Topic: Cash Book
Table Of Contents
- Meaning Of Cash Book
- Rule For Keeping The Cash Book
- Types Of Cash Book
- Difference Between Petty Cash Book And Main Cash Book
Meaning Of Cash Book
We learnt that cash book is one of the special journals as well as a ledger. All cash transactions (receipts and payments) are first recorded before they are posted to other books of accounts.
The cash book is a subsidiary ook as far as the items in the “particulars” column of the cash book are concerned because they are further posted into the ledger. The cash book is also a ledger because it has debit and credit sides and is balanced at the end of the month to determine the difference between cash received and cash paid.
Therefore, as far as cash account is concerned, the cash book is a ledger. It is a ledger account for cash itself. i.e. Cash account is not opened in the ledger. Other subsidiary books do not have these features.
Cash book is divided into two sides, the left-hand side (the debit [Dr] side) and the right-hand side (the credit [Cr] side). On the debit side are recorded all cash receipts while on the credit side or right-hand side are recorded all cash payments.
Rule For Keeping The Cash Book
There are two rules for keeping the cash book:
1. Debit all cash received (all monies that flow into the business).
2. Credit all cash payments (monies that flow out of the business).
Types Of Cash Book
There are three types of cash book, namely:
1. Single Column Cash Book
2. Double or Two Column Cash Book
3. Three Column Cash Book or Cash Book With Bank Column
The rules for keeping them are the same. The difference lies in the number of columns.
1. Single Column Cash Book
This is a very simple Cash Book usually kept by small retailers such as shop owners to record their cash transactions.
Ruling Of A Simple Cash Book
The double vertical lines in the middle of the cash book divide the cash book into two, the left-hand side and the right hand side. The left-hand side is the Debit (Dr) side, on this side all the monies received are recorded.
The right-hand side is the Credit (Cr) side, on this side are recorded all the monies that go out of the business.
The date column is where the date the transaction takes place is written. In the column for particulars is written the person or account from whom cash is received (if it is on the debit side) or the person or account to which cash is paid (if it is on the credit side). “L/F” means Ledger Folio.
In this column is entered the page of the ledger where the item is posted. The amount column is where the money received or paid is recorded.
The rule for keeping the cash-book should be borne in mind when writing up the book. For every transaction, ask yourself whether the money comes into the business or goes out. If it comes in, the transaction should be recorded on the debit side (left-hand side), but if it goes out, it should be recorded on the credit side (right-hand side). E.g., the transaction “Paid Electricity” should be recorded on the credit side because the money has been taken out of the business to pay elecricity bill.
Balancing The Cash Book
At the end of the month, the cash book is balanced. The balance is the cash remaining in the cash safe, Till or Wallet at the end of the period, let say, a month.
In balancing the cash-book, the following steps should be taken:
1. Add the figures on the debit side.
2. Add the amount on the credit side.
3. Subtract the total of the credit side from the total of the debit side.
4. Enter the difference on the lower side. This is usually the credit side. With the cash book, the credit (payment) side is always lower than the debit (receipts) side. This is because the cashier or the business cannot pay out more money than it has.
If for instance, you are away from your school, on excursion and you have some cash in your pocket to spend. During the excursion you will stop buying things as soon as your money finishes- you cannot spend more than you have. This illustration also applies to business ventures.
5. Entry of this difference is the last to be made on the credit side of the cash book. Under the particulars column, against this difference is written “Balance c/d” meaning balance Carried Down. A simple horizontal line is ruled below which the total is written.
After the total, a double line usually referred to as “double line total” is drawn. This double line, in bookkeeping, shows that the addition or the account has come to an end.
Once the difference between the two sides is entered on the lower side, the two sides become equal. The line where the total is written should fall at the same level for both sides.
The three lines are blank and therefore covered with diagonal and horizontal lines to make it difficult for any other entry to be made there after the book has beem balanced.
6. The balance is “Brought Down” on the debit side of the cash book below the double line total, leaving at least two lines.
2. Double Column Cash Book
Cash with Bank Column
In this double column cash book, transactions made by bothe cash and cheque are recorded. The use of cheque as a means of payment has made it possible for businessmen and others to settle their financial obligations with cheques.
