Here we detail about the three types of cash book, i.e., (1) Simple Cash Book, (2) Two Column Cash Book, and (3) Petty Cash Book.
Simple Cash Book:
Simple cash book contains only one amount column on each side (debit and credit) for recording cash receipts and cash payments.
A format of simple cash book is given below:
For recording transactions in the simple cash book, the foremost step is to understand the rule for recording transactions i.e., which account is to be debited and which account is to be credited.
Rules for Recording Transactions:
We know that cash book is also a cash account and there are two approaches for recording business transactions in the books of accounts. One is ‘Traditional Approach’ and the other is ‘Equation Based Approach.
Under traditional approach, cash is a real account so that following the rule: ‘Debit what comes in and credit what goes out’, receipt of cash is to be debited (i.e., cash comes in) in the cash book and payment of cash is to be credited (i.e., cash goes out).
Similarly, in the equation based approach, cash is an asset and following the rule: ‘Increase in asset is to be debited and decrease in asset is to be credited’, receipt of cash is debited (i.e., increase in cash) and payment of cash is to be credited (i.e., decrease in cash) in the cash book.
Procedure for Recording Transactions:
After knowing the rule for recording a transaction, it is essential for us to learn the procedure for recording the transactions in the simple cash book. It can be observed from the above format that the columns on ‘Receipts Side’ of the cash book are similar to the columns appearing on ‘Payment Side’.
However, for recording transactions in the cash book following steps should be taken:
In the ‘Date’ column, the day, month and the year, on which transaction occurs should be recorded.
In the ‘Particular’ column, the nomenclature of the accounts, from where cash is received or paid, gets recorded.
In the ‘L.F.’ (Ledger Folio) column, the folio (page number) of the respective ledger, where the posting of the transaction is made, shall be recorded.
In the ‘Amount’ column, the actual cash paid or received is recorded.
The last, but not the least, cash book is to be balanced. As already stated, a separate cash account in ledger is not opened when a cash book is maintained. Like an account is balanced in the ledger, the cash book is balanced in the same way. Depending upon the need and size of the enterprise, the cash book should be balanced daily, weekly or monthly.
Total of the ‘Amount’ column on both sides of the cash book is compared and the difference if any, should be entered on the credit side of the cash book under the ‘Particulars’ column as “By Balance c/d’. By putting the difference under the amount column both sides of the cash book become equal.
Now total amount under the ‘Amount’ columns on both side of the cash book is written opposite to each other. The closing balance shown as ‘By Balance c/d’ becomes the opening balance for the next period and is written as ‘To Balance b/d’.
Double Column Cash Book- Cash Book with Bank Column:
Simple cash book with single amount column on either side is maintained if the organization has only cash transactions. However, due to security and legal bindings, sometimes the transactions have to be necessarily routed through banks. The receipt issued by the cashier is the source document for cash receipts.
Any document viz., invoice, bill receipt etc., through which payment has been made, will serve as a source document for payment. These documents, popularly known as vouchers are numbered serially and filed in a separate file for future reference, verification and audit.
Bank facilitates a business enterprise to open current account in which the business enterprise can withdraw amount in excess of what is available in the current account. In that case transactions related to cash and banks are to be recorded separately in a cash book so that at any particular period of time, cash balance available in the cash chest and bank balance available in the bank account can be known immediately.
It is better to record transactions relating to both cash and bank in the same cash book. For this purpose, one more amount column for recording bank transaction is to be added on both sides of the cash book. This is known as bank column. Under bank column of the cash book, cash transactions routed through bank are recorded.
A format of cash book with bank column is given below:
Similar to simple cash book, cash transactions are recorded in the two column cash book. The difference is that here we also record banking transactions i.e., the transactions in which bank is also involved.
Rule for Recording Transactions:
Entries in the cash column are recorded similar to recording transactions in the simple cash book. For recording bank transactions there are two approaches. One is ‘Traditional Approach’ and the other is ‘Equation Based Approach’. Under traditional approach, bank is personal account so that as per the rule: ‘Debit the receiver and credit the giver’, receipt of cash by the bank is to be debited (i.e., debit the receiver) in the cash book and payment of cash by the bank is to be credited (i.e., credit the giver).
However, in the equation based approach, bank is an asset and the rule: ‘Increase in asset is to be debited and decrease in asset is to be credited’, will be followed. If in a transaction, bank column increases, bank column of the cash book is to be debited (i.e., increase in bank) and decrease in bank column is to be credited (i.e., decrease in bank) in the cash book.
