Diploma in Bookkeeping

Cash payments
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Contents
3 Lesson outcomes

3 Introduction

4 The purchases cycle

8 Types of payments

11 Cash payments journal

14 References

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Lesson outcomes
By the end of this lesson, you should be able to:

● Describe the purchases cycle as well as the supporting documents and master lists
involved in the process

● Identify the types of payments that can be made

● Identify which other processes are impacted by the payment cycle

● Describe the petty cash process

● Know under which circumstances to use petty cash

● Produce the cash payments journal layout

Practical lesson outcome: The practical outcome is to be able to apply all the skills obtained
throughout the course to date to reflect transactions in the cash payments journal.

Introduction
Without bookkeeping, there would be no
means of reliably measuring the financial
performance of a business. In fact,
businesses would cease to exist. The need
to trade gave rise to the need for
bookkeeping. Therefore, one cannot exist
without the other. A key component of
Quote
transacting is cash, as all transactions will
“Great companies start because the
eventually result in the flow of cash. So, it is
founders want to change the world, not
quite important to be able to manage the
make a fast buck.” – Guy Kawasaki
cash elements of your business and manage
it well. So, in this lesson, we will look at cash
payments as well. It is vital to make money.
It is equally important to spend money so
that you can make money.

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The purchases cycle

Overview of the purchases cycle

● The purchase cycle gives rise to expenses in the income statement

● To make money, you must spend money, so the cash cycles of a business are very important to
staying in operation
● Every business will require an investment in some form or another, whether it be the owner's
investment or a cash loan or donations from friends and family or even just time, each equates
to cash
● The day to day running of the business requires the same commitment of cash, whether
it be to buy stock, putting in fuel to go and see your clients, even buying stationery and
equipment spending cash is as important as earning it

● Every business is prone to the risk of fraud and error

● To manage the risk and add an element of control, putting robust policies and
procedures in place will be paramount for managing the spending of money
● Policies and procedures will be covered in depth in Module 3
● Comprises three key steps
● The order is not of utmost importance if the process is followed

1. Ordering

● This process starts with the need which will give rise to placing an order with a supplier

● If the supplier has stock, it is delivered, which then requires storage until it is needed, or
the service is then rendered

● This gives rise to your obligation to pay the supplier

● Whether it be cash on delivery or at a future time due to extended payment terms

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Example: If the owner of a business needs a laptop. In a large organisation, an internal request
would need to be created, this would be done on a purchase requisition, then the procurement
process begins where quotes will be obtained from suppliers. On the supply side, the revenue
cycle now kicks into gear. Once a good quality laptop has been sourced for a good price, the order
is then confirmed with the supplier.

2. Delivery and storage

● Once the goods have been delivered the first point is to check you have received the correct
item and all the necessary accessories

● This can be done by comparing the physical goods to the order that was placed with
the supplier

● If you have requested a service be performed, you can check the outputs against the
contract entered with the supplier

● It is also important to check the quality of anything you buy

● This is especially critical when ordering stock

● Another good habit, and critical in large organisations, is to keep track of the many
items procured

● The last activity that might take place during the receiving step is getting an invoice from the
supplier

Example: Once you have taken delivery the laptop you should ideally be adding it to an asset
listing. If you purchase laptops for your staff, to track who has been assigned a laptop you can add
it to the list. This is also critical for accounting purposes. A record of the date it was purchased is
needed to calculate depreciation. This is another skill you can look forward to acquiring in module
two.

