ICAI Notes 2.5, Cash Books- 1 - CA Foundation PDF Download

Learning Objectives After studying this unit you will be able to :

• Understand that a Cash Book is a type of subsidiary book but treated as a principal book.
• Be familiar with various kinds of Cash Books, viz., Simple Cash Book, Two-column Cash Book and Three-column Cash Book.
• Learn the technique of preparation of Simple Cash Book and how to balance it.
• See how Double-Column Cash Book is a prepared adding discount column alongwith cash column.
• Understand the techniques of preparing Three-column Cash Book.
• Understand what is a Petty Cash Book and the Imprest System of Petty Cash.
• Note the advantages of the Petty Cash Book.
• Learn how to maintain a Petty Cash Book and how to post the entries of the Petty Cash Book in the ledger.
• Understand the accounting of credit/debit sales transactions.

1.  CASH BOOK - A SUBSIDIARY BOOK AND A PRINCIPAL BOOK

Cash transactions are straightaway recorded in the Cash Book and on the basis of such a record, ledger accounts are prepared. Therefore, the Cash Book is a subsidiary book. But the Cash Book itself serves as the cash account and the bank account; the balances are entered in the trial balance directly. The Cash Book, therefore, is part of the ledger also. Hence, it has also to be treated as the principal book. The Cash Book is thus both a subsidiary book and a principal book.

2. KINDS OF CASH BOOK

The main Cash Book may be of the three types:

(i) Simple Cash Book;

(ii) Two-column Cash Book;

(iii) Three-column Cash Book.

In addition to the main Cash Book, firms also generally maintain a petty cash book but that is purely a subsidiary book.

2.1 SIMPLE CASH BOOK

Such a cash book appears like an ordinary account, with one amount column on each side. The left-hand side records receipts of cash and the right hand side the payments.
Balancing of the Cash Book: The cash book is balanced like other accounts. The total of receipts column is always greater than total of payments column. The difference is written on the credit side as ‘By balance c/d’. The totals are then entered in the two columns opposite one another and then on the debit side the balance is written as “To Balance b/d”, to show cash balance in hand in the beginning of next period.

Illustration 1 Enter the following transactions in a Simple Cash Book:

Solution
                                                    CASH BOOK

Note: One can see the following:

(i) In the simple cash book only the cash receipts and cash payment are recorded.

(ii) The total of debit side is always greater than the total of credit side since the payment cannot exceed the available cash.

(iii) The simple cash book is like an ordinary account.

2.2 DOUBLE- COLUMN CASH BOOK

If along with columns for amounts to record cash receipts and cash payments another column is added on each side to record the cash discount allowed or the discount received, or a column on the debit side showing bank receipts and another column on the credit side showing payments through bank. It is a double column cash book.

Cash discount is an allowance which often accompanies cash payments. For example, if a customer owes  500 but is promised that 2% will be deducted if payment is made within a certain period, the customer can clear his account by paying promptly 490. Cash received will be 490 and  10 will be the discount for the firm receiving the payment discount is a loss; for the person making the payment it is a gain. Since cash discount is allowed only if cash is paid, it is convenient to add a column for discount allowed on the receipt side of the cash book and a column for discount received on the payment side of the cash book.

In the cash column on the debit side, actual cash received is entered; the amount of the discount allowed, if any, to the customer concerned is entered in the discount column.

Similarly, actual cash paid is entered in the cash column on the payments side and discount received in the discount column. Also the bank column on the debit side records all receipts through bank and the same column on the credit side shows payment through bank.

Balancing: It should be noted that the discount columns are not balanced. They are merely totalled. The total of the discount column on the receipts side shows total discount allowed to customers and is debited to the Discount Account. The total of the column on the payments side shows total discount received and is credited to the Discount Account. The Cash columns are balanced, as already shown. The bank columns are also balanced and the balancing figure is called bank balance. Thus a double column cash book should have two columns on each side comprising of either cash and discount transaction or cash and bank transactions.

Illustration 2 Ganesh commenced business on 1st April, 2011 with 2,000 as capital. He had the following cash transactions in the month of April 2011:

Make out the two-column Cash Book (Cash and discount column) for the month of April, 2011.

Solution 
                                                            CASH BOOK

To summarise : 

(i) the discount columns in the cash book are not accounts;
(ii) they are not balanced; and
(iii) their totals are entered in the discount received/paid account in the ledger.

