Financial Accounting · Lesson 5

Cash books, petty cash, bank transactions and reconciliation

JAMBWAECNECO

What the syllabus asks

JAMB: Topic 4 Cash book (two- and three-column, discounts, petty cash and imprest system); Topic 5 Bank transactions and reconciliation (cheques, e-banking, bank statement, bank reconciliation statement)

WAEC: Cash book including analytical and petty cash book; bank reconciliation statement

NECO: Cash book including analytical and petty cash book; bank reconciliation statement

What you will learn

Explain the dual role of the cash book.
Prepare two- and three-column cash books including contra entries and discounts.
Post discount totals to the ledger.
Keep a petty cash book on the imprest system with analysis columns.
Describe cheques, e-banking and other bank services used in Nigeria.
Update the cash book and prepare a bank reconciliation statement, including overdrafts.

Key points

The cash book is both a book of original entry and the cash/bank ledger account.
Debit side = receipts; credit side = payments.
Contra entries (C) record cash to bank or bank to cash; no ledger posting.
Discount columns are memorandum: total and post, never balance.
Trade discount is never recorded; cash discount is.
Cash column cannot have a credit balance; a bank credit balance is an overdraft.
Imprest: reimbursement equals the amount spent.
Update the cash book first (charges, transfers, dishonours, errors).
BRS handles timing items: unpresented cheques and uncredited lodgements.
Statement of financial position uses the updated cash book balance.

Start here: The cash book and its dual role

Almost every Nigerian business, from a provision shop in Onitsha main market to a pharmacy in Ikeja, handles money in two places: notes and coins in the till, and money in a bank account. Because these transactions are so frequent, they are not first written in a separate day book. They go straight into the cash book.

The cash book has a dual role:

Book of original entry: receipts and payments are recorded first here, from receipts, cheque counterfoils, paying-in slips, POS and transfer alerts.
Ledger account: it is the cash account and the bank account of the general ledger. There is no separate “cash account” in the ledger; the cash book takes its place. Only the other side of each entry is posted to the ledger (to sales, rent, the customer’s account and so on).

The layout follows the ledger rule: the debit (left) side records money received and the credit (right) side records money paid out. Balancing is done in the usual way: add the larger side, put the difference as “balance c/d” on the smaller side, and bring it down on the opposite side as “balance b/d”.

Types of cash book

Single-column: cash only (rare today).
Two-column: cash and bank columns on each side.
Three-column: cash, bank and discount columns on each side.
Analytical (columnar) cash book: extra analysis columns, for example sales by department or payments by type, used by WAEC to test classification.
Petty cash book: for small payments (5.6).

Advantages of the cash book: it shows the cash and bank balance at any time, reduces the number of ledger entries, makes theft and errors easier to detect because cash can be counted against the book, and provides the record needed for bank reconciliation.

Continue this lesson in the free app →

Practice questions

1. A two-column cash book has columns for

cash and bank
cash and discount
bank and discount
debit and credit only

Show answer

A: cash and bank
The three-column cash book adds discount columns.

2. Cash paid into the bank from the office is recorded as

Dr cash column, Cr bank column
Dr cash, Cr capital
Dr bank, Cr sales
Dr bank column, Cr cash column

Show answer

D: Dr bank column, Cr cash column
Bank rises, cash falls: a contra entry marked ‘C’.

3. Discount received is shown on the

debit of the discount received account
sales day book
credit side of the cash book
debit side of the cash book

Show answer

C: credit side of the cash book
It is with payments to suppliers on the credit side.

4. Discount received is

a liability
income
an expense
an asset

Show answer

B: income
It reduces the amount paid to suppliers: an income.

5. A petty cashier has an imprest of ₦20 000 and spends ₦13 750. The amount to restore the imprest is:

₦13 750
₦6 250
₦20 000
₦33 750

Show answer

A: ₦13 750
Reimbursement equals the amount spent: ₦13 750.

Key words

Cash book: A book recording all cash and bank receipts and payments; it serves as the cash and bank accounts.
Contra entry: An entry appearing on both sides of the cash book, e.g. cash paid into bank.
Discount allowed: A cash discount given to a customer for prompt payment: an expense.
Discount received: A cash discount received from a supplier for prompt payment: an income.
Trade discount: A reduction off list price for trade buyers; never entered in the books.
Overdraft: Permission to withdraw more than the amount in a current account; a liability.
Petty cash book: A book for small cash payments, kept by the petty cashier.
Imprest: A fixed float of petty cash restored to the same amount at the end of each period.
Petty cash voucher: A document authorising and supporting a petty cash payment.
Bank statement: A copy of the customer’s account as kept by the bank.
Unpresented cheque: A cheque issued and entered in the cash book but not yet paid by the bank.
Uncredited lodgement: Money paid into the bank and recorded in the cash book but not yet on the statement.

Learn Cash books, petty cash, bank transactions and reconciliation step by step, free.
The Cara's Tips app teaches every topic from the very basics, with quick checks, worked examples and exam practice. It works offline.
Open this lesson in the free app Download for Android