RECORDING FINANCIAL TRANSACTIONS 3

4 Cash book

Section overview
The cash book records all payments from and receipts into the entitys bank account.
Payments and receipts may be via cheque, Bank transfer or online transfer.
Ideally, payments and receipts should be evidenced by a remittance advice as the source document.
The cash book is analysed to show the types of payment and receipt, and any VAT.
Discount allowed and received is recorded in memorandum columns in the cash book.

Definition
Cash book: The book of original entry for receipts and payments in the business's bank account.

4.1 What is the cash book used for?

The cash book is used to record money received and paid out by the business. The cash book deals with
money paid into and out of the business bank account. This could be money received on the business
premises in notes, coins and cheques, and subsequently paid into the bank. There are also receipts and
payments made by bank transfer, standing order, direct debit and online transfer, plus bank interest and
charges made directly by the bank.
Some cash, in notes and coins, is usually kept on the business premises in order to make occasional
payments for odd items of expense. This cash is usually accounted for separately in a petty cash book.
One part of the cash book records cash receipts, and another part records payments. The best way to see
how the cash book works is to follow through an example.

Worked example: Cash book

At the beginning of 1 September 20X7, Robin Plenty had CU900 in the bank.
On 1 September, Robin had the following receipts and payments.
(a) Cash sale: receipt of CU94 (including VAT of CU14)
(b) Payment from credit customer Hay CU380
(c) Payment from credit customer Been CU720
(d) Payment from credit customer Seed CU140
(e) Cheque received as a short-term loan from Len Dinger CU1,800
(f) Cash sale: receipt of CU141 (including VAT of CU21)
(g) Cash received for sale of machine CU200 (no VAT)
(h) Payment to supplier Kew CU120
(i) Payment to supplier Hare CU310
(j) Payment of telephone bill CU376 (including VAT of CU56)
(k) Payment of gas service charge CU282 (including VAT of CU42)
(l) CU100 in cash withdrawn from bank for petty cash
(m) Payment of CU1,500 to Hess for new plant and machinery (no VAT)

The Institute of Chartered Accountants in England and Wales, March 2009 61