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Cash BooksLecture Notes 7

Cash BookDefinition• The Cash book is another book of Prime Entry, where

cash transactions are recorded.

• The Cash book may take the form of two or three columns.

• The Cash book forms part of the double entry system.

Cash BookCash - What is It?• Cash is the single asset readily convertible into any

other type of asset. • It is the most liquid of assets, • The standard medium of exchange• The basis for measuring and accounting for all other

items.

Cash BookCash - Reporting Criteria• To be reported as cash it must be:– readily available for the payment of current

obligations – It must also be free from any contractual restriction

that limits its use in satisfying debts.

Cash BookClasses of CashCash consist of:– Coins, currency and available funds on deposit at the

bank.– Negotiable instruments such as money orders,

certified cheques, cashier’s cheques, personal cheques, and bank drafts are also viewed as cash.

Cash BookNear Cash Items• Temporary investments are securities that contain

restrictions or penalties on their conversion to cash, and are not classified as cash.

• Cash equivalents are short-term highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in interest rates.– Generally only investments with original maturities of three

months or less qualify under these definitions.

Cash BookNear Cash Items• A bill of exchange is an unconditional order in writing,

addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of, a specified person or bearer.

Cash BookTwo Column Cash Book • The two column cash book has two sides appearing on

each side of the cash book– One side is used for the individual cheques or cash

received into the Business or its Account at the Bank – The other for payments by cheque or cash

• The cash columns are used for actual cash receipts and payments of cash only.

• There is an assumption that an actual cash balance is kept as well as a bank account.

(Millichamp 1992: 116)

Cash BookThree Column Cash Book • The three column cash book has three columns

appearing on each side of the cash book representing three types of accounts which are classified as :-– Discount - which is a nominal account– Cash - which is a real account– Bank - which is a personal account

Cash BookThree Column Cash Book It is necessary to have three columns on the debit side because:1. The discount column is required as a prime entry place

for discount allowed;2. The individual cheques or cash received from each

customer or other source are required.– So that they form a record of such receipts – They can be posted to the credit of the customers’

accounts;

Cash BookThree Column Cash Book It is necessary to have three columns on the debit side because:3. The actual banking column is required to record the

actual amount banked on each occasion money is banked. – These figures can be compared with the entries in

the bank statements. (Millichamp 1992: 116)

Cash BookTwo-Column Cash Book Format

Three-Column Cash Book Format

Date Details Cash Bank Date Details Cash Bank

RECEIPTS PAYMENTS

Date Details Disc All

Cash Bank Date Details Disc Rec.

Cash Bank

RECEIPTS PAYMENTS

Cash BookDiscount• Cash discounts are reductions made from:– Accounts Receivable (debtors)– Accounts Payable (creditors)

• at the time of settlement. • The totals are posted to:– A Discounts Allowed– A Discount Received

• Account in the General Ledger.

Cash BookDiscount Column• The discount column in the cash book is not part of the

double entry system of Book keeping• The discount column is placed in the cash book solely as a

source of prime entryDouble entry for Discount Allowed Column is:-– Debit Discount allowed account – this is an expense account.– Credit The individual customer’s account (Wellington etc.).

Double entry for Discount Received Column is:-– Debit The supplier’s account (Reid etc).– Credit Discount received account – a revenue account required

for the year end profit and loss account.

RECORDING OF RECEIPTS IN THE CASH BOOK

Lecture Notes 7

Cash BookRecording of Receipts from Debtors• On receipt of cash from debtors, the amount actually

received is entered in the cash column on the debit side.• If the money is paid direct into the bank, the entry would

be made to the debit side of the bank column.

• The corresponding entry is made in each case to the debtor’s account in the ledger.

Cash BookRecording of Cash Sales• On receipt of an amount in respect of cash sales, the

entry is made in the cash column on the debit side, • The corresponding entry being made to the sales account

in the ledger.

Recording of Sale of Fixed Asset• On receipt of an amount from the sale of a fixed asset, the

entry would be to the debit side of the cash or bank column,

• The credit will be to the asset account in the ledger.

Cash BookRecording of Discounts Given• All cash discounts given are entered in the discount

allowed column, which is on the debit side of the cash book.

• The total is subsequently transferred to the debit side of the discount allowed account.

RECORDING OF PAYMENTS IN THE CASH BOOK

Lecture Notes 7

Cash BookRecording of Payments to Creditors• On payment of cash to a creditor the amount is entered in

the cash column on the credit side. • If the payment is made by cheque, the amount is entered

on credit side in the bank column.

• The debit entry is made to the creditor’s personal account.

Cash BookRecording of Payments for Purchases• On payment of an amount in respect of Purchase of

Goods, the entry is made in the cash or bank column (Cheque) on the credit side.

• The corresponding entry is made to the debit side of the purchases account.

• Recording of Purchases of Assets• On payment of an amount for the purchase of an asset,

the credit will be to the cash or bank column (Cheque).• The corresponding debit is made to the asset account in

the ledger.

Cash BookRecording of Discounts Received• If cash discount is received, such an amount is entered in

the discount received column which is on the credit side of the cash book.

• The total is transferred to the credit side of the discount received amount in the ledger.

Cash BookContra Entry• Definition - Contra is a book-keeping entry by which a

transfer of money from cash to bank and vice versa is made.

• Surplus cash is paid into the bank and a shortage of cash is made good by withdrawals from the bank.

• Both entries occur in the cash book and no ledger entry is required.

• The letter ‘C’ is recorded in the folio column to indicate that the transaction is a contra.