Chapter 4: Prepare cash books

Financial accounting plays a critical role in all professional fields by providing reliable records of monetary transactions and financial positions. Among the key tools in financial accounting is the cash book, which serves as a fundamental record of cash inflows and outflows. Accurate maintenance of cash books enables organizations to manage liquidity, prevent fraud, and comply with regulatory requirements. This chapter explores the preparation of cash books, focusing on their structure and the classification of cash receipts, with examples drawn from diverse Kenyan sectors such as healthcare, education, banking, and agriculture.

4.1 Cash books

A cash book is the book in which a business records every receipt and payment of money, whether the money passes through the till or through the bank account. It does two jobs at once. It is a book of original entry, because each transaction is written here first, and it is also the ledger account for cash and for bank, so the business keeps no separate cash account or bank account in the general ledger. Receipts go on the debit (left) side and payments on the credit (right) side, and the difference between the two sides is the money in hand or at the bank.

A hardware shop shows why the book matters. It takes cash from walk-in buyers, receives cheques from building contractors, pays suppliers by cheque and settles small bills from the till. Without one record of what came in and what went out, the owner cannot say how much cash should be in the till or how much is available at the bank.

Purpose of cash books

• Cash management: Recording inflows and outflows in order shows the owner how much money is available at any time.
• Bank reconciliation: The bank column gives the figures to compare with the bank statement and so find errors or missing items.
• Financial reporting: Cash and bank balances and the totals posted to the ledger feed the trial balance and the final statements.
• Control and accountability: Every line is supported by a source document, so the book leaves an audit trail.
• Budget monitoring: Actual receipts and payments are compared with the planned amounts for the month.

The simplest form, a single column cashbook, records cash only and is enough for a trader who never banks money. This topic deals with the three forms below. They differ in how much detail they carry.

Rules that apply to every cash book

• Debit what comes in, credit what goes out: Every receipt is entered on the debit side and every payment on the credit side.
• Date order: Entries follow the order in which the transactions happened, so the book can be checked against receipts, cheque counterfoils and bank paying-in slips.
• Source document for every entry: A receipt, a copy of the cash sale, a payment voucher, a cheque counterfoil or a paying-in slip supports each line.
• Cash cannot be overdrawn: The cash column always has a debit balance or nil, because a business cannot pay out more cash than it holds. The bank column can show a credit balance, which means the account is overdrawn.
• Opposite side in the ledger: The other half of each entry is posted to the opposite side of the account named in the details column.
• Separate duties: Where the business is large enough, one person receives money, another records it in the cash book and a third checks the book against the cash and the bank statement.
• Pre-numbered documents: Receipts and vouchers carry serial numbers, so a missing number shows that a transaction was left out.

4.1.1 Two column cashbook

A two column cashbook has two money columns on each side, one for cash and one for bank. Both are written in the same book, so the owner sees the till and the bank account together and can follow money as it moves between them. The details column names the account where the other half of the entry belongs, such as sales, rent or a customer, and the folio column holds the page number of that account in the ledger.

Columns of the two column cashbook

• Date: The day the transaction took place.
• Details: The name of the other account involved, for example Sales or Customer Mwangi.
• Folio: The ledger page of that account, which links the cash book to the ledger.
• Cash: Notes and coins received on the debit side and paid out on the credit side.
• Bank: Cheques paid in, transfers received and cash banked on the debit side; cheques issued, transfers made and bank charges on the credit side.

Contra entries

A contra entry is a transaction in which both halves fall within the cash book, so nothing is posted to the ledger. It happens when cash is paid into the bank or when cash is drawn from the bank for use in the till. When cash is banked, the bank column is debited and the cash column is credited. When cash is drawn from the bank, the cash column is debited and the bank column is credited. The letter C in the folio column marks each contra entry.

