Unit 5: Cash Book Chapter Notes | Accounting for CA Foundation PDF Download

Unit Overview

Cash Book: A Subsidiary and Principal Book 

• The Cash Book is where cash transactions are recorded right away. This record is then used to prepare ledger accounts.
• Because of this, the Cash Book is considered a subsidiary book.
• However, the Cash Book also functions as the cash account and bank account. The balances from the Cash Book are entered directly into the trial balance.
• This means that the Cash Book is also part of the ledger.
• Therefore, it needs to be treated as a principal book as well.
• In summary, the Cash Book is both a subsidiary book and a principal book.

Types of Cash Books

Simple Cash Book

• A Simple Cash Book resembles a regular account, with one column for amounts on each side. 
• The left side records cash receipts, while the right side records cash payments. 

Balancing:

• The cash book is balanced like other accounts. 
• The total of the receipts column is always greater than the total of the 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 each other. 
• On the debit side, the balance is written as "To Balance b/d" to indicate the cash balance at the beginning of the next period. 

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

SOLUTION

Note :

• In the simple cash book only the cash receipts and cash payments are recorded.
• The total of debit side is always greater than the total of credit side since the payment cannot exceed the available cash.
• The simple cash book is like an ordinary account.
• Rent due not yet paid for January has not been recorded in the cash book because no cash has been paid, hence it will be recorded through normal Journal entry.

Double Column Cash Book

The Double Column Cash Book is an extension of the single column cash book, with the addition of a second column on each side to record cash discounts allowed or received, or to show bank receipts and payments.

• Cash Discounts: Cash discounts are allowances that accompany cash payments. For instance, if a customer owes ₹500 but is offered a 2% discount for prompt payment, they can settle their account by paying ₹490. In this case, the cash received would be ₹490, and the ₹10 difference would be the discount for the firm receiving the payment. The discount represents a loss for the firm and a gain for the customer. 
• Recording Discounts: Since cash discounts are only applicable when cash is paid, it is practical to include a column for discounts allowed on the receipt side of the cash book and a column for discounts received on the payment side. 

Types of Double Column Cash Book:
There are two types of double-column cash books: 

• Cash Book with Cash and Bank Columns: This type includes separate columns for cash and bank receipts/payments. 
• Cash Book with Discount Columns: This type features columns for cash discounts allowed and received. 

Balancing: The discount columns in the cash book are not balanced; they only reflect totals. The total discount on the receipts side indicates the discounts given to customers and is debited to the Discount Account, while the total on the payments side shows discounts received and is credited to the Discount Account. The cash and bank columns are balanced, with the bank balance serving as the balancing figure. Therefore, a double column cash book should include two columns on each side for either cash and discount transactions or cash and bank transactions.

In the cash column on the debit side, the actual cash received is recorded, while any discounts allowed to customers are noted in the discount column. Conversely, actual cash paid is entered in the cash column on the payments side, with discounts received recorded in the discount column. Additionally, the bank column on the debit side captures all bank receipts, whereas the credit side reflects all bank payments.

ILLUSTRATION 2
Ganesh commenced business on 1st April, 2022 with ` 2,000 as capital. He had the following cash transactions in the month of April 2022:

Make out the two-column Cash Book (Cash and discount column) for the month of April, 2022.

SOLUTION

To summarise:

• The discount columns in the cash book are added together.
• These columns are not balanced.
• The total amounts are recorded in the discount received/paid account in the ledger.

Note:The individual making the payment is credited with both the cash he pays and any discounts he receives, while the recipient of the payment is debited with the total amount paid and the discounts he provides.

Three-Column Cash Book

• A three-column cash book is a financial record that tracks cash, bank transactions, and discounts in one place. 
• It simplifies bookkeeping by combining cash and bank accounts, making it easier to monitor funds. 
• The book has three columns: cash, bank, and discount, allowing for detailed tracking of transactions. 
• It's commonly used by businesses to maintain accurate financial records and streamline their accounting processes. 

Features of Three-Column Cash Book

• Cash Column: This column records all cash transactions, including cash sales, cash purchases, and cash payments. It helps businesses keep track of their physical cash on hand. 
• Bank Column: The bank column records all transactions involving the bank, such as deposits, withdrawals, and cheque payments. This column reflects the business's bank balance and ensures accurate tracking of funds held in the bank. 
• Discount Column: The discount column is used to record any discounts allowed or received during transactions. It helps businesses keep track of discounts offered to customers or received from suppliers, providing a clearer picture of overall expenses and income. 

