TOPIC 3- introduction to simple CASH BOOK-1.pptx

csh

1. CASH BOOK

2. Introduction : Every entrepreneur should have knowledge of cash book as from these book, he may check how much balance is available to him for meeting his expenses and liabilities, and what are the details of receipts and payments of a particular period. With the details of payments, it can be checked whether the payments are of reasonable amount or not.

3. If the expenses are unreasonably high, he may take steps to control them. An entrepreneur who regularly checks his cash and bank balances would never face problems like dishonor of cheques or cash crisis etc. The entrepreneur, who doesn’t distinguish between his revenue and profits, may spend all his receipts for his personal purposes subsequently resulting in deficiency of cash for business purposes and that might lead to a cash crisis.

4. Definition : Cash book is a subsidiary book, which records the receipts and payment of cash. With the help of cash book, cash and bank balance can be checked at any point of time.

5. Types of cash book Cash book can be of four types: Simple cash book/single column cash book Two column cash book Three column cash book Petty cash book

6. Simple cash book A simple cash book is prepared like any ordinary account. The receipts are recorded in the Dr side and the payments are recorded in the Cr side of the cash book. The specimen Performa of a simple cash book is given as follows:

7. Simple cashbook DR CR Date Particulars Amount Date Particulars Amount

8. Balancing the cash book The Cash book is balanced like any other account. The receipts column total will be more than the payments column total. The difference will be written on the Cr. Side as “ Bal c/d”.

9. Example 1: Enter the following transactions in a simple cash book of JJ & Sons Co: 1 st Jan XX Cash in hand 12,000 5 th Jan XX Received from Amina 3,000 7 th Jan XX Paid rent 3,000 8 th Jan XX Sold goods 7,000 10 th Jan XX Paid John 2,000 13 th Jan XX Paid into bank 1,000

10. Example 2: Enter the following transactions in a simple cash book of JJ & Sons Co : 1 st Dec Cash in hand 10,000 2 nd Dec Received from Aisha 13,000 3 rd Dec Purchased furniture 15,000 4 th Dec Machinery sold 10,000 5 th Dec Goods sold 20,000 6 th Dec Salaries paid 1,000 10 th Dec Drawn from bank 2,500 12 th Dec Deposit to bank 5,000

11. Two column cash book Many business people maintain their cash book where they record receipts and payments, and at the same time they have their bank accounts that they deposit and withdrawal money for business purposes. Sometimes cash book and bank may intermingle and this may affect both cash and bank accounts. So to understand the two column cash book, its better to understand the following concepts first

12. Deposit Account: Its an account which is normally for earning interests on the balance. Withdrawals are infrequent. Current Accounts: It’s a working account for regular banking and withdrawal of money. Generally interest is earned on the balance only if the balance is kept above a certain minimum.

13. Paying in slip: The paying-in slip is used for paying and withdrawing cash or cheques into a bank account. Cheque clearance: A cheque is cleared when the drawee bank has indicated that it will pay the amount stated on the cheque . There is a time delay before the 2 accounts involved (drawer’s and drawee’s ) are adjusted.

14. Credit transfer: used for: ( i ) single settlement, eg payment of one bill; or (ii) multiple settlement, eg one give instruction to the bank to make a number of payments to different accounts (of persons or organizations).

15. Standing order: Is used for regular payments of fixed amounts; at stated dates and to certain persons or firms. Bank loan: An amount made available for an agreed period; interest is charged on the full amount of the loan regardless of how much is drawn.

16. Bank overdraft: An overdraft occurs when withdrawals exceed deposits; it may be with or without prior agreement with the bank; interest is charged from day to day on the varying balance.

17. Preparing a two column cash book Preparing a cash book will require presenting the work in a columnar form. In a 2-column Cash Book, related accounts, cash and bank, are merely positioned beside each other. The example of a cash account and bank account are presented on the following slide.

18. When preparing a two column cash book, the two accounts, cash and bank are combined together. In preparing a two column cash book, make sure you enter the items in a correct date order and you carefully tick the original items as they are entered in the newly presented cash book.

19. Prepared two column cash book

20. It is very necessary to keep cash and bank account together in columnar format because cash and bank are closely related and sometimes transfer can take place between them. If a business owner transfer cash into the bank, the result would be: Cash reduce- credit cash column to bank. Bank increase- debit bank column to cash. Look at the following example

21. Example: On 12th Feb, year 4, the business owner transferred cash of 270 into a bank account. Show how this will appear on a cash book.

22. NOTE: The “C” means contra, which is used where a double entry is complete within the cash book. Cash might also be taken out of the bank account, and the effect can only be shown in a reverse format in a cash book. Example 2: On 15 th March year 4, the business owner took cash of 120 from a business bank account. Show how this will appear in two column cash book.

23. Example3:

24. Note : There is a bad business practice which is followed by W. Towcester , he is keeping too much cash in the office at one time which is a security risk. For example, on 6 April, 470 cash was received for sales, but none of which was banked until 9 th April.

25. For security reasons, the general practice is to bank cash, if possible, on the day of receipt. If cash is banked on the day that it is received, the account entries should be recorded as if a cheque had been banked immediately. For example, on 9 May Year 6, W Towcester receives £590 in cash from sales and banks the cash the same day. The account entry for this transaction would be as follows:

26. Some book-keepers record the entry for cash sales that are banked, first as a debit in the cash column and then separately bank the amount. If the entry has been recorded in this way, the initial entry must be followed by a complete set of contra entries such as credit cash/debit bank. For examination purposes, the method shown in W Towcester’s Cash Book above – direct entry in the debit bank column – is strongly recommended. This method prevents complications and confusion as to the double entry is less likely.

27. There is an alternative way of recording cash sales that are banked. This alternative is used when part of the cash received from sales is banked (on the same day) and the remainder is retained as office cash. For example, 5 June Year 6, £985 is received from cash, £900 of which was banked on the same day. This transaction would be recorded as follows: