UNIT 8: CASH AND BANK

TRANSACTIONS 1

Unit 8: Cash and Bank Transactions

Learning objectives:

At the end of this unit, you will be able to:

Define cash and bank transactions

List examples of cash transactions

Record cash transactions (dual aspect)

Draw a cash account

8.1 Business Transaction

Business transactions are money inflows and outflows.

It can be in terms of cash or cheque (Bank).

They affect the financial position or operations of an enterprise.

8.2 Cash Transaction

Cash transactions refers to cash receipts and cash payment.

Cash receipts

When a business sells goods/services, it receives Revenue.

It is cash coming into the business.

Cash Receipts = Cash Inflows

Bu

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Tra

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Cash Transactions

Bank Transactions

Cash Inflow-Cash comes IN

Cash Outflow-Cash goes OUT

Cheque Received-Money in

the bank Increases

Cheque Paid-Money in the

bank Decreases

UNIT 8: CASH AND BANK

TRANSACTIONS 2

Cash payments

When a business purchases goods or pay expenses, it makes payments.

Payments are expenditures.

It is cash going out of the business.

Cash Payments = Cash Outflows

8.2.1 Examples of Cash Transaction

1. Purchase goods for resale Rs 15 000

1.

BusinessCash goes OUT

Goods comes

IN

UNIT 8: CASH AND BANK

TRANSACTIONS 3

2. Sold goods for Rs 20 000 by cash

3. Purchase equipment to be used by cash for Rs 10 000

BusinessGoods goes OUT

Cash comes

IN

BusinessCash goes OUT

Equipment

comes IN

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4. Paid wages Rs 3 000 by cash

8.3 Dual aspects of business transactions

All business transactions are recorded in an account.

An account is a record of financial transactions of a business.

Each business transaction affects two accounts.

One account – shows Cash comes IN

One account – Shows Cash goes OUT

BusinessCash goes OUT

Labour service

comes IN

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Examples of Dual aspects

1. Purchase goods for cash Rs 15 000

2. Sold goods for Rs 20 000 by cash

Purchase goods for resale Rs 15 000

Goods come IN

Purchases Account

Cash goes OUT

Cash Account

Sold goods for Rs 20 000 by cash

Cash comes IN

Cash Account

Goods go OUT

Sales Account

UNIT 8: CASH AND BANK

TRANSACTIONS 6

3. Purchase equipment to be used by cash for Rs 10 000

4. Paid wages Rs 3 000 by cash

Purchase equipment to be used by cash

for Rs 10 000

Equipment comes IN

Equipment Account

Cash goes OUT

Cash Account

Paid wages Rs 3 000 by cash

Labour service comes IN

Wages Account

Cash goes OUT

Cash Account

UNIT 8: CASH AND BANK

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8.4 Recording of cash transactions

All cash transactions are recorded in CASH ACCOUNT

Steps to record cash transactions

Identify the cash inflows items and cash outflows items

Record the inflows on the left hand side of the cash account

Record the outflows on the right hand side of the cash account

CASH ACCOUNT

Cash comes IN -

INFLOWSLeft hand side

Cash goes OUT-

OUTFLOWSRight hand side

UNIT 8: CASH AND BANK

TRANSACTIONS 8

Examples of Recording cash transactions

1. Started business with capital in cash Rs 50 000

2. Purchase goods for cash Rs 17 000

Started business with capital in cash Rs 50 000

Cash comes IN

Left hand side of the Cash Account - Capital

Purchase goods for cash Rs 17 000

Cash goes OUT

Right hand side of the Cash Account - Purchases

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TRANSACTIONS 9

3. Sold goods for cash Rs 10 000

4. Paid water bill by cash Rs 3 500

Sold goods for cash Rs 10 000

Cash comes IN

Left hand side of the Cash Account - Sales

Paid water bill by cash Rs 3 500

Cash goes OUT

Right hand side of the Cash Account – Water bill

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TRANSACTIONS 10

5. Paid general expenses Rs 2 600

Paid general expenses Rs 2 600

Cash goes OUT

Right hand side of the Cash Account – General expenses

UNIT 8: CASH AND BANK

TRANSACTIONS 11

A worked example

Transactions Rs Cash Inflow (IN)

Cash Outflow (OUT)

Started business with capital in cash 50 000 Cash Inflow (IN)

Purchase goods for cash 17 000 Cash Outflow (OUT)

Sold goods for cash 10 000 Cash Inflow (IN)

Paid water bill by cash 3 500 Cash Outflow (OUT)

Paid general expenses 2 600 Cash Outflow (OUT)

Cash Account

IN Items Rs OUT Items Rs

Capital 50 000 Purchases 17 000

Sales 10 000 Water bill 3 500

General expenses 2 600

UNIT 8: CASH AND BANK

TRANSACTIONS 12

A worked example

The following transactions are form the books of Harvey.

