What is the cash book?

The cash book is where we record the firm’s cash and cheque transactions. In it we record all the payments coming in and all the payments going out. Like the four day books it is a book of prime entry: it is the first place we record a transaction. However, unlike the day books, it is also a book of account, i.e. part of the ledger. The cash book and petty cash book are the only ones with this dual status.

The cashier is responsible for writing cheques to pay bills, banking money received and for drawing funds for petty cash. Most people are familiar with the process of writing cheques, banking funds and drawing cash from banks so no treatment of this will be given here. Similarly most people understand what payments by standing order and direct debit mean. What they may not be familiar with, however is receiving and making payments by electronic means, e.g. BACS and CHAPS transfers. Both are electronic forms of funds transfer for which a form has to be completed at the bank branch. BACS takes around four working days to reach the recipient, but CHAPS payments are usually received same day.

The advantages of making payments by BACS or CHAPS include:

• No need to write individual cheques.
• The payments are more secure, as they are not physically handled in any form.

The advantages of receiving payments in this way, include:

• The funds are available immediately the instruction is received by recipient’s bank branch, as no clearance time is needed.
• They are less time-consuming as the need to visit the bank to pay in a cheque is eliminated.
• No bank paying-in slip has to be filled in.
• The payments are more secure as the funds are not physically handled.

Recording cash and bank transactions

The cash book is where we first record the details of cash and banking transactions. This includes all cash or cheques received from such customers as Mr Jones or JBC Roofing (see opposite) or indeed from anyone else, and all cash or cheques paid out to suppliers or to anyone else (disbursements). Banks debit firms directly for their services—they don’t send out invoices for payment of interest and bank charges. The firm must record details of these amounts in the cash book as soon as it knows them, for example from the bank statement which shows them.

Source documents

To write up the cash book we need:

• Cheque book stubs (counterfoils) and paying-in book stubs (counterfoils) for all transactions which involve the bank account.
• Any bank advice slips, bank statements or other information received from the bank from time to time. This might for example include a letter advising that a customer’s cheque has been returned unpaid by his bank owing to lack of funds, or information on standing orders, direct debits or bank charges and so on: anything that tells us about any payments going out from, or receipts coming into, the firm’s account.
• Cash purchase invoices, receipts for cash paid out, and copies of receipts given for cash paid in.
• Any payment advice slips which arrived with cheques or cash received: these will show for example whether an early settlement discount has been claimed.

Entering debits and credits

All the cash and cheques we receive are entered on the left-hand side of the cash book (debits). All the cheques we write, and cash we pay are entered on the right-hand side (credits).