Chapter 6 - Cash Book

 Lets start on chapter 6- Cash book & Petty cash book. First on Cash book, the cash book may refer to the cash in hand that is being held by the business or the cash inside the bank account. 

Whenver a customer pays up, the double entry will be: -

Dr Cash at bank      $XX

Cr Customer A                   $XX

However, when we introduce cash discount allowed to customer, the double entry changes, for e.g. Customer A pays us $90 for a debt owning of $100 to us, meaning we allowed customer A to enjoy a discount of $10. ($100 - $90). The double entry will be as such: -

Dr Cash at bank                  $90

Dr Discount allowed(Exp) $10

Cr Customer A                                 $100

Lets move onto Supplier next, for supplier, since we will be the one paying them, the discount will be termed as discount received.

Whever we pay a supplier, the double entry will be :- 

Dr Supplier B      $XX

Cr Cash at bank                  $XX

 However, when we introduce cash discount received from Supplier B, the double entry changes, for e.g. when we pay Supplier B for a debt owning of $100 to them, meaning we received a cash discount of $10 from supplier B. (Note: its a Discount received for payment to suppliers & Discount allowed for payment received from customers).The double entry will be as below:-

Dr Trade Creditor - Supplier B     $100

Cr Cash at bank                                                                 $90

Cr Discount Received(income)                                         $10

You may ask what's the difference between a trade discount and a cash discount?

1. Purpose - A cash discount is offered to encourage its credit customer to settle their debts within a shorter time than the credit period given. A Trade discount is given to encourage customer to buy in larger quantities.

2. Calculated - A cash discount is a discount off the invoice price while trade discount are not shown on invoices. For e.g. A cash discount of 20% given to early payment, the original invoice amount is $100. The invoice will still shows $100. 

If a trade discount of 20% given to encourage increase quantities purchase of $100 original price, the invoice will not state $100, instead it will shows $80 in the invoice. 

3. Recording in ledger: - Cash discount are recorded as discount received/allowed while trade discount are not recorded.  

4. Discount given: - Cash discount arises when the customer pays up earlier than his credit terms while a trade discount is given at the sale/purchase of goods, before the invoice is issued. 

Dishonoured cheques 

Dishonoured cheques are cheques that are received from customers which are rejected by the bank, that is no funds inflow. The reasons why a cheque is dishonoured can be found below: -

1. The Cheque has expired - issued more than 6 months ago and no longer valid. 

2. The information on the cheque is incomplete or inconsistent, e.g. no date or signature is not consistent with the authorised version. 

3. Insufficient funds - Supplier who issues the cheque might not have sufficient funds in the bank account.

For e.g. On Receipt of a cheque by customer C for $$40 for a original debt owning of $50, we will pass  the below entries: -

Dr Bank $40

Dr Discount allowed $10

Cr Trade Receivable - Cust C $50

Having informed by the bank that the cheque was dishonoured, we reverse the transaction :- 

Dr Trade Receivable - Cust C $50 

Cr Bank                                                  $40

Cr Discount allowed                               $10

Lets move onto cash book: -

A cash book normally has 3 columns on each side of debit/credit: - Discount allowed/cash in bank/cash in hand on the debit side and Discount received/cash in bank/cash in hand on the credit side.

Normally a payment voucher needs to be filled in before a business can issue out funds to supplier/staff, for receipt of funds, a receipt will normally be issued after funds has been received ----> Source documents.

Questions

On 30 Jun 20X1,an amount received from Customer A of $90 for settlement of an amount owning of $100, the recording to cashbook will be as such: 

** Notice the discount allowed of $10 which will not be entered to bank balance, instead it will be Charged to Discount Allowed Acc @ Dr Discount Allowed $10 at the month end. 

Lets try payment to supplier: -

On 30 Jun 20X1, we made a payment  of $90 to supplier B  for settlement of an amount owning of $100, the recording to cashbook will be as such: 

The double entry will be Dr Supplier B $100 , Cr Discount received $10 & Cr Bank $90

Since we only need to pay $90 for an original owning of $100, the $10 is hence a discount received for the business.  The $10 discount received is also not added to the cash at bank balance but instead is charged off the discount received account Cr Discount received at the month end. 

💥Question: assuming a sales of $100 was made to Customer D, we gave customer D a cash discount of $20 for early repayment, how much sales revenue does the business records in its book?

Answer: $100, since the cash discount was given after invoice has been received, the discount will impact discount allowed - $20 which will be shown as a separate account from the Sales Revenue account. 

Petty Cash fund 

A business sometime keep some sum of money for low value expenditures such as refreshments, transport or toiletries such as toilet paper. 

The amount paid from the fund plus the amount remaining in the fund has to be equal to a fixed sum called the imprest amount or float.

(Float here doesnt refers to A & W float, although it is very tasty to drink)

For e.g. a petty cash fund of $100 paid out $60, the amount remaining of $40 + Paid out amount of $60 will be $100, which is the imprest amount.

The $60 paid out will be reimbursed to the fund such that the imprest amount of $100 is maintained. 

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