------Principles of Accounts 4

The Banking System

Types of Accounts

There are two main types of accounts:

1. Current Accounts – an account which is used for regular payment into and out of a bank. A cheque book is given to make
payments. Cheques are instructions to the bank to make payment from an account. These accounts do not
usually earn interest.

2. Deposit accounts – a regular savings account which usually generates interest.

Cash Book

This book of original entry is used to record cash and cheque transactions. The cash book is a combined account for the cash account and the bank account.
The debit side has columns for both cash and bank accounts, likewise the credit side. In the three column cash book cash discounts are introduced. Cash
discounts are given to encourage prompt payments. Discounts are amounts off a balance which reduces the amount to be paid or received. Discount
allowed is a percentage off the debtors balance, and is an expense to the firm. Discount is allowed if the debtor pays on time. Discount received on the
other hand, is given to the firm (us) if payments are made within the given time and is therefore a revenue to our business.

The source documents which provide information for the cashbook includes:

Receipts, bills, vouchers, cheques, cheque counterfoils, deposit slips/ lodgement slips etc.

Purpose of the cash book

 It reduces the number of entries in the ledger

 It enables the division of labour since another person can be entrusted to do the job of recording cash transactions.
 Cross reference to the cash and bank account is easier with the use of a cash book.

Bank overdrafts

A bank overdraft occurs when the payments from the bank account/column is greater than the receipts in the bank account/column. Therefore, the balance
on this account is a credit balance.
Contra Entries:

This is where a transaction is completed in the cash book. This happens when the transaction affects both the cash account and the bank account, where
one is debited and the other is credited.

1. When there is excess cash: Banked cash

Entry: Dr. Bank a/c, (increasing)
Cr. Cash a/c (decreasing)

2. When there is insufficient cash: Withdraw cash for business use

Entry: Dr. Cash a/c (increasing)
Cr. Bank a/c (decreasing)
 Cash Book – Format

Cash Book
Date Details Fo Dis. Cash Bank Date Details Fo Dis. Cash Bank
2017 All’d 2017 Rec’d
Mar $ $ $ Mar $ $ $
1 Balance b/d 56 2356 2 Rates GL 156
5 Sales GL 74 3 Postage GL 5
7 Cash C 60 7 Bank C 60
12 J. Moore SL 50 100 8 T. Lee PL 75
20 P. Jones SL 79 10 C. Brooks PL 2
22 Bank C 200 17 Drawings GL 20
31 Sales GL 105 22 Cash C 200
24 Printer GL 195
28 Rent GL 40
31 Balance c/d 98 2229
380 2700 380 2700
Apr
1 Balance b/d 98 2229

CASH BANK

DR 380 2700

CR 282 471

Diff 98 2229
 Cash Book
Date Details Fo Dis. Cash Bank Date Details Fo Dis. Cash Bank
2017 All’d 2017 Rec’d
Mar $ $ $ Mar $ $ $
1 Balance b/d 230 4756 4 Rent GL 120
2 R. Burton SL 7 133 8 N. Black PL 9 351
E. Taylor SL 11 209 P. Towers PL 12 468
R. Harris SL 15 285 C. Rowse PL 20 780
6 J. Cotton GL 1000 10 Motor exp GL 44
12 H. Hankins SL 3 74 15 Wages GL 160
18 C. Winston SL 13 247 21 Cash C 350
R. Wilson & so SL 17 323 24 Drawings GL 120
H. Winter SL 23 437 25 T. Briers PL 7 133
21 Bank C 350 29 Fixtures GL 650
31 Commission GL 88 31 Balance c/d 123 4833
89 580 7552 48 580 7552
Apr
1 Balance b/d 123 4833