The cash book is very important in the accounts of any business. Business transactions are measured in monetary terms so naturally, the accounting book that is responsible for recording the day to day movements of money in the books is very important. There are four types of cash book, the singles column, two-column cash book, three column cash book and the petty cash book. The cash book types differ in the nature, size and complexity of transactions that they handle.
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What is a cash book?
A cash book is a financial journal that contains all cash receipts and disbursements, including bank deposits and withdrawals. Entries in the cash book are then posted into the general ledger. As you may have noticed the cash book includes the bank deposits and withdrawals. It is named the cash book because it deals with transactions that occur on a cash basis as opposed to an accrual basis. Accrual based transactions debit or credit (whichever is appropriate) a corresponding account to record the debtor or creditor. Cash basis accounting makes the corresponding debit or credit in the cash book. With that in mind, we can take a look at the similarities and differences in the four cash book types we have identified.
Simple cash book
The simple cash book or single column cash book records only cash transactions. It is, in essence, a cash account recorded in its book of entry. Recording it this way has the advantage of allowing the balance to be periodically calculated, perhaps daily. This cash book type also allows the easy tracking of errors if any mistakes are made or noticed. The book keeps a chronological record of all transactions that affect the cash account. Because it only has the single column it cannot record bank transactions as others we shall look at later can do.
This cash book type will feature the following columns for recording transactions;
Date: The date the transaction was carried out on. This will go chronologically as transactions progress.
Description: In this column, the corresponding account name is recorded for the transaction. Suppose we bought inventory and paid cash the entry in this column for that transaction would read Inventory or goods purchased.
Voucher No: the voucher or invoice number is the number on the original transaction receipt or invoice. This is done to enable this cash book type to have some tracking ability. This information in the processes of correcting errors and audit procedures.
Posting reference: This column is used to write the page number of each ledger account named in the description column of the cash book. It helps to simplify double-checking of the entries.
Amount: The amount column of single column cash book is used to record the money value of each cash transaction.
Two-Column Cash Book
The second cash book type is the double column cash book which is similar to the single-column cash book in layout but where the single column cash book has one column for an amount (cash only) the double column cash book as has a second column for bank transactions. The two-column cash book type, therefore, acts as both a cash and bank account, combining the transactions in one place. If businesses operated on a cash-only basis the single column cash book would be the ideal cash book type. However, the advances in payment systems over time to include checks and bank transfers made the two-column cash book necessary. In all other matters, the format is identical to that of the single column cash book type.
The double-column cash book introduces us to a concept of contra entries. These are entries which involve the cash and bank accounts as the two accounts involved in a transaction. Therefore these transactions are recorded completely in the cash book. In the reference columns, these are denoted with a “C”. An example is when a business withdraws cash from its bank account for use in the business.
The three-column cash book
The third cash book type is the three column cash book. This cash book type is also referred to as the triple column cash book. It’s a step up from the double column cash book as it adds a third column on each side. This column is for discounts allowed and discounts received. The three-column cash book type is useful to businesses which do a large amount of business in which cash discounts are received or allowed. This allows the accountant to record the value of discounts received and allowed.
The amounts for discount allowed and discount received go into two separate accounts from this cash book type. Discount allowed is recorded on the debit side as it represents amounts discounted when customers pay money into the business. The corresponding account for this entry is discount allowed which represents an expense to the business. The discount column on the credit side is discount received, a discount offered to us when we make payments to customers. This corresponds with a discount received account in the ledger and is a line item in the income calculation as it represents income to the business by way of saving.
Petty Cash Book
The fourth type of cash book is the petty cash book. For small expenditures in a business, it is customary to maintain a petty cash book. This type of cash book records these minor transaction of the business. The cash expenditures are funded by way of withdrawal of cash from the bank, which would be represented by a contra entry in the two or three-column cash book types. The petty cash book also comes in handy where businesses expect small receipts of cash in the business. It is similar in format to the single cash book type recording receipts on the debit side and payments on the credit side with a single column on each side. Petty cash book is maintained and balanced regularly, perhaps daily by an assigned petty cashier. There are two types of petty cash book management system; the ordinary system and the imprest system.
This is a simple system. For this petty cash book type, an amount of money is allocated to petty cash. Once the petty cash amount has been exhausted the petty cash book is double-checked and a new allocation of money made to petty cash.
In the imprest petty cash book type, an allocation is made to petty cash that is known as a float. All records are maintained and at the end of a period such as a day, week or fortnight the cash book is examined. The difference between the set float amount and the current petty cash book balance is reimbursed to the petty cash book to reinstate the float. This shortfall is equivalent to the amount of cash that has been spent through the petty cash book over the designated period. This cash book type enables improved tracking of petty cash and analysis on the adequacy of petty cash allocation.
The different types of cash book have their advantages and disadvantages and which type of cash book a business should adopt depends on their characteristics and transaction frequency.