Chapter 4: Prepare cash books

Financial accounting is a cornerstone of effective business management, providing critical insights into a company’s financial health and cash flow position. For Kenyan business managers, maintaining accurate cash records ensures liquidity, supports decision-making, and facilitates compliance with regulatory frameworks such as the Kenya Revenue Authority (KRA) reporting requirements. This chapter focuses on the preparation of cash books, essential tools for tracking cash transactions, and the classification of cash receipts, enabling managers to monitor daily cash movements efficiently in diverse business environments.

4.1 Cash Books

Cash books serve as primary records for all cash and bank transactions within a business. They document every inflow and outflow in date order, which supports transparency and helps prevent misappropriation of funds. Kenyan businesses, from small retail shops to workshops and wholesalers, rely on cash books to reconcile their daily cash balances and to support financial audits.

A cashbook is both a book of original entry and a ledger account: the cash and bank columns are themselves the cash account and the bank account. Receipts are entered on the left (debit) side and payments on the right (credit) side. The formats below add columns step by step: the two column cashbook adds a bank column to the cash column, the three column cashbook adds discount columns, and the petty cashbook is kept separately for small payments.

4.1.1 Two Column Cashbook

A two column cashbook is a fundamental accounting record that tracks both cash and bank transactions in one book. This format is particularly useful for businesses that handle cash payments alongside bank deposits and withdrawals. Example: a retail shop receives cash from customers at the till and pays its suppliers by cheque; the two column cashbook lets the shopkeeper record both kinds of transaction in the same place.

Structure and components of a two column cashbook

• Cash column: Records all cash receipts and payments, giving a clear view of the physical cash handled by the business.
• Bank column: Records money paid into and taken out of the business bank account, whether by cheque, transfer or deposit.
• Date and particulars columns: Show the transaction date and the name of the account on the other side of the entry, so that every entry can be traced.
• Folio column: Gives the ledger page where the other side of the entry is posted, which allows cross-referencing and verification.
• Balances: Each side is totalled at the end of the period; the difference is written as balance c/d on the smaller side and brought down as balance b/d on the opposite side, separately for cash and for bank.

Recording transactions in a two column cashbook

The process of recording involves entering the date, the particulars and the amount in the cash column or the bank column of the correct side. When a customer pays cash for goods sold at a retail shop, the amount is entered on the debit side in the cash column. When the business pays a supplier by cheque, the payment is entered on the credit side in the bank column. Cash banked and cash withdrawn from the bank are contra entries, which are explained under Three column cashbook. This dual tracking means that cash on hand and the bank balance are always watched together.

Benefits of using a two column cashbook

• Comprehensive cash management: The business tracks physical cash and bank transactions together, which reduces errors.
• Facilitates bank reconciliation: The bank column can be compared with the bank statement to identify discrepancies.
• Simplifies financial reporting: The cashbook gives a clear summary of cash flows for financial statements and for tax reporting to KRA.
• Improves internal controls: Detailed entries make irregularities and possible fraud easier to detect.
• Enhances decision making: The owner can see the cash and bank position at any time, which helps with timely payment and budgeting decisions.

4.1.2 Three column cashbook

A three column cashbook has three money columns on each side: discount, cash and bank. The discount columns record cash discounts, which are reductions allowed for settling a debt promptly. A discount allowed to a customer is entered on the debit side beside the money received, and a discount received from a supplier is entered on the credit side beside the money paid. Example: a household goods shop is owed Ksh 30,000 by a customer who pays within the agreed period and deducts 4%; the cashbook shows the cheque in the bank column and the Ksh 1,200 reduction in the discount allowed column. A trade discount is deducted on the invoice before anything is recorded, so it never appears in the cashbook (see Discounts).

Layout of the three column cashbook

• Date column: The date of each transaction, so that entries follow in time order.
• Details column: The name of the account on the other side of the entry, for example the customer who paid or the supplier who was paid.
• Folio column: The ledger page of the other side of the entry; the letter C marks a contra entry.
• Discount column: Debit side, discount allowed; credit side, discount received. It sits to the left of the cash column on each side.
• Cash column: Money received or paid in notes and coins.
• Bank column: Money received into or paid from the business bank account, for example by cheque or transfer.

Discount allowed and discount received

Discount allowed is the reduction the business gives its customers for paying early. It is a cost to the business, so it is entered on the debit side with the receipt. Discount received is the reduction the business gets from its suppliers for paying early. It is a gain to the business, so it is entered on the credit side with the payment.

