Cashbook and Errors in Financial Accounting

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1. Cash book Cash book is maintained to record the transactions, relating to the receipts and payments of cash. There are many transactions in a business relating to the cash which justify the maintenance of a separate book for this purpose. Cash Book plays a dual role as a principal book of account as well as a subsidiary book. It is a subsidiary book because all cash transactions are first recorded in the Cash Book and then posted to various accounts in the ledger. The recording of transactions in Cash Book takes the shape of a Ledger Account. As receipts of Cash are entered on the debit side and payments of cash on the credit side, there is no need of Cash Account in the ledger. Therefore, Cash Book serves the purpose of a ledger accounts.

2. Types of Cash Book There are three types of Cash Book which are maintained in the business according to its needs and convenience. They are: Simple Cash Book - Cash book with Cash Column only Double Column Cash Book - Cash Book with Cash and Discount columns Triple Column Cash Book - Cash Book with Discount, Cash and Bank Columns In additional to the Cash Book, the various business concerns may also maintain Petty Cash Book.

3. Simple Cash Book This type of cash book contains debit side and credit side, showing all receipts of cash on debit side and payments of cash on credit side. Debit side is called receipts side and credit side is called payments side . Cash Book of ….. (Single Column) Date Particulars R.N. L.F. Amount Rs . Date Particulars V.N. L.F. Amount Rs .                    

4. Double Column Cash Book This type of Cash Book has two Columns- Cash and Discount on either side of the Cash book. Cash Column is meant for recording cash receipts and payments. Discount column is meant for recording discount allowed and discount received. If there are bank transactions, they can be entered in a separate Bank Account opened in the ledger and not in the Cash Book.

5. Cash Book of ….. (Double Column ) Date Particulars R.N. L.F. Discount Allowed Cash Date Particulars V.N. L.F. Discount Received Cash                        

6. Date Particulars R.N. L.F. Discount Allowed Cash Rs. Bank Rs . Date Particulars V.N. L.F. Discount Received Cash Rs . Bank Rs .                             Triple Column Cash Book This type of Cash Book contains Cash, Discount and Bank Columns. The cash column for cash received or paid, Discount column for discount allowed or received and Bank column for money deposited in or withdrawn from the bank. Cash Book of ….. (Triple Column)

7. Petty Cash ‘Petty’ is a derivation of the French word ‘PETIT’ which means small . So, it is meant to be a small cash book, not in physical size but in recording ‘small payments’. A business makes numerous routine small payments day after a day like postage, stationery, cartage, refreshments, cleaning, etc. If all these payments are recorded in the main cash book, it becomes too bulky and the principal cashier becomes overburdened . In most of the medium and large-sized business establishments, a separate cashier is entrusted with the job of making all the small routine payments and maintained accounts for them. He is called ‘petty cashier’ and the book he maintains is called ‘petty cash book’.

8. Petty Cash Book Amount Received Rs . C.B.F.N Date Particulars V.N Total Payments Postage & Stamps Telephone & Telegram Conveyance Stationery Sundries                      

9. TRIAL BALANCE Meaning A Trial balance is the list of balances extracted from the ledger account prepared to check the arithmetical accuracy of accounts. Definition According to M.S. Gosav (The Substance of Accountancy) “Trial balance is a statement containing the balances of all ledger accounts, as at any given date, arranged in the form of debit and credit columns placed side by side and prepared with the object of checking the arithmetical accuracy of ledger postings.”

10. Objects / Advantages of Trial balance: The trial balance is prepared to check the arithmetic accuracy of accounts. Errors in the accounts are disclosed. But there are some errors that are not disclosed by trial balance. It is useful in the preparation of the final account. It helps to prepare the trading, profit and loss account. It also helps to prepare the Balance Sheet. It is the lucid form of the accounts prepared.

11. Serial No Name of the Accounts L.F. Debit Credit drawings Total 6,000 - Specimen Form of a Trial Balance TRIAL BALANCE AS ON ……

12. Rectification of Errors Accounts are prepared by accountant; a human being is likely to commit mistakes at time of recording and posting in the books. However, such errors are located after some time and should be corrected by passing corrective journal entry, which is known as rectification of errors. Classification of Errors Accounting errors are classified in to four types on the basis of nature of Errors . They are (1) Errors of Omission, (2) Errors of Commission, (3) Errors of Principles and (4) Compensating Errors. The Errors of Omission will occur when a transaction is not recorded in the books of accounts or omitted by mistake.

13. 1. Errors of Omission: When a transaction is not recorded by mistake in the books of accounts, it is called an error of omission. The omission may be partial or complete. Partial Omission may happen in relation to any subsidiary book. Here the transaction is entered in the subsidiary book but not posted to the ledger. For example, goods returned by a customer has been entered in the sales returns book but not posted to the credit of customer’s account. Similarly, cash paid to the supplier has been entered in the payment side of the Cash Book but not posted to the debit of supplier’s account. Complete omission can happen when the transaction is completely omitted from the books of accounts. For example, a bookkeeper failed to enter an invoice from the sales daybook.

