1.0
INTRODUCTION
As the business grows
in volume and the transactions increase in number, a greater demand is made on
the book-keeper to keep the accounts entered day-by-day. Some suitable schemes
have been devised to sub-divide the work, but the use of one ledger only for
all accounts set a limit to any scheme, as the ledger cannot be used by more
than one person at a time.
A step in the
direction of sub-division of duties is to place one person in charge of Cash
and Bank Accounts, and for his convenience and the general convenience of the
staff, to separate these two accounts from the other accounts in the main
ledger.
The Cash and the Bank
Accounts in such circumstances are kept in the Cash Book — a book bound separately
from the Ledger purely as a matter of convenience in the internal organization
of the business. The accounts are still Ledger Accounts and the separation does
not affect the double entry principles already discussed in Note 4.
2.0
OBJECTIVES
On completion of this
Note, you should be able to:
1. Understand the
objectives of book-keeping
2. Explain the role
played by cash-book in accounting
3. Understand the
three types of Cash Book and record transactions in them.
3.0
MAIN CONTENT
3.1
The Cash Book
This is a book bound
separately from the Ledger purely as a matter of convenience. It is the
combination of Cash Account and Bank Account in the Ledger.
3.2
Objectives of the Cash Book
The objectives of the
Cash Book is to keep a daily record of the transactions relating to receipts
and payments of cash. The number of transaction relating to cash are usually
large because most of the business dealings ultimately resolve themselves into
cash transactions, so it is necessary to keep a separate book for cash
transactions' . If every cash transactions were recorded in the Journal, a
tremendous amount of work will be involved in debiting or crediting Cash
Account every time cash is received or paid. If the Cash Book is maintained,
the botheration of posting every item of receipt or payment of cash
individually to Cash Account in the Ledger is avoided.
3.3
The Role Played by Cash-Book in Accounting
Cash Book plays dual
role as a book of original entry as well as a ledger. It is a subsidiary book
because all cash transactions are first recorded in the Cash Book and then from
Cash Book posted to various accounts in the ledger.
The recording of
transactions in the Cash Book takes the shape of Ledger Account as receipts of
cash are entered on the debit side and payments of cash on the credit side, so
there is no need of Cash Account in the Ledger. Therefore, Cash Book serves the
purpose of a ledger account.
From the above, you
should be able to understand that Cash Book fulfils the functions of both
subsidiary book and ledger.
3.4
Types of Cash Book
The following are the
three types of Cash Book
1. Simple Cash Book
2. Cash Book with two
columns.
3. Cash Book with
bank and discount columns
Explanation
3.4.1
Simple Cash Book
This type of Cash Book makes a record of
all the receipts and payments of cash. All cash received in the form of coin,
notes, cheques, postal orders, bank drafts will be recorded on the debit side
and payments on the credit side. The ruling of this type of Cash Book is as
follows: 
From the above
specimen, you should note that when Cash is received, it is entered on the
debit side of the Cash Book in the amount column along with the name of the
party paying the cash in the particulars column. Similarly, cash paid is
entered on the credit side of the Cash Book. Each payment must be supported by
a voucher and voucher number is entered in the V.N (Voucher Number) column if
provided beside the Ledger Folio (L/F) on the credit side of the simple Cash
Book. Also R. N. (Receipt No.) is written in Receipt Number Column beside the
Ledger Folio column on the debit site of this book.
At regular periodic
intervals, preferably daily, Cash Book should be balanced like other ledger
account and the balance shown by it should be equal to cash in hand, If no
mistake or fraud has been committed. The Cash Book should always show a debit
balance (i.e. cash in hand) because total cash paid can never exceed the
opening balance plus cash received.
Posting of
transactions into Simple Cash Book.
Opening balance
appearing on the debit side of the Cash Book is not posted to any account in
the ledger as it comes in the Cash Book from the opening entry recorded in the
journal proper. The other transactions recorded on the debit side of the Cash
Book are posted to the credit side of the respective accounts in the ledger to
complete the second aspect of the entry as the first aspect of the transactions
has been covered by giving debit to Cash Account in the Cash Book itself.
Similarly, the entries appearing on the credit side of the Cash Book are posted
to the debit of the respective accounts in the ledger.
3.4.2
Cash Book with Bank Columns or Two-Column Cash Book
In the Cash Book with
bank columns, the amount column on each side of the Cash Book is divided into
two, one for cash transactions and the other for bank transactions. All cash
received are entered in the cash column, debit side and all cash payments are
entered in the cash column credit side. All the cheques received and lodged
with the bank and all cash paid into bank are entered in the bank column debit
side, and all payments by cheque are entered in the bank column credit side.
