How to prepare a cash book

The cash book is the only subsidiary book used to record cash transactions. The interesting thing about this book is its ability to serve several purposes. With the book, a company can trace its cash resources and ensure its optimal usage.

1. What's a cash book

A cash book is the book of original entry that is used to record cash transactions. While other books focus on credit events in the organization, cash books focus on the cash resources of the entity. Since “cash is king” as mostly said in the finance world, this book must be monitored strictly to ensure that every penny is accounted for.

The cash book serves dual purposes. It is a subsidiary book and also a ledger. This means that after recording a cash item in it, you don't need to post to another ledger account. As part of the double entry system, the book is one of the accounts needed to apply the duality concept. For example, if goods were sold for cash, the cash book is debited while the sales account is credited.

Receipt is the source document for this book. When cash is received by the entity from third parties, a receipt is issued and used as supporting evidence to record the transaction in the book. In recent times, the term cash and its equivalent is used to show the total cash on hand, at bank, and near cash items of a business entity.

2. Features

2.1 Debit and credit column: 

Just as every other ledger the book has columns for debit and credit side. 

2.2 Cash transactions: 

It is the only book that can be used for cash events in the business. It doesn't matter the amount to be spent or received. In addition, its handles both revenue and capital cash items of a business.

2.3 Types: 

In most businesses, the single column cash book is used. However, there are also double and triple columns as explained in part 4 of this article.

2.4 Date: 

The book has a column for date. This helps to trace transactions to a particular date. Date is very useful when there is no reference number. Or it can be interchanged with reference number when tracing transactions.

2.5 Particulars: 

This explains the details of the transaction. For example, if it is a sale, then the particular will state it. When an individual makes the cash payment, it will be stated in the particular.

2.6 Reference: 

The reference or folio number helps to trace the other accounts the transaction is coming from. Referencing is usually available in all subsidiary and ledger books. It eased finding the second entry passed to complete the double entry rules.

3. Five (5) uses of cash books

3.1 To track cash transactions

The cash book is used to track cash transactions. At the end of the day's trading, the treasury officer of a business ensured that the amount of cash on hand equals that in the cash book. Any difference is tracked and resolved.

3.2 Comply with cash basis accounting

Cash basis of accounting explains that an organization might decide to use cash accounting rather than accrual accounting. However, the financial reporting standard encourages the use of accrual basis. However, this doesn't stop the use of cash. Therefore, all cash items comply with this accounting basis.

3.3 Manage cash resources

With the cash book, an entity can manage its cash resources. It can tell when cash is below or above minimum and maximum limits respectively. Therefore, a firm can set an optimal cash level and ensure that staff complied with it.

3.4 Make payment for debts

From the cash resources, debts can be paid. This includes paying for expenses, trade creditors and loans collected from banks. And ensuring that they are recorded immediately 

3.5 Received cash payments from trading partners

Also, cash received from debtors are recorded in the book. When goods are sold for cash, the receipt goes to the book. Any other cash receipt such as a refund from suppliers serves as a cash receipt.

3.6 Prepare cash flow statement 

It can aids the preparation of a cash flow statement. If an organization decides to use the direct method of preparing the account. However, if the indirect method is used, the balance in the statement of cash flow must be equal to the closing balance in the business cash book.

4. What are the three types of cash books

The three types of cash book include the single, double, and triple columns cash books. We explain them a bit here:

4.1 Single column: 

The single column book has just a column for cash items. Most organizations used this method. Therefore, they will have a cash account for different purposes or staff handling cash and have the general cash account which will serve as a control account.

4.2 Two column: 

The two columns book has a column for cash which is separate from the bank column. This helps to reduce having many single column cash books. Although it is recommended, it is rarely used in real life situations. 

4.3 Three column: 

For three columns book, there are columns for cash, bank and discount. The discount column is a memorandum column used to total the discounts received or allowed for the months before it is posted to their respective ledger accounts. 

5. Steps to prepare a cash book

A cash book can be prepared using a spreadsheet template. The accountant will decide the pattern of the template. Or can download a free template online. Also, accounting software can be used to do the same. If the entity decides to use one. When a cash transaction takes place the staff in charge of cash will post them to the template or software. He or she must ensure that there is supporting evidence before posting the transaction. When cash is received the item is posted to the debit side. However, when cash is paid it is recorded to the credit side of the book. The cashier must ensure that the date, details of the transaction, and the reference number are recorded.

6. Conclusion 

To conclude, the cash book serves as a subsidiary book and ledger. As it were, the book is useful for tracking and managing cash resources of an entity. This makes the book unique. As the most important resource of an entity, it is important to ensure that every penny is recorded in it.