Chapter 1 BK book 2 - Intro PDF

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Chapter 1 COLUMNAR CASH BOOK

In this chapter, you will learn about:  Meaning of cash book  Types of cash book  Features of cash book  Advantages of cash book  How to prepare each type of cash book  Methods of posting two and three columns cash book  The differences between cash book and cash account  The different terms used in cash book Meaning of cash book Cash book is a book of original entry in which transactions relating only to cash receipts and payment are recorded in detail. There are cash books which are required to be maintained which are: (a) (b)

Receipt cash book: This records all cash received from whatever sources. Payment cash book: This records all payments made to various sources.

Columns of the cash book The cash book is divided into five columns which are: (a) Date: The date of transaction is written in this column in two lines. The first line is written the year while in the second line, is written the name of the month followed by the actual date. (b) Particulars: In this column, all details of the transactions made in short way are narrated. (c) Ledger folio (L.F): This is a page number which shows the reference of an account in ledger. (d) Amount: The value of the transaction is recorded in this column. The value of cash received is recorded on the debit side in amount column and the value of cash paid is recorded on the credit side in amount column. (e) Voucher number (V.NO.): Each voucher has a serial number. A voucher is necessary for each item of receipt and payment for reference purposes.

Demonstration of cash book

Cash book Date

Particulars

V.NO

Folio

Amount

Date

Particulars

V.NO

Folio

Amount

Types of cash books A cash book is a financial journal that contains all cash receipts and payments, including bank deposits and withdrawals. The following are the types of the cash books. (a) Single column cash book (b) Two (double) column cash book (c) Three (triple) column cash book (d) Petty cash book (e) The imprest system Single column cash book It is a cash book in which only cash transactions are recorded. The term single column means one amount column on each side of the cash book. One amount column on the debit side in which inflow of cash (cash received) is recorded and one amount column on the credit side in which outflow of cash (cash paid) is recorded. Advantages and disadvantages of single column cash book The following are some of the advantages of single column cash book: (a) Single entry system is easy and simple to understand, maintain and keep on its track. There are no fixed set of principles associated with single entry system, so, it is easier for implementation. (b) Single entry system is an economical system for implementation as it does not require skilled staff and professional accountants to do the accounting procedures. In addition to that, a large number of books are also not required to record the financial transactions in a single entry. (c) In a single entry system, it is easier to calculate the profit. The amount of loss and profit for a particular period can be obtained by computing the difference between the opening and the closing balance of the period.

The following are some of the disadvantages of single column cash book: (a) Single entry system is an unscientific and unsystematic system. There are not set rules or principles that made it a generic and standardize accounting system. (b) This kind of system is an incomplete system, as it does not record the two aspects of the accounting procedure. There are no records for nominal account or cash account. (c) Single entry system does not support advance computation such as extraction of trial balance. (d) It does not reflect the true profit or true loss that occurs in a certain accounting period. (e) There is a possibility great tendency of occurrence of fraud and error in this entry system. Illustration 1: Single column cash book Record the following transactions in cash book of Mapambano Company: 2016 Oct. 1 Oct. 3 Oct. 3 Oct. 4 Oct. 6 Oct. 8 Oct. 12 Oct. 15 Oct. 20 Oct. 22 Oct. 23 Oct. 28 Oct. 28

Solution:

Balance in band Paid by Ismail Purchased land Purchased machinery Purchased goods from Chamrangi & Co. (On credit) Sold goods received cash Paid Rahim Paid life insurance premium Cash sales Purchased goods on credit Received from debtors Paid rent Paid salary to Sachin (Accountant)

TZS 77,638 21,870 40,695 20,190 31,500 32,000 5,500 2,250 32,000 8,400 30,000 7,300 6,600

Books of Mapambano company Cash book Dr Date

Cr Particulars

2017 Oct. 01 Oct. 03 Oct. 08 Oct. 20 Oct. 23

To balance b/d To Ismail’s A/C To Sales A/C To Sales A/C To Debtors A/C

Nov. 01

To balance

V.N O Folio

Amount TZS

77,638 21,870 32,000 32,000 30,000

b/d

Date

Particulars

2017 Oct. 03 Oct. 04 Oct. 12 Oct. 13 Oct. 28 Oct. 28 Oct. 31

By land A/C By Machinery A/C By Rahim A/C By Drawings A/C By Rent A/C By Salaries A/C By balance c/d

V.N O Folio

193,508 110,773

Double column cash book Meaning of double column cash book. This is the cash book in which there are columns for cash balance as well as for bank balance. The cash column records all cash transactions while bank column records all transactions made through bank.

