7.0 Learning Objectives………………………………………………………………
7.1 Introduction……………………………………………………………………….
7.2 The Need for Control Over Cash…………………………………………………. .
7.2.1 How to Handle Cash………………………………………………………………
7.3 Definition of Some Terms Relating to Control Over Cash………………………
7.4 Trade Discounts and Cash Discounts…………………………………………….
7.4.1 Cash Discount……………………………………………………………………..
7.4.2 Accounting Treatment of Cash Discount…………………………………………
7.5 The Main Cash Book………………………………………………………………
7.5.1 Double Column Cash Book………………………………………………………
7.5.2 Three Column Cash Book…………………………………………………………
7.6 The Petty Cash Book………………………………………………………………
7.6.1 Control Over Petty Cash Imprest…………………………………………………
7.6.2 Advantages of the Imprest System………………………………………………
7.7 Summary……………………………………………………………………………
CHAPTER SEVEN
ACCOUNTING FOR CASH TRANSACTIONS
7.0 Learning Objectives
At the end of this chapter candidates should be able to
• Know the need for control over cash
• Know basic requirements for internal control over cash
• Distinguish between trade discount and cash discount
• Know the need for the use of petty cash book
• Explain the importance of using the imprest system to control cash.
7.1 Introduction
Cash is defined to include cheques, money order, coins and paper money that a bank will accept for immediate deposit from a customer.
Cash is the asset most susceptible to loss through theft and other means; therefore there is a need for proper internal control over cash to minimize the loss of cash.
7.2 The need for Control over Cash
A good internal control over cash will help management to achieve the following objectives:
(i) There will be accurate accounting for cash transactions.
(ii) Management will maintain sufficient amount of cash at all times
(iii) Management will not keep excessive cash rather they will invest idle cash in profitable ventures.
(iv) It will prevent losses of cash from fraud or theft.
(v) It will save employees from unnecessary suspicion and harassment that result from losses of cash through fraud and theft.
7.2.1 How to Handle Cash
In order to have good internal control over cash, the following steps should be taken in handling cash:
(i) Cash must be deposited daily in the bank
(ii) All payments (except for petty cash transaction) should be made by cheques.
(iii) The function of receiving cash should be separated from that of maintaining records of cash. Each function should be performed by different persons.
(iv) All cash receipts must be recorded in a cash register. At the end of each day the amount in the register should be compared with the physical cash.
(v) All payments must be checked and approved in writing by responsible officers before payments are made.
(vi) The function of approving payment must be separated from the function of signing cheques.
(vii) Carbonized receipts must be issued for all cash sales and cash received.
(viii) When payment is made for a transaction the invoice and other supporting documents relating to that transaction should be stamped paid with date so that payment will not be made for a transaction twice.
7.3 Definition of Some Terms Relating to Control Over Cash
(i) Voucher System: A voucher system involves a written authorization called a voucher that is prepared for every cash payment transaction. It requires that every transaction be verified, approved and recorded before payment is made.
(ii) Voucher: A voucher is a written authorization used in approving a transaction for payment.
(iii) Voucher register: This is a special journal used to record the payment of cash.
(iv) Cash over or short: This is the account in which errors in making change to a cash customer would be recorded.
7.4 Trade Discounts and Cash Discounts
In chapter four we describe the trade discount as a reduction in the invoiced price for goods and that it is usually given for bulk purchase. We also explain that only the net amount of purchases or sales would be recorded in the books. This means that trade discount is not part of the double entry.
7.4.1 Cash Discount
A cash discount is also called a settlement discount. It is given for prompt payment. The cash discount on sales is referred to as discount allowed and the cash discount on purchases is referred to as discount received.
A cash discount is not recorded until the customer has fulfilled the terms of payment specified in the invoice. When cash is paid promptly the customer will deduct the discount from the amount due.
Illustration 7.1
Appiah Enterprises sold goods to Sule Ventures for N250,000. A trade discount of 10% was granted and cash discount of 5% if payment is made within 60 days.
Required:
Calculate (i) The net sales value (ii) the cash discount and the amount received by Appiah Enterprises if it paid within 60 days.
Solution to Illustration 7.1
Immediately the goods were sold a trade discount of 10% is deducted i.e.
N
Invoiced price 250,000
Less: 10% trade discount 25,000
Net sales value 225,000
Assuming the customer paid within 60 days the amount due, the settlement discount of 5% would be deducted from N225,000. i.e.
