Cash

1 Introduction

This chapter shows the use of the cash book and petty cash book.

2 The cash books in the accounting system

The cash book and the petty cash book are books of prime entry and are part of the double entry system. The cash book records the flows of money in the bank account of the business; the petty cash book records relatively small amounts of cash expenditure on items like paying for coffee for the office, reimbursing employees for taxi fares, buying some pens for cash from the local stationery shop.

3 Types of payment from the bank

Payments can be made from a bank account in four main ways:

• Cheque. A written order to the business's bank to pay an amount to the payee.

  Cheque details are entered into the business’s cash book as they are made out. However, it can be some time before that cheque arrives with the payee and who might delay paying it in. Until the money is taken from payer’s bank account the cheque is described as ‘unpresented’.
  

• Internet transfer: now very common. It is vitally important that account log-on details are kept secure. In addition to user-known passwords, some banks now issue devices that generate unique use-once codes. Access to the bank account is then possible only by someone who both knows the password and who possesses the device.
  

• Direct debit. Here the person receiving the funds has the right to extract them from the bank account. This is often used by institutions like insurance companies to collect insurance premiums from clients. The process can be completely automated.
  

• Standing order. Here the person paying instructs their bank to pay a regular amount to the recipient. This is often used to pay regular amounts like rent. The process can be completely automated.
  

In addition, banks can remove funds from accounts for interest and bank charges.

4 The cash book

The cash book is the cash account of the business and is where bank account receipts and payments are recorded. In a simple ‘T’ account it would look like;

Notes:

1. At the start of the period there is cash of $1,200.
   

2. The receipts from Smith and Bodkin will be the settlement of sales invoices.
   

3. The payments to Clark and Drake will be the payment for purchases invoices.
   

4. At the end of the period there is cash of $372
   

Although the cash book would work perfectly well in this format, it does mean that every entry has to be posted individually to the other side of an account in the general ledger. A more efficient arrangement would be as follows:

This is called an analysed cash book.

Remember, the cash book is part of the double entry, so the debit entries in the cash book are debits in the double entry system. However, their corresponding credit entries for those items have not been made. The entries required can be made from the total of each column:

Cr   Sales               360

Cr   Receivables ledger control account   960

In addition, the memoranda accounts of A Smith and B Bodkin in the Receivables ledger would have to be updated.

Similarly, the credit entries have been recorded in the double entry system, but the corresponding debit entries for those items have not been. The entries required can be made from the total of each column:

Dr   Purchases   72

Dr   Payables ledger control account   576

Dr   Wages   1200

Dr   Tax   300

In addition, the memoranda accounts of C Clark and D Drake in the Payables ledger would have to be updated.

5 Cash book with sales tax

The introduction of sales tax alters the cells that are shaded.

Assume sales tax is at 20%

On the debit side, cash sales of $240 and $120 were made, but some of these amounts are the sales tax and some the net sales. These have to be accounted for separately.

Gross sales $240; net sales $200; sales tax $40

Gross sales $120; net sales $100; sales tax $20

Cash of $240 plus $120 was received and these amounts are in the total column of the cash book.

$300, the total of the cash sale column would be credited to the Sales account

$60, the total of the sales tax column would be credited to the sales tax account.

There is no sales tax implication arising from the amounts received from A Smith and B Bodkin. These are not new sales and are merely these customers paying what they owe.

On the credit side, cash purchases of $72 were made and $72 was paid out. However, only $60 of this was the net purchases; the $12 was sales tax on these purchases.

$60 will be debited to the purchases account

$12 will be debited to the sales tax account

Wages and Tax are not subject to sales tax.

The payments to Clark and Drake are not new purchases so there is no sales tax implication. These payments are simply settling what is owed.

6 Bank reconciliations

The cash account (or cash book) records the movements of cash in the business’s bank account. Of course, there are usually many cash movements and it is easy for errors to be made. Fortunately, banks will normally send regular bank statements to their customers (or these can be downloaded or viewed over the Internet) and, by comparing the bank’s version with the cash book version, businesses have a very valuable way of checking that their bank account contains no errors.

