Cash book is a record of all the transactions related to cash. Examples include: expenses paid in cash, revenue collected in cash, payments made to creditors, payments received from debtors, cash deposited in bank, withdrawn of cash for office use, etc.
In double column cash book, a discount column is included on both debit and credit sides to record the discount allowed to customers and the discount received from creditors respectively.
In triple column cash book, one more column of bank is included to record all the transactions relating to bank.
Note: In modern accounting, simple cash book is the most popular way to record cash transactions. The double column cash book or three column cash book is practically for academic purpose. A separate bank book is used to record all the banking transactions as they are more than cash transactions. These days, cash is used just to meet petty and routine expenditures of an organization. In most of the organizations, the salaries of employees are paid by bank transfer.
Note: Cash book always shows debit balance, cash in hand, and a part of current assets.
Single Column Cash Book
Cash book is just like a ledger account. There is no need to open a separate cash account in the ledger. The balance of cash book is directly posted to the trial balance. Since cash account is a real account, ruling is followed, i.e. what comes in – debit, and what goes out – credit. All the received cash is posted in the debit side and all payments and expenses are posted in the credit side of the cash book.
|CASH BOOK (Single Column)|
Double Column Cash Book
Here, we have an additional Discount column on each side of the cash book. The debit side column of discount represents the discount to debtors of the company and the credit side of discount column means the discount received from our suppliers or creditors while making payments.
The total of discount column of debit side of cash book is posted in the ledger account of ‘Discount Allowed to Customers’ account as ‘To Total As Per Cash Book’. Similarly, credit column of cash book is posted in ledger account of ‘Discount Received’ as ‘By total of cash book’.
|CASH BOOK (Single Column)|
Triple Column Cash Book
When one more column of Bank is added in both sides of the double column cash book to post all banking transactions, it is called triple column cash book. All banking transactions are routed through this cash book and there is no need to open a separate bank account in ledger.
Petty Cash Book
In any organization, there may be many petty transactions incurring for which payments have to be done. Therefore, cash is kept with an employee, who deals with it and makes regular payments out of it. To make it simple and secure, mostly a constant balance is kept with that employee.
Suppose cashier pays Rs 5,000 to Mr A, who will pay day-to-day organization expenses out of it. Suppose Mr A spend Rs 4,200 out of it in a day, the main cashier pays Rs 4,200, so his balance of petty cash book will be again Rs 5,000. It is very useful system of accounting, as it saves the time of the main cashier and provides better control.
We will soon discuss about ‘Analytical or Columnar Petty Cash Book’ which is most commonly used in most of the organizations.
|PETTY CASH BOOK|
|Amount Recieved||C.B.F||Date||Particulars||Amount Paid||Stationery & Printing||Cartage||Loading||Postage||L.F.|
Purchase book is prepared to record all the credit purchases of an organization. Purchase book is not a purchase ledger.
|Date||Particulars||Inward Invoice No.||L.F.||Amount|
The features of a sale book are same as a purchase book, except for the fact that it records all the credit sales.
|Date||Particulars||Outward Invoice No.||L.F.||Amount|
Purchase Return Book
Sometimes goods are to be retuned back to the supplier, for various reasons. The most common reason being defective goods or poor quality goods. In this case, a debit note is issued.
|PURCHASE RETURN BOOK|
|Date||Particulars||Credit Note No.||L.F.||Amount|
Sale Return Book
The reason of Sale return is same as for purchase return. Sometimes customers return the goods if they don’t meet the quality standards promised. In such cases, a credit note is issued to the customer.
|SALE RETURN BOOK|
|Date||Particulars||Debit Note No.||L.F.||Amount|
Bills Receivables Book
Bills are raised by creditors to debtors. The debtors accept them and subsequently return them to the creditors. Bills accepted by debtors are called as ‘Bills Receivables’ in the books of creditors, and ‘Bills Payable’ in the books of debtors. We keep them in our record called ‘Bills Receivable Books’ and ‘Bills Payable Book’.
|BILLS RECEIVABLE BOOK|
|Date||Received From||Term||Due Date||L.F.||Amount|
Bills Payable Book
Bills payable issues to the supplier of goods or services for payment, and the record is maintained in this book.
|BILLS PAYABLE BOOK|
|Date||To Whom Given||Term||Due Date||L.F.||Amount|
Key Features of Subsidiary Books
There is a difference between a purchase book and a purchase ledger. A purchase book records only credit purchases and a purchase ledger records all the cash purchases in chronical order. The daily balance of purchase book is transferred to purchase ledger. Therefore, purchase ledger is a comprehensive account of all purchases.
The same rule applies to sale book and sale ledgers.
- It is quite clear that maintaining a subsidiary book is facilitation to journal entries, practically it is not possible to post each and every transaction through journal entries, especially in big organizations because it makes the records bulky and unpractical.
- Maintenance of subsidiary books gives us more scientific, practical, specialized, controlled, and easy approach to work.
- It provides us facility to divide the work among different departments like sale department, purchase department, cash department, bank department, etc. It makes each department more accountable and provides an easy way to audit and detect errors.
