Cash Disbursements JournalDefined with Examples
As a business owner, it’s always a sad sight to see your cash leave your hands.
However, you have to think about your creditors, suppliers, and service providers too.
What if they don’t get the cash they were expecting to get?
What if they plan to use such cash to purchase the materials they need to produce the supplies you need?
If they can no longer supply or provide you with their products and services because they don’t have the means to do so, what then?
Now apply it to your situation.
What if your debtors or customers decide not to pay you anymore because they don’t want to part with their money?
Will you be able to buy and pay for the business’s needed supplies then?
Yes, it’s sad to see your cash go, but it is necessary for the continued operation of your business.
Cash payments or disbursements are just a natural part of a business.
To purchase the needed supplies to produce your products, you’ll need to pay for them with cash.
To acquire capital assets necessary for operations, you’ll need to shell out cash.
Want to make sure that you’re employees are satisfied and won’t leave you?
Then you’ll need to pay their salaries and wages with – guess what? Cash!
That doesn’t mean that you can go ham with your cash disbursements though.
What I mean is that you cannot spend your cash without proper documentation.
You still need to account for every outflow of cash.
It’s what cash management is for.
Accounting for cash can be done in many ways.
There is the tried and true practice of using a general journal.
With a general journal, you’ll have a record of all your business’s transactions. That includes cash payments or disbursements of course.
But if you want to segregate all of the cash transactions, then you can use the cash book.
It is a hybrid of a journal and a ledger that chronicles all the cash transactions of a business. Needless to say, cash transactions include cash payments.
If you want to take it a little bit further and have an accounting record that only covers cash payments, then there’s a specific special journal for that. I
t’s called the Cash Disbursements Journal – an accounting record that is dedicated to recording all cash outflows of a business.
What is a cash disbursements journal?
A cash disbursements journal (also referred to as a cash payments journal) is a special journal that records all of a business’s cash payments or outflows.
In bookkeeping terms, it is a journal that records every transaction that credits cash.
Whenever cash payment occurs, it will first be recorded in a cash disbursements journal before posting to other accounting records.
This makes the cash disbursements journal a book of original entry.
Some examples of cash payments that are recorded in a cash disbursements journal are the following:
- Payment made to creditors (e.g. accounts payable, loans payable, etc.)
- Cash purchases of merchandise or materials
- Acquisition of capital assets which is paid in cash
- Payment of cash dividends
- Cash payment for expenses such as rent, utility costs, salaries and wages, etc.
- Refunds for cash sales that were returned
- Cash payment for interest and other finance charges
Like any other journal, a cash disbursements journal records a business’s cash outflows in chronological order.
It can be customized according to the business’s or users’ needs, however, it must have the following information at minimum:
- Date of the transaction
- Check number if a business issues bank checks for payments
- Description of the transactions (can also be called particulars, narration, or explanation)
- The monetary amount of transactions
- Credit columns for cash and/or other accounts
- Debit columns for other accounts (e.g. expenses, accounts payable, capital assets, etc.)
Here’s a simple illustration of a cash disbursements journal:
Additional columns can be added such as the payee’s name, a credit column for each bank account, a debit column for a specific expense (e.g. supplies, rent, utility).
Note that a cash disbursements journal records every cash outflow.
This means that aside from actual cash payments, checks and other types of payment are included too.
It’s similar to a triple column cash book in that it has money columns for cash and bank transactions, as well as discounts.
Though, a cash disbursements journal only records cash outflows whereas a cash book records both inflows and outflows.
Speaking of cash books, the cash disbursements journal is actually derived from one.
A cash book can be further segregated into two journals: the cash disbursements journal which only records cash outflows; and the cash receipts journal which only records cash inflows.
Small and some medium businesses only use cash books to record their cash transactions.
This is because the volume of cash outflow transactions may not be enough to warrant maintaining a cash disbursements journal.
However, for businesses that have a lot of cash transactions, particularly cash payments/disbursements, then a cash disbursements journal is essential for efficient cash management.
Why prepare and maintain a cash disbursements journal?
To reiterate what is written above, a business may want to maintain a cash disbursements journal if it has a large volume of cash outflow transactions.
Even so, there is no strict guideline as to who is allowed to prepare and maintain a cash disbursements journal.
You may prepare one for your business even its volume of cash outflow transactions is low.
With a cash disbursements journal, you can segregate all of a business’s cash outflow transactions.
This includes actual cash payments as well as check payments.
Since all cash outflow transactions are recorded in one place, it makes them easier to manage.
It can also be a good source of information regarding individual payment transactions.
A cash disbursements journal is summarized at the end of the period, usually a month.
The total cash outflow is then posted to the general ledger, along with the total cash inflow (which can be derived from the cash receipts journal).
A summary of total cash outflows and inflows may also be prepared to check the net cash flow of a certain period.
Ideally, total cash inflow should be greater than total cash outflow but that isn’t always the case in reality. This is especially true for businesses that are greatly affected by seasonal factors.
