THE CASH JOURNALS
=The Cash Book.=—For recording transactions involving cash, two
journals are used. One of these records receipts and the other
disbursements of cash. They are known respectively as the “Cash
Receipts Journal” and the “Cash Disbursements Journal.” Instead of
being separate books, however, they are usually bound together and
comprise what is called the “Cash Book.” When bound together their
pages alternate throughout the book. The cash receipts journal occupies
the left-hand pages, i.e., the even numbered pages—2, 4, 6, etc.—and
the cash disbursements journal the right-hand pages—3, 5, 7, etc.—page
1 not being used. This method sets up the cash record, receipts and
disbursements, on facing pages and the movement of cash is thus under
easy and constant review.
=The Cash Receipts Journal—Analysis of a Cash Receipt.=—If $100 cash
is received on account from John Doe, a customer, an analysis of the
transaction shows “Cash” debit and “John Doe” credit.
Cash 100.00
John Doe 100.00
So with all receipts of cash; the “cash” element is a debit. The
record of cash receipts being made in a journal devoted exclusively to
receipts of cash, the “Cash, Dr.” element of the entry may be omitted
and only the “credit” element need be shown; the very fact that the
entry is made in the cash receipts journal is sufficient to indicate
that “Cash” is a debit. The cash receipts journal (Form 10)—the left or
debit side of the cash book—is operated, therefore very much like the
purchase journal.
[Illustration: Form 10. Cash Book (left-hand page) (Cash Receipts
Journal)]
=The Cash Disbursements Journal—Analysis of a Cash Disbursement.=—If
$10 is paid for expenses of some kind, the analysis gives “Expense”
debit and “Cash” credit.
Expense 10.00
Cash 10.00
So with all disbursements of cash. A separate journal being devoted
exclusively to cash disbursements, the “Cash, Cr.” element of the entry
may be omitted and only the debit shown. The cash disbursements journal
is thus seen to be operated in the same way as the sales journal.
Thus, all left-hand pages in the cash book show receipts and all
right-hand pages show disbursements. Because it is unnecessary to
_write_ the debit element of cash received and the credit element of
cash paid out, a great saving of labor is effected. Nevertheless, it
must be remembered that the entry on either side of the cash book is
essentially a journal entry, and that the missing elements—cash debit
on the left page and cash credit on the right page—are supplied at the
end of the period by the totals when the two journals are summarized in
preparation for posting to the Cash account in the ledger.
[Illustration: Form 11. Cash Book (right-hand page) (Cash Disbursements
Journal)]
=Form of the Cash Journals.=—In the cash journals, just as in all
other journals, provision is made for date, account classification,
explanation, ledger posting index, and money columns. In a simple form
of cash book, just as in the purchase and sales journals, two money
columns are usually provided, the one for detail—a day’s or week’s
detail—and the other for totals. Such a form is shown in Forms 10 and
11. The student should note carefully how the cash receipts journal
is summarized. The balance of cash brought forward from the previous
week is entered in the second or total column so that the detail column
shows only the current week’s receipts. Inasmuch as the Cash account
in the ledger already shows the balance of cash at the beginning
of the week, i.e., $5,000, this amount must not be included in the
summary entry for the current week. In summarizing the cash receipts
journal, therefore, the total only of the detail column, showing the
cash received since the last summary, is set up as a “Cash, Dr.”
item. In summarizing the cash disbursements journal, since there is
normally no balance carried over from the previous week, the total of
the journal—representing the cash disbursed since the last summary—is
set up as a “Cash, Cr.” item. This is shown as $365, the amount being
posted to the credit of the ledger Cash account on page 1.
=Cash Book Taking the Place of the Cash Account.=—Because the two cash
journals are set up on facing pages, the record contains essentially
the same information as a detailed Cash account in the ledger. The
double page record brings together both the receipts and the deductions
from receipts—cash being normally a debit account. For this reason
the cash book record is itself sometimes used as a ledger account and
when it is so used its totals are not posted to the ledger account.
The balance of the cash book must, however, be included in the trial
balance of the ledger, because when so used the cash book is not only a
_journal_ but a _ledger account_ as well.
When, however, the totals of both cash receipts and disbursements are
posted to a Cash account in the ledger, the balance used in the trial
balance is taken from the ledger account and not from the cash book,
although of course the balances in both are the same.
Whichever of these two methods is used, it must always be remembered
that the cash book is essentially a journal and that therefore its
classifications of business transactions must be transferred to their
proper accounts in the ledger.
Best accounting practice, however, requires that a Cash account be
carried in the ledger so that the ledger will be a complete record of
all transactions and will be independent of all other records for proof
of its equilibrium.