14. 2. Error of Commission: When a transaction is entered in the books of accounts, it might be entered wrongly. It may be entered partially or incorrectly. Such error is called an error of commission. These errors arise often due to the ignorance or negligence or absent-mindedness of the accountant. It may be of different types. Examples of such errors are as follows: (a) Errors relating to subsidiary books: These are three types: ( i ) Entering wrong amount in a subsidiary book, e.g., a purchase of Rs.430 may be entered in the Purchase Day Book as Rs.340 due to wrong transposition of figures. (ii) Entering the transaction in a wrong subsidiary book, e.g., a purchase transaction may be entered in sales daybook and a sales transaction may be entered in the purchase daybook. (iii) Wrong casting or carry forward of a subsidiary book. Casting refers to the process of totaling the daybooks periodically. A mistake in relation to totaling is called ‘error in casting’.

15. If there is excess totaling, the error is ‘over casting’ and short totaling is ‘under casting’. Sometimes, error may be the result of wrong carry forward of the total from one page of the daybook to another, e.g., the total of a page may be Rs.235 and carried forward to the next page as Rs.325. (b) Errors relating to ledger: These errors may be subdivided broadly into two types. They are: errors of posting and errors in balancing .

16. Error of posting may be further being subdivided as follows: ( i ) Posting wrong amount on the right side of an account. Example. Sale of Rs.560 to Mr.Raja is entered as Rs.650 in the debit side of his account from the Sales Day Book. (ii) Posting the same amount twice to an account. Example. A cash receipt of Rs.1000 from Mr.Ram is credited twice to his account. (iii) Posting the correct amount to the wrong side of the right account. Example. A purchase of goods from Mr. Raj for Rs.1000 is debited to his account [instead of crediting], (iv) Posting wrong amount to the wrong side of right account. Example. A purchase of Rs.1000 from Mr.Sam is debited to his account as Rs. 10,000.

17. (v) Posting the correct amount to the wrong account but on the right side. Example. A sale of goods to S.Anish for Rs.1000 is wrongly debited to G.Anish a/c. (vi) Posting correct amount to the wrong account and on the wrong side. Example. A sale of Rs.1000 to S.Anish is wrongly credited to G.Anish a/c . Errors in balancing: Errors may arise in balancing the account resulting in excess or short balance of the account . 3. Errors of Principle: These errors occur when entries are made against the principles of accounting. Example. Purchase of computer for office use is wrongly entered in the Purchases Day Book. Capital expenditure should not be treated as revenue expenditure . These errors may be committed: Due to the inability to make a distinction between revenue and capital items; Due to inability to make a difference between business expenses and personal expenses; (c ) Due to inability to make a difference between productive expenses and non-productive expenses, e.g., wages paid for production may be debited to salaries a/c or salaries paid to office employees may be debited to wages a/c.

18. 4. Compensating Errors : These are the errors, which compensate themselves in the net results, i.e., over debit of one account is neutralized by an over credit in some other account to the same extent. Similarly a wrong credit might have been compensated by some wrong debit in some other account. For example, if tax paid Rs.2, 500 is debited in Tax a/c as Rs.3, 000 and interest received Rs.3, 500 is credited in the interest a/c as Rs.4, 000, the excess debit of Rs.500 in tax a/c is compensated by an excess credit of Rs.500 in interest a/c. This type of error may be committed in combination of different errors in different accounts. Normally the presence of this type of errors will not be revealed by the trial balance. Impact of Errors on Trial Balance: The agreement of the Trail balance is proof as to the arithmetical accuracy of the books of accounts. But it is a final proof of accuracy of books of accounts; it simply assures that for every debit there is a corresponding and equal credit. If trial balance does not agree, it is a clear indication that there are certain errors in the books of accounts. Even if the trial balance agrees, there may be errors in the books of accounts.

19. Hence, the errors may be classified, depending upon the agreement of trial balance, as follows: (a) Errors that do not affect the agreement of the trial balance. (b) Errors that affect the agreement of the trial balance. Errors that are not disclosed by Trial balance or not affect the agreement of the Trial balance are mainly the errors of principle, errors of complete omission, errors of commission and compensation errors. Certain errors like entering a transaction in two subsidiary books or writing a wrong amount in a subsidiary book or mis -posting to the wrong account but correct side, etc. locating such errors are quite difficult and such errors can always be rectified by means of journal entries. Errors that are disclosed by trial balance or affect the agreement of the Trial balance are mainly the errors of wrong or omission of posting, wrong totaling of subsidiary books, wrong carry-forward and wrong balancing of ledger accounts, etc.

20. Wrong posting may be in the forms of posting a wrong amount to a ledger account or posting to the wrong side of an account or double posting. As these errors affect mostly only one side of ledger accounts, they will be revealed by the trial balance through disagreement of debit and credit totals .