Note : The person who pays, is credited by both the cash paid by him and the discount allowed to him. Similarly, the person to whom payment is made, is debited with both the amount paid and the discount allowed by him.

2.3 THREE-COLUMN CASH BOOK 

A firm normally keeps the bulk of its funds at a bank; money can be deposited and withdrawn at will if it is current account. Probably payments into and out of the bank are more numerous than strict cash transactions. There is only a little difference between cash in hand and money at bank. Therefore, it is very convenient if, on each side in the cash book, another column is added to record cash deposited at bank (on the receipt side of the cash book) and payments out of the bank (on the payment side of the cash book).
For writing up the three-column cash book the under mentioned points should be noted:

1. While commencing a new business, the amount is written in the cash column if cash is introduced and in the bank column if it is directly put into the bank with the description “To Capital Account”. If a new cash book is being started for an existing business, the opening balances are written as : “To Balance b/d”.

2. All receipts are written on the receipts side, cash in the cash column and cheques in the bank column. If any discount is allowed to the party paying the amount, the discount is entered in the discount column. In the particulars column the name of the account in respect of which payment has been received is written.

3. All payments are written on the payments side, cash payment in the cash column and payments by cheques in the bank column. If some discount has been received from the party receiving the payment, it is entered in the discount column.

4. Contra Entries: Often cash is withdrawn from bank for use in the office. In such a case the amount is entered in the bank column on the payments side and also in the cash column on the receipts side. In the reverse case of cash being sent to the bank, the amount is recorded in the bank column on the receipts side and in cash column on payment side. Against such entries, the letter “C” should be written in the LF. column, to indicate that these are contra transaction and no further posting is required for them.

Note : If initially cheques received are entered in the cash column and then sent to the bank, the entry is as if cash has been sent to the bank.
While recording contra entries, the basic but important rules should be followed -

(a) The Receiver               Dr.
The Giver                          Cr.

(b) All what comes in        Dr.
All what goes out              Cr.

e.g. where a Cash Book with separate columns for Bank Account is maintained.

(a) If cash is deposited in Bank Account, the Bank will be the Receiver, hence it will be Debited and as the cash is going out, cash will be credited.

(b) If cash is withdrawn from the Bank Account, the Bank will be the Giver, hence it will be Credited and, as the cash is coming in, cash will be Debited.

5. If some cheque sent to the bank is dishonoured, i.e., the bank is not able to collect the amount, it is entered in the bank column on the credit side with the name of the related party in the particulars column.

6. If some cheque issued by the firm is not paid on presentation, it is entered in the Bank column on the debit side with the name of the party to whom the cheque was given.

7. In a rare case, a cheque received may be given to some other party, i.e., endorsed. On receipt, it must have been entered in the bank column on the debit side; on endorsement the amount will be written in the bank column on the credit side.

The advantages of such type of Cash Book are that -

(a) the Cash Account and the Bank Account are prepared simultaneously, therefore the double entry is completed in the Cash Book itself. Thus the contra entries can be easily cross-checked in Cash column in one side and the Bank column in the other side of the Cash Book. Also the chances of error are reduced.

(b) the information regarding Cash in Hand and the Bank Balance can be obtained very easily and quickly as there is no need to prepare Ledger of the Bank Account.
In case of maintaining more than one Bank Account, separate column can be add for each Bank Account. Transactions between these two or more Bank Accounts can be recorded and tallied with a much less effort.

Suppose, there are two Bank Accounts namely PNB Current Account and SBI-Cash Credit Account. Now, if a cheque is deposited from PNB cheque Book to SBI Account, the receiver - i.e., PNB Account will be debited and the giver i.e. the SBI Account shall be credited.

Balancing: The discount columns are totalled but not balanced. The cash columns are balanced exactly in the same manner as indicated for the simple cash book. The process is similar for balancing the bank columns also. It is possible, however, that the bank may allow the firm to withdraw more than the amount deposited i.e., to have an overdraft, In such a case, the total of the bank column on the credit side is bigger than the one on the debit side. The difference is written on the debit side as “To Balance c/d.” Then the totals are written on the two sides opposite one another, the balance is then entered on the credit side as “By Balance b/d.” However, the usual case is that payments into the bank will exceed the withdrawals or payments out of the bank. Then the bank columns are balanced just like the cash columns.

Illustration 3 Enter the following transactions in Cash Book with Discount and Bank Columns. Cheques are first treated as cash receipt.

Solution