Maintaining detailed records of your firm’s cash transactions in a cash book is extremely vital. In addition to serving as an important accounting record, it helps companies in keeping track of their financial position at all times. It also provides updated and relevant data while formulating budgets, making forecasts, and allocating resources, thus, ensuring efficient financial management.
Cash book: Meaning
A cash book is a chronological financial record of all the cash transactions of a business involving cash receipts and cash disbursements. It also includes details of bank withdrawals and deposits. It is updated and balanced on a real-time, continuous basis.
However, some mid-to-large-sized businesses prefer maintaining two separate cash book records: a cash receipts journal and a cash disbursement journal.
A cash receipts journal records all the money received by the business, such as cash sales and customer payments. On the other hand, a cash disbursement journal accounts for payments made, like vendor payments and cash expenses.
Cash book: Purpose
A cash book serves dual purposes, as stated below:
- It serves as a journal by chronologically recording all the cash transactions of the business relevant to the accounting period.
- It functions as a subsidiary of the general ledger, as it entails both cash and bank accounting records.
Overall, the main purpose of maintaining a cash book is to accurately record all the cash transactions as they occur, thus providing up-to-date information about a firm’s cash balances without going through the general ledger.
Subsequently, the cash book balances are compared against the bank statements and reconciled in case of discrepancies. This data is then utilised for the preparation of the company's financial statements.
Cash book: Accounting
Cash book entries follow the cash book double entry system. It means all transactions involve two different accounts. To illustrate, for a company receiving cash payment for sales, entries will be made both in the sales ledger and the cash book.
A cash book includes two main sections: receipts (debit) and payments (credit). All cash book receipts are entered date-wise on the left side, while all the payments are recorded on the cash book’s credit side.
At the end of the accounting period, the difference between the debit and credit sides is computed. Generally, businesses show a debit cash balance, indicating cash inflows are higher than cash outflows.
For a better understanding of cash book debit or credits, always remember that cash receipts, such as collections from customers and cash sales, are recorded on the left/debit side. Conversely, all cash payments, including rent, payroll expenses, and vendor payments, are entered on the right/credit side.
Types of cash books
There are three main types of cash books: single-column cash books, double-column cash books, and triple-column cash books. Their use cases are determined based on a firm’s size, frequency of transactions, and other characteristics.
Single-column cash book
A single-column cash book, alternately called a simple cash book, shows only cash receipts and payments. It means it does not record bank details separately. It is suitable for small-scale firms that operate on a cash-only basis.
Typically, a single-column cash book has four columns, each on the debit and credit side, that chronicle the date, a description of the transaction, a reference/folio number, and the transaction amount. A folio number is a unique number assigned to a specific ledger account mentioned in the description column for easy reference and cross-verification.
An illustration of a single-column cash book and a cash book example is as follows:
Double-column cash book
A double-column cash book, also called a two-column cash book, records both cash and bank transactions. So, transactions like cheque payments and bank transfers are recorded in a two-column cash book. Thus, it fulfils the purposes of both a cash and a bank account.
Consequently, this cash book has given rise to the concept of contra entries, commonly denoted as ‘C’ in the cash book. Contra entries are made when transactions occur between a cash and a bank account, for instance, cash withdrawn from a bank account for business investment.
A two-column cash book is similar to a single-column cash book in terms of layout, with an additional column for bank transactions on both the debit and credit sides. A double-column cash book template is as follows:
Triple-column cash book
In addition to detailing cash and bank transactions, a triple-column or three-column cash book shows additional information about sale and purchase discounts. It is mostly used by firms that avail of massive cash discounts.
The discounts received from suppliers are entered on the credit side, and discounts offered to end customers are stated on the debit side. A triple-column cash book format can look like this:
In contrast to utilising a cash book template, companies today prefer maintaining records with excel sheets or accounting software.
Petty cash book
Some classify petty cash books as the fourth type of cash book. It is used for recording small/minor business expenses. It has the same format as the simple cash book.
Firms record all their cash and bank transactions in a cash book for easy tracking and law compliance. Primarily, there are three types of cash books, namely single-column, double-column, and triple-column cash books, with petty cash books rounding up as a fourth type.