Recording transactions

1. Enter cash received on the debit side in the cash column, naming the account that gave rise to the receipt, such as sales.
2. Enter a cheque or transfer received on the debit side in the bank column on the day it is paid in or credited by the bank.
3. Enter cash paid on the credit side in the cash column, naming the account that benefits, such as transport.
4. Enter a cheque issued or a transfer made on the credit side in the bank column on the date it is issued. The bank may pay it a few days later, which is one reason the bank statement and the cash book can differ.
5. Enter every banking of cash or withdrawal of cash as a contra pair, one on each side, with C in the folio column.
6. Fill in the folio column when the entry is posted to the ledger, and mark contra entries so that they are never posted twice.

Worked example of a two column cashbook

A hardware shop starts March with Ksh 15,000 in the till and Ksh 120,000 at the bank. These transactions follow.

• 3 March: Cash sales of Ksh 22,500.
• 4 March: Rent of Ksh 30,000 paid by cheque.
• 6 March: A cheque of Ksh 18,000 received from customer Mwangi and paid into the bank.
• 8 March: Transport of Ksh 2,500 paid in cash.
• 10 March: Cash of Ksh 25,000 paid into the bank.
• 12 March: Ksh 10,000 drawn from the bank for use in the till.
• 15 March: A cheque of Ksh 45,000 issued to supplier Odhiambo.

DEBIT SIDE (receipts)
Date    Details                 Folio       Cash       Bank
-----------------------------------------------------------
1 Mar   Balances b/d                      15,000    120,000
3 Mar   Sales                   GL        22,500
6 Mar   Customer Mwangi         SL                   18,000
10 Mar  Cash (contra)           C                    25,000
12 Mar  Bank (contra)           C         10,000
-----------------------------------------------------------
                                          47,500    163,000

CREDIT SIDE (payments)
Date    Details                 Folio       Cash       Bank
-----------------------------------------------------------
4 Mar   Rent                    GL                   30,000
8 Mar   Transport               GL         2,500
10 Mar  Bank (contra)           C         25,000
12 Mar  Cash (contra)           C                    10,000
15 Mar  Supplier Odhiambo       PL                   45,000
31 Mar  Balances c/d                      20,000     78,000
-----------------------------------------------------------
                                          47,500    163,000

Working, using the cash column and the bank column separately:

Cash debit total    = 15,000 + 22,500 + 10,000          = 47,500
Cash credit total   = 2,500 + 25,000                    = 27,500
Cash balance c/d    = 47,500 - 27,500                   = 20,000

Bank debit total    = 120,000 + 18,000 + 25,000         = 163,000
Bank credit total   = 30,000 + 10,000 + 45,000          = 85,000
Bank balance c/d    = 163,000 - 85,000                  = 78,000

The balances carried down appear on the credit side so that both sides of each column add up to the same total. On 1 April the same balances are brought down on the debit side: cash Ksh 20,000 and bank Ksh 78,000.

Benefits of the two column cashbook

• One record of all money: Cash and bank are written in one book, which lowers the risk of a missed entry.
• Support for bank reconciliation: The bank column is compared with the bank statement to find items that appear in one and not in the other.
• Daily view of liquidity: The owner sees how much is in the till and at the bank before approving a purchase.
• Control over money: A missing receipt or an unexplained difference shows quickly because every line has a source document.
• A base for the ledger: Totals and individual entries are posted to the ledger accounts, which completes the double entry.

4.1.2 Three column cashbook

A three column cashbook adds a discount column on each side of the two column cashbook, so each side has three money columns: discount, cash and bank. The discount column on the debit side records discount allowed, which is the reduction the business gives a customer who pays early. The discount column on the credit side records discount received, which is the reduction a supplier gives the business for paying early. The meaning and kinds of discount are explained under Discounts; this topic deals with how discounts are recorded in the cash book.

Columns of the three column cashbook

• Discount allowed (debit side): The reduction given to a customer who settles an invoice within the agreed period.
• Discount received (credit side): The reduction a supplier gives the business for settling an invoice within the agreed period.
• Cash and bank: The same columns as in the two column cashbook, holding the money actually received or paid.

The amount in the cash or bank column is the money that actually changed hands. The discount is not money: it is the part of the debt that is cancelled. Together they settle the customer's or supplier's account in full.

