Study tips: Understanding the cashbook – processing bookkeeping transactions

Understanding & posting the cashbook series (AAT foundation level)


The bank account or cash-book is at the heart of any business and rightly so as it records all of the monies in and out. Yet, transferring data from a cash-book can cause lots of problems when we are processing bookkeeping transactions. We’re therefore going to take a look at it from a different perspective in this two part article, using a typical scenario to illustrate the thought process we need to go through when thinking about and then posting from a cash-book. This first article focuses on understanding the cash-book. Our scenario is based on a small VAT registered company called E&J Consultancy. They have a cash-book which is both a book of prime entry as well as part of the double entry bookkeeping system. The totals of the columns in the credit side of the cash-book at the end of the month are: So, first question, is this an integrated or non-integrated cash-book? In this case, we have been told it is both a book of prime entry and part of the double entry bookkeeping system.’ That means it is an integrated cash-book.

Integrated

  •  does two jobs:
  •  being a day-book ie. just a list of transactions
  • being the Bank ‘T’ account ie. part of the double entry bookkeeping system

Non-integrated

  •  only does one job:
  • being a day-book
Question two – Which side of the cash-book are we working with? In our scenario the cash-book is split into two and we only have one side. In this case we are just working with the credit side but it is helpful to remember that there is a debit side too. If we visualise the cash-book as a ‘T’ account with both a debit and credit side, it becomes more familiar. Question three – What’s the difference between the Cash and Bank columns? The Cash column is for bank transactions that have been paid with cash: notes and coins. The Bank column is for bank transactions that have been made or received directly in or out of the bank account: cheques, BACS etc. In reality they record the method of payment for all the company’s banking activity and can be used for both cash and credit transactions. Question four – What is the difference between cash and credit transactions? Cash transactions are:
  • when money changes hands immediately
  • the first time the transaction has entered the accounting system
  • analysable for VAT ie. the TOTAL amount needs to be separated into the NET value of the purchase and the VAT
This is how E&J Consultancy’s cash payment is entered into the cash-book.  In this case the method of payment was also cash. The TOTAL amount they have spent is £1800 of which £1500 is the NET value of the purchase and £300 can be reclaimed from HMRC as they are a VAT registered company. Credit transactions:
  • are when money is paid after a period of time
  • initially account for the expense in the purchases day-book (PDB)
  • show as a liability in the Purchase ledger control account (PLCA)
  • are posted to the individual supplier’s accounts with the total invoice amounts, as memorandums, because that’s    the amount the suppliers are owed
  • are not analysable for VAT as that will have been accounted for in the PDB and does NOT need to be analysed again
This is how E&J Consultancy’s credit payment is entered into the cash-book. In this case the method of payment was directly out of the bank. This is the amount paid in total to suppliers. The bank charges are also a bank transaction but not a credit transaction. The bank has taken the payment directly though so this is how E&J Consultancy will enter it into the cash-book.

The theory is the same if we are working with the debit side of the cash-book. We will be receiving money from customers for cash sales which need to be analysed into the value of the NET sales and the VAT. Additionally, we will be receiving money from credit customers whose sales were recorded in the sales day-book (SDB), posted to the Sales ledger control account (SLCA) and are showing as a debit balance. This will have been repeated in the individual customer accounts in the sales ledger too so each customer’s account balance shows how much they need to pay us. Finally, we can start to think about the analysis columns. They are there just to explain the purpose of the expenditure. When we look at the debit side of the cash-book, the theory is the same, just that we are analysing or explaining the receipts instead. So, question five – Which are the analysis columns? More often than not, the headings of the analysis columns are the same as the general ledger account names.  This will be useful to remember in the second part of this article as it is about how we now post our cash-book into the general, sales and purchase ledger accounts. In part 2, we’ll look at posting the cashbook and processing bookkeeping transactions.

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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