However, often the cash book balance and the bank statement balance will differ because of timing and other differences. For example:

1. The bank might have made interest charges that have not yet been reflected in the cash book.
   

2. Cheques issued by the organisation and credited to their cash book, might not yet have reached the payee and not yet gone through the bank account (ie not yet cleared).
   

3. The organisation might have forgotten to enter standing orders or direct debits in its Cash Book, though these will have been paid by the bank.
   

4. Sometimes if an amount is paid at a different bank, it takes time to make its way to the bank account.
   

It is therefore necessary to carry out a bank reconciliation to ensure that any difference between the balance shown on the bank statement can be reconciled to (made to agree with) the balance in the cash book.

Bank reconciliations are an indispensable part of the internal control system of a business: cash has many movements and it is a very desirable asset so the accuracy of cash records has to be checked regularly

Here’s an example:

[CN = cheque number]

Note CN = cheque number; DD = direct debit; SO = standing order.

Note that things seem to be reversed on the bank statement. This is the bank’s document showing its relationship with its customers. If the customer has $1,900 cash in the bank on 1 May then on that date the bank owes its customer $1,900. The customer is therefore a creditor of the bank and this will show a credit balance on the bank statement.

As cash leaves the account then the bank owes the customer less and debits these amounts from the account.

You will see that the closing balances do not agree here: $1,232 compared to $1,355. We have to see if the difference can be explained logically by performing a bank reconciliation.

First compare the two documents and mark off each item which appears on both: they cannot be the cause of any difference.

Then bring each document up to date for the reconciling items

You will see that the two balances now agree.

7 The bank figure to report in the financial statements

This is the point of the whole exercise, and it is worth stating plainly. The figure that goes into the statement of financial position is the CORRECTED cash book balance - $1,177 above - not the balance on the bank statement and not the balance the cash book showed before the reconciliation.

The bank statement balance is not used because it is out of date: it is missing the unpresented cheques and the uncredited lodgements, which are real transactions the business has already entered. The uncorrected cash book balance is not used because it is wrong: it is missing the direct debits, standing orders, bank charges, bank interest and dishonoured cheques that the bank has put through and the business had not yet recorded.

Two further rules on reporting cash and bank:

• Petty cash and cash in hand are added to the bank balance and shown within current assets. In the pro forma statement of financial position this is the line 'Cash at bank and in hand'.

• A business with two bank accounts, one in credit and one overdrawn, reports them gross: the credit balance as a current asset and the overdraft as a current liability. They are not netted off against each other. An overdraft is a current liability because it is repayable on demand.

8 Petty cash

The petty cash book will look similar to the main cash book and will usually have analysis columns. Usually the only source of funds will be when the petty cash is topped up by cash from the main bank account, though occasionally there will be small amounts received from staff as payment for personal photocopying, use of the firm’s postage and so on.

Petty cash is usually kept in a small locking box, the petty cash box.

As payments of cash are made, a petty cash voucher will be filled in showing the amount and purpose of the payment. Ideally, any receipts for the purchase will be stapled to the petty cash voucher and the voucher approved by a manager or supervisor.

Petty cash is usually kept on the imprest system as this prevents too much cash accumulating in the petty cash box. Under this system, on the presentation of the vouchers the balance is topped-up, back to an agreed amount (the petty cash float). The amount of the top-up should equal the sum of the vouchers and the vouchers are filed away.

At any stage, the total of the cash and the vouchers in the box should add back to the agreed maximum balance.

9 Control account reconciliations (again)

The previous chapter dealt with errors and inconsistencies that could arise from posting day book entries to control accounts and individual ledger accounts. Similar problems can occur when making postings from the cash book: the totals of the sales ledger and purchase ledger columns in the cash book are posted to control account whilst individual entries are posted to separate accounts in the receivables and payables ledgers,

10 The journal

The journal is used as the book of prime entry for transactions or adjustments that are not initiated anywhere else. Examples include:

• Correction of errors
  

• Off set of amounts owed and owing. For example $1,400 is owed from ABC Ltd in the receivables ledger and $1,600 is owed to ABC Ltd in the payables ledger (ABC Ltd is both a customer and a supplier). The two amounts can be offset and only $200 needs to be paid.
  

• Dealing with depreciation (the reduction in the value of non-current assets)
  

The traditional way of setting out a journal is: