Exam code:4AC1
Cash or bank
Do I enter a transaction in the cash account or the bank account?
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Enter the transaction in the cash account if physical money is exchanged
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Paying a supplier using cash
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Receiving cash from a customer
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Taking money from the till for personal use
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Enter the transaction in the bank account if there is no physical money involved
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Transactions involving a bank transfer
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Paying an invoice or bill by cheque
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Receiving a cheque from a customer
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Standing orders and direct debits
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Some transactions are entered into both the cash and bank accounts
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Depositing cash from the business into the business bank account
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Withdrawing cash from the business bank account for business use
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The cash book
What is the cash book?
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The cash book has two functions
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It is a book of original entry
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It is a ledger account for both the cash and bank accounts
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The cash book records all cash transactions
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Both physical cash and cash in the bank
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The bookkeeper gets the information from:
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Receipts
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Cheques & cheque counterfoils
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Paying-in slips
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Remittance advice
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Bank statements
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The cash book is part of the double entry system
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There are columns for the dates and details just like other ledger accounts
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There are three columns for the value of the transaction on both sides of the cash book
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Discount columns
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Discount allowed on the debit side
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Discount received on the credit side
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Cash columns
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Bank columns
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Which side should the balances be on?
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The balance for the cash account is always on the debit side
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Cash is always an asset
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It can never be a liability
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The balance for the bank account can be on either side
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It is on the debit side if the business has money in the bank
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It is on the credit side if the business is overdrawn
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How do I enter transactions into the cash book?
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STEP 1
Identify whether the transaction affects the cash or bank account -
STEP 2
Decide whether the account should be debited or credited-
Debit the account if the business is receiving money
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Credit the account if the business is losing money
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STEP 3
Include any discount that was allowed or received
What are contra entries in the cash book?
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A contra entry is for a transaction that is entered into both sides of the cash book
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It will be entered in the cash column on one side
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It will be entered in the bank column on the other side
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The two transactions which result in contra entries are:
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Withdrawing cash from the business bank account for business use
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Debit the cash account
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Credit the bank account
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Depositing cash from the business into the business bank account
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Debit the bank account
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Credit the cash account
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Examiner Tips and Tricks
It is very easy to get confused when making contra entries into the cash book.
If the amount goes in the cash column, the details will say “bank”. If the amount goes in the bank column, the details will say “cash”.
For contra entries, remember that the name used for the details will be different to the name of the column where the entry is made.
Worked Example
Worked Example
Yana is a sole trader. On 1 January 2024, Yana had $20 cash in hand and $850 in the bank. During January 2024, the following transactions took place. Prepare Yana’s cash book.
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Jan 2 |
Purchased goods on credit, $350, from Liza |
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4 |
Paid electricity, $250, by telephone transfer |
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6 |
Sold goods on credit, $180, to Tobey |
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10 |
Withdrew cash, $300, from the bank for business use |
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11 |
Cash sales, $50, were paid directly into the bank account |
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18 |
Paid Liza, $320, by credit transfer, in full settlement of the invoice from 2 January 2024 |
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21 |
Tobey paid his account of £180 by cheque after deducting 5% cash discount |
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28 |
Paid rent, $500, by direct debit |
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31 |
Paid $200, cash, for wages |
Answer
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Jan 1 |
Debit balance of $20 for cash and debit balance of $850 for bank |
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2 |
No entry into the cash book as there was no exchange of cash |
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4 |
$250 credit entry to the bank account |
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6 |
No entry into the cash book as there was no exchange of cash |
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10 |
Contra entry – debit the cash account and credit the bank account |
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11 |
$50 debit entry to the bank account |
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18 |
$350 – $320 = $30 $320 credit entry to the bank account with $30 discount |
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21 |
5% ✕ $180 = $9 and $180 – $9 = $171 $171 debit entry to the bank account with $9 discount |
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28 |
$500 credit entry to the bank account |
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31 |
$200 credit entry to the cash account |
Yana
Cash Book
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Date |
Details |
Discount Allowed $ |
Cash $ |
Bank $ |
Date |
Details |
Discount Received $ |
Cash $ |
Bank $ |
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2024 |
Balance b/d |
20 |
850 |
2024 |
Electricity |
250 |
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Jan 10 |
Bank |
300 |
Jan 10 |
Cash |
300 |
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Jan 11 |
Sales |
50 |
Jan 18 |
Liza |
30 |
320 |
|||
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Jan 21 |
Tobey |
9 |
171 |
Jan 28 |
Rent |
500 |
|||
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Jan 31 |
Wages |
200 |
Balancing the cash book
How do I balance the cash book?
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Balance the cash columns just like any other ledger account
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Ignore the other columns
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Remember the balance is always brought down onto the debit side
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Balance the bank columns just like any other ledger account
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Ignore the other columns
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The balance will be brought down onto the:
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debit side if the business has money in the bank
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credit side if the business is overdrawn
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Do not balance the discount columns
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You just need to total them up
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They will likely be different totals
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Where do I put the totals for the discount columns?
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The cash book is the book of original entry for discount
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It records the discounts allowed and received
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It is not part of the double entry system for discount</
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Responses