Cash Book: The Effective Tool for Easy Cash Management
The physical form of currency such as bank-note and coins are known as money or cash. Generally, the possession of money can transfer one to another, known as negotiable in the business world. In another word, cash can be described as a medium of transaction which is negotiable and have value to pay the worth of products, goods or services. It used as a reserve for payments for individuals or any organizations.
In finance and bookkeeping, the word cash refers to current assets including currency or something equivalents to currency that can be accessed straight away or near-future. These items include cheques, money orders, bank draft, pay-order, travelers’ cheque and others. So, in finance and accounting, “money or any other item which is commonly accepted to the bank for immediate deposit is called cash.”
Generally a financial company involves in two type transactions, transactions on credit and transaction in cash. A transaction which is made on credit is not included in cash book. It is one type of journal that contains all cash inflow and outflow, including deposits and withdrawals from banks. Entries in the cash book are written in chronological order by the date and then posted in the general ledger. It needs to reconcile with the bank statements periodically as an internal method of auditing.
Usually a larger firm maintains the cash book into two parts. It maintains the first part with the cash disbursement journals which includes all cash payments, like accounts payable, operating expenses and other expenses. On the second part, it keeps the cash receipts journal like accounts receivable and cash sales.
There are three types of cash book with two sides. Those are called the debit side and the credit side.
Debit side is used to record any cash received or in another word all cash inflows within the business. It is also used to record cheques received by the firm and recorded on the debit side on the bank column.
Credit side is used to record cash and cheques paid by the business. In another word, it recorded all cash outflows for the business. However if any company use cheque for it’s payment then it will be recorded in the Bank column on the credit side of the cash book.
Characteristics of Cashbook
From the definition and other features of cash book, we can find the following characteristics:
- Book of cash transactions: In a cash book only the cash/bank transactions are recorded.
- Both journal and ledger: The cash book performs the role of both journal and the ledger.
- Specialized journal: The cash transactions are written on cash book rather journals. As the transactions should have written in primary book, cash book is considered as the specialized journal.
- Cash in hand: Generally the receipt is recorded on the debit side and payments on the credit side. So the difference between these shows the cash in hand.
- Record in chronological order: All the transactions are recorded in chronological order. So, it is easy to check the mismatch.
- Mostly shows debit balance: The cash column of cash book must have debit balance whereas bank column may have a debit or credit balance.
- Easy to transfer in the ledger: As it mostly shows the debit balance, it is easy to transfer the balance of cash book into the ledger.
- Easy to transfer in trial balance: As it mostly shows the debit balance, it is easy to transfer the balance of cash book into the trial balance.
- Can divide in two departments: A larger firms can maintain accounts into two departments. It can separate its’ cash department from accounts departments.
Necessity of Cash Book
Every business institution or individual completes lots of transactions daily. It will be too much time and energy consuming for them if they keep those records in their journal and transfer them into ledger later on. Beside these- journal cannot show the cash in hand. That is why; there is some use of preparing cash book separately. Those are given bellow:
Time Saving: It does not need to keep records in journal and then transfer to cash book. All the transactions are directly entered in the cash book and then transfer to advanced statements. So it saved valuable time for an institution.
Labor Saving: All the transactions are directly recorded in the cash book and then transfer to advanced statements. So it saved valuable time for an institution by skipping the journal entries.
Controlling cash outflow: A larger firms can maintain the accounts by separating its’ cash department from accounts departments. The separate cash department can work more effectively in cash management.
Preventing misappropriation: The cash book prevents misuse or embezzlement. It posted the transactions as soon as it occurs. So, the chance of misappropriation is reduced.
Finding errors: Cash book is needed in the Bank reconciliation process. By this process, an institution can find its’ common errors.
Understanding the cash status: It helps the business to track all the payment and receipt for a particular period. It also shows the cash in hand anytime. So, it is easy to understand the cash status of any business with the help of cash book.
Advantages of Cash Book
The main advantages of maintaining a cash book are given bellow:
It is a reliable and verified method of transactions recording. In this method the chance of duplication of work in journal and then posting the same into the ledger, is minimized.
It can save money, time and labor by finding out daily cash and bank balance.
It can also serve the purpose of journal as well as ledger.
It is possible to see how the business is going on a month to month basis by looking through the cash book.
It can minimize the chance of misappropriation which involved in cash payments in any stage.
It will be too much time and energy consuming for them if they keep those records in their journal and transfer them into ledger later on. Cash book can be a great solution for this problem. This book performs the role of both journal and the ledger.