Uses of Three-Column Cash Book

• Cash Management: Businesses use the cash column to monitor their cash flow, ensuring they have enough cash on hand to meet daily expenses and obligations. This is crucial for maintaining liquidity. 
• Bank Reconciliation: The bank column helps businesses reconcile their bank statements with their internal records. By tracking bank transactions in real time, discrepancies can be identified and resolved promptly, reducing the risk of errors. 
• Discount Tracking: The discount column allows businesses to track discounts offered to customers and received from suppliers. This information is valuable for assessing the effectiveness of discount strategies and managing supplier relationships. 

Benefits of Three-Column Cash Book

• Simplified Accounting: The three-column format streamlines accounting processes by consolidating cash and bank transactions in one place. This reduces the need for multiple books and simplifies record-keeping. 
• Improved Accuracy: By recording transactions in real-time and reconciling bank statements regularly, businesses can improve the accuracy of their financial records. This minimizes the risk of errors and discrepancies. 
• Better Financial Insights: The three-column cash book provides businesses with a clear overview of their cash flow, bank balances, and discount activities. This information is valuable for making informed financial decisions and identifying trends. 

Three-Column Cash Book Format 

Points to Remember While Writing Up the Three-Column Cash Book
1. Starting a New Business or Cash Book: When beginning a new business, record cash introduced in the cash column and cash directly deposited in the bank column with "To Capital Account." For an existing business, use "To Balance b/d" for opening balances. 

2. Recording Receipts: All receipts go on the receipts side. Cash receipts are recorded in the cash column, cheques in the bank column. Any discounts allowed are entered in the discount column. Specify the account name receiving the payment in the particulars column. 

3. Recording Payments: Payments are recorded on the payments side. Cash payments go in the cash column, cheque payments in the bank column. If a discount is received, it is entered in the discount column. 

4. Contra Entries: For cash withdrawn from the bank, record it in the bank column on the payments side and in the cash column on the receipts side, marking it "C" in the L.F column. For cash sent to the bank, reverse this process. 

5. Dishonoured Cheques: If a cheque sent to the bank is dishonoured, record it in the bank column on the credit side with the party's name. If a cheque issued by the firm is not paid, record it on the debit side with the party's name. 

6. Endorsed Cheques: If a cheque received is endorsed to another party, record it in the bank column on the debit side upon receipt and on the credit side upon endorsement. 

7. Advantages of Three-Column Cash Book: It allows simultaneous preparation of Cash and Bank Accounts, reducing errors and facilitating cross-checking of contra entries. It provides quick information on Cash in Hand and Bank Balance without needing a separate Bank Account Ledger. 

8. Multiple Bank Accounts: Separate columns can be added for each bank account, making it easier to record and reconcile transactions between different accounts. 

Balancing: The discount columns are totalled but not balanced. The cash and bank columns are balanced similarly to a simple cash book. In cases of bank overdrafts, the bank column's credit side total may exceed the debit side, with the difference recorded as "To Balance c/d." In usual cases, debits into the bank exceed withdrawals, and balancing is similar to cash columns. 

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

SOLUTION

Posting the Cash Book Entries

•  The cash columns in the cash book represent the cash account, while the bank column represents the bank account. The discount columns are memorandum columns, intended to inform about the total discount allowed and received. 

Debit Side: Receipts:

• The debit side columns for cash and bank indicate receipts. Amounts debited in the cash book should be credited to the account from which cash or a cheque has been received. 
• For instance, if ₹175 is received for the sale of goods, it is credited to the Sales Account as “By Cash ₹175.” 
• If M/s. Warsi pays ₹450 with a discount of ₹35, discharging a debt of ₹485, the posting in their account is on the credit side as: 
  • By Cash: ₹450 
  • By Discount: ₹35 
  • By Sundries: ₹485 

Credit Side: Payments:

•  All payments are recorded on the credit side. The particulars column indicates the accounts to which payments have been made. 
• In the ledger accounts concerned, the amount is recorded on the debit side. For example, if a cheque for ₹330 is issued to M/s. Ratan & Co. with a discount of ₹20, meeting an obligation of ₹350, the posting in their account is: 
  •  To Bank: ₹330 
  •  To Discount: ₹20 
  •  Or To Sundries: ₹350 

Posting Rules:

•  From the debit side of the cash book, credit the respective accounts with their amounts, including any discounts allowed. 
•  From the credit side of the cash book, post to the debit of the accounts mentioned in the particulars column with their respective amounts, including any discounts received. 

Discount Account:

•  The total of the discount columns on the debit side is debited to the discount account. 
•  The total of the discount column on the credit side is credited to the discount account. 
•  For example, from the cash book, ₹35 is debited and ₹20 is credited to the discount account.

Petty Cash Book

 To avoid this, firms typically appoint a Petty Cashier who is responsible for making these small payments, usually for amounts below a certain limit, like ₹200. The petty cashier keeps track of these payments and is later reimbursed for the amounts paid. 