• Discount allowed (debit side): The customer's debt is cleared by the money received plus the discount. A customer owing Ksh 8,000 who pays Ksh 7,600 has been allowed Ksh 400.
• Discount received (credit side): The supplier's debt is cleared by the money paid plus the discount. A supplier owed Ksh 15,000 who is paid Ksh 14,700 has allowed the business Ksh 300.
• Amount in the cash or bank column: Only the money that actually changes hands is entered there, never the full invoice value.
• Only cash discounts: The discount columns record discounts for prompt payment. Trade discounts and quantity discounts are dealt with on the invoice.
• Discount not claimed: If a customer pays late and is not given the discount, nothing is entered in the discount column and the full amount goes in the cash or bank column.

Contra entries for deposits and withdrawals

A contra entry is a transaction that affects both the cash column and the bank column of the same cashbook. Both sides of the entry are in the cashbook, so the letter C is written in the folio column on both lines and nothing is posted to the ledger.

• Cash deposited in the bank: Debit the bank column (receipt) and credit the cash column (payment). The shop's cash on hand falls and its bank balance rises by the same amount.
• Cash withdrawn from the bank for use in the shop: Debit the cash column (receipt) and credit the bank column (payment). The bank balance falls and the cash on hand rises by the same amount.
• Discount columns: Contra entries carry no discount.
• Details column: The details name the other column: on a deposit the debit line reads Cash and the credit line reads Bank.
• Effect on the totals: A contra entry adds the same amount to a debit total and a credit total, so the total money held by the business does not change.

Recording transactions in a three column cashbook

1. Write the opening balances of cash and bank on the debit side, dated the first day of the period.
2. Enter each receipt on the debit side. Put the money received in the cash column or the bank column, and any discount allowed in the discount column of the same line.
3. Enter each payment on the credit side. Put the money paid in the cash column or the bank column, and any discount received in the discount column of the same line.
4. Enter each deposit or withdrawal as a contra entry, one line on each side, and mark both lines with C in the folio column.
5. Enter transactions in date order on each side, using the source document of each one, such as the receipt, the cheque counterfoil or the payment voucher.
6. Compute any discount before entering it, for example discount = rate × amount owed, and compute the money paid or received as amount owed − discount.

Balancing the cash and bank columns

The cash column and the bank column are balanced separately, because each is an account of its own. The discount columns are not part of this balancing.

1. Add the debit-side cash column, including the opening balance, and write the sum on scrap paper.
2. Add the credit-side cash column, which holds the payments only, and write the sum on scrap paper.
3. Subtract the smaller sum from the larger to find the balance: for cash, balance = total receipts − total payments.
4. Write the balance on the smaller side (normally the credit side) as Balance c/d, dated the last day of the period.
5. Add the balance to the payments so that both sides show the same total, and write that total on both sides on the same line.
6. Write the balance on the opposite side (the debit side) as Balance b/d, dated the first day of the next period.
7. Repeat steps 1 to 6 for the bank column. If bank payments exceed bank receipts, the bank balance is an overdraft: Balance c/d is written on the debit side and Balance b/d is brought down on the credit side.
8. Compare the cash balance with the money counted in the till, and the bank balance with the bank statement; any difference is investigated.

Totalling and posting the discount columns

The discount columns are only totalled, not balanced. They are not accounts of their own: they record the discount entries so that the totals can be posted once at the end of the period. Each total is written below its column and is not brought down.

• Total of discount allowed: Debited to the Discount allowed account in the general ledger.
• Total of discount received: Credited to the Discount received account in the general ledger.
• Customers' accounts: Each customer is credited with the money received and with the discount allowed, so that the whole debt is cleared.
• Suppliers' accounts: Each supplier is debited with the money paid and with the discount received, so that the whole debt is cleared.
• Other entries: Sales, rent and other items are posted to their own ledger accounts from the cashbook line; contra entries are not posted.

Worked example: three column cashbook

A household goods shop has the following transactions in January 2027:

• Jan 1: Cash in hand Ksh 12,000; cash at bank Ksh 85,000.
• Jan 3: Cash sales Ksh 26,500.
• Jan 5: Wambui, a customer who owes Ksh 30,000, paid by cheque after deducting a 4% cash discount; the cheque was banked.
• Jan 8: Paid Mutua, a supplier owed Ksh 50,000, by cheque after deducting a 3% cash discount.
• Jan 10: Paid Ksh 20,000 cash into the bank.
• Jan 14: Njeri, a customer who owes Ksh 8,000, paid in cash after deducting a 5% cash discount.
• Jan 18: Withdrew Ksh 6,000 from the bank for use in the shop.
• Jan 22: Paid Chebet, a supplier owed Ksh 15,000, in cash after deducting a 2% cash discount.
• Jan 27: Paid shop rent by cheque Ksh 18,000.
• Jan 30: Paid cash for cleaning materials Ksh 1,800.