Procedure for Recording Transactions:
The procedure for recording transactions in the cash book with bank column is the same as that stated in the case of simple cash book. Depending upon the reputation or goodwill of the business enterprise, bank fixes a limit on withdrawals, which is known as credit limit. It means bank column may either show debit or credit balance depending upon how receipts and payments made through bank column of the cash book have affected the credit limit.
Petty Cash Book:
Petty cash book is a kind of cash book which records large number of small payments such as conveyance, cartage, postage, telegrams and other expenses under the imprest system. These expenses are repetitive in nature. The procedure becomes cumbersome if all small and repetitive payments are handled by the main cashier and are recorded in the main cash book.
The cash book may become very bulky and the cashier may be overburdened. Applying the rule of ‘management by exception’ the main cashier should not be disturbed for small and petty items.
Big organizations normally appoint one or more cashier known as ‘Petty Cashier’ and assign the handling of petty expenses. Sometimes the work of handling small and petty expenses is assigned to an existing employee who in addition to his normal duties maintains a separate cash book to record these petty and small cash transactions. For this purpose petty cash book is to be maintained by such employee. The petty cashier so appointed for recording the small and petty expenses works on the imprest system.
Under the imprest system, a fixed amount say Rs. 5,000 is given to the petty cashier for incurring small and petty expenses. This amount is called imprest money. The petty cashier makes all the payments for which he is authorized out of the imprest amount. After a specific period or as soon as he exhausts the full imprest amount, whichever is earlier, he gets reimbursement for the actual amount spent by him from the main cashier.
Thus at the beginning of the next period he once again has the full imprest amount. Keeping in view the quantum of amount involved and frequency of transactions, reimbursement of amount is made on a weekly, fortnightly, monthly basis. Sometimes the petty cash system is operated through the main cash book and in that case petty cash book is not maintained independently.
(i) Reduces the labour:
Petty cash book is based on the division of labour and works on imprest system; hence, it reduces the work and labour of main cashier.
(ii) Controls irregular expenses:
One of the famous principles of management is ‘control by exception’ which means that if one person tries to control everything, he may end up controlling nothing. Based on this principle, a petty cashier is appointed who can control the irregular expenses. In the absence of petty cashier, it is very difficult to watch and control the necessities of incurring any expenses.
(iii) Main cash book does not become over bulky:
Petty cash book helps to keep the main cash book in a compact form because numerous entries for small and petty items are recorded in the petty cash book itself.
(iv) Quick payment possible:
In petty cash book, payments for petty items are recorded. Though they are small, yet they are essential. Sometimes they are so urgent that they cannot wait for approval of the higher authority. In that case quick payment is required and this can be made by the petty cashier.
Types of Petty Cash Books:
There are the two methods of preparing petty cash book:
(i) Simple Petty Cash Book
(ii) Analytical Petty Cash Book or Columnar Petty Cash Book
I. Simple Petty Cash Book:
In simple petty cash book there is one column each for recording of receipt of cash from the main cashier and for payment of petty expenses. ‘Date’ and ‘Particulars’ column is same for receipts and payments. In the ‘C.B. Folio’ column, page number of cash book in which payment to petty cashier is made is to be recorded.
In the particular column heads of the items are to be mentioned. In ‘V .No’ column, voucher number of the transactions are recorded. ‘L.F.’ column shows where the posting of these items have been made in respective ledgers. ‘Amount’ column shows the money value of the transactions.
The format of simple petty cash book is as under:
II. Analytical Petty Cash Book:
Analytical Petty Cash Book or Columnar Petty Cash Book is different from the simple petty cash book in the sense that in this type of petty cash book, an analytical presentation of cash payment is made. All petty payments are to be classified into different heads and different columns are maintained.
The format of the analytical petty cash book is as under:
Explanations to the Various Columns & Balancing the Analytical Petty Cash Book:
Receipts are recorded in one amount column on the receipts (debit) side known as ‘Amount Received’ column. However, for recording receipts and payments the column for date, voucher number and particulars are common. For recording petty expenses, petty cash book has one column on the payment (credit) side which is known as ‘Total Amount’ column.
In this column total of various expenses paid by same voucher and on the same day are recorded at one place. The total amount column is followed by number of columns for recording the heads of items which are most common in the business enterprise.
After allotting the columns to most common heads, one column is allotted for recording miscellaneous items which are known as “Miscellaneous’ column. Payments for which a separate column does not exist are recorded in this column.
The last column is allotted for ‘Remarks’. The nature of payments is recorded in this column. All amount columns are totaled at the end of the period. The total amount spent and the amount reimbursed shall be shown in the total amount column.
Illustration 3: (Petty Cash Book)
Sharma Sports Goods Co. follows the imprest system of petty cash under which, Rs 6,000 was handed over to the petty cashier as on 1st March 2011.
The expenses during the month were as follows: