Cash Book

Objectives

1. State the purpose of the cash book

2. Explain the advantages of keeping cash in the bank

3. Draw a three column cash book

4. Features of the cash book as both a ledger account and book of original entry

5. Interpret transactions and details in the cash book

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CASH & BANK

CASH ACCOUNT

records cash in hand or cash kept in the

office

BANK ACCOUNT

records cash held in the current account

at the bank

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Cash and Bank are assets with similar account rules

Dr Cash Account Cr Dr Bank Account Cr

Cash Receipts

Cash

Payments

Deposits into bank account

Payments by cheques

Decrease in asset

Outflow

Increase in asset

Inflow

Increase in asset

Inflow

Decrease in asset

Outflow

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Purpose of the cash book

• Reduces the number of entries in the Ledger.

• Enables division of labour since another person can be given the job of recording only cash transactions.

• With division of labour, efficiency increases.

• Cross-reference to the Cash A/c and the Bank A/c is made easier with the use of a separate book.

• General Ledger & Cash Book are separate books

• easier to update accounts

• easier to check for errors

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Advantages of keeping cash in Bank

• For security reason, excessive cash attracts criminal activities. Loss due to negligence (carelessness) will be substantial

• For convenience sake, a current account is a convenient way of making payments to suppliers using cheques.

• For record keeping, a current account provides a bank statement that clearly show the amount of deposits and withdrawal

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Recording Cash Transactions

• Cash transactions involved the use of cheques and

notes and coins.

• Cash Account – for all transactions relating to

notes and coins

• Bank Account – for all transactions involving:

o cheques received and paid out

o cash banked in

o cash withdrawn from bank

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Dr CASH ACCOUNT CR

$

Jul 3 Purchases 300

$

Jul 1 Capital 1,000 5 Sales 600 18 Drawings 500

26 Amy 700 27 Stationery 45 30 Bank 400

Total debits = 2,700

Total credits = 845

Total debits > total credits by 1,855

31 Balance c/d 1,855

____

2,700

____

2,700

Aug 1 Balance b/d 1,855

This difference is brought down as balance of the month

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Dr Bank Account Cr

$

Jul 8 Furniture 1,500

22 Vehicle 15,000

25 Sunrise Ltd 2,500

29 Wages 2,000 Total debits= 30,000

Total credits =21,400

Total debits > total credits by 8,600

_____

30,000

_____

30,000

This difference is brought down as balance of the month

31 Balance c/d 8,600

Aug 1 Balance b/d 8,600

$

Jul 1 Capital 10,000

20 Capital 20,000

30 Cash 400

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Two Column Cash Book

- similar to a typical ledger account in terms of the ‘T’

format

- however it has two columns to record the amount:

•

• * one column represents the Cash Account

• * another represents the Bank Account

• Basically it merges the two accounts into one.

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Source Documents

• Source Documents for Cash Book:

- cash bills

- cash register receipts

- cash payment vouchers

- cheque butts

- bank-in slips

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Two-Column Cash Book Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

One column for cash One column for Bank

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Date Particulars Cash Bank Date

Dr Two-column Cash Book Cr

Particulars Cash

Bank

Dr Cash Account Cr Dr Bank Account Cr

Feb 1 Balance b/d 500

$ $

19 Sales 800

Feb 1 Balance b/d 500 5,000

$ $

$ $

Feb 8 Purchases 1, 600

28 Balance c/d 900

Feb 1 Balance b/d 5,000 Feb 15 Rent 1,000

28 Balance c/d 2,500 25 Wong 1,200

$ $

Feb 8 Purchases 1,600

19 Sales 800

24 John 1,500

25 Wong 1,200

15 Rent 1,000

24 John 1,500

28 Balance c/d 900 2,500

2,500 2,500 5,000 5,000

Mar 1 Balance b/d 900 Mar 1 Balance b/d 2,500

2,500 5,000 2,500 5,000

Mar 1 Balance b/d 900 2,500

Feb 1 Cash in hand $500, cash at bank $$5,000 Feb 8 Cash purchases $1,600 Feb 15 Paid cheque $1,000 for rental of premises Feb 19 Cash sales $800 Feb 24 Paid John a cheque $1,500 for amount owed Feb 25 Received cash $1,200 from Wong for amount owed Feb 28 Balance the Cash and Bank Accounts

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TRADE DISCOUNT & CASH DISCOUNT

Cash Discount

Given to customer to encourage prompt payment on amount payable

Terms of payment:

5% 7 days, 3% 30 days

Trade Discount

Given to buyer to encourage bulk purchases

Terms of purchase: 1,000 units and below at $2 each less 10 % discount

1,000 units and above at $2 each less 15% discount

Amount payable is $2,550.

1500x$2 less 15%

Amount paid is $2,473.50

$2,550 less 3%

What is the amount payable if Tom were to purchase 1,500 units?

How much must Tom pay if he settles the bill 20 days after the purchase?

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Types of Discount

• Trade Discount – is used to adjust the selling price

charged to a customer

• this reduces the amount charged to the customer

• Cash Discount – is given when terms of payment are

complied with.

• Example: 5% 7 days means that customer pays 5% less if he settles his bill within 7 days

• The purpose is an incentive for early or prompt payment by the customer.