The need for two column cash book The following advantages are derived from double column cash book: (a) All entries made in `bank` column of double column cash book form a part of double entry system and hence a separate bank account is not needed to be opened in a ledger. This saves time and cost. (b) Both cash transactions and bank transactions are recorded in the same book. So, both cash balance and bank balance are easily available from the same book. Preparation of double column cash book When the bank column is maintained in the cash book, the bank account also is not opened in the ledger. The bank column serves the purpose of the bank account. Entries marked C (contra entries) are ignored when posting from the cash book to the ledger. These entries represent debit or credit of cash account against the bank account.

The following are the procedures to follow when preparing double column cash book.

Amount TZS

40,695 20,190 5,500 2,250 7,500 6,600 110,773 193,508

(i) Recording cash transactions: All cash receipts are recorded in cash column on the debit side and all cash payments are recorded in cash column on credit side of the double column cash book. (ii) Recording bank transactions: When a cheque is received and the same is deposited into the bank account on the same date, the amount of the cheque is entered in the bank column on the debit side. When a cheque is received and the same is not deposited into the bank on the same date, the amount of the cheque is entered in the cash column, not in the bank column. (iii) Recording contra entries: The word “contra” is a Latin word which means against or opposite. The contra entry is an entry which involves cash account and bank account and which is recorded on both debit and credit sides of the double column cash book at the same time. This entry is not posted to any ledger account because both debit and credit aspects of transaction are handled within the cash book and the double entry transaction is completed. (iv) Balancing and posting a double column cash book Both cash column and bank column of double column cash book are totalled and balanced at the end of an appropriate accounting period. The process of balancing and posting cash book has been explained in detail in single column cash book article. The same process is also applicable to a double column cash book. Illustration 2: Double column cash book Complete the double column cash book of Walwal for the following transactions in the year 2017:

Jan.1 Jan.2 Jan.4 Jan.6 Jan.9 Jan.12 Jan.15 Jan.18 Jan.20 Jan.22 Jan.24

Walwal a sole trader started a business with, TZS. 10,000,000 in cash She opened bank account and paid in TZS. 7,500,000 Purchased goods for resale by cheque TZS. 5,000,000 Bought furniture by cheque TZS. 1,500,000 Paid for transport TZS. 20,000 Cash sales TZS. 3,000,000 Cash sales paid direct into bank TZS. 2,000,000 Received cheque from Mussa TZS.1, 500,000 cash sales TZS. 780,000 paid cash into bank TZS. 1,700,000 Cash sales TZS. 1,700,000 Paid IPA by cheque TZS. 2,500,000

Jan.26 withdraw cash from bank TZS. 1,200,000 and paid salaries TZS.750, 000, rent TZS.750, 000 by cash. Jan. 29 Cash from bank TZS.720, 000 Solution: Walwal Two column cash book Date

Details

Foli o

Jan.1

Capital

GL

2 9 12 15 18 20 22 25 26

Cash Sales Sales Mussa Sales Cash Sales Bank Sales

Feb.1

C GL GL SL GL C GL C GL

Balance b/d

Bank Cash TZS TZS “000” “000” 10,000 7,500 3,000 2,000 1,500 780 1,700 1,700 1,200 720 17,400 6,680

Date

Details

Folio

Jan.2

Bank

C

4 6 6 20 24 25 26 26 31

Purchases Furniture Transport Bank IPA Cash Salaries Rent Balance c/d

GL GL GL C PL C GL GL

12,700 2,500

Dr

Bank Cash TZS TZS “000” “000” 7,500 5,000 1,500 20 1,700 2,500 1,200 750 750 6,680 17,400

2,500 12,700

Cr

Differences between single column cash book and double column cash book The following are the differences between single column cash book and double column cash book.

1.

Single column cash book Has one amount column in each side. All cash receipts are recorded on the debit side and all cash payment on the credit side. 2. Only cash account is shown.

