Introduction to Cash Book SS1 Principles of Accounting

JOURNALS AND CASH ACCOUNT

CONTENT

General Journal

Classes of Entries

Errors Affecting the Agreement of the Trial Balance

Introduction to Cash Book

General Journal

Meaning and Uses of the General Journal

General journal is designed as an all-purpose book. This means that any business transaction can be conveniently recorded in it. But its entries are usually restricted to records of opening and closing entries of business e.g.

The purchases or the sales of fixed asset on credit

Correction of errors,

Adjustment in account

Purchases of new business

and other transfer

General Journal is also called journal proper, it is also part of the books of original entry in which are recorded the initial entries in chronological order.

Uses of General Journal

The general journal is used for the following:

Opening entries

Closing entries

Correction of errors

Transfer between accounts

Purchases of fixed asset on credit

Sales of fixed assets on credit

To answer questions on double entry

Classes of Entries

Simple Entries

Only two accounts are involved. One account will be debited and another credited.

Composite entries

These may involve several accounts to be debited and only one account to be credited or vice versa.

1. Format of Journal Entries

DATE PARTICULARS FOLIO DR CR

Name of account to be debited ×××

Name of account to be credited ×××

Narrations.

Note: It should be noted that any transaction which cannot be entered in the subsidiary books must appear in the journal before being posted to the ledgers.

1. Sales and purchases of fixed assets on credit: e.g.

(a) Sold Furniture to Rita on credit N600.00

DATE PARTICULARS DR CR

₦ ₦

Furniture 600

Rita 600

Sales of furniture to Rita

(b) Purchases of Motor Vehicle N5,000.00 from Ali on credit

DATE PARTICULARS DR CR

₦ ₦

Motor Vehicle 5,000.00

Ali 5,000.00

Purchases of Motor Vehicle from Ali

1. Use of journal to answer questions on double entry system

Examples:

Paid rent N400.00 for cash

Cash sale N650.00

JOURNAL

DATE PARTICULARS DR CR

₦ ₦

Rent 400

Cash 400

Rent paid with cash

DATE PARTICULARS DR CR

₦ ₦

Cash 650

Sales 650

Being sales of goods for cash

1. Opening entries

Example:

Jojo’s book shows the following balances on 1st January, 2013

Assets: Motor Van N800.00, Stock N450.00, Plant and machinery N900.00, Furniture N450.00, Cash N500.00 Debtor N200.00 Bill receivable 550.00

Liabilities: Creditor 1,600.00, Loans 1,400.00 Bill payable 850.00

DATE PARTICULARS DR CR

₦ ₦

Assets:

Motor van 800

Stock 450

Plant and machinery 900

Furniture 450

Cash 500

Debtors 200

Bill receivable 550

Liability:

Creditor 1,600.00

Loans 1,400.00

Bill receivable 850

3,850.00 3,850.00

1. Correction of errors

Examples:

Cash sale N300.00 was omitted completely from the books

DATE PARTICULARS DR CR

N N

cash 300

sales 300

correction of cash sales omitted

1. Transfer between accounts

Examples:

Bola, a doctor, could not pay N1, 000 owed to us but bought machinery for full settlement.

DATE PARTICULARS DR CR

₦ ₦

Bola 1,000.00

Machinery 1,000.00

Full settlement of debt with machinery

(c) Correction of errors

In accounting literature errors are classified into two broad categories: the first group of errors does not affect the Trial Balance while the second group affects the Trial Balance. It means that if the Trial balance fails to agree it is due to the second group of errors.

There are six main errors in the first group:

Error of omission

Error of principles

Error of commission

Compensating error

Error of original entry

Error of complete reversal of entry

1. Error of Omission: There is an error of omission if the transaction is completely omitted from the books of account. That is, there is no entry on either side of all the books of account.
2. Error of Principles: An error of principles occurs when the entry of a transaction is made in a wrong class of account. Such a situation may arise where a transaction of a fixed asset (real account) is entered in a nominal account.
3. Error of commission:It occurs when recording transactions in wrong person’s account. An error of commission occurs when personal account of one person, organization or firm is entered in an account of other person, organization or firm.
4. Compensating error: The compensating error occurs when the effect of the mistake is exactly offset by another mistake of the same size working in the reverse direction. Error due to undercast or overcast by the same amount, which cancels each other.
5. Errors of original entry: This is an error committed right from the prime books, which are transferred into the ledger entries the same way. Hence its entering wrong amount to both the debit and credit sides of an account.
6. Errors of complete reversal of entry: This is a case where an item that was supposed to be debited was credited and the one to be credited was debited. Posting a transaction to a wrong side of account.