Totalling the discount columns

The discount columns are not balanced. They are only totalled at the end of the month, and each total is posted once to the ledger. The total of the discount allowed column is debited to the Discount allowed account, which is an expense. The total of the discount received column is credited to the Discount received account, which is income. Cash and bank are balanced as in the two column cashbook.

Recording rules

1. When a customer settles an invoice early, enter the money received in the cash or bank column and the reduction in the discount allowed column on the same line.
2. When the business settles a supplier's invoice early, enter the money paid in the cash or bank column and the reduction in the discount received column on the same line.
3. Post the cash or bank column amount plus the discount on that line to the customer's or supplier's account, so that the account closes at nil.
4. At the end of the month, total the two discount columns and post each total to its own account.
5. Balance the cash and bank columns, and bring the balances down.

Worked example of a three column cashbook

A stationery wholesaler starts March with Ksh 8,000 in cash and Ksh 60,000 at the bank. These transactions follow.

• 2 March: Customer Kamau owes Ksh 20,000 and pays by cheque within the discount period, taking a 5% discount. Discount allowed is 5% of 20,000 = Ksh 1,000 and the cheque is Ksh 19,000.
• 5 March: The wholesaler owes supplier Pius Ksh 30,000 and pays by cheque within the discount period, taking a 3% discount. Discount received is 3% of 30,000 = Ksh 900 and the cheque is Ksh 29,100.
• 9 March: Cash sales of Ksh 12,000.
• 12 March: Customer Langat owes Ksh 10,000 and pays in cash, taking a 5% discount. Discount allowed is Ksh 500 and the cash received is Ksh 9,500.
• 15 March: The wholesaler owes supplier Quinto Ksh 6,000 and pays in cash, taking a 2% discount. Discount received is Ksh 120 and the cash paid is Ksh 5,880.
• 20 March: Wages of Ksh 7,000 paid in cash.
• 25 March: Cash of Ksh 10,000 paid into the bank.

DEBIT SIDE (receipts)
Date    Details               Folio   Discount       Cash       Bank
--------------------------------------------------------------------
1 Mar   Balances b/d                                8,000     60,000
2 Mar   Customer Kamau        SL         1,000                19,000
9 Mar   Sales                 GL                   12,000
12 Mar  Customer Langat       SL           500      9,500
25 Mar  Cash (contra)         C                               10,000
--------------------------------------------------------------------
        Totals                           1,500     29,500     89,000

CREDIT SIDE (payments)
Date    Details               Folio   Discount       Cash       Bank
--------------------------------------------------------------------
5 Mar   Supplier Pius         PL           900                29,100
15 Mar  Supplier Quinto       PL           120      5,880
20 Mar  Wages                 GL                    7,000
25 Mar  Bank (contra)         C                    10,000
31 Mar  Balances c/d                                6,620     59,900
--------------------------------------------------------------------
        Totals                           1,020     29,500     89,000

Working:

Discount allowed total   = 1,000 + 500                     = 1,500
Discount received total  = 900 + 120                       = 1,020

Cash debit total         = 8,000 + 12,000 + 9,500          = 29,500
Cash credit total        = 5,880 + 7,000 + 10,000          = 22,880
Cash balance c/d         = 29,500 - 22,880                 = 6,620

Bank debit total         = 60,000 + 19,000 + 10,000        = 89,000
Bank credit total        = 29,100
Bank balance c/d         = 89,000 - 29,100                 = 59,900

Posting to the ledger at the end of the month:

Debit  Discount allowed account    1,500
Credit Discount received account   1,020
Credit Customer Kamau account     20,000   (19,000 in the bank column + 1,000 discount)
Credit Customer Langat account    10,000   (9,500 in the cash column + 500 discount)
Debit  Supplier Pius account      30,000   (29,100 in the bank column + 900 discount)
Debit  Supplier Quinto account     6,000   (5,880 in the cash column + 120 discount)

Benefits of the three column cashbook

• Discounts shown in full: Management sees how much the business gives away and how much it earns through early payment.
• Accounts closed correctly: A customer or supplier account is cleared by cash plus discount, so it does not show a small false balance.
• Credit control: Comparing discount allowed with the cash collected shows whether the early payment terms are working.
• Fewer separate entries: The discount is written on the same line as the payment, instead of in a separate journal entry for each settlement.