N
Net sales value 225,000
Less: Cash discount of 5% 11,250
Amount received by Appiah Enterprises 213,750
7.4.2 Accounting Treatment of Cash Discounts
(a) Cash discounts are recorded in a memorandum column in the cash book. Discount allowed is recorded in a column on the debit side of the cash book, the same side in which receipts from cash sales are recorded. Discount received is recorded on the credit side, the same side in which payments for cash purchases are recorded in the cash book.
(b) The sales and purchases would be recorded in the books at their invoice value less trade discount.
(c) Discount allowed is debited in discount allowed account and credited in the receivables account. When the income statement is being prepared the amount
will be transferred from the discount allowed account to Income statement as expenses.
(d) Discount received is debited to trade payable account and credited to discount received account. When the income statement is being prepared, it is transferred from discount received account to statements of comprehensive income as addition to income.
We shall illustrate the treatment for cash discount later in this chapter.
7.5 The Main Cash Book
We have seen in chapter five that cash book records only cash receipts and payments. Another thing is to note that cash book is a book of original entry as well as a ledger account for cash transactions.
In this chapter we shall consider the double column and three column cash book.
7.5.1 Double Column Cash Book
The double column cash book has two columns on both sides of the accounts namely; cash and bank columns.
The cash column records the cash transactions that involve cash in hand. The bank column records cash transactions that involve cash in bank. Supporting documents for these bank transactions are mainly cheques and pay-in-slips.
Contra entries
When related to the cash book, contra entry refers to either the lodgement of cash into the bank account or the withdrawal of cash from the bank for office use.
Illustration 7.2
Mallam Ture has been in business for many years as a sole trader. His cash at hand was N75,000 but there was no bank account.
The following transactions took place during the month of June 20X6.
N
June 1 Opened bank account and paid in cash 75,000
,, 4 Rented premises and paid for 2 months by cheque 3,000
,, 7 Bought furniture and fitting by cheque 9,000
,, 11 Purchased goods for sale by cheque 12,000
,, 14 Cash sales to date 22,500
,, 16 Received cheque from Kojo on account of May Sales 12,300
,, 19 Paid Cash into bank 19,000
,, 20 Purchased goods for resale from Shuaib and Sons 15,000
,, 25 Cash Sales 11,250
,, 26 Paid cash into bank 11,250
,, 28 Sold goods to Stephens & Co 2,700
,, 29 Withdrew Cash for office use 10,000
,, 29 Paid Shuaib and Sons on account by cheque 7,500
,, 30 Paid Salaries by cash 8,155
,, 30 Paid electricity bill by cheque 1,350
,, 30 Paid sundry expenses by cash 600
Required: Prepare the two column cash book of Malam Ture Enterprises Solution to illustration 7.2
Mallam Ture
Dr. Cash book Cr NOTES
(i) When cash was paid into the bank we debited bank account and credited cash account and indicated by „C‟ in the ledger folio column that it is a contra entry.
(ii) When cash was withdrawn from the bank for office use, it was also a contra entry. We debited cash account and credited bank account.
(iii) The transactions of June 20 and June 28 did not pass through the cash book because they were not cash transactions.
(iv) The cash book will normally show a debit balance but the bank column may show a credit balance when the business enjoys overdraft facility from the bank, otherwise a person cannot spend more than what he has.
7.5.2 Three Column Cash Book
The three column cash book has three main columns for discount, cash and bank. The only additional column is the discount column. Discount allowed is shown as a memorandum column on the debit side of the cash book. Discount received is shown as a memorandum column on the credit side of the cash book.
As explained earlier, memorandum records do not form part of the double entry.
Illustration 7.3
Solo Enterprises started a business with N96,000 on July 20X6 and paid the money into the bank on 4 July, 2006. His transactions for the rest of the month were as follows:
20X6 N
4/7 Purchases by cheque 32,760
7/7 Credit purchases 30,240
,, Electricity paid by cheque 600
,, Rent paid by cheque 840
10/7 Sales - on credit 51,024
- cheque 60,000
- by cash 576
,, Drew cash for office use 2,400
11/7 Paid trade payables by cheques 18,120
,, Cash discount recorded from creditors 384
12/7 Cash Sales 20,538
,, Wages paid by cash 600
14/7 Cheques received from customers 47,040
,, Discount allowed to customers 960
17/7 Drew cash for Office use 300
18/7 Paid cash for repairs 144
Purchases – credit 54,000
- cheques 6,000
- cash 23,000
22/7 Sales – cash 45,000
- cheques 20,400
24/7 Paid trade payables by cheques 32,400
Discount received from trade payables 120
Cash Sales immediately paid into bank 2,400
26/7 Paid rent by cheque 1,800
Paid Wages & Salaries by cheques 6,720
31/7 Cash paid into bank 12,000
Drew cheque for petty cash 240
Required:
(a) Enter the above transactions in the cash book of Solo Enterprises (b) Show the double entry for discount on sales and discount on purchases (c) Show also the receivables account and the creditors account.