=Posting the Cash Book.=—In posting the debit side of the cash book to
the ledger, it is important to remember that the debit element of the
transaction is merely indicated by the fact that the entry appears on
the left-hand page of the cash book. The account name written in the
Account Classification column is the credit element and must be posted
to the credit of the corresponding account in the ledger. Similarly, on
the right-hand side of the cash book, the cash credit element of the
entry is suppressed and the named account should be posted to the debit
of the corresponding ledger account.
After the posting of the individual items has been completed, the
“Cash, Dr.” and the “Cash, Cr.” as shown by the summary entries must be
posted to the ledger Cash account, as explained on page 143.
As stated above, each side of the cash book is, in reality, a journal
in itself—a cash receipts journal and a cash disbursements journal—and
it is only because these two journals are shown side by side that the
cash book is sometimes made to serve the purpose of a ledger Cash
account.
=Balancing and Ruling the Cash Book.=—The cash book in its simple form
is balanced and ruled in the same manner as a ledger account. When the
balance is brought down to the new section it is usually entered in the
second or total column, thus reserving the first or detail column for
the daily or weekly cash receipts, and separating these items from the
balance brought down from the previous period. (See Forms 10 and 11.)
When the record is to be transferred to a new page, either the current
page (double page) is balanced and ruled and only the balance is
carried forward, or the current page is totaled and both debit and
credit footings are carried forward as shown in Chapter XIV for the
ledger cash account. The cash book is closed, ruled, and transferred as
of the same date and on the same line for both sides, although usually
there is room for more entries on one side or the other, which may be
closed by diagonal ruling. This is done in order to keep the record
of the receipts of a given period and that of the disbursements in
nearly exact juxtaposition, and thereby facilitate a review of the cash
movements for that period.
=The Cash Short and Over Account.=—It sometimes happens that when the
cash book is balanced, the amount which ought to be on hand as shown by
this balance, does not agree with the amount of cash on hand as shown
by actual count. The discrepancy may be due to failure to enter some
items of receipts or disbursements in the cash book, or to errors in
making change; or it may be due to petty thieving by the cash clerk.
If the error cannot be rectified at the time, an entry is made in the
cash book, on whichever side necessary, in an amount sufficient to
bring the book balance into agreement with the actual cash balance.
The account to be debited or credited, as the case may be, is entitled
“Cash Short and Over.” If the correct charge or credit is afterwards
determined, the item or items should be transferred from Cash Short and
Over to their proper accounts. Usually the Cash Short and Over account
is treated as an income or expense account and closed into Profit and
Loss at the close of the period. Sometimes it is treated as an asset or
liability account, depending upon the nature of its contents, i.e., the
amount of the discrepancy shown and its probable cause.
=The Cash Purchase and Sales Transactions.=—A standard method of
handling the cash purchase transaction when it is desired to keep a
record of the volume of business done with each vendor, was explained
on page 140, where the purchase was shown to be “washed” or cleared
through the vendor’s account. A more direct method is sometimes used.
When purchases are made for cash, a complete record of the transactions
is made by the entry:
Purchases
Cash
Here there is evidently a conflict of places of original record. The
transaction being a purchase, record should be made in the purchase
journal; and since it is also a cash transaction, record should also
be made in the cash book. However, if an independent record were made
in both places, a duplication of the transaction would result, since
entry in either journal is a complete debit and credit record. The
transaction would be entered twice in full, causing an inflation of the
purchases and cash disbursements. In the purchase journal, the credit
to Cash would be set up at the time of the transaction and at the time
of summarization the debit to Purchases would be included in the total
of the Purchases, thus completing the ledger record. In the cash book
the debit to Purchases would be set up at the time of the transaction,
and when the summary was made the credit to Cash would be in the Cash
total. Entry in both journals would, when posted to the ledger, bring
about two debits and two credits for the same transaction.
To overcome this difficulty the following methods are commonly employed:
1. The record is made complete in both journals, but the credit to
Cash from the purchase journal record is not posted, because that
credit will be posted from its record in the cash book. Similarly,
when posting the cash disbursements journal, the debit to Purchases is
_not_ posted, because that will be posted from the purchase journal.
In this way original record may be made in both journals and each
journal will then show by its total what it is intended to show,
viz., total purchases and total cash disbursed, respectively. In the
secondary record, the ledger, only half of each journal entry is set
up, the debit to Purchases from the purchase journal and the credit to
Cash from the cash book. This prevents the inflation mentioned above
and does not destroy the equilibrium of the ledger because there is
omitted, when posting from the cash book, a debit equal in amount to
the credit omitted when posting the purchase journal.
