By the end of this chapter, you will be able to:
Mastering these skills will help you keep precise financial records, which is essential for any successful business in the real world.
Compiled by: Patrick Maina
Financial accounting is an essential skill across all professional fields in Kenya, providing a systematic method to record, summarize, and report financial transactions. The cash book plays a critical role in this process as it serves as the primary record of all cash receipts and payments made by an organization. Mastery of cash book preparation ensures accurate financial tracking, supports transparency, and helps organizations such as county hospitals, banks, and retail businesses manage their liquidity effectively. This chapter focuses on the preparation of different types of cash books commonly used in Kenyan organizations, essential for maintaining sound financial records.
Cash books are specialized accounting books that record all cash transactions in chronological order. They combine the functions of a ledger and a journal, providing a detailed and immediate record of cash inflows and outflows. In Kenyan organizations, cash books are indispensable in sectors such as education, agriculture, and hospitality, where cash transactions are frequent and need close monitoring to prevent misappropriation and errors. Understanding the various types of cash books enables professionals to select and maintain the appropriate record-keeping system for their organization's needs.
The two column cash book is a fundamental accounting tool that records all cash and bank transactions in two separate columns. This format is widely used in institutions like county government offices and universities where cash and bank dealings occur regularly but do not require detailed bank reconciliation within the cash book itself.
The two column cash book consists of a debit side and a credit side. The debit side records cash and bank receipts, while the credit side records cash and bank payments. Each side has two columns: one for cash and one for bank transactions. Additionally, there are columns for the date, details of the transaction, and folio numbers for cross-referencing with other accounting books.
Recording involves entering cash and bank receipts on the debit side and payments on the credit side. For example, when a retail business receives cash from sales, the amount is entered in the cash column on the debit side. When a payment is made by cheque, it is recorded in the bank column on the credit side. Accurate recording ensures that all cash movements are traceable and verifiable.
At the end of an accounting period, the two column cash book must be balanced. Balancing involves totaling the debit and credit sides separately for both cash and bank columns, calculating the difference, and bringing down the balance to the next period as a carried forward balance. This process helps maintain continuity and provides a clear snapshot of cash and bank positions.
The two column cash book simplifies cash and bank transaction recording, reducing errors and improving financial control. It is suitable for organizations with moderate transaction volumes, such as SACCOs or small hotels. However, it does not provide an automatic bank reconciliation, which can be a limitation where bank transactions are frequent and complex.
The three column cash book extends the two column format by including a column for discounts, allowing for more detailed recording of cash transactions involving trade discounts and cash discounts. This type is commonly used in banks, retail businesses, and cooperative societies in Kenya where discounts are a frequent feature of transactions.
The three column cash book has a debit and credit side, each with three columns: cash, bank, and discount. The discount columns record either discount allowed (on the debit side) or discount received (on the credit side). This structure provides a comprehensive view of all cash-related transactions, including discounts, in one book.
Discounts allowed represent reductions given to customers and are recorded on the debit side’s discount column, reducing the amount of cash or bank receipts. Conversely, discounts received from suppliers appear on the credit side’s discount column, reducing cash or bank payments. For instance, a hotel offering a prompt payment discount to a supplier would record the discount received in the discount column on the credit side.
Balancing involves totaling the cash, bank, and discount columns on both sides, finding the difference, and carrying forward the balances. The inclusion of discount columns requires careful attention to ensure discounts are correctly classified and do not distort cash or bank balances. This cash book facilitates easier reconciliation with bank statements, aiding financial accuracy.
The three column cash book provides detailed financial information, supporting transparent discount management in sectors like retail and hospitality. It improves control over cash flow and financial reporting. However, it requires a higher level of accounting knowledge and can be time-consuming to maintain, especially for small-scale farmers or micro-enterprises with limited accounting resources.
The petty cash book records small, routine payments that are impractical to pay by cheque or bank transfer, such as stationery purchases or local transport fares. It is an essential tool in organizations like hospitals, schools, and county offices where small cash expenses are frequent and need effective control.
The petty cash book streamlines the management of minor expenses, reducing the administrative burden on the main cash book and preventing misuse of funds. It enables organizations to track small expenditures clearly, facilitating budgeting and audit processes. For example, a school managing petty cash for photocopying and office supplies can maintain clear records without disturbing its main cash accounts.
The petty cash book typically contains columns for date, particulars, voucher number, and amount. It may be operated using the imprest system, where a fixed amount is allocated, and replenished periodically, or the simple system, where expenses are recorded as they occur without a fixed float. The imprest system is preferred for its control benefits, as seen in cooperative societies managing petty cash for field operations.
Each petty cash payment is supported by a voucher or receipt, entered in the petty cash book with details of the expense. The custodian manages the fund, ensuring payments are legitimate and within budget. Periodic reconciliation and replenishment maintain the fund’s integrity and ensure continuous availability of cash for minor expenses.
Challenges include the risk of misappropriation, inaccurate recording, and lack of supporting documentation. Control measures involve strict authorization of petty cash payments, regular audits, and maintaining proper voucher documentation. For instance, a county referral hospital may implement monthly petty cash reconciliations to detect discrepancies early and enforce accountability.
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Create a free accountThis chapter explored the preparation of cash books as essential tools in financial accounting, focusing on the structure and use of two-column, three-column, and petty cashbooks. The two-column cashbook records both cash and bank transactions, while the three-column cashbook adds a discount column for comprehensive tracking. Petty cashbooks manage small, routine expenses, ensuring detailed oversight of minor disbursements. Classification of cash receipts was examined to distinguish various sources of incoming cash, which is crucial for accurate record-keeping. The chapter then detailed the procedures for recording these cash receipts systematically in the appropriate cashbooks. Finally, the treatment of discounts was discussed, differentiating cash discounts given for prompt payment, trade discounts offered on the sale price, and quantity discounts granted for bulk purchases, each affecting accounting records in distinct ways. Together, these topics provide a thorough understanding of managing and documenting cash transactions in business operations.
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