topic 6 cash book

• Cash book (cash account):

  • where money is exchanged the transaction is recorded in the cash book
  • the cash account records receipts and payments of notes and coins, the bal cd should agree with the cash in hand
  • the cash balance must always be carried down on the CR side and brought down on the DR side as it is impossible to have a negative cash balance
• Cash book (bank account):

  • bank account records receipts and payments made through the bank eg. cheques, direct debits, standing orders, credit transfers
  • bank balance should agree with the balance shown on the bank statement sent to the business by its bank
  • the bank balance can be bd/cd depending if balance is in credit or overdrawn
• Contra - this is when cash is transferred to or withdrawn from the bank, the double entry takes place in the cash book
• When cash is withdrawn from till/safe and deposited in to the bank:

  DR Bank column in cash book CR Cash column in cash book
• When cash is withdrawn from the bank and put in the till/safe:

  DR Cash column in cash book CR Bank column in cash book
• Contra entries:

  • if the withdrawal is for business use this is a contra entry - if it is for the owner's personal use the double entry is drawings
  • where a cheque is cashed for specific purposes or deposited from a specific source a contra is not necessary
• Paying in slip - these slips record the amount of cash and cheques paid into the business bank account also known as lodgements, the source document is the counterfoil
• Cheque - a cheque is a written instruction to transfer money from a bank account and give to someone else, the source document is the cheque counterfoil
• Debit cards/switch - these are increasingly replacing cheques as a means of transferring money from one account to another, source document is the printed receipt which used to be signed but is now more likely to be authorised through chip and pin
• Other transactions - are processed automatically by the bank and the source document is the bank statement
• Credit transfer - this is an amount paid into an account directly through the banking system rather than issuing a cheque, it is a receipt
• Standing order - this is an automatic payment made by the payer's bank account for a regular set amount, it is a payment
• Direct debit - another form of regular payment made by the bank but the authority to withdraw money comes from the payee's bank and the payments are variable
• Bank charges - are made by the banks to cover the cost of administering a current account, bank charges are a business expense
• Bank interest - is charged on bank overdrafts and is a business expense
• Bank interest received - some current accounts pay interest to customers, a receipt in the bank account and a source of income
• Dishonoured cheque - this is when a bank refuses to process a cheque either because there is an error on the cheque or the drawer has insufficient funds in their account, is money going out the bank and is a CR in the bank column in the cash book
• Discounts - a reduction in the quoted price of a product, a business may be offered two types of discounts
• Trade discount - is offered to business customers to encourage them to buy more, regularly or in larger quantities, customers pay less than the general public so a percentage is deducted on the invoice
• Cash discount - is given by suppliers as an incentive to credit customers to pay promptly and settle an invoice before credit period expires, they do not alter the purchase price of the product and the customer will be invoiced for the full amount due before any cash discount
• Cash float - most businesses try to minimise the amount of cash they keep in the till because:

  • it is safer to deposit money in the bank to minimise the risk of theft
  • businesses are charged interest on a daily basis when a current account is overdrawn/exceeds its overdraft limit
  • some current accounts pay interest - leaving money in the till is an opportunity cost
• Explain the process for recording a contra transaction - This is when cash is transferred to or withdrawn from the bank - the double entry takes place in the cash book. (Then state the correct contra entries DR/CR for 4 marks)
• Explain how discounts are recorded in the cash book

  1. Trade discount offered to business customers

  2. Cash discount given by suppliers as incentive to pay promptly

  3. Trade discount deducted from total invoice, amount after discount entered in ledger

  4. Cash discount applied once payment made, entire balance including cash discount entered in debit side of cash book
• Explain why businesses keep a cash float - It is safer to deposit money in the bank to minimise the risk of theft. Businesses are charged interest on a daily basis if a current account is overdrawn/exceeds its overdraft limit. Some current accounts pay interest - leaving money in the till is an opportunity cost