Banking and Cash Transactions

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.

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.

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.

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.

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.

When a cheque is issued to a creditor, the liability towards that creditor decreases. According to the rules of personal accounts, the receiver (the creditor) is debited, while the bank account is credited as the source of funds.