If you compare the above with those
postings in the Cash Account and Bank Account in Note 4 already discussed, you
will agree that the Cash Book has fulfilled the functions of the ledger.
“Contra
Entries”
As a general rule, a
business does not keep much cash on hand. Cash not required for immediate use
is paid into bank. Similarly, when business runs short of cash, it can get cash
from the bank by drawing a cheque. Cash and Bank columns in the above specimen
of Cash Book are treated in effect as two ledger accounts, one for cash and the
other for bank, and the double entry for transactions between them is completed
in the cash book. To indicate that the double entry for an item is on the
opposite side of the cash book and that no posting to the ledger is required
the word "CONTRA" or "C" should be entered on the folio
against entries on both sides of the books. When we pay cash into Bank we debit
bank column and credit cash column because cash is the giver and bank is the
receiver. When we draw cash from the bank for office or business use, we debit
cash column and credit bank column because bank is the giver and cash is the
receiver.
3.4.3
Cash Book with Bank and Discount Columns or Three-Column Cash Book
The third type of
Cash Book is the Three-Column Cash Book or Cash Book with Bank and Discount
columns is provided on each side of the Cash Book, it is known as Three Column
Cash Book. Discount column on the debit side represents Cash Discount Allowed
to customers and on the credit of this column indicates Cash Discount Received
from creditors.
You should note that
Cash and Bank columns are balanced like other ledger accounts but discount
column are not balanced but totalled.
Each item of discount
allowed appearing on the debit side of the Cash .94
Book
will be posted to the Credit of respective personal account and total of
discount column should be posted to the debit side of Discount Account with the
words "To Sundry Accounts' or "Amount as per Cash Book".
Similarly, on the credit side of the cash book, the discounting column will be
posted to the debit of respective personal account and total of discount
received column should be posted to the credit of Discount Account with the
words "By Sundry Accounts" or "Amount as
per Cash Book".
Below is the specimen of Three-Column
Cash Book:
Exercises
1. Define a Cash
Book. Is it a subsidiary book or a principal book of accounts? Give reasons.
2. What do you mean
by Three Column Cash Book? Give a specimen of it. Also explain the meaning of
Contra entry by giving examples.
3. Write up a
two-column cash book of Freeland Cooperative Society Ltd from the following
transactions.
Balance off the Cash
Book at the end of the month, 31st January, 2002.
N : K
1/1/2002 Started business with 60,000
: 00
3/1/2002 Paid into Bank 45,000 : 00
7/1/2002 Purchased office furniture
by cheque 4,000 : 00
13/1/2002 Purchased goods for cash 8,000 : 00
20/1/2002 Withdrew cash for office use 10,000 : 00
21/1/2002 Sold goods for cash 1,000 : 00
22/1/2002 Cash sales banked 2,500 : 00
24/1/2002 Drew cash for personal use 3,000 : 00
28/1/2002 Paid cash for rent 550 : 00
28/1/2002 Paid stationery by cash 1,500 : 00
29/1/2002 Paid cash for telephone bill 700
: 00
31/1/2002 Paid wages by cash 1,800 : 00
4.0
CONCLUSION
As already discussed
in this Note, Cash Book plays double role in accounting. It is a principal book
of accounts as ledger and also a subsidiary book..95
With
the development in the banking industry and other business organizations, many
payments are made and received through cheques. In such a case, the Cash Book
should have a bank column in addition to the Cash and discount columns to have
a record of Bank Account in the Cash Book.
5.0
SUMMARY
In this note, we have
successfully explained the object of Cash Book, and the functions of the three
types of Cash Book, that is,
1. Simple Cash Book,
which has the same ruling as Cash Account in the ledger;
2. The Two-column
Cash Book, i.e. Cash Book with bank column,
which is the
combination of Cash and Bank Accounts in the ledger; and
3. The Three-column
Cash Book or Cash Book with Bank and Discount Columns. As already explained
that, the number of transactions relating to cash are usually large because
most of business dealings ultimately resolve themselves into cash transactions,
so it is necessary to keep a separate book for cash transactions.
If any of the above Cash Books is
maintained in the business, the botheration of posting every item of receipt or
payment of cash individually to cash account in the ledger is avoided.
Question:
You
are required to prepare a Three-Column Cash Book from the following
information; balance the book at the end of the month and show the relevant
discount accounts as they would appear in the Ledger.
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