Cash Book and Subsidiary Books

Balancing an account involves calculating the difference between the total debits and the total credits. This difference, known as the balance, is then entered on the side with the smaller total to make both sides equal. This process is essential for preparing the trial balance and financial statements.

A double column cash book features two columns on each side (debit and credit) to record cash and bank transactions simultaneously. This allows a business to track its physical cash on hand and its bank balance in a single ledger. Credit transactions are not recorded here as they do not involve immediate cash or bank movement.

The sales journal is reserved specifically for the credit sale of goods (inventory). When an asset other than inventory, such as machinery or furniture, is sold on credit, it must be recorded in the journal proper. This is because it does not fit into the specialized subsidiary books designed for routine inventory transactions.

A cash book is a subsidiary book used to record all receipts and payments made in cash or through a bank. Transactions that do not involve an immediate exchange of cash, such as credit sales or credit purchases, are excluded. It serves as both a journal and a ledger account for cash.

The purchase book, or purchase journal, is specifically designed to record the credit purchase of goods intended for resale. Cash purchases are recorded in the cash book, not the purchase book. Only transactions involving inventory bought on credit from suppliers are entered here.

When goods bought on credit are returned to the supplier, the transaction is recorded in the purchase return journal, also known as the returns outward book. This book tracks all such returns to ensure the accounts payable to suppliers are correctly adjusted. It is a specialized subsidiary book for this specific purpose.

The sales return journal records all returns of goods from customers. At the end of a period, the total of this journal is posted to the debit side of the sales return account in the general ledger. This account tracks the total value of goods returned, which is later deducted from gross sales.

Under the imprest system of petty cash, a fixed sum of money is provided to the petty cashier at the start of a period. This fixed amount is called the imprest amount or float. At the end of the period, the petty cashier is reimbursed for the exact amount spent to restore the balance to the original imprest level.

A bank overdraft occurs when an account holder withdraws more money than is currently available in their bank account. This results in a negative balance, effectively creating a short-term loan from the bank. It is a common credit facility provided to businesses to manage temporary cash flow shortages.

A contra entry occurs when a transaction affects both the cash and bank columns of a double-column cash book. For example, depositing cash into the bank or withdrawing cash from the bank for office use requires an entry on both the debit and credit sides. These entries cancel each other out in terms of the total liquid assets of the business.

When a business maintains a cash book, all cash-related transactions (including cash purchases and cash sales) are recorded directly there. Consequently, these transactions are excluded from the specialized journals like the purchase book and sales book, which only record credit transactions. They are also not recorded in the general journal.

In a standard cash account, the debit side represents receipts and the credit side represents payments. Since a business cannot spend more physical cash than it has received, the debit total will always be greater than or equal to the credit total. This results in a debit balance, representing cash on hand.

The purchase book is exclusively for the credit purchase of goods (inventory) meant for resale. Since a machine is a fixed asset and not inventory, its credit purchase cannot be recorded in the purchase book. Instead, it must be recorded in the journal proper, which handles non-routine credit transactions.

Salary is an expense paid in cash, which represents an outflow of funds from the business. In a cash book, all cash payments are recorded on the credit side, while all cash receipts are recorded on the debit side.

Cash sales involve the immediate receipt of cash, so they must be recorded in the cash book. The sales journal is reserved specifically for recording credit sales of goods.

Depositing money into a bank account reduces the amount of physical cash on hand. In a double-column cash book, this decrease is recorded by crediting the cash column.

When expenses are paid via bank, the transaction is recorded in the bank column of the cash book. Since the physical cash held by the business is not touched, the cash column remains unaffected.

The Purchase Account is used to record the total cost of all goods purchased for resale, regardless of whether they were bought for cash or on credit. Purchases of fixed assets like buildings or furniture are recorded in their specific asset accounts instead.

Withdrawing cash for personal use is a type of drawing that reduces the business's cash balance. Because it is a cash outflow, it is recorded on the credit side of the cash book.

Receiving a cheque and depositing it on the same day increases the bank balance of the business. In accounting, an increase in an asset like a bank balance is recorded on the debit side.

A cheque that has been received but not yet deposited is generally treated as 'Cash in Hand' rather than a bank balance. Therefore, it does not affect the bank column of the cash book until the moment it is actually deposited.

A credit balance in the bank column of a cash book indicates that the business has withdrawn more money than it has deposited. This situation is known as a bank overdraft and is treated as a liability.

Trade discounts are never recorded in the books of accounts as they are deducted directly from the invoice price. Cash discounts, however, are recorded to track the cost of encouraging early payments from customers.

Depositing cash into a bank account is a contra entry that involves two columns of the cash book. The cash column is credited because physical cash is leaving, and the bank column is debited because the bank balance is increasing.

Small, recurring expenses such as courier fees and bus fares are typically handled through a petty cash system. These are recorded in a petty cash book to prevent the main cash book from becoming cluttered with minor transactions.