The Cash Book – SS1 Financial Accounting Lesson Note (First Term)

The cash book is a book of original entry that records all money received and paid by a business, in cash or by cheque. It is part of the double entry system, so it works as both a ledger and a subsidiary book.

Behavioural objectives

By the end of the lesson, students should be able to:

1. state the types of cash book;
2. prepare a single column cash book from given information;
3. explain which transactions are left out of the cash book;
4. explain how a two-column cash book is used to record cash and bank transactions;
5. record contra entries correctly;
6. explain what a bank overdraft is and how it appears in the cash book.

Why is the cash book both a ledger and a subsidiary book?

The cash book is a ledger because it holds the Cash Account and the Bank Account, and it is a subsidiary book because transactions are first recorded in it.

• As a subsidiary book: it is a book of original entry, where cash and cheque transactions are first written down.
• As a ledger: it is itself the Cash Account and Bank Account, so it is balanced like any ledger account.
• Double entry: the other side of each entry is posted to another ledger account, except contra entries.

What are the types of cash book?

There are four types of cash book: single column, two column, three column and petty cash book.

1. Single column cash book: has one money column on each side, for cash only.
2. Two column cash book: has cash and bank columns on each side. It is also called the double column cash book.
3. Three column cash book: has discount, cash and bank columns on each side.
4. Petty cash book: records small day-to-day expenses such as postage and transport fares.

What is a single column cash book?

A single column cash book is the simplest cash book, and it records only cash receipts and cash payments.

• Receipts (debit side): cash sales, cash received from credit customers, loans received and the opening balance.
• Payments (credit side): cash purchases, cash paid to suppliers, expenses paid and fixed assets bought with cash.

Illustration

Prepare a cash book from the following information for March 2017.

Solution: single column cash book

How is the balance found?

1. Add the debit side: ₦14,130 + ₦3,600 + ₦15,235 + ₦10,000 + ₦14,000 = ₦56,965.
2. Add the payments on the credit side: ₦19,450.
3. Subtract: ₦56,965 − ₦19,450 = ₦37,515, the balance carried down (c/d).
4. Write ₦37,515 on the credit side so both sides total ₦56,965.
5. Bring the balance down as the opening balance (b/d) on the debit side on April 1.

Which transactions are left out of the cash book?

Transactions that do not involve the movement of cash or cheques are left out of the cash book.

• Credit sales: the sale of ₦42,000 to Owoyemi on March 22 is recorded in the Sales Journal.
• Credit purchases: the purchase of ₦15,550 from F. Lawal on March 24 is recorded in the Purchases Journal.
• Examination tip: look out for credit items in the list of transactions and leave them out.

What is a two-column cash book?

A two-column cash book is a cash book with a cash column and a bank column on each side.

• Why it is used: a growing business opens a bank account to keep its money safe.
• Layout: the Cash Account and the Bank Account appear side by side.
• Balancing: each column is balanced separately to find cash in hand and cash at bank.

Rules for recording

• Cash received: debit the cash column.
• Cheque received or money paid into the bank: debit the bank column.
• Cash paid out: credit the cash column.
• Payment by cheque: credit the bank column.

What are contra entries?

A contra entry is a transaction whose debit and credit entries are both in the cash book, one in the cash column and one in the bank column.

• Why “contra”: the two entries appear on opposite sides of the same book.
• Folio: the letter “c” is entered in the folio column to show this.

How are contra entries recorded?

How are cash and bank balances treated?

The cash balance is always brought down as a debit balance, because a Cash Account cannot have a credit balance.

• Cash column: the balance is a debit balance, or nil if no cash is left.
• Bank column: the balance is normally a debit balance, but it can be a credit balance when the account is overdrawn.

What is a bank overdraft?

A bank overdraft is an arrangement in which the bank lets a business pay out more money than it has in its bank account.

• Interest: the bank charges interest on the amount overdrawn.
• In the cash book: the bank column is balanced in the usual way, and the balance is brought down on the credit side.
• Meaning: the balance is the amount the business owes the bank, so it is a liability.

What is a three-column cash book?

A three-column cash book is a cash book with discount, cash and bank columns on each side.

• Discount allowed: a reduction given to customers who pay promptly. It is entered in the discount column on the debit side.
• Discount received: a reduction given by suppliers when the business pays promptly. It is entered in the discount column on the credit side.
• Totals: the discount columns are added up but not balanced.
• Posting the totals: the debit total goes to the Discount Allowed Account, and the credit total goes to the Discount Received Account.

What is a petty cash book?

A petty cash book is a book that records small, regular expenses paid in cash by the petty cashier.

• Examples of expenses: postage, transport fares, stationery and cleaning materials.
• Imprest system: the petty cashier receives a fixed amount, called the imprest or float.
• Analysis columns: payments are split into columns such as postage, transport and stationery.

How does the imprest system work?

1. The main cashier gives the petty cashier a fixed amount, the imprest.
2. The petty cashier pays small expenses and keeps a voucher for each one.
3. At the end of the period, the expenses are added up in each analysis column.
4. The main cashier refunds the amount spent, which restores the imprest to its original figure.

Evaluation

1. Define the cash book and say why it is both a ledger and a subsidiary book.
2. List the four types of cash book.
3. Why are credit sales and credit purchases not posted to the cash book?
4. What is a contra entry? Give the debit and credit entries when cash is paid into the bank.
5. What is a bank overdraft, and on which side of the cash book is the balance brought down?

Assignment

1. Explain how a two-column cash book records money received in cash, money received as a cheque and money paid by cheque.
2. State the debit and credit entries for cash withdrawn from the bank for office use, and the folio entry used to show it.