USING AN ANALYSED CASH BOOK

As your business grows you may start wanting some elementary management information from the records. For example, ‘How much have I spent on advertising so far this year?’ or ‘What sales are each of my products bringing in?’

Without getting into too much extra work this information can be easily obtained by adding a few analysis columns to your cash book, so that it becomes an analysed cash book. Of course, it can only be a guide at this stage as it doesn’t quite give the full picture. It does not, for example, allow for the amounts that you still owe for advertising in last week’s paper. But it’s a good starting point towards management information.

How to keep the book

Figure 18 shows an example of a page from an analysed cash book. The example is for the credit side of the book (payments), but you can make a similar analysis for the receipts side. With this type of book, as well as recording the amount of each payment in a ‘total’ column a second entry is made in one of the analysis columns. You can adjust the headings of these columns to suit your own business. Depending on how you claim VAT input tax, for instance, you can enter the amounts in the analysis columns either gross or net of VAT. If you are using the cash accounting (or cash book accounting) methods of recording VAT (see Chapter 3), then just add a VAT column next to the total column, and you can analyse your expenses net of VAT.

By analysing the payments as shown in Figure 18 it is easy to see how much, for example, has been spent on advertising during the month (£138.64).

Tip: the last column is a sundries column to mop up anything that doesn’t fit neatly into any of the other columns. Your regular payments should each have a column of their own; only items such as the purchase of a new machine or other occasional ‘one off’ payments need to be entered in the sundries column.

It can also be useful to add small amounts of narrative (i.e. a few words) to some of the items, to remind you later what some particular expense was for.

There are two final points to make:

• 1.In the example on 16 June a cheque for £662.90 was written out to the Insurance Brokers; this was to pay for both van insurance (motor expenses) and office insurance. In a case like this put the appropriate amount into each of the analysis columns just as in the example.
• 2.When you add up the page at the end of the month it is vital that you check that the sum of the total of all the analysis columns does in fact equal the sum of the total column. This is cross addition (because you are adding across the page). If the totals don’t agree then there’s a mistake somewhere and you’ll have to recheck your work.

To summarise

• An analysed cash book is the first step to providing management information.
• Each entry is made both in the total column and also in an analysis column.

• At the end of the month when the book is added up it must cross add.

RECORDING YOUR SALES

So far, you have controlled which customers have paid you, and which have not, by handling the individual invoices. You have filed your copy invoices in a separate file until they are paid, or ‘flagged’ them in your duplicate sales invoice book until they are paid.

This is fine as far as it goes, but you’ll probably find it has two main drawbacks. First, you’ll have to thumb through all the unpaid invoices, adding them up as you go, to work out how much you are owed altogether. Second, you can’t tell very quickly how much a particular customer owes you. They may owe you for several invoices and the invoices may not be in sequence. And they may have only sent you part-payments.

A better alternative – the sales ledger

As your business grows you’ll need a better system to control how much your customers owe you (see Figure 19). You’ll need a proper sales ledger. The sales ledger together with the purchase ledger (dealt with on page 75), are sometimes referred to as the personal ledgers. This is because they deal with persons rather than inanimate things such as the bank account or motor cars. The ledger itself may take many forms. You could use a bound book, a loose-leaf book, or just a set of sheets or cards. It doesn’t matter too much, the main thing is that each page or sheet is ruled into debit (DR) and credit (CR) sides as shown in Figure 20.

This system has one great advantage: it gives all the information for each customer on one page. You can easily tot up how much each owes you at any date. Also, by adding all the balances in the ledger you can work out how much your customers owe you as a grand total.

How the sales ledger fits in with other records

In Chapter 3 you were advised to keep a special book to record your sales for VAT. Actually, this book can be a good way of starting a sales ledger as well, since it forms a readymade register of all your sales invoices. When used along with a sales ledger it becomes known as the sales day book (or sales journal). It is called a day book because you write it up every day as you invoice your customers.

The columns in the sales day book are almost the same as the VAT book that we looked at earlier. The only difference is an extra ‘Account Reference’ column, so you can cross-reference the entries to the entries in the sales ledger (see Figure 21), You write your sales day book up from your sales invoices. Then each week or month, you post the entries from the sales day book (inclusive of VAT) to the (left) debit side of the sales ledger.

