Monday, October 22, 2012

Cash Book

When innumerable number of transactions takes place, the journal, as the sole book of the original entry becomes inadequate. In order to overcome this problem, the journal is sub-divided into many subsidiary books which are called special journals. The journal in which transaction of a similar nature is recorded is known as special journal or subsidiary book.
The special journals are ruled differently on the basis of the nature of transactions to be recorded. Transactions that cannot be recorded in any of the special journals are recorded in a journal called journal proper or miscellaneous journal.
Objects of preparing subsidiary books: -
a) Economy in labour: If the transaction are recorded in the book of accounts directly if will be consume less time then if transaction are recorded in the journal then posted to the ledger
b) More accuracy: There will be more accuracy in the book of accounts as entries are made in total only.
c) Statistical record: Additional information is collected while maintaining a subsidiary book as a book of original entry.
d) Journalizing of transaction: Recording a transaction in journal is called journalizing.
Advantages of subsidiary books
1. Division of work: since there are so many subsidiary books, the accounting work may be divided amongst a number of clerks.
2. Specialization: when the same work is allotted to a period of time he acquires full knowledge of it and becomes efficient thus the accounting works will be done more efficiently.
3. Save in time: the trader can save time and labor by avoiding repetitions
4. Availability of information: since separate subsidiary book is kept for each class of transactions, information relating to that will be readily available.
5. Facility in checking: checking is facilitated in subsidiary books which will prevent errors and frauds.
Important Subsidiary Books
There are many types of journals and the following are the important ones:
1.       Sales Day Book- to record all credit sales.
2.       Purchases Day Book- to record all credit purchases.
3.       Cash Book- to record all cash transactions of receipts as well as payments.
4.       Sales Returns Day Book- to record the return of goods sold to customers on credit.
5.       Purchases Returns Day Book- to record the return of goods purchased from suppliers on credit.
6.       Bills Receivable Book- to record the details of all the bills received.
7.       Bills Payable Book- to record the details of all the bills accepted.
8.       Journal Proper-to record all residual transactions which do not find place in any of the aforementioned books of original entry.
Cash Book
Cash Book is a sub-division of Journal recording transactions pertaining to cash receipts and payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a ledger with the required explanation called as narration and hence, it plays a dual role of a journal as well as ledger.
All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side. All cash transactions are recorded chronologically in the Cash Book. The Cash Book will always show a debit balance since payments cannot exceed the receipts at any time.
A Cash Book has the following features:
(1) It plays a dual role. It is both a book of original entry as well as a book of final entry.
(2) Only one aspect of cash transaction is posted to the ledger account. The other cash aspect needs no posting in Cash A/c.
(3) It has two identical sides: left hand side, the debit side and right hand side, the credit
(4) All the items of cash receipts are recorded on the left hand side and all items of cash payments are recorded on the right hand side in order of date.
(5) The difference between the total of two sides shows cash in hand.
(6) Its balance is verified by counting actual cash in the cash box.
(7) It always shows debit balance. It can never show credit balance.

Cash Book is both journal and a ledger.
Cash Book is a journal in the sense that all the transactions relating to receipt or payment of cash are recorded only in Cash Book and not in the journal. Cash Book is a ledger also because there is no need to open a separate account in the ledger. In case of Cash Book, only one posting is required unlike in journal where two postings are required. Cash Book is ruled like a ledger account.
In the words of Spicer and Pegler, “Cash book is actually a ledger account but owing to the large number of entries made therein, it is kept in a separate book called cash book, which is also used as a book of prime entry.”
Cash Book as Journal
Cash Book as Ledger
1.       All cash transactions are first recorded in cash book like a journal.
2.       Like Journal, in cash book also, transactions are recorded in chronological order.
3.       Transactions recorded in cash book are ultimately posted to relevant accounts in the ledger.
1.       Cash book is maintained in account form (“T” form) like a ledger.
2.       Like a ledger, cash book too has debit and credit sides.
3.       Like a ledger accounts, cash and bank columns of cash book are periodically balanced.

The advantages of cash book are as follows:
1.       It prevents duplication of work in entering cash transaction in journal and then posting the same into the ledger.
2.       Cash and Bank transactions can be recorded in cash book.
3.       It is possible to find out daily cash and bank balance.
4.       Cash book also serves the purpose of book of original entry as well as ledger.
5.       Frauds involving cash are likely to be minimized and where committed are likely to be detected at an early stage.

