Cash BookDefined with Examples & How it Works
When somebody asks you what’s the most important resource to have when starting a business, what would be your answer?
It’d probably be cash right?
It’s the lifeblood of a business after all.
Without cash, your business won’t have the resources to acquire other assets such as capital assets, and even personnel.
In fact, if a business is deemed to have insufficient cash, it’d be more exposed to the risk of bankruptcy.
In the worst case, the business might cease to exist.
Take a look at a business’s balance sheet.
What’s the first asset account that you see, the one that’s first listed?
It’s probably cash.
Well, it’s no secret- cash is important for a business.
It’s why businesses put more emphasis on the security and management of their cash.
On top of that, there are many tools available that can help in the management of a business’s cash.
One of these tools is called the “Cash Book”.
A typical cash book will chronicle all of a business’s cash transactions.
It will also provide the business’s cash balance at a certain period (e.g. end of the day, week, month, year).
This article aims to equip you with knowledge about the cash book, the different types of cash books, and why you should be keeping one.
If you want to expand your knowledge on one of the tools that help with cash management, then read on.
What is a Cash Book?
A cash book is an accounting book that records all of a business’s cash transactions.
Not only that, it records these transactions in detail and chronological order.
It’s pretty similar to the cash account that you’ll find in a general ledger in that it keeps track of a business’s cash transactions.
But a cash book does more than a cash account. The former often provides more detail than the latter.
A typical cash book will have a detailed record of all a business’s cash transactions.
These transactions are recorded in chronological order too.
Some cash books also include bank account transactions, some even details on cash discounts (be it on sales or from purchases).
At the end of the period, the cash balance will be computed and shown.
The balance should be a debit balance as cash is an asset account.
Whenever a cash transaction occurs (be it a cash receipt or cash disbursement), it will be recorded on the cash book.
This makes the cash book one of the books of original entry.
For example, a business receives $2,000 cash when it made a sale.
This transaction will be recorded in the cash book as a cash receipt, along with other details such as the date of transaction, a short description, the source document, etc.
Recording cash transactions with a cash book makes it easier for a business to monitor its cash balance.
The detailed recording of transactions makes it easier to find and identify mistakes, errors, and/or discrepancies.
As cash transactions often occur daily, a cash book can provide an updated balance of a business’s cash.
The Cash Book – Is it a Journal or a Ledger?
Some consider the cash book as a journal, while some consider it as a ledger.
They’re both correct – a cash book is a notable special journal as it functions both as a journal and as a ledger.
That means that a cash book acts as a book of original entry as well as a book of final entry.
The cash book as a journal
The cash book has the following functions as a journal:
- Cash transactions are first recorded in a cash book when they occur
- Transactions are recorded in chronological order
- Details about a transaction such as a reference to the source document, monetary amount, and description can be found on a cash book
- It is a special journal that only accounts for cash transactions
The cash book as a ledger
The cash book has the following functions as a ledger:
- A cash book will usually have a similar format to that of a ledger account
- Unlike many other special journals, the cash book has debit and credit columns – a feature that is often found on ledgers
- As a cash book already provides us with the ending balance of cash, the preparation of a cash account on a ledger is no longer needed
- Similar to other ledger accounts, the balance shown in a cash book is used for the preparations of the trial balance and other financial statements
Because of the functions presented above, a cash book can be considered as a journal and a ledger at the same time.
Why Maintaining a Cash Book is Worth it
The main reason why a business would prepare and maintain a cash book is to manage cash efficiently.
With a cash book, all transactions can be recorded in chronological order making it easier to track when a mistake or error occurs.
Since details of the transactions are also included, it’d be easier to know what type of cash transaction is made, and which source document it should be compared to.
A cash book is often updated too which gives it the ability to provide an up-to-date balance of a business’s cash.
Imagine having to look up at a general journal every time you want to inquire about the cash transactions of the business.
Then you have to sum it all up to get the cash balance.
Sure, you can consult the cash account in the general ledger for that, but a general ledger is typically only updated at the end of a month.
What if you want to know the cash balance in the middle of the month?
Besides, a general ledger does not provide details of a transaction.
So to summarize, look up all the cash transactions in the general journal, add it all up, or wait for the end of the month to consult the general ledger.
Sound tiring huh? Imagine having to do it hundreds or thousands of times in a day… yeah, it’s not pleasant to think about.
Thankfully, with a cash book, you don’t have to do all that as everything you need to learn about a business’s cash transactions can be found in it.
This is especially useful if your business has a large volume of cash transactions.
Some business even split their cash books into two, sometimes three: the cash receipts book which records every cash inflow; the cash disbursements book which records every cash outflow; and sometimes the petty cash book which records every petty cash transaction.
Advantages of Maintaining a Cash Book
Aside from providing an efficient way of managing cash, a cash book can provide the following advantages:
- A cash book functions both as a journal and as a ledger; This saves time as you no longer have to prepare a cash account in the general ledger
- All cash receipts and disbursements can be found in a cash book; this makes it easier to track a particular cash transaction for internal or external audits
- A cash book is updated regularly and can provide you with the current cash balance at any given time; the cash balance found on the cash book can then be compared with cash on hand or in a cash box; if there’s any discrepancy, then it should be noted
- Segregating cash transactions, especially if your business has large a volume for them, prevents the overcrowding of your general journal
- Cash transactions are recorded in a cash book in chronological order; that means that it’s easier to gather information of all of the cash transactions in a certain period, say a month or a quarter
- A cash book, along with proper internal controls, can help in the prevention of fraud and embezzlement; an example of internal control is to assign the responsibility of maintaining the cash book and the responsibility of safekeeping the cash box to two different and unrelated persons
The Three Types of Cash Books
A cash book can either be single column, double column, or triple column.
