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CHAPTER 7: CASH BOOK

Business can settle transactions either by cash or cheque.

Since businesses deal with very large amounts of money every day, there is need to have various techniques to control the use of cash within the business. One such method is to use cheques to pay for all transactions. Another method is to bank or deposit all the cheques & cash received on a daily basis.

Cheques banked have to be cleared before the business can use the money for other transactions.

[Cheque Clearing is the banking process where one bank checks with another bank that the person who writes the cheque has enough money in his/her account to pay for the cheque & the money transferred between the banks]

Since transactions by cash or cheque are very common, the business can create special journals that record all the cash or cheques it collects & all the cash or cheque payment is makes.

To record all cash/cheque transactions, business use one special book called Cash Book.

Format of a two-column Cash Book:

Format of a three-column Cash Book:

The Cash Book differs from the other journals in the following ways:

it combines the Cash & Bank accounts into one book
it records and posts transactions all at the same time by using one entry
it is both a book of prime entry as well as a ledger

Cash discounts are provided to encourage prompt payments of outstanding amounts while Trade discounts are provided to encourage bulk purchases (or buying in big quantities).

Discount allowed refers to discounts given to debtors who have purchased goods on credit.

Discount received refers to discounts given by creditors to the business for goods purchased on credit.

Business might wish to apply for an overdraft facility from its bank. This means that the bank allows the business to draw more than what it has in its bank account.