Cash Book


Cash Book – Definition, Explanation, Preparation and its Types:

Cash book is used to record all cash transactions. Cash transactions not only involve receipt and payment of cash and cheques but also include cash discounts (allowed and received). If we prepare cash book, we can put the two accounts in the same cash book together.

Cash book is usually prepared in a “T-account” format and in multi-columns manner. Cash book is a book of original entry because it is the first book in which all transactions relating to cash and bank are recorded as and when they arise. This at the same time is a part of ledger because it contains cash and bank accounts. The balances of cash and bank columns at the end of accounting period are used to construct the trial balance and prepare the balance sheet.

There are following types of cash book:

(1) Two Column Cash Book

(2) Three Column Cash Book

(3) Petty Cash Book

(1) Two Column Cash Book – Definition and Format:

The pages of a cash book are vertically divided into two equal parts. A two column cash book has a pair of debit columns for recording cash and bank receipts, whereas; a pair of credit columns to record cash and bank payments. Following is the format for two column cash book.  

two column cash book format

(2) Three Column Cash Book – Definition and Format:

If cash discounts are allowed to customers or received from suppliers then discount columns are also added to the left of cash and bank columns. The receipts of cash, cheque and cash discount allowed are entered on the debit side with their dates. The payments of cash, cheque and cash discount received are entered on the credit side with their dates. As there are three amounts columns on both sides of cash book so it is called three column cash book. Following is the format for three column cash book:

three column cash book format

Nature of Discount Columns:

The discount columns shown in the cash book are not part of double entry system. Accounts for discount allowed and discount received are kept in general ledger along with all other incomes and expenses accounts. It should be noted that only cash discounts are recorded in the discounts columns of the cash book whereas trade discount is ignored.

The total discount allowed column of the cash book is debited to discount allowed account in the general ledger and the total of discount received column of the cash book is credited to the discount received account in the general ledger.

Folio Column:

Folio columns are shown on the left to the amounts (accounts of cash, bank and discounts) columns. Folio columns contain the name and page number of other book on which second aspect of the transaction is recorded. Use of folio columns in the cash book ensures that double entry for recording the transaction is completed.

Contra Entries:

Frequently, firms deposit cash into their bank accounts and also withdraw money out of the bank for business use. The entry needed to record this transaction is unusual because both ‘halves’ of the transaction are recorded in the same book – cash book.

contra entries column

Balancing of Cash and Bank Columns:

Cash column of the cash book always has a debit balance as a business cannot pay more than what it has in the form of cash. The balance of the bank column of the cash book may appear on either side of the cash book. If the debit side total of the bank column is more than its credit side is more than the debit side total then the difference represents an overdrawn balance. This is called bank overdraft and is liability for the business. Bank overdraft indicates that business has put out more money from the bank than what was paid in as a result of overdraft (loan) facility offered by the bank to the business.

(3) Petty Cash Book:

There are occasions when business makes small payments in cash as where cheques may be unacceptable. In that case, a petty cash book may be prepared for recording cash transactions.

Solved Example:

Graham Oldham is a sole trader who keeps full double entry records including a three column cash book. On 1 June 2019 his cash book showed the following balances:

Cash (debit) = $2455

Bank (credit) = $250

Transactions for the month of June 2019 are:

June 01 = Purchased furniture and paid by cheque $600.

June 03 = Cash deposited into bank $500.

June 06 = Received a cheque from M. Dannie in settlement of his account of $400, after deducting cash discount of 5%.

June 09 = Paid rent in cash $200.

June 13 = Paid Solomon Micheal a cheque for $171 to settle the amount due, after deducting cash discount of $9.

June 18 = Cash sales amounted to $250.

June 22 = Paid a cheque of $190 to Christine Jones in settlement of her account after receiving a cash discount of 5%.

June 24 = Banked a cheque received from Simon for $96 in full settlement of his account of $100.

June 26 = The cheque received from Joseph was returned by the bank dishonored.

June 30 = Cash purchases of $200.

Required:

(a) Enter the above transactions in Graham Oldham’s cash book. Balance the cash book at 30 June 2019 and bring down the balances on 1 July.

(b) Make the entries required in the discounts accounts on 30 June 2019.

Solution (a):