Cash Book definition

Cash book is a special type of book that is only concerned with the
recording of cash transactions of an organisation. It performs the dual role
of both journal and a ledger for all the cash transactions taking place in a
business organisation.

A cash book records all the cash receipts on the debit side and all the cash
payments of the organisation on the credit side.

Features of Cash Book

Cash book has the following features:

1. Acts as both a journal and a ledger.

2. Can be used as an alternative to a cash account for recording transactions.
3. It follows the dual entry system of accounting (i,e. Debit and credit side in cash
book).
4. The debit side should be identical to the credit side.
5. Cash book should always have a debit balance.

Types of Cash Book

There are four types of cash books used for accounting purposes. Let us
have a look at the types of cash books.

1.Single column cash book

2.Double column cash book

3.Triple column cash book

4. Petty cash book

Single column cash book: Single column cash book is also called a simple
cash book. It presents entries for cash received (receipts) on the left side or
debit side and cash payments on the right hand side or credit side.
The bank transactions and the discounts that are given for transactions
will be featured in separate ledger accounts in case of single-column cash
books.

Cash books are updated on a daily basis in some business firms. The most
striking feature of a cash book is that it can never have a credit balance. It
should always show a debit balance.

Double Column cash book: In a double column cash book, there is an

additional column that is reserved for the discounts. Therefore, in a double-
column cash book, also known as two-column cash book, the cash
receipts and transactions are recorded in one column while the second
column records discounts received and discounts provided.

Discount being a nominal account the discount provided is placed on the

debit side of the cash book while discount received is placed on the credit
side of the cash book.

At the end of the accounting period, both the columns are balanced, and
the closing balances are transferred appropriately.

Triple column cash book: In a triple column cash book, the two columns
are similar to the double column cash book. While the additional column is
for bank transactions.

Due to the advances in the banking industry, most firms deal in cheques
and therefore, the presence of a bank column in a cash book is helpful in
understanding the transactions properly.

Petty cash book: Petty cash book, as the name suggests, is for very small
transactions that take place in an organisation. Such transactions can
occur in a day and are repetitive in nature, which can put undue load on
the general cash book. For this reason, it is maintained separately.

Examples of such transactions are: stationery, postage, food bills, etc.

Advantages of Cash Book

Cash book offers the following advantages:
1.It offers easy verification of cash by matching the balance in the cash
book with actual cash in hand and is therefore helpful in identifying
mistakes in the entry.

2.It helps in creating a regular record of transactions date wise for the
convenience of accounting personnel.

3. As it is maintained date wise, any cash payments or the transaction can

be correctly traced back in the cash book.

4. It is helpful in detecting any cash frauds in the organisation.

5.It helps in saving time and labour by reducing the workload

Cash Book vs. Cash Account

A cash book and a cash account differ in a few ways. A cash book is a
separate ledger in which cash transactions are recorded, whereas a cash
account is an account within a general ledger. A cash book serves the
purpose of both the journal and ledger, whereas a cash account is
structured like a ledger. Details or narration about the source or use of
funds are required in a cash book but not in a cash account.2

There are numerous reasons why a business might record transactions

using a cash book instead of a cash account. Daily cash balances are
easy to access and determine. Mistakes can be detected easily through
verification, and entries are kept up to date, as the balance is verified daily.
By contrast, balances in cash accounts are commonly reconciled at the
end of the month after the issuance of the monthly bank statement.

Meaning of Depreciation
Depreciation can be defined as a continuing, permanent and gradual
decrease in the book value of fixed assets. This type of shrinkage is based
on the cost of assets utilised in a firm and not on its market value.

Causes of Depreciation
1. Wear and Tear due to Use or Passage of Time: Wear and tear is nothing but
deterioration and the following decrease in the value of an asset, resulting
from its use in business operations for earning revenue.
 2. Expiration of Legal Rights: Some categories of assets lose their value after the
agreement directing their use in business comes to an end after the expiry of
the predetermined period.
3. Obsolescence: Obsolescence is another factor driving to the depreciation of
fixed assets. In common language, obsolescence means being “out-of-date”.
Obsolescence refers to an actual asset becoming outdated on account of the
availability of a better type of asset.
4. Abnormal Factors: Drop in the use of the asset may be caused by abnormal
factors. Namely, accidents due to the earthquake, fire, floods, etc., Accidental
loss is permanent but not continuing.

Advantages and Disadvantages of Straight Line Method:

Advantages Disadvantages

1. It is a very simple method of
calculating depreciation.
2. Under this method, Asset can
be depreciated up to the net
scrap value or zero value.
3. Under this method, the same
amount is charged as
depreciation in Profit & Loss
Account.
1. Under this method book value of the asset
will be charged more for maintenance and
repair in the final years as compared to
initial years.
2. It is difficult to ascertain a suitable rate of
depreciation.
3. It is not suitable for assets having long life
and high value.

Various Depreciation Methods

Various methods are used by the companies to calculate depreciation. These are as
follows:

Various Depreciation Methods

• Straight Line Depreciation Method

• Diminishing Balance Method
• Sum of Years’ Digits Method
• Double Declining Balance Method
• Sinking Fund Method
• Annuity Method
• Insurance Policy Method
 • Discounted Cash Flow Method
• Use Based Method
• Output Method
• Working Hours Method
• Mileage Method
• Other Methods
• Depletion Method
• Revaluation Method
• Group or Composite Method
1. Straight Line Depreciation Method
This is the most commonly used method to calculate depreciation. It is also known
as fixed instalment method. Under this method, an equal amount is charged for
depreciation of every fixed asset in each of the accounting periods. This uniform
amount is charged until the asset gets reduced to nil or its salvage value at the end
of its estimated useful life.

