(8) THE CASH BOOK AND THE PETTY CASH BOOK
Cash book
This is the prime entry book in which the receipts and payments of cash (currency) are recorded. A business has various sources of cash receipts as well as different ways of payments.
Examples for sources of cash receipts of a business
- The owner's capital
- Cash sales
- Cash received from debtors
- Borrowing money
- Cash receipts for rent income, investment income and income on commissions
- Purchase of goods for cash
- Repayment of loans
- Cash payment to creditors
- Payments made for expenses such as salaries for employees, electricity, etc.
- Payments made for purchasing fixed assets such as furniture, equipment, etc.
- Withdrawal of cash by the owner for personal use (drawings)
Receipts
When a business receives cash the business would issue a document called a 'receipt' to the party who gave money to the business, as evidence for such a receipt.
A serial number in consecutive order is printed on it. Further, this receipt is issued with the details such as date of cash receipt, the reason why it was received, the amount received and the signature of the cashier. This is also known as the cash receipt or cash memo. Receipt is the written evidence of cash received by the business. A duplicate of the receipt should be received by the accounts branch and it should be used as a source document to record the receipt of cash in the cash book. Receipts can be prepared in different formats according to the nature and requirement of the business. There is no specific format for a receipt. A business could use a receipt that has a general format as indicated below. Please refer them.
Payment voucher
The payment voucher is a document prepared by businesses with the relevant details as an evidence that cash payments are made, which also should be authorized by a responsible officer.
Every payment voucher is given a consecutive serial number. This is a written evidence of such payments, because it should be authorized by a responsible person.
There is no commonly accepted format for payment vouchers, but a voucher could be prepared based on the following general format.
Dual function of the cash book
Cash book functions as a prime entry book as business records the receipts and payments of cash at first in the cash book in a sequential order using the receipts and payment vouchers as source documents.
Cash book also functions as a ledger account as it has both the debit and the credit sides. Therefore, cash book performs two functions.
- Performs the function as a prime entry book
- Performs the function as a ledger account
Recording of cash transactions
Cash is an asset of the business. The receipt of cash increases assets and the payment of cash decreases assets. Therefore, the double entry principle for asset accounts should be applied for recording cash transactions in the cash book.
Cash received - Cash book debit [the rule, the increase of asset - debited]
Payment of cash - Cash book credit [the rule, the decrease of asset - credited]
Accordingly, all the cash receipts should be debited and all the cash payments should be credited in the cash book.
Since the cash book functions as a ledger account, when the business receives cash, the debit entry of the double entry for that transaction entered in the cash book. Only the credit entry of the relevant account has to be posted in the ledger. Similarly, the payment of cash is credited in the cash book and the credit entry of the double entry entered in the cash book. Only the debit entry of the relevant account has to be posted in the ledger.
Accordingly,
- The values that are debited in the cash book should be credited to the relevant accounts in the ledger
- The values that are credited in the cash book should be debited to the relevant accounts in the ledger.
Balancing off the accounts
The value of transactions are debited and credited in the accounts according to the principle of double entry. At the end of the period, the difference of the total values of debit and credit entries in accounts should be calculated. This difference is known as the balance of the account. Balancing off of an account is required to calculate the balance of that account.
Example :-
The total receipt of cash is Rs. 50 000. The total payment of cash is Rs. 33 000. Then the balance of cash is Rs. 17 000. This is considered to be the balance of the cash book.
Examine how the following accounts have been balanced.
Accordingly,
- If the value of the debit side of an account is higher than the value of the credit side, the balance we get is a debit balance
- If the value of the credit side of an account is higher than the value of debit side, then the balance we get is a credit balance.
Discounts
A discount can be explained in brief as the deduction of value from the value of a transaction (i.e. listed price) when it takes place. Discounts can be classified into two main categories as trade discounts and cash discounts. Discounts are further classified as discount received and discount allowed.
Trade Discounts
Most businesses sell goods deducting a certain amount from the listed price. The deduction which was made from the listed price is called as trade discount. This deduction is a trade discount allowed from the point of view of the seller and a trade discount received from the buyer's point of view.
The value to be recorded in the sales or the purchase accounts should be the net value after deducting the trade discount. Therefore, trade discounts are not recorded in accounts.