Imprest System of Petty Cash:

•  The Imprest System of Petty Cash is a method where a fixed sum of money is entrusted to the petty cashier at the beginning of a period, and he is reimbursed for the payments made at the end of that period. This way, the petty cashier always starts with the same fixed amount at the beginning of each new period. 
•  This system is particularly effective when using an analytical Petty Cash Book, which has one column for recording cash receipts (only from the main cashier) and other columns for various types of payments. The totals of these columns help in identifying the reasons for the payments, allowing for proper debiting of the relevant accounts. 

Key Points for the Imprest System of Petty Cash:

•  The amount fixed for petty cash should be adequate for the anticipated small payments over a relatively short period, such as a week or a fortnight. 
•  Reimbursement should occur only when the petty cashier provides a statement detailing the total payments, supported by vouchers (documentary evidence), and should be limited to the actual disbursements. 
•  Vouchers should be organized and filed in order. 
•  No payment should be made without proper authorization, and payments exceeding a specified limit should be handled by the main cashier. 
•  The petty cashier should not accept any cash except for reimbursement purposes. 

Structure of the Petty Cash Book:

•  The left-hand column records cash receipts. 
•  The right-hand side column shows total payments for various purposes, with a column for sundries to record infrequent payments. 
•  The sundries column is analyzed regularly. 
•  The petty cash book is balanced at the end of the week or fortnight using the same method as a simple cash book. 

ILLUSTRATION 4
Prepare a Petty Cash Book on the imprest System from the following:

SOLUTION

* Voucher Numbers

There are mainly three advantages: 

• Time Efficiency: Using a petty cash book helps save the chief cashier's time.
• Reduced Labor: It minimizes the effort needed to record transactions in the cash book and to update the ledger.
• Better Control: It allows for effective management of small payments, ensuring that expenses are monitored closely.

Posting the Petty Cash Book 

In the ledger, a petty cash account is kept to track the funds given to the petty cashier. When money is allocated to the petty cashier, the petty cash account is debited. 

Every week or fortnight, the total payments made by the petty cashier are credited to this account. This process reflects the balance of cash in the hands of the cashier, who should be able to produce this amount for counting when requested. At the end of the accounting period or year, the balance in the petty cash account is included in the balance sheet as part of the cash balance. 

Payments recorded in the petty cash book must be debited to their respective accounts. There are two methods to do this: 

1. Directly debiting the concerned accounts from the totals of the various columns in the petty cash book. 
2. Preparing a journal entry based on the petty cash book, debiting the accounts indicated by the analysis columns and crediting the total payments to the petty cash account. 

For Illustration 4 the journal entry and relevant accounts are as follows:

ILLUSTRATION 5
Enter the following transaction in Cash Book with Discount and Bank columns. Cheques are first treated as cash receipts –

SOLUTION

Note: If the received cheque is endorsed to the other party on the same day, then no entry is required. However, in the above case posting has been done through cash column as the endorsement is done on next day.

•  Credit and debit card sales are now offered by almost every bank in India, either directly or in collaboration with other agencies. Popular cards include HSBC, SBI, BOB, ICICI, HDFC, and Andhra Bank cards. 

 Issuing Process of Credit/Debit Cards: 

• Credit Card: Banks issue a credit card to a prospective customer after verifying their credibility, usually based on income sources. 
• Debit Card:. debit card is issued to customers who have an account with the bank. Nowadays, an ATM card can also function as a debit card. The card contains a 16-digit embossed number and the cardholder's name. 

 Fees and Charges: 

•  Banks typically charge an annual subscription fee for credit cards. Debit cards usually do not incur a fee, although some banks may charge a nominal fee. 

 Transaction Process: 

•  When a cardholder wants to make a purchase, the seller inserts the card into a card machine, inputs the sale amount, and hands the card back to the customer. The customer then enters their Personal Identification Number (PIN) to authorize the transaction. 

 Transaction Submission: 

•  Sellers compile and submit their daily sales to the bank, which credits the seller's account and debits the bank or card issuing company. 

 Commission Charges: 

•  The card-issuing bank charges a commission for each transaction, typically ranging from 1% to 4%, which is immediately debited from the seller's account. 

 Monthly Statements: 

•  Banks send monthly statements to cardholders. For debit cards, the account is debited immediately. For credit cards, the cardholder must pay the amount in full or in part, with interest charged on any unpaid balance. 

Accounting for Credit/Debit Card Sale

 From the seller's perspective, sales made through credit or debit cards are treated as cash sales. The commission charged by the bank is considered a selling expense. The following journal entries are recorded in the seller's books of accounts: 

• Bank A/cTo Sales Account (Sales made through Credit/Debit Card) 
• Commission AccountTo Bank Account (Commission charged by bank)