Basic bookkeeping - Lesson 4

Question 0

Which accounts does the Cash Book contain and why is it useful?

Answer 0

Where a business has a large volume of transactions and a number of people recording them, two of the most used accounts, the Cash Account and the Bank Account, are placed in a separate book called the Cash Book.

Both accounts remain part of the ledger but they are physically separated from it.

Question 1

What is the Cash Book?

Answer 1

The Cash Book is a subdivision of the ledger for recording cash and bank transactions.

It is the only book which acts both as a subsidiary book and as part of the ledger. The entries in it therefore form one half of the double entry.

Question 2

What is a Contra Entry?

Answer 2

If a single transaction results in an the double-entry being into both the Cash Account and the Bank Account then the folio column should have the contra sign (meaning ‘opposite’) to signify that the double-entry is on the opposite side of the same page, on the other account.

Question 3

How are the Cash and Bank accounts set out in the Cash Book layout?

Answer 3

In columns alongside each other.

This is a convenient way of setting out the book, because many transactions affect both accounts.

However, they are really two separate accounts.

Question 4

What is the Petty Cash book?

Answer 4

The Petty Cash book is a subdivision of the Cash Book.

It is used where a business has a large number of minor cash transactions in a normal day.

Question 5

Why is a Petty Cash book useful?

Answer 5

It removes some of the smaller items of cash from the Cash book to the Petty Cash book, in the same way that the Cash book itself removes some of the volume of transactions from the ledger. These three books then become more manageable.

It is often useful for the bookkeeper who records entries in the Cash Book to delegate the responsibility for small day-to-day cash transactions to a more junior member of staff.

Periodic totals are then recorded in the ledger instead of making the Cash Book lengthy with small items of expenditure.

Question 6

How is the Petty Cash book laid out?

Answer 6

The cash received by the petty cashier is on the debit side and cash paid out is on the credit side.

The columns for date and particulars are common to both sides of the account.

This is because there will be few cash receipts other then those received from the bookkeeper from the Cash Account.

Question 7

What are Analysis columns in the Petty Cash book used for?

Answer 7

For grouping together types of expenditure so that total postings for each category can be posted to the debit side of the appropriate expense account at the appropriate time.

As well as recording each amount paid out in the total amount paid out column, it is also recorded in one of the analysis columns.

Question 8

Where will cash received by e Petty Cashier come from? What will the double-entry be for that cash?

Answer 8

From the cashier or bookkeeper. It will represent a contra entry as the amount will be credited in the main Cash book and debited in the Petty Cash book.

Question 9

What is the Imprest System?

Answer 9

The most usual way of operating a petty cash system.

The opening amount drawn for use as petty cash is known as the Imprest.

At the end of each week, the cashier or bookkeeper will give to the petty cashier the amount of cash spent during the period, so that the total in the cash box is restored to the Imprest amount.

Question 10

When a payment is made from petty cash, how will the petty cashier account for it?

Answer 10

The petty cashier will complete a petty cash voucher on which are details of what the payment is for. This will normally be signed by someone in the business who is authorised to make the type of expenditure in question as evidence that the payment has been made.

Any receipt which the purchaser obtains will be attached the voucher. Vouchers are numbered and filed and the voucher number in thenPetty Cash book is used as a cross reference so that the petty cashier can show who authorised the payment.

Question 11

What are the three basic types of bank account which businesses use?

Answer 11

The Deposit account
The Current account
Loan accounts

Question 12

What are the main advantages of using a current account?

Answer 12

The facility to pay money to a creditor without having to transport large amounts of cash.

Also, money can be paid in and withdrawn without any prior notification.

Question 13

What is a cheque?

Answer 13

An instruction to the bank to transfer money from one account to another.

Question 14

Who are the three parties to a cheque?

Answer 14

The Drawer : the person who sigs the cheque and from whose account the money will be taken

The Drawee : the banker who holds the account of the drawer and will make the transfer of funds.

The Payee : the person to whose account the money is payable.

Question 15

If the accounts of the Drawer and the Payee are at different branches or banks, how will the cheque be processed by the Payee’s banker?

Answer 15

The Payee’s banker will add the amount to the Payee’s account and then send the cheque to a ‘clearing house’ where the cheques are collated and sent to the Drawer’s bank so that the amount can be deducted from the Drawer’s account.

The Payee cannot withdraw the money until that cheque has cleared, even though the amount has been added to his account already.