Double column cash book Has two amount columns on both sides.

3.

There are columns for cash balance as well as for bank balance. Only cash transaction is Both bank and cash transaction are recorded.(excludes receipt and recorded. payments by cheque)

Three column cash book

Meaning of three column cash book. A three column cash book or treble column cash book is one in which there are three columns on each side - debit and credit side. One is used to record cash transactions, the second is used to record bank transactions and third is used to record discount received or paid. The three columns in cash book are: (a) Cash column (b) Bank column (c) Discount column Preparation of three column cash book  Whenever it is desired to ascertain the bank balance, the bank columns are totalled on both sides. If debit column is greater than the credit column, the difference represents cash at bank. If the credit column is greater than the debit column, the difference represents overdrawn balance.  Bank account may have an overdrawn balance due to arrangements done with the bank. An overdraft with the bank is the situation whereby more money has been withdrawn from the bank than what has been deposited.  The cash columns are entered in exactly the same way as the bank columns, cash received being debited, and cash payment being credited, in the cash columns. When cash is banked, the cash column must be credited and the bank column debited with the same amount. When cash is drawn from the bank, the bank column must be credited and cash column must be debited. Methods of posting three column cash book to ledger accounts The method of posting a three column cash book into ledger is as follows: (i) Opening balance: The opening balance of cash in hand and cash at bank are recorded on the debit side in cash and bank column respectively. If the bank balance is a credit balance (overdraft) then it is entered on the credit side in the bank column. (ii) Receipt of cheques or cash: If a cheque is received and is deposited into bank account in the same date it will appear on the debit side on the cash book in bank column. If the cheque is not deposited into bank on receipt of cash, it is recorded in the cash column in usual manner. (iii) Record payments made by cheque or cash: if payment is made by cheque, it will be recorded in the credit side in the bank column as the cash at bank is decreased. If the payment is made in cash, it will be recorded in cash column in usual manner. (iv) Recording of bank charges: Bank charges are recorded on the credit side of cash book in bank column because cash at bank is decreased as a result of such charges.

(v) Recoding cash transactions Recording a payment from the buyer to the seller that involves a cash discount, debit the cash account for the amount paid, debit a sales discounts expense account for the amount of the discount and credit the account receivable account for the full amount of the invoice being paid. Advantages of three column cash book (a) It is very helpful to the entity, since it reveals the cash and bank deposits at a glance. (b) Three column cash book records the transaction involving cash, bank and discount hence saving time to the entiy. (c) It is maintained by larger firm. Illustration 3.Three column cash book Complete the three column cash book for the given transactions of kupatana limited: Jan. 1. 2. 4. 5. 7. 9. 11. 11. 13. 15. 17. 20. 24. 27. 29. 30.

Balance brought forward cash TZS. 960, 000, bank TZS. 6,750,000. Cash sales TZS.2,700,000. Received cheque from Anna TZS. 4,000,000 less 10 per cent cash discount. Cash sales paid direct into bank TZS. 1,900,000. Paid IPA by cheque TZS. 5,000, 000 less TZS 250,000 cash discount Cash sales TZS. 2,800,000. Cash purchases TZS. 4,000,000. Paid for transport TZS. 50,000. Cash sales TZS. 2,560,000 less TZS. 60,000 cash discount. Paid cash into bank TZS. 5,000,000. Received cheque from Iddi TZS. 3, 000,000 less 10 per cent cash in discount. Received cheque TZS. 3,000,000 from Anna. Paid Patel by cheque TZS. 3,200,000 less 5% cash discount. Cash sales TZS. 2, 000,000 less 10% trade discount and 5% cash discount. With draw cash from bank TZS.1, 200,000 and paid TZS. 1, 200,000 salaries. Paid rent TZS.1, 200,000 by cash and deposit all cash in leaving a balance of TZS.500,000.