Notes
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3. Billing

● Most online businesses would require payment upfront prior to making delivery

● In the billing step, you could also receive the invoice if you did not receive it upon
delivery

● During this step, returns and other adjustments need to be considered as these will all
impact the accounting records

● Upon the payment of cash to the supplier, an entry must be recorded in the books

Key supporting documents

● All the documents are not mandatory

● They are helpful in creating audit trails

● Take a step back and consider what is most beneficial and practical for your business

● Purchase requisition

● Purchase orders

● Goods received note

● Proof of delivery

● Invoice

● Statements

● Remittance advice or proof of payment

Accounts impacted

● Expenses in the income statement

● Assets in the balance sheet
● Accounts payable in the balance sheet
● Bank account in the balance sheet

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Master lists

● The terms suppliers and vendors can be used interchangeably

● Master lists are important for maintaining all static data in a business

● To ensure you are transacting with legitimate suppliers, you will do a level of due diligence as
you will most likely transact with them again in the future

● For efficiency sake, instead of doing the same exercise every time, once you have created a
supplier, add the details onto the supplier master listing

● This is known as the list of authorised suppliers

● This is where you are confident about their banking details and they are legitimate businesses
with good reputations and quality products

● However, there is another list called the preferred supplier listing, which contains the same
details with a little bit extra

● If you have arranged a deal with a supplier and there is a special item or price involved and
agreed upfront, you can add the supplier to the preferred supplier listing as well

● It might be your preferred supplier in terms of the best quality, or maybe you prefer a supplier
due to the discount they provide or even if they offer lenient payment terms

Notes
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Types of payments
Processes impacted by the purchases cycle

● The purchases cycle is a pervasive one as it impacts many other processes within a business.
Inventory: for ordering stock
● Equipment and supplies: for ordering laptops and stationery
● Logistics: when booking local or international travel
● Capital: land, buildings, and vehicles
● Professional services
● Operating expenses: day-to-day running costs
● Ad hoc expenses: once-off costs

Payment types

● There is a further disaggregation of the types of purchases that can be made

● Standard purchases: the day-to-day operating expenses

● Blanket purchases: bulk buying

● Contract: enter into an agreement with the supplier to deliver a set number of items per month
over an agreed upon period

● Planned expenditure: the supplier will be on call to make a set delivery with a reasonable
amount of prior notice

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Petty cash

● It is not always beneficial to use the main bank account to pay for all your purchases due to
bank charges

● There may be instances where small amounts of cash are required

Example: If you are meeting a client at their premises and need to pay for parking or you have a
meeting at the office where you require some coffee and refreshments following an
onerous procurement process is lengthy and not efficient. So, having some petty cash on
hand can prove useful.

● This is an immaterial amount of cash for unplanned expenses

● The owner will determine a feasible limit, which can be anywhere from $ 50 to $
300 depending on the type of business

● Petty cash is generally physical cash withdrawn from the ATM and placed in a
secure locked box

● It is protected by lock and key, generally by an appointed custodian who is office

bound

● In the world of electronic money, a cash card may be a safer and more
convenient option, which can then be issued to a staff member through prior arrangements

● Petty cash is one of the easiest ways to commit theft

● Strict controls are vital for the protection of this process

● The petty cash can be managed in multiple ways, but the most common one is known as the
imprest system, which involves regular top ups
● The balance in the books will remain at a constant value, making the tracking of expenditure
easier
● There is a separate account in the general ledger for petty cash transactions
● If petty cash is used, the supporting document is called a petty cash voucher
● The transactions are then logged and checked during the reconciliation process and during
unplanned petty cash counts called surprise accounts
● For every petty cash transaction, there must be proof of the purchase by means of a receipt,
which is the supporting document used to trigger the capturing of the expense in the
accounting records

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Examples: ink cartridges for printers, posting documents or small parcels, minor office supplies or
stationery, refreshments for the office, fuel and parking and even minor reimbursements to staff
members for miscellaneous but valid business expenditure.

Petty cash process

● The funds are transferred from the main bank account to the petty cash card or
withdrawn from the main bank account if cash is needed at the beginning of the
month or week, depending on how often you wish to manage the process
● Throughout the month, disbursements and reimbursements need to be logged
● All the receipts and petty cash vouchers must be filed so that the expenses can
be captured and reconciled
● When the balance is calculated, the amount is topped up to restore the petty cash to the pre-
set limit
Example: In Joe's lemonade business, the money earned from the sale of his bottles of fresh
homemade lemonade can be classified as operating income as this is his value proposition.
Should he sell his juicer in the future and make a profit, this would be deemed as non-operating as
he is not in the business of selling juicing machines.

