Classwork Exercise and Series (Financial Accounting- SS1): The Cash Book

Concept of cash book

Cash book is the book for recording detailed particulars of all money received and paid. All cash transaction with cheque must pass through the cash book.

The cash book is a subsidiary boo and it is part of the principal book called ledger. The cash and bank accounts are taken out of the ledger and combined into a single book called cash book. It is the book for cash receipts,payments and transaction with cheques. In the treatment of the cash book,the principle of double entry system will remain unchanged. Any transaction on credit must not appear in the book.

Two column cash book; double column cash book

In this type of cash book,two separate accounts cash and bank,are combined for the sake of convenience.there will be separate columns for date,particulars,folio,cash and bank

1. Cash column:cash receipts and payment are recorded
2. Bank column:all payment made by cheque and money received and paid into the bank are recorded

Format of double column cash book

Dr                                                                                                                                                                               Cr

Date

Particulars

folio

Cash

Bank

Date

Particulars

folio

Cash

Bank

 

Contra Entries

These are made in the cash book when cash deposited into the bank account out of the cash in hand or when cash withdrawn from the bank for office use

1. Cash paid into the bank:when there is surplus of cash in hand,the firm can pay it into the bank,money will leave the cash till and will be deposited in the bank.the effect of of this is that the cash balance will decrease and the bank balance will increase.

Action: credit: cash column

Debit:bank column

The double entry will be completed in the cash book with letter “C” recorded in the folio column

       2. Cash withdrawn from the bank : When there is a shortage of cash or insufficient cash in the hand the firm can withdraw from their bank account.a cheque will be drawn and cash will be received. The effect of this is that the bank balance will decrease and the cash balance will increase.

Action credit:t bank column

Debit: cash column

The use of the folio column: this is the column which shows the name of the other book in abbreviated form and the number of the page in the other books where double entry is completed..when the folio column is not filled it can be assumed that the double entry have not been completed.

The three column cash book

The tree column cash book three accounts:cash,bank and discount combined into one book of account.it follows the principle as that of the two column cash book.in the three column cash book,discount allowed and discount received will be introduced.since cash discount is given as an inducement to the customers to settle their account promptly,then they must be a column for discounts allowed on the debit side of the cash book and discount received column on the credit side of the cash book.there are two types of discount –cash discount and trade discounts. It should be noted that only cash discount will be recorded in the accounts. Trade discount will not appear in the book. The discount column must be regarded as a mere listing device or discount journal which are located in the cash book.

Meaning of cash discount

Cash discounts are discounts given for prompt payment of accounts. This is divided into discount allowed and discount received.

Meaning of trade discount

Trade discount is the allowance off the invoiced or catalog price of an item given by the manufacturer to the customer

Discount allowed: This is the discount given to the customers for prompt payment of their accounts,it must be treated as an expenses and hence debited to discount allowed and credited to the personal accounts of the customers

Discount received: This is the discount received from suppliers for prompt payment of our accounts. It is treated as a revenue and hence it is credited to the discount received account and debited to the personal account of the suppliers.the two discounts are classified under nominal accounts.

The column on the debit side is the discount allowed and each discount is entered opposite the name of the customers.it similarly contains all the discount received from suppliers which are entered opposite their names on the credit side.

Differences between cash and trade discount

1. Trade discounts are allowance off the invoiced price while cash discounts are allowance for prompt payment
2. Trade discount appears in the day books while cash discount appears in the cash book.
3. Trade discount is unconditional every customer is entitled to it while cash discount is conditional only customer that pay within a certain period of time are entitled to it.
4. Trade discount are deducted first while cash discount are deducted later

Format of the three column cash book

Date	Particulars	folio	Cash	Bank	Discount allowed	Date	Particulars	folio	Cash	Bank	Discount received
	Customers		x	X	x		Suppliers		x	x	x