Cash Book

Our discussions on the recording of payments and receipts have so far centred around the bank account in the form of “T” account in the general ledger. We have seen that inputs of money (receipts) are recorded on the debit side, while payments are recorded on the credit side.

While this concept is a useful tool for understanding double entry at a higher level, in practice, most businesses prefer to record these transactions in a cash book.

Why do we need a cash book?

There are plenty of reasons. When a payment is made or received, multiple postings need to be made. If we have received a payment from a debtor, the gross receipt needs to be debited in the bank account, and credited to the sales (subsidiary) ledger account while a summary total is credited to the debtors control account (SLCA).

If we have received payment for a cash sale on the other hand, we would need to debit bank with the gross receipt and credit the amount net of VAT to the sales account and the VAT figure to the VAT control account. We also like to see each transaction analysed out on a seperate line - it makes life easier. There is also likely to be a high volume of transactions – much more than is shown below.

This is simply too detailed to go into a “T” account. We can see below how this looks in a receipts page in the cash book.

CBR_2 1

Recording the receipts

This example follows on from the discussion on control accounts, where a week has passed and we have received some payments. In this accounting system, the cash book is part of the double entry. This means that the total column is equivalent to the debit side of the bank “T” account.

First notice that the cash book opens with “Balance b/d” of £759.50. Since this is cash book “receipts”, it corresponds to the debit side of a “T” account and shows the balance is in the “black”.

Cash sales
The first entry is for sales. This is a cash sale, which means goods were paid for on the spot – no debtors are involved. The VAT amount is shown separately from sales, which is the amount excluding VAT. The total figure - £634.80 – represents a debit entry in the bank account.

Receipts from debtors
Next we received a payment from Doyle Ltd. Recall from the discussion on control accounts, we recorded a credit sale on 6 Jan to Doyle Ltd for £1493.75 in total, for a sale of £1250.00 excluding VAT.

Note also that it was at that time that the sales and VAT amounts were posted to the general ledger. Now we’ve received payment, we don’t need to record that again, as we did for the cash sale above. We do however need to record a credit to the debtors control account (SLCA) and the sales (subsidiary) ledger.

Discount was taken
Now notice that we’ve received £1462.50, not the £1493.75 originally invoiced. Doyle Ltd has taken £31.25 discount for early settlement. This is recorded in the discount column. At the end of the week, all the columns are totalled, and the postings are made.

Posting the ledger summaries

  • VAT control is credited with £266.79, which is how much is added to what we owe HMRC.
  • Sales are credited with £1333.95, which is the total amount of cash sales made that week.
  • SLCA is credited with £4262.65 which is the amount received from the debtors. This should net off what they owe us on the debit side, but it doesn’t quite do that. The reason is because some have paid less that the amount showing on the debit side due to discounts. We therefore post the £76.12 discount to the credit side of the SLCA – now both sides balance. But there is more – we can’t just post a discount to one side of the double entry without posting to the other. The other side in this instance is the discount account.
    • In summary
      The double entry is therefore £6622.89 as a debit to the bank account and credits to VAT, sales and SLCA. Discount has both a credit and debit entry for the same amount. Both sides of the double entry now balance. Since the cash book IS part of the double entry, the £6622.89 is not posted anywhere else – it is effectively already the debit side of the bank account.

The other side - Payments

CBP 1

We can see a cash purchase with separate entries for VAT and the purchases account. Then we have made payment for a credit purchase from Staples Ltd. Again, the purchase and VAT would have already been recorded in the purchases day book. We just need to post to the purchases (subsidiary) ledger and the creditors control account (PLCA).

Again, the columns are totalled at the end of the week and posted as shown to the general ledger accounts.

Balancing off

We cannot just total up the receipts and payments pages and leave things like that, because we wouldn't easily be able to tell what the net position is. Balancing "T" account has already been discussed, and this is no different in principle - we just have the debit and credit on different pages and it is only the total column that is balanced.

The total figure is compared with the total from the receipts page, and the difference recorded under “Balance c/d” to make both totals the same. The Balance c/d of £1840.89 is then posted as “Balance b/d” on the receipts page.

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