Cash discounts
Cash discounts come in to being when amounts are received from debtors and paid to creditors.
There are certain instances where a condition is included in the invoice to encourage the customers to settle their outstanding balances such that a percentage from the outstanding balance would be deducted from the amount due if that amount is paid within a specific period of time set by the business. This amount which is deducted from the amount due is called a cash discount.
Cash discounts can be classified into two,
- Discounts allowed
- Discounts received
Discounts allowed
The deduction made on the amount receivable from the debtors, if such amount is settled within a time allowed by the business, is called a discount allowed. It is an expense from the point of view of the business.
Accordingly, since discounts allowed are generated when cash is received from debtors, it is easy to record the discount allowed in the cash book. A separate column for discounts allowed is drawn in the debit side of the cash book and discounts allowed are recorded in it.
Discounts received
Discount received is the amount deducted by the creditors from the amount payable to them if it is paid by the business within the time allowed by the creditors. It is an income in the point of view of the business.
Discounts received are created when creditors are paid. Therefore it is easy to record the discount received in the cash book. Discounts received are recorded in the discount received column, which is separately drawn in the credit side of the cash book.
These discount columns are considered as memorandum columns. These columns serve only the purpose of a prime entry book. Since discount columns do not serve the purpose of a ledger account, mere recording a value in them do not complete even one entry of the double entry. Therefore the double entries for these items in the discount columns should be entered in the ledger accounts separately.
Recording of discounts in the accounts
The total of the debit side discount column in the cash book should be debited in discount allowed account which is opened in the ledger. Debiting of discount allowed account conforms to the double entry principle on increase of an expense. Credit entries should be made in each of the debtors accounts. This is done because the decrease of asset is credited in that account as per the rules of double entry.
Accordingly, the double entry for discount allowed is,
Discount allowed account Dr.
Debtors' accounts Cr.
The total of credit side discount column in the cash book is credited in the discount received account opened in the ledger. Discount received is an income and increase of income is credited according to the double entry rule for income. Debit entries for these should be made in each of the creditor's account. This is due to decrease of liability should be debited in the liability account.
Therefore, the double entry for the discount received is as followers.
Creditors accounts Dr.
Discount received account Cr.
Example :-
Saranga's business had the following balances as at 01.03.20xx.
Debtor's balances
Buddhi Rs.40 000
Sanod Rs.30 000
Creditor's balances
Maneesha Rs.45 000
Sithumini Rs.35 000
Cash in hand Rs.50 000
Following transactions took place during the month of March.
05.03 Cash received from Buddhi Rs. 12 500
Discount allowed Rs. 2 500
08.03 5% discount deducted when cash is received from Sanod in respect of Rs. 10 000 receivable from him.
10.03 Cash paid to Maneesha Rs. 12 600
Discount received Rs. 1 400
15.03 5% discount deducted when Sithumini was paid for Rs. 20 000
The following show how the above transactions are recorded and balanced of the cash book and other relevant ledger accounts.
Example :-
Sapumalee's business has the following balances as at 01.03.20xx
Debtors balance (Dr.) Rs. 40 000
Creditors balance (Cr.) Rs. 50 000
Cash balance (Dr.) Rs. 30 000
05.03.20xx Cash received from debtors Rs. 7 600. Discount deducted Rs. 400
08.03 Cash is received from debtors to settle Rs. 10 000 subject to 5% discount.
10.03 Cash paid to creditors Rs. 4 700 and discount received Rs. 300
15.03 Cash is paid to creditors to settle Rs.12 000 had been subject to 10% discount.
The following show how the above transactions are recorded and balanced in the cash book and the relevant ledger accounts.
A business receives cash as well as cheques from the debtors. At the same time cheques may also be received from cash sales. If the cheques so received are not banked on the same day then they can be used as currency notes. Therefore, cheques received should be recorded in the cash book similar to recording of receipts of cash. There will be discounts allowed when cheques are received from debtors. These discounts are recorded in the discount allowed column of the cash book.
Example :-
Hiruni's business has the following balances as at 01.03.20xx
Capital Rs.100 000
Creditors -
Suranga Rs.25 000
Tharanga Rs.15 000
Cash Rs.80 000
Debtors -
Malka Rs.40 000
Imalka Rs.20 000
The following transactions took place during the month of march.
