank. As soon as the cheques are deposited in the bank, the amounts are debited to the bank account appearing in the books of the business. But the bank will credit its customer’s account only when the actual amount is realized or collected. The time lag in the two results in the difference of balances known as “Collection Float.”
As a matter of fact collection float is a part of overall deposit float, which additionally covers mailing float and processing float. Mailing Float arises due to the time lag involved in the issue of cheques by customers and their receipts by the recipients. Processing float arises on account of time taken by the business for processing the cheques for presentation to the bank.
Disbursement Float
Disbursement float is sum total of all the cheques which have been issue to the suppliers but are in the process of being presented to the bank for payment. The bank account in the books of the business is credited as soon as cheques are drawn on it and send to suppliers, but the bank would debit the account of its customer only on the receipt of the cheques from the banker of suppliers. The difference between the two balances is known as Disbursement Float.