Errors Affecting the Agreement of the Trial Balance

The second groups of errors that visibly affect the agreement Trial Balance are called clerical errors. Where clerical errors occurs the trial balance is usually balanced by opening, an interim, a suspense account to take records of the difference between the two sides, until the errors are discovered and necessary corrections made. These errors include:

Error in casting the figures in either the books of the original entry or the ledger accounts. Thus an account may be over cast or under cast.

Mistakes in the addition of the trial balance.

Omission of some balances in the ledger including the cash book when extracting the trial balance.

Mistakes in the calculation of the balances.

Some items not posted from the books of the original entry.

Introduction to Cash Book

Cash book is the book of prime entry which record cash transactions only. Cash book is the book for recording detailed particulars of all money received and paid. It is a subsidiary book and also performs the function of a ledger.

Types of Cash Book

Single column cash book( also known as cash account)

Two or double column cash book

Three column cash book

Petty cash book

Single Column Cash Book

ILLUSTRATION 1

Enter the following transactions in the cash book of A. Diamond, a sole trader, for the month of January, 2013.

Jan. 1 Start business with cash ₦7,200.00

2 bought goods for cash ₦1,800.00

3 sold goods for cash ₦440.00

3 paid carriage ₦80.00

6 paid advertising account ₦80.00

9 Ham paid cash on account ₦340.00

14 lent U. Olu ₦800.00

16 purchase goods for cash ₦1,600.00

18 cash sales ₦850.00

24 paid wages ₦180.00

28 cash sales ₦760.00

29 paid rent and rates ₦100.00

30 U. Olu paid on account ₦400.00

Open a cash book, ledger accounts and extract a trial balance as at 31st Jan., 2013.

DR. DIAMOND CASH BOOK FOR THE MONTH END 31ST JAN. 2013

DR CR

Date Particulars Folio Cash Date Particulars Folio Cash

₦ ₦

Jan.1 Capital 7,200 Jan.2 Purchases 1,800

Sales 440 3 Carriage 80

9 Ham 340 6 Advert 80

12 U.Olu 800 16 Purchases 1,600

18 Sales 850 24 Wages 180

28 Sales 760 29 Rents 100

30 U. Ola 400 31 balance c/d 6,950

10,790 10,790

Feb.1 Balance b/d 6,950

CAPITAL ACCOUNT

DR CR

Date Particulars Folio Amount ₦ Date Particulars Folio Amount ₦

Jan. 1 Cash 7,200

PURCHASES ACCOUNT

DR CR

Date Particulars l/f Amount N Date Particulars l/f Amount N

Jan. 3 Cash 1,800 Jan. 31 Bal.c/d 3,400

19 Cash 1,600

3,400 3,400

Feb. Bal.b/d 3,400

SALES ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 31 Bal. c/d 2,050 Jan. Cash 440

Cash 850

Cash 760

2,050 2,050

Feb. 1 Bal. b/d 2,050

WAGES ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 5 cash 80

ADVERTISING ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 8 cash 80

HAM ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 9 Cash 340

U. OLU ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 31 Cash 800 Jan. 29 Cash 400

31 Bal. c/d 400

800 800

Feb. 1 Bal. b/d 400

WAGES ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan. 25 cash 180

RENT AND RATE ACCOUNT

DR CR

Date Particulars l/f Amount ₦ Date Particulars l/f Amount ₦

Jan cash 100

NOTE: The cardinal point in posting items from cash book to the ledger is that all items from the debit side of the cash book except the balance(s) and cash discounts are posted to the credit side of the ledger and vice versa.

EVALUATION

MR. DADA commenced business as a petty trader in Lagos, on 1st of March, 2011 with ₦5, 000 in cash. During the month, the following transactions took place.