2. The method explained on page 140 is used with this variation: The
record in each journal shows the individual vendor’s account, but at
posting time no vendor account is set up in the ledger, neither the
credit to the vendor’s account shown in the purchase journal nor its
offsetting debit shown in the cash disbursements journal being posted.
It is necessary, when making the original entries in the journals,
to indicate all postings which are to be omitted, by entering a check
mark, ✔, or a cross, ❌, in the ledger folio column of the journal.
The purchase on a note payable, one method of recording which was
explained on page 140, may also be handled more directly by either of
the methods explained above for a cash purchase. In the case of the
note, however, the journals used are the purchase and general journals.
Similar methods are employed, also, for handling the cash sale and the
sale against a customer’s note.
=Columnar Analysis of Cash Receipts and Disbursements.=—As illustrated
in the chapters on purchase and sales journals, additional money
columns are often used for the purpose of analyzing the purchases and
sales by departments or classes of commodities. A similar analysis of
both the cash receipts and cash disbursements may aid in segregating
certain classes of cash items and thus save labor in posting. Of cash
receipts, two classes are usually more active than all others combined.
More cash is received from cash sales and from customers on account
than from any other source. Accordingly, two additional columns may be
used with these headings. _All_ cash receipts must be entered in the
Total, Bank, or Net Cash column, as it is variously termed, and then
distributed into any special columns provided. Thus all “Cash Sales”
would be extended, both in the Net Cash and in the Sales column, and
all receipts from customers would be entered in the Net Cash and in the
Accounts Receivable column.
In the case of cash disbursements, the number of columns depends upon
the degree of analysis desired. At least two additional columns are
frequently found, one for creditors and one for expenses. Where cash
purchases are numerous they may be segregated, or where any particular
_class_ of expense is of frequent occurrence it may be shown in a
separate column. Where one ledger is used for customers, creditors, and
general accounts, there is little gain in segregating customers and
creditors by special columns in the cash book, except as a slight aid
in posting. Where separate ledgers are used, it is important to have
separate customers and creditors columns in the cash book, as will be
shown later in connection with the subject of controlling accounts.
Illustration and explanation of the columnar cash book are given on
pages 158 and 159.
=Cash Discounts Analyzed.=—Sales and purchase discounts are another
class of transactions best handled through the cash book, although,
strictly speaking, they are not cash transactions. When a customer
buys goods on account, he is usually offered two bases of settlement,
depending on the length of the credit term allowed. Thus, 2% off is
frequently allowed if payment is made within 10 days; otherwise the
full amount of the invoice must be paid. Because the vendor does not
know, at the time of entry on his books, on which basis settlement
will be made, he makes the charge at the full invoiced amount. If the
customer takes advantage of the discount offered, he pays less than the
amount at which his account stands debited, yet the vendor must credit
his account for the full amount of the original charge, in order to
cancel his entire claim against the customer. To illustrate, a customer
buys $100 worth of merchandise, with 2% off if paid within 10 days. On
the 10th day he pays $98. The sale entry would be:
(1) Customer 100.00
Sales 100.00
The cash entry would be:
(2) Cash 98.00
Customer 98.00
But this does not cancel in full the $100 claim against the customer.
The $2 discount, an allowance for early payment, is an expense to
the business and must be charged to an expense account called “Sales
Discount,” and the customer must be given $2 additional credit, the
entry being:
(3) Sales Discount 2.00
Customer 2.00
Entries (2) and (3) are usually combined in one as follows:
(4) Cash 98.00
Sales Discount 2.00
Customer 100.00
Entry (4) is known as a compound entry. If entry (2), which is the part
involving cash, is made in the cash book, then the additional entry (3)
will have to be made in the general journal because there is no cash
element in it and theoretically nothing but cash should be recorded in
the cash book.
=Handling Discounts in the Cash Book.=—This recording in two separate
places of what is really one transaction has led to the introduction
into the cash book of a non-cash column in order to bring the whole
transaction together. The customer’s payment being a receipt of cash,
the record must be made on the debit side of the cash book. Reference
to entry (4) shows that Sales Discount is also a “debit.” Where the
cash book is limited strictly to cash transactions, the cash debit
record shows only the “credit” element of the entry. The use of a Sales
Discount column on the debit side of the cash book for the sake of
making a complete record in one place thus introduces an extraneous
element, one out of harmony with the other entries made there. In
posting, great care must be exercised not to transfer Sales Discount to
the credit side of its ledger account but to the _debit_ side.
