Month: November 2020

Cash book is a specialized accounting journal used to record all cash transactions, both receipts and payments. It is divided into two main sections: the receipt side, which records all cash inflows, and the payment side, which tracks all cash outflows. The cash book acts as both a journal and a ledger, simplifying cash management and providing an up-to-date balance of cash on hand. It ensures accurate tracking of cash transactions and serves as the basis for the cash account in the general ledger, aiding in financial reporting and analysis.

Types of Cash book:

1) Simple Cash Books

This is also known as a Single Column Cash Book. This cash book will only record cash transactions. The cash coming in (receipts) will be on the left and the cash payments will be on the right. And since we will record all cash transactions here there is no need for a cash ledger account.

Now since there is only one column, we do not record bank transactions in this cash book. Any discounts given will also not feature here. We will record bank and discount transactions in their separate ledger accounts.

Cash books are balanced quite frequently. In fact, most companies balance their cash book daily. One important point to remember is that the cash book can never have a credit balance. Cash books only show a debit balance.

Example:

2) Two Column Cash Books

Here instead of one column, we have an additional column for discounts. So along with the cash transactions, we will also record the discounts in the same cash book. So, both discounts received and the discount that is given is recorded here. If any organization is in a general practice of giving or receiving discounts this is the preferable option.

Discount is a nominal account so the discount is given (loss) is on the debit side and discount received (profit) is on the credit side. At the end of the period, we balance both columns and transfer the closing balances.

Example:

3) Three Column Cash Books

This cash book has the cash, the discount and additionally the bank columns in it. Since the development of banking most firms, these days prefer to deal in cheques or other such bills of exchange. And so having a bank column in your cash book makes things concise and simpler to understand.

So when you receive a cheque and you deposit it in the bank the same day you make the entry in the bank column (the debit side in this case). But say you send the cheque later (not the same day) then this will be a contra entry. A contra entry is transactions that happen between a cash account and a bank account. Ultimately your Cash & Bank balance remains the same, the money just moves around.

The procedure of recording transactions in a triple/three column cash book is similar to that of a double column cash book. The only difference between two types of cash book is that a double column cash book has two money columns (i.e., cash and bank) whereas a triple column cash book has three money columns (i.e., cash, bank and discount).

The cash and bank columns of triple column cash book are used as accounts and are periodically totaled and balanced just like in case of a double column cash book. The discount column is only totaled. It is not balanced because it does not work as an account.

In general ledger, two separate accounts are maintained for discount allowed and discount received. The total of discount column on debit side of cash book represents the total cash discount allowed to customers during the period and is posted to the discount allowed account maintained in the ledger. The total of discount column on credit side represents the total cash discount received from suppliers during the period and is posted to the discount received account maintained in the ledger.

Example:

4) Petty Cash Book

In a firm, there are usually cash transactions happening in all the departments. These we will record in one of the above formats of cash books. But there are many cash transactions happening for very small amounts. Sometimes there are dozens of such transactions that occur in just one day. These are known as petty transactions. Examples are expenses for postage, stationery, traveling, food bills, etc.

So since the number of such transactions tends to be very high we maintain a separate cash book for them the petty cash book. Such a cash book is maintained by the petty cashier (who in most cases also handles the petty cash).

The purpose of each column is briefly explained below:

• Date: The date column is used to enter the transaction date.
• Description: The description column is used to write the name of the account to be debited or credited in the ledger as a result of cash or bank transaction.
• Voucher number (VN): A voucher is a document in support of a transaction. The serial number of the voucher is entered in this column.
• Posting reference (PR): Each account in the ledger is assigned a unique numbered. The number each ledger account that is written in description column is entered in PR column.
• Discount: The amount of discount allowed is recorded on debit side and the amount of discount received is recorded on credit side in discount column.The totals of debit column and credit column are posted to discount allowed account and discount received account respectively.
• Cash: The amount of cash received (net of any discount allowed) is entered on the debit side and the amount of cash paid (net of any discount received) is entered on the credit side in cash column. This column is totaled and balanced like a ledger account.
• Bank: The amount of all receipts and payments made by the bank account are entered in bank column of the cash book. This column is also totaled and balanced like a ledger account.

Example of Petty Cash Book (Imprest System):