Management can use the cash disbursements journal to assess the business’s cash outflow.
It can also be used to examine whether there are expenses that are unusual or unauthorized. This way, it’s easier to track mistakes or errors.
Recording cash payments in a cash disbursements journal
To illustrate how to record transactions in a cash disbursements journal, let’s do an exercise.
Company XZ has the following cash outflow transactions in August 2021:
|2-Aug||Purchased merchandise from company AL for $5,700; Paid in cash|
|4-Aug||Issued check#1211 to company BM in the amount of $7,600 as payment for previous purchases|
|5-Aug||Paid salaries and wages of employees amounting to $6,000; Paid in cash|
|8-Aug||Purchased office supplies from company HD for $800; Paid in cash|
|10-Aug||Paid rent in the amount of $7,000; Paid in cash|
|11-Aug||Paid for utility costs amounting to $5,455; Paid in cash|
|15-Aug||Issued check#1212 to bank A in the amount of $9,600 as loan repayment of which $3,600 is interest|
|16-Aug||Purchased merchandise from company DG for $11,700; Issued check#1213|
|19-Aug||Acquired a piece of equipment from company YA costing $50,000. $25,000 of cash was paid upfront. The remaining balance will be paid on September 18, 2021|
|20-Aug||Paid salaries and wages of employees amounting to $6,000; Paid in cash|
|23-Aug||Paid $4,750 in cash to company LK as payment for the previous purchase of $5,000; $250 was granted as purchase discount|
|28-Aug||Purchased merchandise from company EH for $9,300; Issued check#1214|
To record the above transactions, you must:
- First, enter the transaction date. This is important as a cash disbursements journal records transactions in chronological order
- Next, enter the check number if a check was issued
- After, write a short description of the transaction
- You then enter the amount to be credited on the proper credit columns
- Finally, Enter the amount to be debited on the proper debit columns
- You may want to check if the credit and debit columns match
Now let’s apply the steps for every transaction:
It should be noted that there is no universal format for cash disbursements journals.
Depending on the needs of the business, it may include more credit and debit columns as well as more details (ledger account number, folio number, reference number, etc.).
You may also prepare several cash disbursements journals for every bank account, as well as a separate journal for “cash on hand” transactions.
Cash Disbursements Journal vs Cash Book
A cash disbursements journal and a cash book function similarly in that both record a business’s cash transactions.
However, a cash disbursements journal only records cash outflow transactions.
A cash book on the other hand records both cash inflow and outflow transactions.
Depending on the type of cash book, it may include cash and bank transactions.
Particularly double column and triple column cash books include bank transactions.
A cash disbursements journal on the other hand includes all cash outflow transactions, be it actual cash or any other form of payments (e.g. check, electronic transfer, etc.).
A cash disbursements journal does not eliminate the need to maintain a cash account on the general ledger.
This is because it functions only as a journal. A cash book on the other hand functions as both a journal and a ledger. This means that maintaining a cash book eliminates the need to maintain a cash account on the general ledger.
Cash Disbursements Journal vs Cash Receipts Journal
A cash disbursements journal only records cash outflow transactions. That means any transaction that credits cash is recorded in a cash disbursements journal.
A cash receipts journal does the opposite – it only records cash inflow transactions.
That means any transaction that debits cash is recorded in a cash receipts journal. In a way, the two complement each other.
Both cash disbursements journal and cash receipts journal are derived from the cash book.
They are usually prepared and maintained if a business has a large volume of cash transactions, be it cash inflow or outflow.
Recording an entry for both books follows a similar pattern, except that a cash disbursements journal credits cash, while cash receipts journal debits cash.
At the end of the period, usually a month, both books are summarized. The data gathered are then posted on the general ledger.
Both are useful tools for efficient cash management.
Internal controls checklist for cash payments/disbursements
With proper maintenance of your cash disbursements journal and well-designed internal controls, you can safeguard your business’s most liquid asset: cash.
Here are some common internal control questions that can help in designing your internal controls for cash payments:
- Is there segregation of duties (maintaining the cash disbursements journal, safekeeping of cash, authorization of cash or check payments)?
- Except for petty cash payments, are all payments made by pre-numbered checks?
- Are canceled or voided checks properly filed after mutilation?
- What’s the threshold for cash payments before a signatory is required?
- Do larger checks require more than one signature?
- Is a cash disbursement voucher prepared for each invoice or reimbursement request?
- Are employees required to attach proof of expenses when they make a request for reimbursement? Before approval, are these supporting documents thoroughly checked before approval?
- Are checks pre-signed? Is there a prohibition against the advance signing of checks?
- Are all purchases made on credit?
- Does the business store cash within its premises?
For more internal control questions, you may check this page.
FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.
Sacramenta State "1 Purchases and Cash Disbursements System" Chapter 4. November 23, 2021
University of Wisconsin "THE EVALUATION OF MODERN BUSINESS ACCOUNTING RECORD" White paper. November 23, 2021