Prepare the Cash Account

Rs

Started business with capital in cash 80 000

Purchase goods for resale 25 000

Sold goods by cash 20 000

Paid electricity by cash 5 600

Bought equipment by cash 11 000

Cash sales 5 000

Paid general expenses 3 000

Paid water charges 2 000

UNIT 8: CASH AND BANK

TRANSACTIONS 13

Transactions Rs Cash Inflow (IN)

Cash Outflow (OUT)

Started business with capital in cash 80 000 Cash Inflow (IN)

Purchase goods for resale 25 000 Cash Outflow (OUT)

Sold goods by cash 20 000 Cash Inflow (IN)

Paid electricity by cash 5 600 Cash Outflow (OUT)

Bought equipment by cash 11 000 Cash Outflow (OUT)

Cash sales 5 000 Cash Inflow (IN)

Paid general expenses 3 000 Cash Outflow (OUT)

Paid water charges 2 000 Cash Outflow (OUT)

Cash Account

IN Items Rs OUT Items Rs

Capital 80 000 Electricity 5 600

Sales 20 000 Equipment 11 000

Sales 5 000 General expenses 3 000

Water charges 2000

UNIT 8: CASH AND BANK

TRANSACTIONS 14

8.5 Bank Transaction

Bank transactions refers to all receipts and payments made through the bank.

Businesses should have a bank account to record receipts and payments.

A business uses cheque for bank transactions.

Cheque Receipts

Is when a business sells goods and customers pay by cheques.

It is an inflow of money in the business.

It also increases the bank balance as money comes IN the bank account.

Cheque Receipts = Inflows

Cheque Payments

Is when a business pays goods purchased or expenses by cheques.

It is called payments by cheque.

It is an outflow of money in the business.

It also decreases the bank balance as money goes OUT the bank account.

Cheque Payments = Outflows

UNIT 8: CASH AND BANK

TRANSACTIONS 15

8.5.1 Examples of bank Transaction

1. Purchase goods by cheque Rs 45 000

2. Sold goods for Rs 30 000 by cheque

Business

Money goes

OUT the Bank

Account

Goods comes IN

BusinessGoods goes OUT

Money comes IN the Bank Account

UNIT 8: CASH AND BANK

TRANSACTIONS 16

3. Purchase equipment to be used by cheque for Rs 15 000

5. Paid wages Rs 5 000 by cheque

Business

Money goes OUT the Bank Account

Equipmentcomes IN

Business

Money goes

OUT the Bank

Account

Labour service

comes IN

UNIT 8: CASH AND BANK

TRANSACTIONS 17

8.5.2 Dual aspects of bank transactions

Each business transaction affects two accounts.

One account – shows Cash comes IN

One account – Shows Cash goes OUT

Examples of Dual aspects

1. Purchase goods by cheque Rs 45 000

Purchase goods by cheque Rs 45 000

Goods come IN

Purchases Account

Money goes OUT from Bank

Bank Account

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TRANSACTIONS 18

2. Sold goods for Rs 30 000 by cheque

3. Purchase equipment to be used by cheque for Rs 15 000

Sold goods for Rs 30 000 by cheque

Money comes IN the Bank

Bank Account

Goods go OUT

Sales Account

Purchase equipment to be used by cheque for Rs 15 000

Equipment comes IN

Equipment Account

Money goes OUT from Bank

Bank Account

UNIT 8: CASH AND BANK

TRANSACTIONS 19

4. Paid wages Rs 5 000 by cheque

Paid wages Rs 5 000 by cheque

Labour service comes IN

Wages Account

Money goes OUT from Bank

Bank Account

UNIT 8: CASH AND BANK

TRANSACTIONS 20

8.6 Recording of bank transactions

All bank transactions are recorded in BANK ACCOUNT

Steps to record bank transactions

Identify the cheque receipts and cheque payments items.

Record the cheque receipts on the left hand side of the bank account.

Record the cheque payments on the right hand side of the bank account.