Once you start using a sales ledger, you’ll probably have to amend the layout of your cash book. Earlier in the chapter we looked at how to use

the analysed cash book. When you start your sales ledger, rule up the receipts side (debit) of the cashbook as shown in Figure 22 (one of the analysis columns is a ‘sales ledger’ column). Throughout every month enter the amounts that you get from your credit customers both in the ‘total’ column and in the ‘sales ledger’ column, as shown. You will need the other receipts column to record any amounts received which don’t relate to sales, such as insurance claims or VAT refunds. At the end of each month post (copy) the amounts from the cash book to the sales ledger. The amounts entered on the left (debit) side of the cash book need to be recorded on the right (credit) side of the sales ledger. This is part of double entry bookkeeping which we’ll come to

in Chapter 5. For the moment don’t worry about why it is done; just how.

Once you have entered the invoices, and the cash received, into the sales ledger, rule off each customer’s ledger account at the point where there is no outstanding balance. In practice you can do this at the same time as you post the cash received. Look again at Figure 20: your two invoices number 469 and 491 were paid by the customer on 11 July. At that date the columns of figures were double underlined to show that they were now in balance and that all entries before that point had been paid up. Only the amount of £478.63 is still outstanding from the customer.

If you want to know the total amount owed to you by your customers, you ‘extract’ a list of the balances from the sales ledger accounts. This is shown in Figure 23: at 31 August 200X your customers owed you £9,847.58 but there was also £23.14 owed by you to your customers (presumably credits for returned goods or overpayment by them). So in this example the net total due from your customers is £9,824.44.

How do I know I’ve done it all correctly?

Easy! – and yet it seems to cause some people a lot of problems. The answer is a control account (or total account).

The control account is used to monitor, in total, all the entries made in the sales ledger. At the end of each month you post the total of cash received (from the sales ledger column of the cash book) and the total of the invoices for the month from the sales day book to the memorandum control account. This account does not form part of the double entry since the double entry has already been completed. However, by repeating the postings in total to an extra memorandum account the desired control over individual postings in the sales ledger is achieved. Since these figures each represent the total of the postings in the sales ledger, the resulting control account entries must also show the total of all individual entries made in the sales ledger. In other words the balance of the control account should (if you have entered everything correctly)

equal the net total of the list of balances extracted from the sales ledger. If it doesn’t, there must be a mistake somewhere, and you’ll have to recheck your work if the figures are to be relied on. An example of a control account is shown in Figure 24.

What else changes when I start a sales ledger?

You will no longer be using your copy sales invoice as a record of who still owes you money. These invoices can therefore be filed, in numerical order, as soon as you have entered them into the sales day book. You won’t need a separate unpaid invoice file any longer, because you can now easily check the amount owing by any customer by checking their page in your sales ledger (see Figure 25 for the contrast between the basic system and the full sales ledger system).

To summarise

• The sales ledger is used when the number of transactions increases. It provides a more easily accessed and controlled record of customers owing you money.
• You write the sales ledger up in the following manner:
  • Enter invoices into your sales day book.
  • Enter cash received into a separate column in the cash book.
• At the end of the month:
  • The details are transferred (posted) from the sales day book and cashbook to the sales ledger.
  • The total is entered onto the memo control account.
  • The ledger is balanced off and the remaining balances are listed onto a schedule.

• The list of balances is agreed to the control account balance and any difference is investigated.

RECORDING YOUR PURCHASES

We have seen how to start a sales ledger to give better control over money owing to the business. In the same way a purchase ledger can be used to control how we pay for goods supplied to us (see Figure 26).

In a nutshell the purchase ledger is the exact opposite of the sales ledger. You enter goods purchased on the right (credit) side of the ledger account and payments on the left (debit) side. Unlike sales, there are likely to be all kinds of expenses that you need to analyse. Most firms therefore use an analysed purchase day book along with it (see Figure 27), so they can keep track of expenditure under different categories. Since you’ll now analyse most of your expenditure in the purchase day book, the right (credit) side of the cash book can now be simplified. You will still need some analysis (for non-ledger items) but these will be fewer in number. For example, Figure 28 shows how a cash book is used in conjunction with a purchase ledger. You might like to compare this with Figure 18 on page 67 to see how the entries are reflected.

Once again, since the purchase ledger is now your basis of knowing who is to be paid, you don’t need to keep the purchase invoices in a separate file until payment is made.

SUMMARY

• An analysed cash book will give you improved management information.
• A sales ledger system will make it easier to access and control information about customers owing you money.
• A purchase ledger can be used to control how you pay for goods supplied.
• An analysed purchase day book enables you to keep track of expenditure under a number of categories.