Question 16

If a cheque is retuned by the banker, unpaid, what term is used to describe it?

Answer 16

Dishonoured.

The bank will attach a slip to such a cheque, usually marked ‘R/D’, meaning ‘return to drawer’.

Question 17

What is the purpose of cheque guarantee cards?

Answer 17

To give some security to businesses who accept cheques.

Question 18

Explain why the bank balance in the Cash book would be likely to differ from that in the bank statement at the same date.

Answer 18

The most common reasons would be :

Cheques issued but not yet presented for payment.

Bank charges.

Amounts paid into the bank but not yet included in the bank statement.

It is also possible that the bank or business has made an error.

Question 19

What is the purpose of a bank reconciliation?

Answer 19

A bank reconciliation provides an arithmetical check of the bank entries recorded in the Cash book.

It also allows the business to check that the bank has not made any errors (such as posting amounts to the wrong account or posting the wrong amount).

Question 20

What steps would you follow in reconciling the bank balance as per the Cash book with that in the bank statement?

Answer 20

1. Compare the Cash book and bank statement and list the differences.
2. Bring the Cash book up to date by entering those items, such as bank charges, which are in the statement but not yet in the Cash book.
3. Draft a reconciliation statement to explain the remaining differences.

Question 21

Why is an overdraft facility is more appropriate than a bank loan for those occasions when running expenses are temporarily higher than income?

Answer 21

Because with an overdraft, the business will only be charged interest for the period during which it s overdrawn and on the amount it is overdrawn by.

Question 22

Once the bank statement is received, where would the interest and bank charges be recorded?

Answer 22

In an expense account in the ledger in the same way as other business expenses.

Credit the bank account in the Cash Book, since it is effectively a payment, and debit the Bank Interest and Charges account.

Question 23

The bank account in the business’s books will be the opposite way round from the business account in the bank’s books. Explain why with an example.

Answer 23

If you have £10,000 in the bank you regard the bank as a Debtor since it owes you this money. In the bank’s books, however, you will be a Creditor because the bank owes you this money.

Question 24

When the bank statement is received at the end of each month, it will not usually show exactly the same balance as that in the business’s books. How should the two balances be compared?

Answer 24

By producing a bank reconciliation.

Question 25

What is the Bank Reconciliation?

Answer 25

The process of reconciling the bank balance in a business’s books with the bank balance in the bank’s books at a given point in time.

Question 26

What is a bank current account?

Answer 26

An account on which cheques can be drawn as a means of payment.

Question 27

What is a cash discount?

Answer 27

A reduction in the amount due as an award for prompt payment.

Question 28

What is a trade discount?

Answer 28

An allowance or reduction in price granted between businesses in the same trade.

For example, between a wholesaler and a retailer.

Question 29

What is contained in the General Ledger?

Answer 29

All accounts of the business other than those contained in the Cash Book, the Sales Ledger and the Purchases ledger (and the private ledger if there is one).

Question 30

Why is a bank reconciliation carried out?

Answer 30

To check that the bank’s statement is correct.

To check that the entries in the Cash Book are correct.

To see whether there are any additional entries to be made in the Cash Book such as bank charges.

Question 31

Into what subdivisions can the ledger be broken down?

Answer 31

The Cash Book
The Sales Ledger
Th Purchases Ledger
The Private Ledger (rare)
The General Ledger (for the accounts that remain)

Question 32

Give a definition of each subdivision of the ledger, stating which accounts are kept in it.

Answer 32

The Cash Book contains the Cash Account, the Petty Cash Account and the Bank Account.

The Sales Ledger contains the personal accounts of the business’s debtors. (NB the Sales Account is kept in the General Ledger).

The Purchases Ledger contains the personal accounts of the business’s trade creditors. (NB the Purchases Account is kept in the General Ledger).

The Private Ledger contains the ‘real’ accounts and those accounts of a confidential nature.

The General Ledger contains all the accounts that are not contained in the subdivisions mentioned above.

Question 33

Into what ledger subdivisions would a credit sale be posted? State which are debit and which are credit entries.

Answer 33

The sale would be Debited to the customer’s personal account in the Sales Ledger.

The total sales for a period (normally a month) would be Credited to the Sales Account in the General Ledger.

Question 34

Into what ledger subdivisions would cash purchase of goods for resale be posted? State which are debit and which are credit entries.

Answer 34

The cost of goods would be Credited in the Cash Book and Debited to the Purchases Account in the General Ledger.