The Cash Book SS1 Financial Accounting Lesson Note

The Cash Book is a subsidiary book of account that is used to record the payments and receipts of money (cash or cheques) to or by a business organization. The cash book is part of the double entry system. It therefore functions both as a ledger and a subsidiary book of account 

 Types of Cash Book 

1. Single Column Cash Book 
2. Two Column Cash Book (or Double Column Cash Book)
3. Three Column Cash Book 
4. Petty Cash Book 

 Single Column Cash Book 

This is the simplest form of Cash Book operated by a business and it is used to record all cash transactions. The cash transactions recorded in the cash book can be for cash sales, cash purchases, payment of cash to suppliers, receipt of cash from customers, acquisition of properties (fixed assets) by cash and all other transactions that involve the receipt and payment of cash. 

 Illustration:

Prepare a Cash Book from the following information for March 2017

Cash Book

Note: The credit sale of March 22 and credit purchases of March 24 are not posted to the cash book because they do not involve the movement of cash. The two transactions can only be posted in the Sales Journal and the Purchases Journal respectively. Students should watch out for transactions like these during examinations. 

 Two-Column Cash Book 

As a business grows, the owner will realize the need to open a bank account where the business money can be kept. The business will therefore prepare a two-column (or double-column) Cash Book to record the movements of money. The Cash Account and the Bank Account will appear side-by-side in the Cash Book. 

 The rules of double-entry bookkeeping are still applied. Any money received is debited in the Cash Book. If the money is placed in the cash till, it will be entered in the cash column and if it is paid into the bank or received as a cheque, it will be entered in the bank column. 

Any money paid out is credited to the Cash Book. If the money is paid in cash it will be entered in the cash column and if it is paid by cheque, it will be entered in the bank column. 

The Cash Account and the Bank Accounts must be balanced separately at appropriate intervals to determine the Cash in Hand and the Cash at the Bank. 

 CONTRA ENTRIES 

Sometimes surplus cash is paid into the bank, or money may be withdrawn from the bank to the office. Such transactions are known contra entries because they appear on both sides of the Cash Book.

A contra entry occurs when the double entry records of a transaction occur in the same ledger. 

To record cash removed from the office and paid into the bank:

Debit Bank Account 

Credit Cash Account 

To record cash withdrawn from the bank for office use: 

Debit Cash Account

Credit Bank Account 

In each case, the letter “c” is usually entered in the folio column of the cash book to indicate that the double entry is on the opposite side of the same book. 

The balance on the cash column will always be brought down as a debit balance at the start of the next month. The only exception to this is when there is no cash left in the cash account in which case the balance will be nil. 

 It is not possible to have a credit balance on a Cash Account. 

The bank may however allow the business to have a bank overdraft. This means that the bank allows the business to pay out more from its bank account than the money they have deposited with the bank. The bank will charge interest on the amount overdrawn. 

 In the Cash Book, the bank account (i.e. bank column) is balanced in the usual way and the balance will be brought down on the credit side. This represents the amount the business owes the bank and is a liability.