ACCOUNTING PROCEDURES AND TECHNIQUES 33

2.5 CASH BOOKS

A cash book is a document or a record of all transactions involving cash in business organization.
It keeps track of all incoming and outgoing cash i.e. cash receipts and payments.

TWO COLUMN CASH BOOK

Usually a business maintains two cash books; cash-in-hand cash book and cash-at-bank cash
book. A cash-in-hand cash book records all transactions relating to cash paid out or received
through the cash till. The cash at bank cash book handles transactions relating to cash that goes
through the bank e.g. payments by cheque. Normally these two cash books are combined to

A withdrawal of cash from bank would appear in the cash book as a debit for cash and a credit
for bank of the same amount and vice versa for a deposit. Both the debit and credit entries are in
the same book. When this happens it is known as a contra item.
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Format of a two column cash book

>>> Example

transactions took place.

Using the given details write up a two column cash book for Mr. Tamaa for the month of
January 2007
 ACCOUNTING PROCEDURES AND TECHNIQUES 35

Mr.Tamaa

TWO COLUMN CASH BOOK

FOR THE MONTH OF JANUARY 2007

Notes
(i) It is important to note that only transactions involving cash are entered into the cash
book. Credit sales and credit purchases are not entered until the customer pays or the
supplier is paid.
(ii) When cash is withdrawn from bank and put in the cash till the entry made to capture
this transaction is referred to as a contra entry. A contra entry affects both sides of the
cashbook; the bank column on one side and a cash column on the other. A contra entry
may also arise if cash from the cash till is deposited into the bank account. It’s denoted
by a ‘c’ indicated in the folio column.
(iii) When all transactions have been entered into the cash book we then balance it off.
Normally the cashbook will have debit balance in both the cash and bank columns.

overdraft is a facility offered by the bank where the account holder is allowed to withdraw
more cash than the remaining balance in his account.
(iv) The debit side of the cash book generally records cash/bank receipts while the credit
side records cash/bank payments.
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THREE COLUMN CASH BOOKS

Sometimes businesses maintain a three column cash book. The additional column is the discounts

Format of a three column cash book:

Example:

Enter the following transactions in a three column cash book.

(i) Balance brought forward cash Sh 4700 bank Sh 17000

(ii) Cash sales Sh 20000 (discount 8%)

(iii) Cash sales Sh 42000

(iv) Cash purchases Sh 18000 (discount 10%)

(v) Sales paid for by cheque of Sh 40000 after deducting a 20% discount

(vi) Paid Sh 50000 by cheque after deducting 20% cash discount.

(vii) Purchases by cheque Sh 12000

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Notes
(i) It is important to check whether the amounts of sales or purchases are shown as gross
or net of discount.

Discount allowed = 20%

Therefore the net amount = Gross amount (n) x (100-20) %

n = 40000 = Shs.50000
0.8

(ii) The amounts of both discounts allowed column and discounts received are treated as
follows:

Discount allowed

The totals will be posted to the debit side of the discount allowed account in the general ledger.
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Discount received
The totals of the discounts received column will be posted to the credit side of the discounts
received account in the general ledger.

2.6 BANK AND CASH BOOK RECONCILIATION

Fast forward – Differences between the cash and the bank statement arise for three reasons;

At the end of a particular period (mostly one month) the balances of the cash book should be

with the bank statement over the same period though theoretically it should. This is a normal

early as possible. The causes of the disagreement may be as a result of:

(i) Items that appear on the cash book but not on the bank statement.
(ii) Items that appear on the bank statement but not on the cashbook
(iii) Errors when entering amounts in the cash book
(iv) Errors by the bank while posting transactions