1 Mar. Bought office furniture ₦400.00

3 Mar. Bought assorted goods for sale ₦2000.00

5 Mar. Bought postage stamps ₦10.00

7 Mar. Sold goods for cash ₦80.00

8 Mar. Paid for cleaning materials ₦10.00

10 Mar. Received cash from Godwin ₦50.00

14 Mar. Paid Mark ₦90.00

16 Mar. Bought Stationery for cash ₦5.00

18 Mar. Bought sundry articles for Resale ₦500.00

20 Mar. Received cash from Malin ₦100.0

22 Mar. Cash Sale ₦50.00

22 Mar. Paid Jemima Kemi Cash ₦100.00

28 Mar. Paid wages to assistant ₦100.00

30 Mar. Paid rent ₦50.00

ANALYTICAL CASH BOOK

CONTENT

Two Column Cash Book

Contra Entries

Three Column Cash Book

Discount

Analytical Petty cash Book

Two Column Cash Book

In this type of cash book , two separate accounts cash and bank are combined for the sake of convenience. There will be separate columns for date, particulars, folio, cash and bank.

Cash column: This is where cash receipts and payments are recorded.

Bank column: All payments made by cheque and money received and paid into the bank are recorded here.

Contra Entries

The word contra is a Latin word meaning opposite. In some cases in business, there may be excess cash in hand which needs to be paid into the bank for official use.

These are known as contra entries because both sides of the cash book will have entries concerning each transaction. Contra entries are denoted by “c” or “cc” in the folio columns and on the ledger. A bank that is credited in the cash book will be debited, while cash debited on the cash book will be credited.

ILLUSTRATION 3:

Enter the following transactions in a double column cash book of TUCKSHOP INT’L Enterprises from the following particulars:

May 1 Cash in office ₦260.00

May 1 Cash at Bank ₦1,800.00

May 3 Received bank cheque from Aboh ₦160.00

May 5 Cash Sales to date ₦500.00

May 6 Paid cash into bank ₦650.00

May 8 Paid Attabor by cheque ₦140.00

May 12 Paid rent by cheque ₦100.00

May 14 Bought Stationery by cash ₦100.00

May 17 Withdraw cash from bank to office ₦400.00

May 18 Purchase goods for cash ₦160.00

May 29 Cash sales to date ₦600.00

May 30 Paid cash to the bank ₦150.00

May 31 Paid wages in cash ₦100.00

May 31 Bank desired charges ₦50.00

You are required to prepare double column cash book

TUCHSHOP INT’L

Double Column Cash Book for the Month Ending 31st May, 2013.

DR CR

Date Particulars Folio Cash Bank Date Particulars Folio Cash Bank

₦ ₦ ₦ ₦

May. 1 Bal. 260 1,800 May. 6 Bank c 500

3 Aboh 160 8 Attabor 140

5 Sales 500 12 Rent 100

6 Cash c 500 14 Stationery 100

29 Sales 600 17 Cash c 400

30 Cash 150 18 Purchases 160

31 Wages 100

31 Charges 50

31 Bal. c/d 500 1,820

1,360 2,510 1,360 2,510

Jun. 1 Bal. b/d 500 1,820

EVALUATION

Enter the following transactions in a double-column cash book of CLIFF SHOP, a sole trader based in Lagos for the month of March 2013

Mar.1 Capital at start: Cash ₦4, 500.00

————————–Bank ₦9, 000.00

“2 Lent to Favour in cheque ₦1, 500.00

“4 Purchase goods by cheque ₦7, 500.00

“6 Cash sales ₦6, 000.00

“9 Paid expenses ₦150.00

“15 Cash sales paid into the bank ₦1, 500.00

“22 Paid cash into the bank ₦3, 000.00

“25 Favour paid cheque on account ₦750.00

“25 Withdraw cash from bank for office use ₦600.00

“28 Paid T. Baba by cheque ₦750.00

“28 Cash sales ₦750.00

“29 Paid wages in cash ₦300.00

“30 Cash sales paid into bank ₦350.00

“30 Paid cash into bank ₦600.00

Prepare the Double column Cash Book