What is the cash book?

A cash book is a book that records all money a business receives and pays out, whether as cash in hand or through its bank account. What makes it special is that it plays two roles at once: it is a book of prime entry, where money transactions are first recorded, and it is also the ledger account for both cash and bank.

Two roles in one book

Most books of prime entry, such as the sales journal or the purchases journal, only gather transactions before they are posted to the ledger. The cash book is different because it combines both functions. Whenever money moves in or out, the entry goes straight into the cash book, and at the same moment its cash and bank columns already act as the cash and bank accounts in the ledger. Because of this, a business does not open separate cash or bank accounts in the general ledger.

As a book of prime entry

As a book of prime entry, the cash book takes the first record of every receipt and payment. Money received is entered on the debit side, while money paid out is entered on the credit side. Details such as the date, the description of the transaction and the amount are recorded in the order they happen. From here the information is summarised and posted to other ledger accounts, for example the debtor's account when a customer pays, or an expense account when rent is paid.

Also part of the ledger

This is the part that often confuses students. The cash and bank columns in the cash book are more than a list: they are the cash account and the bank account, complete with a debit and a credit side. The balances obtained when the cash book is balanced are the business's actual cash and bank balances on that date. Because these two accounts already exist inside the cash book, they are not repeated in the general ledger.

The single-column cash book

The simplest form is the single-column cash book, which has just one amount column on each side. It suits a small business that keeps money in only one form, usually cash in hand. In essence it works exactly like an ordinary cash account: receipts on the debit, payments on the credit, and the balance found by taking the total credits away from the total debits. It is a good starting point for grasping the cash book idea before extra columns are added.

The two-column cash book

Most businesses keep money in two forms (cash in hand and money in the bank), so a two-column cash book has one column for cash and one for bank on each side. Cash receipts go into the cash debit column, receipts through the bank go into the bank debit column, and the same applies to payments on the credit side. With this layout a single book can track two accounts at once, saving space and making it easy to cross-check one against the other.

The three-column cash book

The three-column cash book adds a further column on each side to record discounts. On the debit side there is a discount allowed column (the reduction given to customers who pay promptly); on the credit side there is a discount received column (the reduction earned from suppliers). So each side now holds three columns: discount, cash and bank. This layout lets a business record a payment and its related discount together on the same line.

Contra entries

A contra entry arises when money moves between cash and bank within the same business, for example, paying cash into the bank, or drawing cash out of the bank for office use. Because both accounts sit in the same cash book, one transaction produces both a debit and a credit in that very book. Paying cash into the bank, for instance, is recorded as a credit in the cash column and a debit in the bank column. The letter 'C' is usually written in the folio space to mark a contra entry.

The discount columns are only memoranda

One important point: the discount columns in a three-column cash book are not part of a ledger account; they are only memorandum, or reminder, columns. Their totals are not balanced like the cash and bank columns. Instead, the discount allowed total is posted to the debit of the Discount Allowed account, and the discount received total is posted to the credit of the Discount Received account in the general ledger. These columns only gather the discount figures so they can be transferred together at the end of the period.

Debit and overdraft balances

When the cash book is balanced, the cash column almost always shows a debit balance, because a business cannot spend cash it does not have. The bank column may show a debit balance, meaning there is money in the bank, or a credit balance, meaning the account is overdrawn. An overdraft is a liability, since the business owes the bank. Understanding this difference matters when the balance is carried to the financial statements or into a bank reconciliation statement.

How to balance the cash book

To balance the cash book, total the cash and bank columns on each side separately. Find the difference between the debit and credit totals for each column, and enter it as the balance carried down so the two sides agree. This balance is then brought down as the opening balance for the next period. The discount columns are not balanced; they are only totalled and posted. Keeping the columns neatly aligned helps stop the cash and bank figures from being mixed up.

Common student mistakes

The most frequent mistake is trying to balance the discount columns, when they are only memoranda. Students also often put discount allowed on the credit side or discount received on the debit side. With contra entries, many forget to make both entries or reverse the cash and bank directions. Another confusion is assuming the bank balance is always a debit. Checking whether money came in or went out, and in which form, prevents almost all of these errors.

Learn with 1-to-1 guidance

If your child still mixes up the cash book's two roles, our experienced teachers can explain them step by step in 1-to-1 online lessons, in Bahasa Melayu or English. The one-hour trial class is paid at the teacher's rate (from RM50 an hour); contact us on WhatsApp to arrange it.

FAQ

Is the cash book part of the ledger or a book of prime entry? It is both at once. The cash book takes the first record of every money transaction like a book of prime entry, but its cash and bank columns also act as the cash and bank accounts in the ledger, so those two accounts are not repeated in the general ledger.

Why are the discount columns not balanced? Because the discount columns are only reminder, or memorandum, columns, not real accounts. Their totals are gathered for easy posting at period end: discount allowed to the debit of its account and discount received to the credit of its account in the general ledger.

What is a contra entry in the cash book? A contra entry is a movement of money between cash and bank within the same business, such as paying cash into the bank. Because both accounts sit in the same cash book, it produces both a debit and a credit in that book, usually marked with the letter 'C'.