Just as people pay cash for goods purchased, many other issue cheques in settlement of accounts.
Rules For Recording The Bank Transactions In The Double Column Cash Book
The same rules for keeping the cash book apply here, that is, credit the cash book with all monies that go out of the business. Money in this case include cheques. Debit the cash book with all monies that come into the business. So, the basic rules here become:
1. Post to the Debit all cheques and cash received.
2. Post to the Credit all cheques and cash paid out.
If for example Mr. Ambassador settles his account by cheque N500.00, the transaction will be entered on the debit side (Bank column) of the cash book because the cheque is money that comes into the business. If on the other hand, the business pays Joseph N1000.00 by cheque, this transaction will appear on the credit side of the cash book (bank column) because cheque (money) has been paid out.
Let us illustrate this using these two examples:
1. Withdraw cash from bank for office use- N2,000.00
2. Paid cash into bank N3,000.00.
In the first transaction, the cashier withdraws money from the bank and put in the cash till in the office for office use. The cash column is debited for being the receiver while the bank column is credited for being the giver.
Note that the letter “c” which means “contra” is written in the folio column to show that the entry is a contra entry and that the correspondind debit or credit is found on the opposite side of the same accunt.
Also, contra entry is not posted to the ledger because the double entry has been completed by reason of the same entry appearing in both the debit and credit sides of the same account.
Cash Book With Discount Column:
Some businesses seperate cash from bank account- that is they maintain a seperate book for bank transactions and a seperate book for cash transactions. Discount arises when payments are made promptly.
3. Three-Column Cash Book
Whereas two-column cash book takes care of cash and bank columns or cash and discount column (in case of companies that keep seperate cash book), the three column cash book accomodates the cash, bank and discount columns.
Indeed, three-column cash book is exactly the same as two-column cash book except that it contains discount allowed column on the debit side and discount received column on the credit side. Here is a ruling of three-column cash book:
Befor illustrating how the three column cash book is recorded, let us understand the meaning of discount allowed and discount received.
Meaning of Discount:
For example, if Mr. Ambassador buys goods worth N50,000 from Tipstago. He could be given a discount let say 5% if he pays immediately. He will therefore require to pay N50,000 – N2500 which is N47,500.
On the other hand if Ambassador buys on credit, the company may state the following terms in the invoice – 10% discount if paid within a week and 3% discount if paid within 2 weeks. Cash discount therefore encourages the buyer to settle his account promptly.
Cash discount is divided into two- Discount Allowed and Discount Received.
Discount Allowed: Discount allowed is a deduction or allowance granted a payer for paying promptly. Discount allowed is found on the debit side of the cash book and also posted to the debit side of the ledger. Discount allowed is a loss or expense to the one who receives payment that attracts discount.
Discount Received: Discount received is an allowance or deduction received by the business owner for paying promptly. Discount received is recorded on the credit side of the cash book and also posted to the credit side of the ledger.
Discount received is a gain or benefit to the one who makes payment that attracts discount.
i. To encourage bulk purchases.
ii. To increase the volume of sales.
iii. To quicken the sales of obsolete goods in the seller’s warehouse.
iv. If the seller or producer needs to reduce the price of his goods, he could grant trade discount to effect this reduction. This saves him the rigours of having the price list or catalogue reprinted.
The main difference between cash discount and trade discount is that while cash discount is given for prompt payment, trade discount is granted for bulk purchases.
Cash discount is recorded in the cash book as a discount allowed and discount received while trade discount is only recorded and deducted in the purchases invoice or sales invoice.
Cash discount is posted to the ledger as discount allowed and discount received accounts while trade discount does not go beyond purchases and sales invoice. Hence they are not posted to the ledger.
Difference Between Petty Cash Book And Main Cash Book
We have learnt that Petty Cash Book is a book of account where minor expenses which cannot be conveniently entered into the main cash book are recorded such as purchases of stamps, taxi fare, phone calls etc.
But in the main cash book, the major cash transactions of the business are entered such as wages and salaries, cash paid and received from creditors and debtors respectively. Purchases of goods, and land equipment, etc.
The difference between cash book and petty cash book therefore lies in the fact that frequently occuring transactions which are of small values are recorded in the petty cash book while the cash book takes care of the major cash transactions of the company.