SOLUTION TO ILLUSTRATION 7.3
Trade Payables Account
20X6 N 20X6 N
July 11 Discount received 384 July 7 Purchases 30,240
July 11 Bank 18,120 July 18 Purchases 54,000
July 26 Discount received 120
July 31 Bank 32,400
July 31 Bal c/d 33,216 _____
84,240 84,240
Aug 1 Bal b/d 33,216
Cash Book Analysis
The cash book may be analyzed to columns according to the nature of transactions.
For instance, the debit side of cash book with analysis columns can be as follows
Cash Book (Receipts)
Date Particulars L/F Total Receivables Cash sales Others
20X7 N N N N
Jan 1 Bal b/d 5,400
,, 5 Cash Sales 1,440 1,440
,, 9 Receivables – Ajayi 6,840 6,840
,, 12 Receivables Sannie 12,960 12,960
,, 19 Loan – Dangote 32,400 32400
,, 22 Cash sales 2,700 2,700
,, 27 Sales of assets 3,600 3,600
29 Receivables Kabir 2,520 2,520 _____ _____
67,860 22,320 4,140 36,000
Cash Book Payments
Date Particulars L/F Total Creditors Petty cash Salaries Others
20X7 N N N N N
Jan 2 Credit – Ade 2,160 2,160
,, 4 Credit – Ola 5,580 5,580
,, 7 Salaries & Wages 13,320 13,320
,, 12 Telephone 7,200 7,200
,, 17 Petty cash 1,800 1,800
,, 24 Furniture 27,000 27,000
,, 27 Office rent 5,040 5,040
,, 31 Bal c/d 5,760 _____ _____ ______ ____
67,860 7,740 1,800 13,320 39,240
Note
The total of receipts is N67,860 while the total of payments is N62,100. Therefore the balance carried down is N5,760 (i.e. N67,860 – N62,100).
7.6 The Petty Cash Book
The petty cash book is used for recording expenses of a smaller size than those recorded in the main cash book.
The petty cash book is usually operated on the imprest system in which cash float is maintained. The cash float is reimbursed by the amount spent at the end of a specific period.
The only source of cash inflows to the petty cash is the imprest. The expenses are spread on various items which are separately analyzed. At the end of specific periods the columns are added and posted to the debit side of the ledger accounts to which they relate.
7.6.1 Control over Petty Cash Imprest
A petty cash voucher must be filled and approved before the disbursement of any expenditure. The petty cash voucher shows the date, the amount paid, the purpose of the expenditure, the signature of the person who approved the payment and the signature of the person receiving the money.
A surprise count of the imprest should be done occasionally so that the fund can always be kept intact.
7.6.2 Advantages of the Imprest System
(a) It trains young staff (the petty cashier) to be responsible about money and accurate in accounting for it.
(b) It saves the time of the main cashier, who is a person with great responsibilities.
(c) The main cash book will not be overloaded with payment of items with low amount.
(d) It makes expense analysis and monitoring easy.
(e) It reduces the number of accounts to be opened in the ledger accounts thereby facilitating balancing of periodic accounts with ease
Illustration 7.4
Rasak Ventures maintains an imprest of N10,000 per month. The transactions for the month of February, 20X7 are as follows:
N
Feb. 1 Petty cash in hand 2,500
Received cash to make up the imprest
Feb. 3 Bought postage stamps 650
Transport fare 400
Feb 6 Telephone bills 1,500
Paid carriage 650
Taxi fares 850
Feb 7 Paid for repairs to computer keyboard 1,600
Paid carriage 2,500
Office entertainment (beverages) 1,000
Purchase of envelopes 550
prepare the petty cashbook for the period.
Solution to Illustration 7.4
Rasak Ventures
7.7 Summary
In this chapter we have explained the need for control over cash, the internal control required for the security of cash transactions and the operation of the petty cash system.
The chapter also discussed the nature of cash discounts and the accounting entries for cash discounts. We also explained how to prepare double column cash book and three column cash book.
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