- In modern days, the latest computer technology has set its base all over the world. More and more competent accounts professionals are offering their services. Accuracy, quick results, and compliance of law are the key factors of any organization. No one can ignore these factors in a competitive market.
On a particular date, reconciliation of our bank balance with the balance of bank passbook is called bank reconciliation. The bank reconciliation is a statement that consists of:
- Balance as per our cash book/bank book
- Balance as per pass book
- Reason for difference in both of above
This statement may be prepared at any time as per suitability and requirement of the firm, which depends upon the volume and number of transaction of the bank.
In these days, where most of the banking transactions are done electronically, the customer gets alerts for every transaction. Time to reconcile the bank is reduced more.
|BANK RECONCILIATION STATEMENT|
|Particulars||Debit Bank Balance as per Bank Book||Credit Bank Balance as per Bank Book (overdraft)|
|Balance as per Bank Book||50,000||-50,000|
|1. Add: Cheque issued to parties but not presented in bank||3,25,000||3,25,000|
|2. Less: Cheque deposited in bank but not cleared yet||-50,000||-50,000|
|3. Less: Bank Charges debited by bank but not entered in our books of accounts||-1,200||-1,200|
|4. Less: Bank interest charged by bank but not entered in our books of accounts||-10,000||-10,000|
|5. Add: Payment direct deposited by party without intimation to us||1,75,000||1,75,000|
|Balance as per Bank Pass Book/ Statement||4,88,000||3,88,000|
Trial balance is a summary of all the debit and credit balances of ledger accounts. The total of debit side and credit side of trial balance should be matched. Trial balance is prepared on the last day of the accounting cycle.
Trial balance provides us a comprehensive list of balances. With the help of that, we can draw financial reports of an organization. For example, the trading account can be analyzed to ascertain the gross profit, the profit and loss account is analyzed to ascertain the profit or Loss of that particular accounting year, and finally, the balance sheet of the concern is prepared to conclude the financial position of the firm.
|1||ADVANCE FROM CUSTOMERS||XX|
|2||ADVANCE TO STIFF||XX|
|4||BALANCE AT BANK||XX|
|6||BANK INTEREST PAID||XX|
|8||CASH IN HAND||XX|
|9||COMMISSION ON SALE||XX|
|14||INWARD FREIGHT CHARGES||XX|
|20||REPAIR AND RENUWALS||XX|
|24||STAFF WELFARE EXPENSES||XX|
Financial statements are prepared to ascertain the profit or loss of the business, and to know the financial position of the company.
Trading, profit & Loss accounts ascertain the net profit for an accounting period and balance sheet reflects the position of the business.
All the above has almost a fixed format, just put all the balances of ledger accounts into the format given below with the help of the trial balance. With that, we may derive desired results in the shape of financial equations.
|Trading & Profit & Loss Account of M/s ABC LimitedFor the period ending 31-03-2014|
|To Opening Stock||XX||By Sales||XX|
|To Purchases||XX||By Closing Stock||XX|
|To Freight charges||XX||By Gross Loss c/d||XXX|
|To Direct Expenses||XX|
|To Gross Profit c/d||XXX|
|To Salaries||XX||By Gross Profit b/d||XXX|
|To Office Expenses||XX||By Bank Interest received||XX|
|To Bank charges||XX||By Discount||XX|
|To Bank Interest||XX||By Commission Income||XX|
|To Electricity Expenses||XX||By Net Loss transfer to Balance sheet||XX|
|To Staff Welfare Expenses||XX|
|To Audit Fees||XX|
|To Repair & Renewal||XX|
|To Sundry Expenses||XX|
|To Net Profit transfer to Balance sheet||XX|
|Balance sheet of M/s ABC Limitedas on 31-03-2014|
Add:Net Profit XX
|XX||Fixed Assets XXXX
|Bank Borrowings||XX||Current Assets –|
|Long Term Borrowing||XX||Stock||XX|
|Current Liabilities –||Debtors||XX|
|Advance Form Customers||XX||Cash In hand||XX|
|Sundry creditors||XXX||Cash at Bank||XX|
|Bills Payable||Bills receivables||XX|
The equation of equity is as follows:
Owner Equity = Assets – liability
The owner or the sole proprietor of a business makes investments, earns some profit on it, and withdraws some money out of it for his personal use called drawings. We may write this transaction as follows:
Investment (capital) ± Profit or Loss – drawings = Owner’s Equity
Assets that are convertible into cash within the next accounting year are called current assets.
Cash in hand, cash in bank, fixed deposit receipts (FDRs), inventory, debtors, receivable bills, short-term investments, staff loan and advances; all these come under current assets. In addition, prepaid expenses are also a part of current assets.
Note: Prepaid expenses are not convertible into cash, but they save cash for the next financial or accounting year.
Like current assets, current liabilities are immediate liabilities of the firm that are to be paid within one year from the date of balance sheet.
Current liabilities primarily include sundry creditors, expenses payable, bills payable, short-term loans, advance from customers, etc.