Working for the discounts:

Wambui: discount allowed = 4% × 30,000 = 1,200; cheque received = 30,000 − 1,200 = Ksh 28,800

Njeri: discount allowed = 5% × 8,000 = 400; cash received = 8,000 − 400 = Ksh 7,600

Mutua: discount received = 3% × 50,000 = 1,500; cheque paid = 50,000 − 1,500 = Ksh 48,500

Chebet: discount received = 2% × 15,000 = 300; cash paid = 15,000 − 300 = Ksh 14,700

Debit side (receipts):

Credit side (payments):

Working for the balances:

Cash receipts = 12,000 + 26,500 + 7,600 + 6,000 = Ksh 52,100

Cash payments = 20,000 + 14,700 + 1,800 = Ksh 36,500

Cash balance = 52,100 − 36,500 = Ksh 15,600

Bank receipts = 85,000 + 28,800 + 20,000 = Ksh 133,800

Bank payments = 48,500 + 6,000 + 18,000 = Ksh 72,500

Bank balance = 133,800 − 72,500 = Ksh 61,300

Check: cash payments + balance = 36,500 + 15,600 = Ksh 52,100, and bank payments + balance = 72,500 + 61,300 = Ksh 133,800, so each pair of totals agrees.

Discount columns (totalled only):

Discount allowed = 1,200 + 400 = Ksh 1,600

Discount received = 1,500 + 300 = Ksh 1,800

Posting to the ledger:

• General ledger: Discount allowed account debited Ksh 1,600; Discount received account credited Ksh 1,800; Sales account credited Ksh 26,500; Rent account debited Ksh 18,000; Cleaning materials account debited Ksh 1,800.
• Customers: Wambui credited Ksh 28,800 and Ksh 1,200, which clears the Ksh 30,000 owed; Njeri credited Ksh 7,600 and Ksh 400, which clears the Ksh 8,000 owed.
• Suppliers: Mutua debited Ksh 48,500 and Ksh 1,500, which clears the Ksh 50,000 owed; Chebet debited Ksh 14,700 and Ksh 300, which clears the Ksh 15,000 owed.
• Contra entries: The entries of Jan 10 and Jan 18 stay in the cashbook and are posted nowhere else.

4.1.3 Petty Cashbook

The petty cashbook is a specialised record used for small, routine cash expenses that do not warrant writing a cheque or making a bank transaction. This system is critical for businesses where minor expenses such as stationery, transport fares or refreshments must be tracked without crowding the main cashbook. Example: an electrical goods shop uses a petty cashbook to monitor its daily sundry expenses such as postage, cleaning materials and local transport.

Purpose and operation of a petty cashbook

The petty cashbook operates under the imprest system, where a fixed amount of cash is set aside for petty expenses. When money is spent, a voucher is issued and the payment is recorded in the petty cashbook. The custodian replenishes the fund periodically by presenting the recorded expenses so that the main cash account reimburses exactly the amount spent.

Categories of expenditure in a petty cashbook

• Office supplies: Purchases of pens, paper and other consumables needed for daily operations.
• Transport costs: Small payments for public transport or mileage allowances for short trips.
• Postage and courier fees: Costs of sending documents or parcels.
• Refreshments and hospitality: Minor expenses for meetings or visitor refreshments.
• Miscellaneous expenses: Any other small payments not classified under the main expense heads.

Controls and accountability in petty cash management

Maintaining accuracy and preventing misuse require strict controls such as:

• Authorisation of expenditure: Only approved petty cash payments are reimbursed.
• Receipt documentation: Every payment must be supported by a valid receipt or voucher.
• Regular reconciliation: Cash in hand plus the vouchers for the period is checked against the float at regular intervals to identify discrepancies.
• Custodian responsibility: A designated petty cash custodian manages the fund and keeps the records.
• Imprest limit enforcement: The float is fixed and is replenished only after a full accounting of the expenses.

Chapter Summary

This chapter focused on the preparation and management of cash books, starting with an explanation of the two-column cash book which records both cash and bank transactions. It then expanded to the three-column cash book that includes an additional column for discounts, providing a more comprehensive record. The petty cash book was also covered, highlighting its role in tracking small, routine expenses separately from the main cash book. The classification of cash receipts was discussed to emphasize the importance of categorizing incoming funds accurately for proper accounting. Detailed procedures for recording cash receipts were explained to ensure systematic and error-free entries. The chapter concluded with an exploration of various types of discounts, including cash discounts that incentivize prompt payment, trade discounts offered on bulk purchases, and quantity discounts that reward larger orders. Understanding these concepts equips students to maintain accurate financial records and manage cash flows effectively.