The following show how the transactions given in the above example are recorded in the cash book with discount columns and in the appropriate ledger accounts.
Petty Cash Book
Out of the payments made by a business, some of the payments are of small in amount and would occur frequently.
Examples :-
Payment of cleaning expenses of Rs. 150
Payment of postal charges of Rs. 60
Accordingly, postal charges. cleaning expenses, travelling expenses, entertainment expenses and stationery expenses are some examples for the day to day expenses of small values.
The petty cash book is the prime entry book in which the payments of cash with small values that occur frequently are recorded. Petty cash book also functions as a ledger account. Therefore, it also has a dual role like cash book.
The responsibility of maintaining a petty cash book is assigned to a petty cashier, who is under the main cashier. A voucher has to be prepared for each and every petty cash payment. It is known as the petty cash voucher. It is the source document for the payments to be recorded in the petty cash book.
Petty cash imprest
For purpose of carrying the petty cash payments with a control, a specific amount of cash is given to the petty cashier by the main cashier to make petty cash payments, which is known as the petty cash imprest. It is the duty of the petty cashier to make petty cash payments out of this petty cash imprest as well as and to maintain the petty cash book.
Reimbursement of petty cash imprest
The petty cashier has to request again cash from the main cashier before the petty cash imprest is over. The petty cashier should be given the amount equivalent to the amount of payments made at that time and with that the imprest will be reimbursed. This is known as reimbursement of the petty cash imprest.
Example :-
The petty cash imprest of the business of Lihini was Rs. 2 000. The following payments were made out of this imprest received.
Accordingly, total petty cash expenses was Rs. 1 600. When the petty cashier requests again for cash from the main cashier, the main cashier will give the petty cashier only Rs. 1600, which is the amount spent. This is reimbursement of the petty cash imprest.
Then,
Petty cash balance in hand Rs. 400
Petty expenses reimbursed Rs. 1 600
Petty cash imprest Rs. 2 000
The petty cashier should submit a payment voucher that includes all petty cash vouchers to date relevant to the petty cash payments to the main cashier for the reimbursement.
Preparation of petty cash book
Different columns are maintained to record similar types of payments, so that the payments can be posted to the ledger easily. These columns are known as analysis columns.
Examples :-
Stamp charges, postal charges, purchases of envelops and other similar types of expenses could be identified and recorded in the analysis column named as postal charges.
If any petty cash payments cannot be entered in any of the analysis columns, a separate column known as the sundry expense column could be drawn for such payments. Any other expenses, which cannot be included in any of the analysis columns but need to be separately posted to the relevant ledger accounts are recorded in the column named as the other ledger account column.
Examples :- Cash paid to creditors, purchase of assets of small value, carriage inwards.
Study the format of a petty cash book given below.
Like the cash book, the petty cash book also performs a dual function. Accordingly, both the functions of a prime entry book and a ledger account is fulfilled by the petty cash book.
- As the receipt of petty cash imprest and the payment of petty cash payments are first recorded in the petty cash book, it performs the task of a book of prime entry.
- Petty cash book also has both debit and credit sides, and entries are recorded according to the principle of double entry for assets. Therefore, it performs the function of a ledger account.
When the petty cash imprest is received and the reimbursement is made,
Petty Cash book Debit
Cash book Credit
The payments credited in the petty cash book should be debited in the relevant ledger accounts. The totals of each analysis column should be posted to the relevant ledger accounts. Accordingly, the double entry is,
Relevant expense account Debit
Petty Cash book Credit
The values recorded in the other ledger account column should be separately debited to the relevant ledger accounts.
When the petty cash book is balanced at the end of a time period, the total of the debit side is transferred to in the total of the credit column and the difference should be brought forward as the b/f balance.
Example :- Following are the information regarding payments of petty cash payments of the business of Nethmi during the month of March 20xx.
Petty cash imprest was Rs. 2 000 which was received on 01.03.20xx.
How the petty cash book is prepared with the analysis columns of postal charges, travelling expenses , entertainment expenses, miscellaneous expenses and other ledger accounts and how they are posted to the ledger accounts are depicted as follows.
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