4.1.3 Petty cashbook

A petty cashbook records small, routine payments made in cash, such as stationery, fares, postage and tea for visitors. The business keeps a fixed sum for these payments, called the float or imprest, in the care of a petty cashier. The role, layout and controls of the petty cash book are set out under Petty cash book in the books of original entry; here the focus is on preparing, balancing and restoring the petty cashbook and on how it connects to the main cash book.

Imprest system

Under the imprest system the petty cashier holds a fixed sum and pays out only against numbered vouchers; the float is restored by the exact amount spent.

Columns of the petty cashbook

The columns follow those described under Petty cash book in the books of original entry: date, details, voucher number, the amount paid and one column for each type of expense. The worked example below adds a receipts column for the imprest received and a total payment column.

Worked example of a petty cashbook

A distribution office starts the week with an imprest of Ksh 10,000. The vouchers are numbered 1 to 7.

Receipts  Date    Details                     Voucher    Total  Stationery  Transport  Postage  Cleaning  Refreshments
----------------------------------------------------------------------------------------------------------------------
  10,000  1 Mar   Imprest received
          2 Mar   Printer paper                     1    1,200       1,200
          3 Mar   Bus fares, delivery clerk         2      850                    850
          4 Mar   Postage stamps                    3      600                             600
          5 Mar   Cleaning materials                4    1,350                                     1,350
          6 Mar   Matatu fares, errand              5      700                    700
          7 Mar   Envelopes and pens                6      450         450
          8 Mar   Tea and sugar for visitors        7      900                                                     900
----------------------------------------------------------------------------------------------------------------------
  10,000          Totals                                 6,050       1,650      1,550      600     1,350           900

Working:

Total payments  = 1,200 + 850 + 600 + 1,350 + 700 + 450 + 900   = 6,050
Analysis check  = 1,650 + 1,550 + 600 + 1,350 + 900             = 6,050
Balance in hand = 10,000 - 6,050                                 = 3,950

Stationery is 1,200 + 450 = 1,650 and transport is 850 + 700 = 1,550. The total of the analysis columns must equal the total payment column, and that is the check on the arithmetic.

Details                                Amount
---------------------------------------------
Total receipts side (imprest)          10,000
Less total payments                     6,050
Balance in hand (c/d)                   3,950

Restoring the imprest

At the start of the next period the balance of Ksh 3,950 is brought down and the main cashier pays Ksh 6,050 to the petty cashier. This amount is a payment in the main cash book and a receipt in the petty cashbook.

Details                                Amount
---------------------------------------------
Balance in hand (b/d)                   3,950
Received to restore imprest             6,050
---------------------------------------------
Imprest restored                       10,000

Posting from the petty cashbook

The total of each analysis column is debited to the account of that expense, and the amount paid to restore the imprest is credited in the main cash book. In the example, Stationery is debited with Ksh 1,650, Transport with Ksh 1,550, Postage with Ksh 600, Cleaning with Ksh 1,350 and Refreshments with Ksh 900, which together equal the Ksh 6,050 credited in the main cash book.

Chapter Summary

This chapter focused on the preparation and management of cash books, essential tools in financial accounting for tracking cash transactions. It began by explaining the two column cashbook, which records both cash and bank transactions, followed by the three column cashbook that includes an additional column for discounts allowed or received. The chapter also covered the petty cashbook, used for managing small, routine expenses. It then discussed the classification of cash receipts, emphasizing the importance of categorizing different types of income accurately. The process for recording cash receipts was detailed to ensure proper documentation and control. Finally, the chapter distinguished between various types of discounts including cash discounts, trade discounts, and quantity discounts, highlighting their roles in business transactions and accounting records.