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Discount Allowed Discount Received

- deductions from debts owed

by

debtors

- discount given when debtors pay

within the stipulated time

- is related to receipts from the

debtors

- is a business expense and

recorded on the debit side

- deductions from debts owed

to

creditors

- discount received when firm pays

creditors within the stipulated

time

- is related to payments to the

creditors

- is a business revenue and

recorded on the credit side

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Three Column Cash Book

Column are for Cash, Bank and Discount

Date Parti- culars

Folio Discount Cash Bank Date Parti culars

Folio Discount Cash Bank

Discount Allowed (expense)

Discount Received (revenue)

Three-Column Cash Book

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Next Topic

Questions before i proceed?

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Bank Reconciliation

Objectives

1. Purpose of bank reconciliation

2. Interpret a bank statement

3. Relationship between cash book and bank statement

4. Identify and explain causes of discrepancy in balances between cash book and bank statement

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Bank Statement

• It is a record of the current account but it is prepared by the bank.

• Transactions are recorded in the opposite way by the bank.

• If deposits are made the bank will credit the account because the bank owes the account-holder the sum of money.

• If withdrawals are made the bank will debit the account because the bank reduces its liability to the account-holder.

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Date Particular

s

Debit Credit Balance

- all cheques paid

by the bank -

evidenced by

cheque numbers

- bank charges

- bank interest

(paid by firm)

- GIRO (standing

order)

- Stamp duty (on

cheque books)

- cash banked in

- cheques banked

in

- collection made

by bank on

behalf of firm

- deposits made

by third party

- electronic

transfer

A typical bank statement looks like this:

Bank Statement for the month of xxx

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Date Details of Transactions Dr Cr Bal

Bank Statement Dr Cash Book (Bank columns only) Cr

2007 $ $ $

2007 $ 2007 $

Mar 1 Balance b/f 6,500

Mar 1 Balance b/d 6,500

5 Deposit 210 6,710

5 Debtor X 210

20 Cheque 160 6,550

Mar 20 Creditor Y 160

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Worked Example:

Cash Book (bank column)

Date Bank Date Cheq No Bank

2007 $ 2007 $ Jan 1 Bal b/d 3 800 Jan 2 Insurance 21182 800 10 Sales 4 900 10 Rates 21183 460 20 C K Tan 1 450 15 Lee Enterprise 21184 1 280 27 D Dawn 650 24 T Wilson 21185 700 31 Bal c/d 7 560

10 800 10 800

Feb 1 Bal b/d 7 560

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Bank Statement for the month ended 31 January 2007

Date Particulars Debit $

Credit $

Balance $

Jan 1 Balance (Cr) 3 800

3 Cheq no 21182

10 Cheq no 21183

12 Cash

15 Cheq no 21184

20 C K Tan

24 Cheq no 21185

27 D Dawn

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Discrepancy

Explanation

Transaction recorded in

Cash Book ?

Transaction recorded in Bank

Statement ?

1. Unpresented Cheques

cheques issued by the firm but have not been presented to the bank for payment

Yes

No

2. Uncredited

Cheques & Cash

cheques received and lodged with the bank have not been credited by the bank

Yes

No

3. Direct Deposits - credit transfers - income credits

Bank has received deposit on behalf of firm and credited it in the Bank Statement e.g. dividends received, credit transfer, interest on debentures)

No

Yes

4. Direct Payments - standing orders - direct debits - bank charges - dishonoured

cheques

payment made by bank on behalf of firm and this has been debited in the Bank Statement

No

Yes

5. Errors in Cash

Book & Bank Statement

- Incorrect records e.g. $234 written as $243

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Bank Statement Dr Cash Book (Bank columns only) Cr

Date Details of Transactions Dr Cr Bal

2007 $ $ $

2007 $ 2007 $

Mar 1 Balance b/f 6,500

Mar 1 Balance b/d 6,500

5 Deposit 210 6,710

5 Debtor X 210

20 Cheque 160 6,550

Mar 20 Creditor Y 160

31 Sales 1,000

31 Rent 500

Uncredited cheque

Balance c/d 7,050

7,710 7,710

Apr 1 Balance b/d 7,050

Unpresented cheque

How do uncredited and unpresented cheques cause the

Cash Book balance to differ from the Bank Statement balance?

How to reconcile the two balances?

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Bank Reconciliation Statement as at 31 March 2007

$

Cash (credit) balance as per Bank Statement 6,550

Add Uncredited cheque: sales 1,000

7,550

Less Unpresented cheque: rent 500

Cash (debit) balance as per Cash Book 7,050

Starting with Bank Statement

balance

Bank Reconciliation Statement as at 31 March 2007

$

Cash (debit) balance as per Cash Book 7,050

Add Unpresented cheque: rent 500

7,550

Less Uncredited cheque: sales 1,000

Cash (credit) balance as per Bank Statement 6,550

Starting with Cash Book

balance

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Bank Reconciliation Statement as at 30 April 2007

$

Cash (credit) balance as per Bank Statement 10,740

Add Uncredited cheque: T S Fong 200

10,940

Less Unpresented cheque: rent 1,000

Cash (debit) balance as per Cash Book 9,940

Can you prepare this Bank Reconciliation Statement starting with the Cash Book

balance, if required to do so?

Starting with Bank Statement

balance

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