So, this method derives its name from a straight line graph. This graph is deduced
after plotting an equal amount of depreciation for each accounting period over the
useful life of the asset.

Thus, the amount of depreciation is calculated by simply dividing the difference of

original cost or book value of the fixed asset and the salvage value by useful life of
the asset.
Straight Line Depreciation Formula
The formula for annual depreciation under straight line method is as follows:

Annual Depreciation Expense = (Cost of an asset – Salvage Value)/Useful life of an

asset

Where,

• Cost of the asset is purchase price or historical cost

• Salvage value is value of the asset remaining after its useful life
• Useful life of the asset is the number of years for which an asset is expected to be
used by the business
2. Diminishing Balance Method
This method is also known as reducing balance method, written down value method
or declining balance method. A fixed percentage of depreciation is charged in each
accounting period to the net balance of the fixed asset under this method. This net
balance is nothing but the value of asset that remains after deducting accumulated
depreciation.

Thus, it means that depreciation rate is charged on the reducing balance of the
asset. This asset is the one reflected in the books of accounts at the beginning of an
accounting period.So, the book value of the asset is written down so as to to reduce
it to its residual value.

Now, as the book value of the asset reduces every year so does the amount of
depreciation. Accordingly, higher amount of depreciation is charged during the early
years of the asset as compared to the later stages.
Thus, the method is based on the assumption that more amount of depreciation
should be charged in early years of the asset. This is on account of low repair cost
being incurred in such years. As an asset forays into later stages of its useful life, the
cost of repairs and maintenance of such an asset increase. Hence, less amount of
depreciation needs to be provided during such years.
Diminishing Balance Method Formula
Depreciation Expense = (Book value of asset at beginning of the year x Rate of
Depreciation)/100

3. Sum of Years’ Digits Method

Another accelerated depreciation method is the Sum of Years’ Digits Method. This
method recognizes depreciation at an accelerated rate. Thus, the depreciable
amount of an asset is charged to a fraction over different accounting periods under
this method.

This fraction is the ratio between the remaining useful life of an asset in a particular
period and sum of the years’ digits. Thus, this fraction indicates that the capital
blocked or the benefit derived out of the asset is the highest in the first year.

So, as an asset moves towards the end of its useful life, the benefit gained out of
such an asset declines. That is to say, highest amount of depreciation is allocated in
the first year since no amount of capital has been recovered till then. Accordingly,
least amount of depreciation should be charged in the last year as major portion of
capital invested has been recovered.
Sum of Years’ Digits Depreciation Formula
Following is the formula for sum of years’ digits method.

Depreciation Expense = Depreciable Cost x (Remaining useful life of the asset/Sum

of Years’ Digits

Where depreciable cost = Cost of asset – Salvage Value

Sum of years’ digits = (n(n +1))/2 (where n = useful life of an asset)

4. Double Declining Balance Method
This method is a mix of straight line and diminishing balance method. Thus,
depreciation is charged on the reduced value of the fixed asset in the beginning of
the year under this method. This is just like the diminishing balance method.
However, a fixed rate of depreciation is applied just as in case of straight line
method. This rate of depreciation is twice the rate charged under straight line
method. Thus, this method leads to an over depreciated asset at the end of its useful
life as compared to the anticipated salvage value.

Therefore, companies adopt various approaches in order to overcome such a

challenge. Firstly, the amount of depreciation charged for the last year is adjusted.
This is done to make salvage value equal to the anticipated salvage value. Secondly,
many companies choose to use straight line depreciation method in the last year to
adjust the over depreciated salvage value.
Double Declining Balance Formula
Annual Depreciation Expense = 2 x (Cost of an asset – Salvage Value)/Useful life of
an asset

Or

Depreciation Expense = 2 x Cost of the asset x depreciation rate

Features of Depreciation
Following are the 3 principal features of depreciation:

• Depreciation is a decrease in the book value of fixed assets.

• Depreciation involves loss of value of assets due to the passage of time and
obsolescence.
• Depreciation is an ongoing process until the end of the life of assets.

Objectives of Providing Depreciation

1. Knowledge of True Profits
When an asset is purchased, it is nothing more than payment in advance
for an expense. For example, purchasing a building for $100,000 for
business purposes will save rent in the future.

However, after a certain number of years, the building will become useless.
The cost of the building is, therefore, nothing except paying rent in
advance for years.

Any paid rent would have been charged as an expense to determine the
true profits made by the business during a particular period.
Therefore, the amount paid for the purchase of the building should be
charged over the period for which the asset would be serviceable.

2. True Financial Position

The assets depreciate in their value on account of various factors.

To present a true state of affairs of the business, the assets should be

shown in the balance sheet, at their proper values.

In case depreciation is not charged, the balance sheet will not indicate a
true view of the state of affairs of the business.

3. Replacement of Assets
The business uses assets to earn revenue. On account of constant use or
lapse of time and similar other causes, a stage may come when the assets
need to be replaced. Providing depreciation retains a part of the business
profits, which can purchase new assets.

4. Correct Cost of Production

Depreciation is a cost of production, and if depreciation is not charged,
the cost of production so determined will not be correct.