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Chapter 4:
Cash transactions
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What you will learn?
The cash books in the accounting system
Types of payment from the bank
The cash book
Cash book with sales tax
Bank reconciliations
Petty cash
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The cash books in the accounting system
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The cash books in the accounting system
The cash books in the accounting system
The cash book The petty cash book
Books of prime entry Books of prime entry
Part of double entry Part of double entry
system system
Records the flows of Records small amounts
money in the bank of cash expenditure on
account of the business items like coffee for the
office, buying office
stationery, reimbursing
employees for taxi fares,
etc.
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Types of payment from the bank
Cheque
Internet transfer
Four ways of
payment from
the bank account
Direct debit
Standing order
In addition, banks can remove funds from accounts for
interest and bank charges
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Types of payment from the bank
Internet transfer
Common
Internet transfer
Keep secure account log-on details
In addition to Users who both
password, banks know the password
issue devices that and possess the
generate unique device can access
use-once codes the bank account
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Types of payment from the bank
Direct debit
The person receiving the funds has
the right to extract them from the
bank account
Used by institutions like insurance
Direct debit companies to collect insurance
premiums from clients
The process can be completely
automated
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Types of payment from the bank
Standing order
The person paying instructs their
bank to pay regular amounts to the
recipient (like rent)
Standing order
The process can be completely
automated
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Types of payment from the bank
Cheques and the clearing system
Cheques are unconditional orders in writing given to a
bank (the drawee) by the person paying out of his or her
bank account (the drawer of the cheque) to pay an
amount to the payee (the person receiving the money)
A typical UK cheque
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Types of payment from the bank
Cheques and the clearing system
Special machine-readable
The bank The bank branch
characters allow automatic
(drawee) and bank account
processing of the cheque
The drawer
(the person
pays money)
Counterfoil
The cheque leaving a counterfoil
The cheque number
(details of information) can be
torn out of the cheque book
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Types of payment from the bank
Cheques and the clearing system
The payee (the person receives the funds)
15/01/2015
15 January 2015
ABC Co ABC Company Ltd-----------
Ltd ---
One thousand six hundred 1,600 - 00
1600.00 pounds only
Prevent changes being made.
The signature of the authorized person (J
Tar)
All cheques should be accounted for, even those which are
made out incorrectly and scrapped. The cheque should be
marked “VOID” in large letters and kept in the cheque book
Cheque books must be kept securely as the signature of the
authorized person (J Tar) could be forged lead to cheques made
out improperly and funds stolen
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Types of payment from the bank
Cheques and the clearing system
When the payee receives the cheque, paying it into
the company’s bank promptly is necessary. Delay
increases the risk of the cheque being lost, stolen or
of the drawer not having the funds to pay.
ABC Ltd can use a Paying-in slip to list cheque
details on the reverse of the slip, and the total on the
front
Paying-in slip
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Types of payment from the bank
Cheques and the clearing system
The clearing system takes around three days
(Internet transfers are usually completed in a couple of hours)
The total of the cheques appears in payee’s bank account at the
end of the day but the amount is only provisional
The cheque from the drawer is sent back to the drawee (bank) to
check whether there is enough money in drawer’s account
Enough money Not enough money
The drawer’s bank will send The cheque is sent back to
money to payee’s bank and payee’s bank and payee
the funds are transferred at marked ‘Refer to Drawer’
that point
The cheque has been
dishonored or ‘bounced’
The matter is pursued among
2 parties and the provisional
funds in the payee’s account
are removed
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The cash book
The cash book which is the cash account of the business
record bank receipts and payments
T - account
Dr (Receipt) Cash Cr (Payment)
Balance b/d 1,200 Paid to C 404
Cash sales 240 Paid to D 172
Received from A 360 Wages 1,200
Cash sales 120 Cash purchases 72
Received from B 600 Tax 300
Balance c/d 372
2,520 2,520
Balance b/d 372
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The cash book
Analyzed cash book
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The cash book
The cash book is part of the double entry
Debit (credit) entries in the cash book are debits (credit) in the
double entry system
Debit entries corresponding to credit entries
Dr Purchases 72
Cr Sales 360 Dr Payables ledger
Cr Receivables ledger control account 576
control account 960 Dr Wages 1,200
Dr Tax 300
The accounts of A and The accounts of C and
B are updated in the D are updated in the
Receivables ledger Payables ledger
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Cash book with sales tax
Example
Analyzed cash book with sales tax
(Assume tax rate of sales tax is 20%)
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Cash book with sales tax
Example
On the debit side, cash sales of $240 and $120 were made, but
includes the sales tax and the net sales.
• 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
amount are in the total column of the cash book
• The total of the cash sale column ($300) is credited
to the sales account
• The total of the sales tax column ($60) is credited to
the sales tax account
=> There is no sales tax implication arising from the amounts
received from A and B. These are not new sales and are merely
these customers paying what they owe.
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Cash book with sales tax
Example
On the credit side, cash purchases of $72 were made, but
includes the sales tax and the net purchases
• Gross purchases $72; net purchases 60 $; sales tax on
these purchases $12
• $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
There is no sales tax implication arising from the amounts
paid to C and D . These are not new purchases and are merely
these suppliers settled what is owed.
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Bank reconciliations
The bank’s version (bank statement) compares to the cash book of
the business to check that their bank account contains no errors.
Because of timing and other differences, the cash book balance and
the bank statement balance will differ:
Interest charges of the bank have not yet been reflected in
the cash book
Cheques issued by the organization are credited to their
cash book but are not gone through the bank account
The business forgot to enter standing orders or direct debits
in Cash Book, while these were paid by the bank
The amount is paid at a different bank, it takes time to make
its way to the bank account.
Necessary to carry out bank reconciliation
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Bank reconciliations
Ensure that any difference between
the balance in bank statement and in
the cash book is reconciled (make
them agree)
Bank
reconciliations
Be indispensable part of the internal
control system of a business
(cash has many movements and is
desirable asset -> checking the
accuracy of cash records regularly is
very important)
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Bank reconciliations
How to reconcile bank statement and cash book
Start in Bank statement
Bank statement
Opening balance a
Less: cheques in cash book not yet on bank statement (b)
Add: amount received in but not yet on bank statement c
Up-to-date balance d
Compare the balance in cash book to ‘up-to-date balance’
to check whether they agree
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Petty cash
Petty cash Similar to the main cash book and will
book usually have analysis columns
Cash from the main bank account
Small amounts received from staff
Sources of
as payment for personal
petty cash
photocopying, use of the firm’s
postage,…
Petty cash Petty cash is usually kept in a small
reserves locking box
When paid by petty, a petty cash
voucher will be filled in showing the
amount and purpose of the
Payments from payment
petty cash The receipts for the purchase are
stapled to the petty cash voucher and
the voucher approved by a manager
or supervisor.
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Petty cash
The imprest system
Imprest system help prevent too much cash
accumulating in the petty cash box.
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 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
Example
Petty cash float = $100. During the week of 12 July,
petty cash amounts paid out amounted to $68 and all
amounts were supported by petty cash vouchers and
receipts
Just prior to reimbursement
Cash in the box should be = 100 – 68 = $32
Vouchers amount = $68
Cash + Vouchers = $100 (the agreed float)
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Petty cash
The imprest system
Imprest system help prevent too much cash
accumulating in the petty cash box.
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 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
Example
Petty cash float 100
Less: authorized expenditure (68)
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Petty cash reimbursement 68
Re-established float 100