Preparation of Journal and Cash book including Banking Transaction

Cash Book

Cash Book records all receipts of and payments in cash. Usually the deposits into bank accounts maintained by a business firm, withdrawals from such accounts and cheque payments are also recorded in the Cash Book. Sometimes a separate book for recording receipts and payments by cheques/DDs etc., is kept, known as the Bank Book. A Cash Book which is used to record both cash and bank transactions is referred to as a Two-Column Cash Book.

The format of this cash book is given below:

Cash Discounts:

Sometimes, in order to encourage early payments due from customers, a company may offer a certain percentage of the amount as a discount. For example, if a customer owes the company Rs. 1,000, the company may allow 2% discount if the payment is made before a certain date. In such a case, the customer would pay an actual cash of Rs. 980 only (Rs. 1,000-2% of Rs. 1,000) and Rs. 20 would be treated as discount expense by the company.

In the same way, a company might be given some discounts by its creditors for early payment of the amounts payable by it. A cash discount may be distinguished from a trade discount which is given on the invoice price, especially when orders for large quantities are placed. The trade discount is therefore reflected as a reduction in the sale price itself.

A Cash Book can also be used to record the cash discounts that are allowed to customers for prompt payments and the cash discounts that are received on payments made to suppliers within a stipulated time period.

Since discounts will be allowed to customers at the time of receipt of money and received from suppliers at the time of payment of dues, it is convenient to maintain the column for discounts allowed on the receipts side of the Cash Book and the column for discount received on the payments side. A Cash Book in which the cash and bank transactions and the details of cash discounts are recorded is referred to as a Three-Column Cash Book.

An illustrative format of this type of Cash Book is given below:

The Cash Book normally also carries Columns for Cash Memo No., Ledger Folio, Vouchers No. etc.

The unique feature of the Cash Book is that it performs the functions of a Journal and the General Ledger with regard to the Cash and Bank transactions. In other words, Cash Book is the book of first entry for all such transactions and the ledger accounts for cash in hand and cash at bank will not be maintained in the General Ledger.

Petty Cash Book:

When the petty cash fund is operated as an imprest fund, the recording of the petty expenses paid will be made in the petty cash book. This would also avoid recording too many small value transactions in the main cash book. The petty cash book would contain a number of analytical columns for grouping the various expenses under a few classifications which would facilitate subsequent posting into the General Ledger;

A specimen petty cash book is given below:

The Imprest System:

When an analytical petty cash book is maintained for recording the petty expenses, it will be practically more convenient to consider the petty cash as a separate account and take cheques issued for the petty cash imprest as a debit to petty cash account and all petty expenses paid as credits in petty cash account.

The journal entries in the months of April and May 2012 in the books of Ramesh Co. will be as follows:

If credit for all the expenses is also given in the Cash Account (or Bank A/c) then the Cash A/c will be understated (due to two credits-one in respect of release of imprest and the other in respect of actual expenses), and to counterbalance the understatement, the balance in Petty Cash Account must be added to that of the Cash Account.

Journal:

The Books of Accounts maintained by an organisation other than the cash book may be classified into Journals and Ledgers. The Journal is used as the book of first entry for all transactions which cannot be recorded in the Cash Book. In other words, all non-cash transactions should be recorded in the journal. For practical convenience the journal is maintained by using a number of books called the subsidiary books.

For example, the following subsidiary books may constitute the journal for an enterprise:

(i) Purchase Book

(ii) Purchase Returns Book

(iii) Sales Book

(iv) Sales Returns Book

(v) Bills Receivable Book

(vi) Bills Payable Book

(vii) Journal Proper.

Specimen formats of these books and brief explanations regarding their use are given in the following sections:

Purchases Book:

Also known as the Purchases Journal, this book is used to record credit purchases of goods only. The term ‘goods’ covers only those items procured by the business for resale.

Purchase Returns Book:

This subsidiary book is used to record the goods purchased on credit and sent back to suppliers as they are found not conforming to specifications or for any other reason.

Sales Book:

Also known as the Sales Journal, this subsidiary book is used to record all sale of goods on credit.

Sales Returns Book:

This book is used to record the transactions relating to goods sold on credit and received back from the customers as not conforming to the specifications or for any other reason.

Bills Receivable Book:

The Bills Receivable of an enterprise consists of all Promissory Notes given or Bills of Exchange accepted by customers in respect of amounts due from them. The Bills Receivable Book is used to record all such Promissory Notes given or such Bills of Exchange accepted by customers.

Bills Payable Book:

The Bills Payables consist of all Promissory Notes given or Bills of Exchange accepted by the business in respect of amounts owing to its suppliers. The Bills Payable Book is used to record all such Promissory Notes given or Bills of Exchange accepted by the business.

Journal Proper:

This Book is used to record all transactions which cannot be included in the cash book or any of the other six subsidiary books discussed above. The transactions that will be recorded in Journal Proper are: purchase or sale of fixed assets and investments on credit, adjusting entries, rectification entries etc.