The cash book and the petty cash book

Recording cash and bank

A business receives and pays money every day, in cash and through the bank. The cash book records all of it. This lesson covers the two-column and three-column cash book, contra entries, and the petty cash book with its imprest.

What the cash book is

The cash book records receipts and payments of cash and money in the bank. It is a book of prime entry and also a ledger account, so no separate cash or bank account is needed. Receipts go on the debit side; payments go on the credit side.

The two-column cash book

A two-column cash book has a cash column and a bank column on each side. Here is its layout with two entries.

The three-column cash book

A three-column cash book adds a discount column on each side. On the debit side, discount allowed to customers who paid early. On the credit side, discount received from suppliers we paid early. The discount columns are memorandum columns: they are totalled and posted to the discount accounts, not balanced.

Contra entries

A contra entry is when money moves between cash and bank, both inside the cash book. Paying cash into the bank: debit the bank column, credit the cash column. Mark both with a C. Withdrawing cash from the bank for office use: debit cash, credit bank.

Balancing the cash book

Balance the cash columns and the bank columns separately, each with its balance carried down and brought down. The cash balance can never be a credit: you cannot have less than no cash. The bank balance can be a credit, which means an overdraft: the business owes the bank.

The petty cash book

The petty cash book records small cash payments, such as postage, cleaning and taxi fares, kept by a petty cashier. It has analysis columns, one for each type of expense, so totals can be posted easily. It frees the main cashier from many small entries.

The imprest system

Under the imprest system, the petty cashier starts each period with a fixed amount, the imprest, such as 200 dollars. If 164 dollars is spent during the month, 36 dollars is left, and the main cashier restores exactly 164 dollars. So each period starts again at 200 dollars, and spending is easy to check.

Advantages of the imprest system

It controls spending: the petty cashier cannot spend more than the imprest. The amount restored equals the vouchers, so errors or fraud are easier to spot. And it trains junior staff in keeping records.

Posting from the cash book

Each receipt on the debit side is credited to another ledger account, such as sales or a customer. Each payment on the credit side is debited to another account, such as rent or a supplier. The discount totals are posted: discount allowed to the debit of its account, discount received to the credit.

Mistakes that lose marks

Mistake one: showing a credit balance on the cash column. Mistake two: balancing the discount columns. They are totalled only. Mistake three: restoring the imprest by the amount left, instead of the amount spent. The fix: cash never in credit, discounts totalled, imprest restored by what was spent.

The full-marks tip

The full-marks tip: enter receipts on the debit side and payments on the credit side, in the right column. For petty cash, restore exactly the amount spent, so the imprest is back to its fixed amount.

On one card

So, on one card: the cash book. Keep it for revision.