Accounts
June 30, 2023
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Every business regardless of how big or small has to maintain proper accounts, without which it is not possible to ascertain the financial status of that organization.
In financial accounting, several journals and ledgers are used.
Today, let us take a close look at a cash book , why it is important, and what advantages or benefits it provides.
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A cash book is an accounting book that is used to record all receipts and payments made in cash; this includes deposits to the bank and withdrawals as well.
These cash book entries are subsequently posted to the general ledger.
So, one can say that it is a subsidiary book of the general ledger which contains details of all cash transactions that happen during a specific period.
Transactions are recorded as they happen, in chronological order.
It is updated continuously, and the balance is calculated, verified, and carried forward on a daily basis.
Often, large companies that have innumerable cash transactions every day, maintain two cash books – a cash receipts journal and cash payments journal.
It must be remembered that it is not the same as a cash account, which is an account within the general ledger.
There are three main types of cash books: single-column, double-column, and triple-column.
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Let us take a quick look at the features of a cash book:
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A cash book functions as the general ledger’s subsidiary wherein all cash transactions made in a period are recorded in their order of occurrence.
Large companies with complex operations and tons of cash transactions are likely to maintain a Cash Receipts Journal for recording all the cash that comes into the business, and a Cash Payments Journal to record all payments made in cash by the business during the accounting period.
The Cash Receipts Journal includes all such items as money received from customers on pending bills, cash sales, and any other transactions that reduce the accounts receivables by the business.
On the other hand, the Cash Payment Journal includes all items like payments made on outstanding invoices to suppliers, and cash purchases; items that will help reduce the accounts payables by the business.
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A daybook is usually used in a manual accounting system, to record transactions as they take place, throughout the day.
The entries are then posted to various ledgers based on the nature of the transaction.
The difference between a cash book and daybook is that, while a daybook records every transaction, a cash book records only cash transactions that take place.
Some businesses may maintain multiple-day books for different categories of financial transactions; however, there is only one cash book that is maintained.
Large businesses may maintain separate cash books for receipts and payments, which is not the manner in which transactions are recorded in a day book.
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A cash book records all cash transactions, but a cash account is an account in a general ledger.
A cash book can function as a journal and ledger, but a cash account structure is similar to a ledger.
The cash book includes narrations with details regarding the use or source of the cash, which is not found in a cash account.
Businesses prefer cash books over cash account as they can easily determine cash balances every day; these are also easy to calculate and access.
The verification process helps to spot errors quickly, and thanks to the daily verification of cash balances, the entries are always kept up to date.
However, the cash account balances are generally reconciled only at the end of the month, once the bank issues the monthly statement.
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A cash book has two sides, like any other accounting book: debit and credit.
All cash receipts are recorded as debits on the left-hand side, and all cash payments are recorded as credits on the right-hand side.
The balance of cash is arrived at by finding the difference between the debit and credit sides.
If the cash flow is positive, there will be a debit balance, and if the cash flow is inadequate, it will show a credit balance.
The cash book structure is made up of columns and can be in single, double, or triple columns.
In a single-column cash book, only cash receipts and payments are recorded.
In a dual column cash book, you can find details of bank transactions in addition to cash payments and receipts.
In a triple-column cash book, all these details are recorded, and additionally, as details of sales or purchase discounts.
In a single column cash book, you will find four headings – Date, Details, Amount, Folio or Reference Number, ad Amount.
These headings are on both receipts (left) side, and payments (right) side. The date column of course, mentions the transaction date.
As it is continuously updated, a cash book is in chronological order of transaction.
In the Details column, you will find a narration about the transaction, and the account number is written in the Reference Number column.
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To start your cash book, make a list of the amount of cash with which you started the petty cash fund.
As the next step, make a list of all the purchases paid for with this fund, and subtract that amount.
Once the amount is exhausted, you need to add more cash into it, and make a note of it.
You must reconcile the account by ensuring the fund amount and the book balance are the same, at regular intervals.
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The cash book should contain records of all legitimate business transactions, whether expenses or receipts.
For example, money paid for office stationery, raw materials, wages, repairs, etc. are legitimate business expenses.
Cash paid for purchasing personal products should not be entered in the cash book.
Similarly, cash received from sales, and debtors’ payments should be recorded in the cash book as they are legitimate business receipts – not personal loans received, and so on.
Legitimate business expenses should be transferred to the ledger, and you can claim the expenses as deductions after assigning them to the proper categories.
The amounts of money you withdraw from your bank account for funding your petty cash, must be noted in the bank ledger so that you have a proper record of the same.
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Deciding which purchases are the most relevant for cash book accounting can be a bit confusing.
Unauthorized employees may issue cheques or make use of the company credit cards to make purchases (from the petty cash fund) that may be big enough to warrant other payment forms.
If you become too dependent on petty cash purchases, you could end up spending excessively for things that could have been purchased more economically through wholesale vendors instead.
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Manual bookkeeping is not only cumbersome and time-consuming, but is also prone to errors.
A single mistake can have a cascading effect, and impact your financial statements too.
A good solution is to automate and streamline your Accounts functions with reliable ERP software like Tranquil which has a robust Accounts module.
This will help you save time, effort, and money, and ensure accuracy in records.
Moreover, you can leverage the excellent reporting ability of the software and get different types of reports to determine the financial standing of your business.
Still unsure how it will help you? Do schedule a demo at your convenience, and we will be happy to show you how it works. Our representatives will be happy to resolve all your queries.