Notes
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Cash payments journal

CPJ

● An obligation arises due to the probable and measurable future outflow of economic benefits

● This is triggered when you receive your goods and when you get the invoice

● This is the supporting document you will need for your processes to trigger the payment

● The CPJ is also a book of first entry used to record your cash payments or
disbursements

● It will not only help track the transactions for purchases made from suppliers, but all
cash expenses, even rental, salaries, and insurance

● The CPJ entries start with the source document being the invoice

● The totals are transferred to the relevant subsidiary ledgers so it can end up in the
general ledger

Key information to be included in the CPJ

● Date
● Reference
● Description
● Credit column
● Debit column
● Amounts
● Analysis columns
● It is handy to include the analysis columns to keep track of cash versus credit payments

Note
Petty cash transactions will generally not be recorded
in the CPJ.

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Exercise 1:

Transactions:

1) Mary purchased buckets for transporting her flowers from Bucket List Vendors using cash on

the 7th of June for $ 8 000 and received invoice 005.

2) Mary settled her account with Flower Frenzy & Co on 9 June for an amount of $ 3 000. This was

linked to invoice 007.

3) Mary paid her driver Sam his wages for the week ending 17 June. The total was $ 350 and

issued him with wage slip number 10.

4) Mary purchased some more flowers from Flower Frenzy & Co to stock up and received her

goods to the value of $ 6 000 on the 25th June as well as invoice number 008. The invoice is due
for payment on 15 July.

Solution 1:

CASH PAYMENTS JOURNAL

CPJ-01
Credit Debit
Accounts Cash
Date Disbursement Description Amount Account Reference Payable Purchases Other
800-01 Invoice
07-Jun 005 Buckets $ 8 000 Supplies 005 $ 8 000
Invoice
09-Jun 007 Stock $ 3 000 FFC01 007 $ 3 000
900-01
17-Jun 10 Sam Wages $ 350 Wages Slip 10 $ 350
TOTAL $ 11 350 $ 3 000 $ 8 000 $ 350

Notes
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Solution to Weekly Challenge:

Dr (CR)
No. Dr/Cr Account Amount Amount

GJ06 Dr 800-01 Supplies 8000

Cr 300-01 Bank 8000

Cash purchase of buckets from Bucket List Vendors

GJ07 Dr 350-01 Payables 3000

Cr 300-01 Bank 3000

Settled account with creditor Flower Frenzy & Co

GJ08 Dr 900-01 Wages 350

Cr 300-01 Bank 350

Weekly wages paid to Sam

GJ09 Dr 250-01 Inventory 6000

Cr 350-01 Creditor 6000

Purchased stock from Flower Frenzy & Co in June

GJ10 Dr 350-01 Creditor 6000

Cr 300-01 Bank 6000

Settled account with creditor Flower Frenzy & Co in July

Other considerations

● For cash payments, you need to consider tax consequences

● In this instance instead of paying money over to the revenue services, the benefits of certain
expenditure are the ability to deduct the expense, reducing your tax liability
● Do be considerate of the differing rules attached to your specific country and state
● As you are wearing the hat of the purchaser, the tax will be borne by you
● Certain items can be included as deductions to be set off against the income tax, to be
paid over to the revenue services

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References
• Averkamp, H., n.d. What is petty cash?. [Online]
Available at: [Link]

• Javed, R., 2016. Cash payment or cash disbursement journal. [Online]

Available at: [Link]
journal-cash-disbursement/

• Shareslide, 2009. The expenditure cycle: purchasing and cash disbursements. [Online]
Available at: [Link]
the-expenditure-cycle

• Systum Inc., 2019. The different types of purchase orders you need to know. [Online]
Available at: [Link]

• Tate, W., 2014. The essential concepts of purchasing and supply management. [Online]
Available at: [Link]

• Zarzycki, N., 2020. What is petty cash?. [Online]

Available at: [Link]

Notes
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