BANK ACCOUNT

Money comes IN Cheque

Receipts INFLOWS

Left hand side

Money goes OUT Cheques

Payments OUTFLOWS

Right hand side

UNIT 8: CASH AND BANK

TRANSACTIONS 21

Examples of Recording bank transactions

1. Started business with money deposited into bank Rs 100 000

2. Purchase goods by cheque Rs 35 000

Started business with money deposited into bank Rs 100 000

Cheque receipts IN

Left hand side of the Bank Account - Capital

Purchase goods for cheque

Rs 35 000

Cheque payments OUT

Right hand side of the Bank Account - Purchases

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TRANSACTIONS 22

3. Cheque received form sales Rs 40 000

4. Paid wages by cheque Rs 5 500

Cheque received form sales

Rs 40 000

Cheque receipts IN

Left hand side of the Bank Account - Sales

Paid wages by cheque Rs 5 500

Cheque payments OUT

Right hand side of the Bank Account – Wages

UNIT 8: CASH AND BANK

TRANSACTIONS 23

5. Paid general expenses Rs 1 600 by cheque

Paid general expenses Rs 1 600 by cheque

Cheque payments OUT

Right hand side of the Bank Account – General expenses

UNIT 8: CASH AND BANK

TRANSACTIONS 24

A worked example

Transactions Rs Cash Inflow (IN)

Cash Outflow (OUT)

Started business with money

deposited into bank

100 000 Cheque receipts (IN)

Purchase goods by cheque 35 000 Cheque payments (OUT)

Cheque received form sales 40 000 Cheque receipts (IN)

Paid wages by cheque 5 500 Cheque payments (OUT)

Paid general expenses by cheque 1 600 Cheque payments (OUT)

Bank Account

IN Items Rs OUT Items Rs

Capital 100 000 Purchases 35 000

Sales 40 000 Wages 5 500

General expenses 1 600

UNIT 8: CASH AND BANK

TRANSACTIONS 25

A worked example

The following transactions are form the books of Bob.

Prepare the Bank Account

Rs

Started business with capital in the bank 90 000

Purchase goods for resale by cheque 45 000

Received cheques from sales 30 000

Paid electricity by cheque 8 600

Bought machinery by cheque 15 000

Sales paid into the bank 7 000

Paid stationery by cheque 1 100

Paid advertising expenses by cheque 5 000

UNIT 8: CASH AND BANK

TRANSACTIONS 26

Transactions Rs (IN)

(OUT)

Started business with capital in the bank 90 000 Cheque receipts (IN)

Purchase goods for resale by cheque 45 000 Cheque payments (OUT)

Received cheques from sales 30 000 Cheque receipts (IN)

Paid electricity by cheque 8 600 Cheque payments (OUT)

Bought machinery by cheque 15 000 Cheque payments (OUT)

Sales paid into the bank 7 000 Cheque receipts (IN)

Paid stationery by cheque 1 100 Cheque payments (OUT)

Paid advertising expenses by cheque 5 000 Cheque payments (OUT)

Bank Account

IN Items Rs OUT Items Rs

Capital 90 000 Purchases 45 000

Sales 30 000 Electricity 8 600

Sales 7 000 Machinery 15 000

Stationery 1 100

Advertising 5 000

UNIT 8: CASH AND BANK

TRANSACTIONS 27

8.7 Cash and Bank transactions

Business carry their business transactions both by cash and bank.

Hence, transaction carried out by cash are recorded in cash account.

And transactions carried out through the bank are recorded in the bank account.

A worked example

Rs

Started business with capital in the cash and bank 80 000

30000

Purchase goods for resale by cheque 25 000

Received cash from sales 12 000

Paid expenses by cheque 1 300

Bought machinery by cash 14 000

Sales paid into the bank 6 000

Paid stationery by cheque 500

Paid advertising expenses by cash 2 700

UNIT 8: CASH AND BANK

TRANSACTIONS 28

Transactions Rs Cash

/Bank

Inflow/

Outflow

Started business with capital in the

cash and bank

80 000

30 000

Cash

Bank

Inflow

Outflow

Purchase goods for resale by cheque 25 000 Bank Outflow

Received cash from sales 12 000 Cash Inflow

Paid expenses by cheque 1 300 Bank Outflow

Bought machinery by cash 14 000 Cash Outflow

Sales paid into the bank 6 000 Bank Inflow

Paid stationery by cheque 500 Bank Outflow

Paid advertising expenses by cash 2 700 Cash Outflow

Cash Account

IN Items Rs OUT Items Rs

Capital 80 000 Machinery 14 000

Sales 12 000 Advertising 2 700

UNIT 8: CASH AND BANK

TRANSACTIONS 29

Bank Account

IN Items Rs OUT Items Rs

Capital 30 000 Purchases 25 000

Sales 6 000 Expenses 1 300

Stationery 500