=Alternative Treatment for Cash Discounts.=—Sometimes another treatment
of sales and purchase discounts in the cash book is met with. This
treatment for sales discount is based on the fiction that the full
amount of the original charge is received from the customer and that an
immediate return is made to him of the amount of the discount. To use
the example cited on page 155, the entries would be:
Cash 100.00
Customer 100.00
showing receipt of the full invoice price and therefore full credit to
the customer; and
Sales Discount 2.00
Cash 2.00
representing the fictitious payment in cash of a discount on sales of
$2. In the cash book these two entries would appear as follows:
Dr. CASH CASH Cr.
========================== ==========================
Customer 100.00 Sales Discount 2.00
This method of entering discount on sales would have the same ultimate
result in the ledger as the columnar method, but the objection to it
is that it makes the cash book show more money received and paid out
than has actually been the case, thus making it difficult to check the
cash against the bank record of deposits and checks. Another objection
is that by this method the cash book does not show in one place a full
record of the transaction, since the two items are shown on opposite
sides of the cash book. Moreover, these items are seldom on contiguous
lines because one side of the cash book is often considerably “ahead”
of the other. Cash discount on purchases is sometimes handled by a
similar unsatisfactory method.
The first method shown, requiring special discount and net columns on
either side of the cash book, is the approved method.
=Illustration and Explanation of the Analytic Cash Receipts
Journal.=—An example of a columnar cash book debit side is given (Form
12) for the purpose of illustrating some points in the discussion.
It should be understood that there is little uniformity in the
columnization of cash books. The needs of the business govern the
ruling suitable in any given case. The illustration shown is therefore
not presented as a standard form but is given only for the purpose of
illustrating the method of analysis of cash receipts.
[Illustration: †This balance is taken from the credit side of the cash
record appearing on page 159.
Form 12. Columnar Cash Book—Debit Side]
[Illustration: Form 13. Columnar Cash Book—Credit Side]
As shown in the illustration, all _actual cash receipts_ are entered
in the Net Cash column, which in connection with the Sales Discount
column comprises the total corresponding to the Total column of the
other subsidiary journals when an analytic record is made. All items
received from customers are entered in the Accounts Receivable column;
but it is important to note that the _amount_ entered in that column
is not the _actual cash receipt_ but the _full amount_ of the original
charge to the customer. Sales discount, if any, is entered in the Sales
Discount column, and the _net_ amount, the actual cash received from
the customer, is the amount appearing in the Net Cash column. Cash
sales are entered in the Cash Sales column and also in the Net Cash
column. All other kinds of receipts are extended to the Sundry column.
In the ledger folio column, checks are placed for the individual cash
sales entries, the posting usually being made from the summary in the
sales journal, as explained a little later, or from the total of the
Cash Sales column in the cash book if the other method is not employed.
In the summary entry of the illustration, it is assumed that a Cash
account is kept in the ledger. Hence “Cash, Dr.” is shown posted to
ledger Cash account on page 4; and the total Sales Discount, also
_debit_, on page 20. The student should note the method of showing the
amount of cash received during the current week, this amount comprising
the “Cash, Dr.” posting to the ledger Cash account. Of course, the
itemized credits, except the cash sales, are posted to their respective
accounts, as indicated in the ledger folio column.
The use of the Sundry column for extension of the miscellaneous items
makes proof of the distribution possible. The sum of “Net Cash” and
“Sales Discounts”—both debit items—must equal the sum of all the other
columns.
=Handling Columnar Analysis of Cash Sales.=—If all sales, both cash
and “on time,” are entered in the sales journal, the totals of these
two classes of sales are posted to the ledger Sales account from the
summary in the sales journal. In this case there is no need of a
separate Cash Sales column in the cash book, because such a column
would simply duplicate the Cash Sales entry in the sales journal.
Needless to say, cash sales always appear in the Net Cash column of the
cash book, because they are cash receipts, but the “Ledger Folio” must
be checked.
Sometimes two sales accounts are kept in the ledger, one for cash and
the other for “time” sales. Here, also, if there is a Cash Sales column
in the sales journal, no posting of cash sales from the cash book is
necessary. On the other hand, if cash sales are omitted from the sales
journal, then the cash book should provide for a Cash Sales column and
the posting must be made from the total of this column in the cash book.
=Illustration and Explanation of the Analytic Cash Disbursements
Journal.=—The cash disbursements columnar record corresponding to the
cash receipts shown above, would appear as in Form 13. As with cash
receipts, the illustration is not presented as a standardized form but
merely for the purpose of showing the method of analysis. Postings are
made or omitted, and the same considerations govern the making and
posting of the summary entry, as in cash receipts. Being few in number,
cash purchases are not shown in a separate column. The treatment of
discounts received on purchases is exactly parallel to that of sales
discount.
Since all net cash appears in Net Cash column on either side of the
cash book, the cash balance is found by taking the difference between
these two columns. The two sides must be ruled up and closed on
corresponding lines and as of the same date.