Kinds of Cash Book:
Cash Book serves both as a subsidiary books as well as ledger. Depending upon the nature of business and the type of cash transactions, various types of Cash books are used. They are:
a) Single Column Cash Book
b) Two Column Cash Book or Cash Book with cash and discount columns.
c) Three Columnar Cash Book or Cash Book with cash, bank and discount columns.
d) Petty Cash Book.

a)      Single column Cash Book — Simple Cash Book has only one amount column on each side. This book serves the purpose of cash account. It is suited to concerns which have only cash transactions.
b)      Two-column Cash Book — Two-column Cash Book has two amount columns. One for cash and another for Bank on each side. This book serves the purpose of cash account as well as Bank account It is suited to concerns which have cash transactions and banking transactions. A business concern need not maintain a separate account for the banking transactions. At the end of the accounting period the cash book reveals not only cash in hand but balance at bonk also.
There may be a two-column cash book containing cash column and discount column also. On the debit side, all cash receipts and discount allowed to customers arc recorded. On the credit side, all cash payments and discount received from creditors are recorded
c)       Three-column Cash Book —Three-column Cash Book is prepared when there are a large number of cash and banking transactions. This Cash Book has three amount columns on each side namely cash column, bank column and discount column.
d)      Petty Cash Book —In order to make the task of the cashier easy, a petty cashier is appointed and handed over a small sum of money. He meets out small payments like stationery postage, conveyance, cartage etc. At the end of the given period, the petty cashier submits the account to the cashier who reimburses him for payments.

Trade Discount and Cash Discount
Trade discount is an allowance or concession granted by the producers to the wholesalers or by the wholesalers to the retailers on bulk purchase. Trade discount is normally deducted in the purchase book, sales book or returns books, and the net amount is posted to the ledger accounts.
Cash discount is a deduction allowed from amount receivable from a credit customer on his paying the same within a specified time. This cash discount is always associated with payment .A firm may allow cash discount when it receives payment from customers and may receives cash discount when it makes payment to suppliers.
Difference between Trade Discount and Cash Discount
Trade Discount
Cash Discount
a) It helps the retailers to make some profit.
b) It allowable at time of sale cash credit
c) Only retailers are entitled to get it.
d) It is calculated at a given rate on the published price.
e) It is not generally accounted for.
a) It encourages the debtors to pay within specified time
b) It is allowed only at time of cash receipt or cash payment.
c) All categories of costumers are entitled to get it.
d) It calculated at a given late on the net amount payable.
e) It is accounted.

Difference between Cash Book and Cash Account
Cash Account
Cash Book
a)   It is an account in the ledger
a)    It is one of the subsidiary book in which all cash transactions are recorded
b)  Cash account is opened in the ledger and posting is done in this account from journal
b)    It is a book of original entry because all cash transactions are first of all recorded in cash book and then posted from cash book to various accounts in the ledger
c)   When cash transactions are already in journal, it is necessary to open a cash account in the ledger
c)     When cash transactions are recorded in cash book, there is no necessity to open a cash account in the ledger

Simple and Analytical Petty Cash Book
Large firms maintain their transactions through bank. They deposit cash and Cheques to meet their obligations to the creditors by issuing Cheques. Besides these transactions, the firm has to pay for petty and small expenses like postage, transportation, stationery that require very small amount, to pay these expenses through bank is very time consuming process. So, to facilitate immediate and easy payment, firms maintain a small amount of cash with them always. All the payments made through this amount and recorded in a separate cash book called ‘petty cash book’. The person who assists the head cashier in maintaining these books is called ‘petty cashier’.
The proforma resembles the cash book. All receipts are recorded on the debit side and all payments on the credit side. A detailed analysis of expenses will be shown on the credit side. Hence, the petty cash book is called as analytical petty cash book. These books help us to know the expenditure spent on each head.
Features of Petty Cash Book:
1.       The amount of cash received from head cashier is recorded on the left hand side column.
2.       Payment of petty cash expenses are recorded on the right hand side in the respective columns.
3.       It never shows credit balance because the cash payment can never exceed the cash receipts.
4.       Its balance represents unspent petty cash in hand.
5.       Recording is done on the basis of internal as-well-as external vouchers.
6.       Petty cash is both, a book of original entry as-well-as a book of final entry.

Following are the advantages of maintaining a petty cash book:
1.       Saving of time: The head cashier is not bothered to make petty expenses and record their entries. This saves his time which can be utilised for other important matters.
2.       Saving of labour: Petty Cash Book saves the labour of head cashier in recording each and every entry in Cash Book and posting them to the ledger accounts.
3.       Simple to adopt: This is a simple method. Imprest system of petty cash facilitates its easy use.
4.       Lesser mistakes: Since the petty cash book is maintained separately, the possibility of mistakes is reduced. The head cashier can check the accuracy of every entry.
5.       Control over payments: The head cashier supervises the maintenance of petty cash book and verifies the different payments from vouchers. This reduces the chances of fraud and wrong payment.

Imprest System of Petty Cash book:
In this system, petty cash requirements for a specific period of time, a week or month is estimated and that money is given to the petty cashier. The petty cashier makes payments for various expenses during the period and is reimburse exactly by the cashier at the end of the period. So, that he can start the next week or month with the full estimated money. This system of book keeping is called the ‘imprest system’.
Features of Imprest System of Petty Cash Book:
a)      Under this Imprest system, the amount of money in the petty cash is kept at a fixed sum or float which is depending on the size of the organization and its uses.
b)      An initial fixed amount is given to the cashier or the custodian. At each balancing period or when the fixed amount is utilized, a cheque or cash is issued for the exact amounts that have been utilized.
c)       The petty cash book looks much the same as the main cash book.


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