Solution:

Kupatana limited Three column cash book Date

Details

Jan.1

Balance b/d

2 4 5 9 13 15 17 20 27 29 30

Sales Anna Sales Sales Sales Cash Iddi Anna Sales Bank Cash

Feb.1

Balance b/d

Folio

Disc. Allowe d TZS “000”

Cash TZS “000”

960

Bank TZS “000”

Date

Details

6,750

Jan. 7 11 11 15 24 29 29 29 30 31

IPA

250

Purchase Transport Bank Patel Cash Salaries Rent Bank Balance c/d

200

2,700 400

60

3,600 1,900 2,800 2,500 5,000 2,700 2,100

300 90

1,710 2,000

Fol io

920 850 12,670 23,370 500 13,180

Disc. Receive d TZS “000”

Cash TZS “000”

4,750 3,800 50 5,000

160

3,040 2,000 1,200 1,200 920 500

13,180

610 12,670

23,370

Features of a cash book Cash book have the following main features, these are as follows: (a) It plays a dual role. It is both a book of original entry as well as a book of final entry. All cash transactions are primarily recorded in it as soon as they take place; so it is a journal (a book of original entry). (b) Only one aspect of cash transaction is posted to the ledger account. The other aspect (i.e. cash aspect) is not posted in cash account. Since the cash book is the substitute for cash account, the cash account is not opened in the ledger. (c) It has two identical sides; left hand side which is the debit side and right hand side which is the credit side. (d) All the items of cash receipts are recorded on the left hand side and all items of cash payments on the right hand side in sequential order. (e) The difference between the total of two sides indicates cash in hand.

Bank TZS “000”

(f) Its balance is verified by counting actual cash in the cash box. (g) It always show debit balance. It cannot show credit balance. Differences between cash book and cash account. 1.

2.

3. 4.

Cash book It is a separate book in which transactions are directly recorded. It serves the purpose of both journal and ledger and hence, no need of cash transactions to be primarily recorded in journal. Narration is required. A column for ledger folio is provided.

Cash account It is an account in a ledger in which posting is made from journal. It serves the purpose of a ledger only. If cash account is opened in the ledger, all cash transactions are first recorded in journal. Narration is not required. A column for journal folio is provided.

Contra entry  A contra entry is an entry which is recorded to reverse or offset on the other side of an account.  If a debit entry is recorded in an account, it will be recorded on the credit side and vice versa.  Debit and credit aspects of single transactions are entered in the same account but in different columns. Each entry in this case is viewed as a contra entry of the other. Remember the word ‘contra’ stands as against or opposite. Illustration 4: Contra entry Cash 50,000 TZS was withdrawn for an official purpose from the bank. Journal entry for this transaction will be.

Cash A/c To Bank A/c

TZS 50,000 50,000

In the above example, both entries, debit and credit are contra entry of each other, they both offset each other. The narration is not required for such an entry and only a ‘C’ is written in the left column which shows the contra entry.

Illustration 5: Contra entry Cash 10,000 TZS received from a debtor is deposited into the bank.

TZS Bank A/c 10,000 To cash A/c 10,000 The above amount is recorded in the bank column (debit) side of the double column cash book. A contra entry is also used in the intercompany meeting to offset receivable and payable between two different entities so that one amount remains among them. Treatment of contra entry Contra entry is book keeping entry that is entered on the opposite side of an earlier entry to cancel its effect on the account balance. Contra entry is recorded in the journal by making “c” in particular column after ledger name. Contra entries are used in the following situations: (a) (b) (c)

When cash is deposited to bank. When cash is withdrawn from bank. When fund is transferred from one bank account to another.

Situation: Deposit money into bank 5,000,000 TZS Debit: Bank account 5,000,000 TZS Credit: Cash 5,000,000 TZS

Contrary situation: Withdraw money from bank Debit: cash 5,000,000 TZS Credit: Bank account 5,000,000 TZS

Note: Contra entry has no ultimate effect in the business. When a contra entry is made, the effect is transferred from one account to another, as there is no result created in the business. For example, when cash is deposited to bank, it just moving of fund (current asset) from cash account to bank account. Hence, in the balance sheet, amount is floated from one item to another on the same side. Balancing the cash book The cash book is balanced in the same way as a ledger account. A single column cash book always show debit balance (debit side exceeding credit side) due to the fact that more cash cannot be paid than amount on hand. In order to verify the accuracy of the cash book, it should be balanced daily. The balance as per the cash book must tally with the actual cash in the cash box. Illustration 6: Balancing of cash book Msemakweli Company uses a single column cash book to record all cash transacti...