Whatever the type of cash book it is, it will always have two sides: the debit side and the credit side.
The debit side is on the left-hand side of a cash book.
It is where you record all of your business’s cash receipts.
Whenever your business receives cash, you record it on the debit side.
The credit side is on the right-hand side of a cash book.
It is where you record all of your business’s cash payments or disbursements.
The difference between the debit side and credit is the current balance of cash.
It must be a debit balance as cash is an asset account
Single Column Cash Book
Also referred to as the simple cash book, a single column cash book typically only contains a business’s cash transaction.
As the name implies, a single column cash book will only have one money column on each side.
Because of this, only “cash on hand” transactions can be found on a single column cash book.
Cash in bank and discount transactions are not recorded in this type of cash book.
They are instead recorded in their separate ledger accounts.
To illustrate how cash transactions are recorded in a single cash book, let’s have a simple example.
Company PL has the following transactions in July 2021:
|2-Jul||Purchased raw materials amounting to $5,000 from company VC; Paid in cash|
|4-Jul||Paid for advertisement in the amount of $300; Paid in cash|
|5-Jul||Paid salaries and wages of employees amounting to $4,000; Paid in cash|
|8-Jul||Received cash payment from company MT of $6,000 for goods sold on credit on June 12, 2021|
|9-Jul||Made credit sale to company JL in the amount of $3,000|
|11-Jul||Issued check to company AB for $2,450 as payment for previous purchases|
|15-Jul||Received a check worth $6,300 from company LB for goods sold on credit on June 16, 2021|
|17-Jul||Paid rent of $3,000; Paid in cash|
|19-Jul||Purchased raw materials amounting to $3,500 from company VC on credit|
|20-Jul||Paid salaries and wages of employees amounting to $4,000; Paid in cash|
|21-Jul||Withdrew $10,000 from bank to be used for business|
|26-Jul||Purchased office supplies amounting to $600; Paid in cash|
|30-Jul||Made cash sale to company KN in the amount of $7,000|
|31-Jul||Received a check worth $7,800 from company ES for goods sold on credit on June 15, 2021|
In addition, company PL has a cash on hand balance of $15,000 as of June 30, 2021, which is carried over as the beginning balance of July 1, 2021.
First, let’s tackle each transaction and decide whether or not it should be recorded in a single column cash book.
July 2 – is a purchase transaction made with cash. It should be recorded in a single column cash book
July 4 – is a transaction made with cash. It should be recorded in a single column cash book
July 5 – is a transaction made with cash. It should be recorded in a single column cash book
July 8 – is a cash receipts transaction. It should be recorded in a single column cash book
July 9 – is a credit sale transaction. It does not involve cash and should not be recorded in a cash book
July 11 – is a “cash in bank” transaction. It cannot be recorded in a single column cash book
July 15 – is a “cash in bank” transaction. It cannot be recorded in a single column cash book
July 17 – is a transaction made with cash. It should be recorded in a single column cash book
July 19 – is a purchase transaction made on credit. It does not involve cash and should not be recorded in a cash book
July 20 – is a transaction made with cash. It should be recorded in a single column cash book
July 23 – is a contra entry transaction. It increases cash on hand, but does not increase the total cash of the company PL. It should be recorded in a single column cash book
July 26 – is a transaction made with cash. It should be recorded in a single column cash book
July 30 – is a cash receipts transaction. It should be recorded in a single column cash book
July 31 – is a “cash in bank” transaction. It cannot be recorded in a single column cash book
Now that we have identified which transactions are to be recorded in a single column cash book, let’s proceed with the recording:
Double Column Cash Book
A double column cash book functions similarly to a single column cash book in that it records all cash transactions.
However, a double column cash book has an additional money column for each side.
One column is for cash on hand transactions, while another column is for cash in bank transactions.
Some businesses use the extra column for sales and purchase discounts.
A double column cash book contains more than a single column cash book as it also records bank transactions.
It eliminates the need to maintain a “cash in bank” account in the general ledger.
To illustrate, let’s once again use the company PL example above.
There were “cash in bank” transactions that we were not able to record. With a double column cash book, we can now record these “cash in bank” transactions.
In addition to the information above, let’s assume that company PL has beginning cash in bank balance of $120,000 as of July 1, 2020:
Triple Column Cash Book
A triple column cash book is leaps ahead of the single and double column cash books – it has three money columns!
This way, a triple column cash book can record cash and bank transactions, as well as any cash discounts.
Discounts granted for sales are recorded on the debit side. Discounts received from purchases are recorded on the credit side.
A triple column cash book is particularly useful for businesses that frequently grants and avail of cash discounts.
A typical triple column cash book will look like this:
Notice that each side has three money columns: cash on hand, cash in bank, and discount allowed/received.
A cash book is a useful tool for cash management.
Maintaining one properly is essential for good and strong bookkeeping and accounting.
With proper internal controls in place, a business can protect its most liquid asset: cash.
As a cash book can contain information regarding all of a business’s cash transactions, it paves the way to efficient cash management.
It is highly recommended that you maintain a cash book for your business (unless it has very low cash transactions).
With one, you can manage your business’s cash much easier.
You’d have easier access to information about your business’s cash transactions too.
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University of Wisconsin "THE EVALUATION OF MODERN BUSINESS ACCOUNTING RECORD" White paper. November 23, 2021