CASH BOOKS

A cashbook records all the receipts (cash and cheques from customers and debtors or other
sources of income) and all the payments (to creditors or suppliers and other expenses) for a
particular financial period. The cashbook will also show us the cash at bank and cash in hand
position of the firm.

There are two types of cashbooks:

i. Cash in hand cashbook, which records the cash transactions in the firm or business.
ii. Cash at bank cashbook, which records the transactions at/with, the bank.

The cashbook is the most important book of prime entry because it forms part of the general
ledger and records the source documents (receipts and cheques). The cash at bank cashbook and
cash in hand cashbook are combined together to get a two-column cashbook. The format is as
follows:

Two-column cashbook

Date Details Cash Bank Date Details Cash Bank

Additional columns for discounts allowed and discounts received can be included with the cash
at bank columns to get a 3 – column cashbook. The format is as follows:

Date Details Discount Cash Bank Date Details Discounts Bank Cash
Allowed (Ksh.) (Ksh.) Received Ksh.) (Ksh.)
The balance carried down (Bal c/d) for cash in hand and cash at bank will form part of the ledger
balances and the discounts allowed and discounts received columns will be added and the totals
posted to the respective discount accounts. The discount allowed total will be posted to the debit
side of the discount allowed account in the general ledger and the total of the discount received
will be posted to the credit side of the discount-received account of the general ledger.

Cash at bank can have either a credit or debit balance. A debit balance means the firm has some
cash at the bank and a credit balance means that the account at the bank is overdrawn - (the firm
owes the bank some money).

Example 1
Write up a two-column cashbook from the following details, and balance off as at the end of the
month:

2020
May 1 Started business with capital in cash Ksh.1,000.
“ 2 Paid rent by cash Ksh.100.
“ 3 F Lake lent us Ksh.5,000, paid by cheque.
“ 4 We paid B McKenzie by cheque Ksh.650.
“ 5 Cash sales Ksh.980.
“ 7 N Miller paid us by cheque Ksh.620.
“ 9 We paid B Burton in cash Ksh.220.
“ 11 Cash sales paid direct into the bank Ksh.530.
“ 15 G Moores paid us in cash Ksh.650.
“ 16 We took Ksh.500 out of the cash till and paid it into the bank account.
“ 19 We repaid F Lake Ksh.1,000 by cheque.
“ 22 Cash sales paid direct into the bank Ksh.660.
“ 26 Paid motor expenses by cheque Ksh.120.
“ 30 Withdrew Ksh.1,000 cash from the bank for business use.
“ 31 Paid wages in cash Ksh.970.

Solution
Two Column Cash Book
Cash Bank Cash Bank
Capital 1,000 Rent 100
F. Lake (Loan) 5,000 B McKenzie 650

Sales 980 B Burton 220

N Miller 620 Bank C 500
Sales 530 F Lake (loan) 1,000
G Moores 650 Motor Expenses 120 100
Cash C 500 Cash C
Sales 660 Wages 970
Bank C 1,000 Balances c/d 1,840 4,540
3,630 7,310 , 7,310
Example 2
A three-column cashbook is to be written up from the following details, balanced off, and the
relevant discount accounts in the general ledger shown.

2020
Mar 1 Balances brought forward: Cash Ksh.230; Bank Ksh.4,756.
“ 2 The following paid their accounts by cheque, in each case deducting 5 percent
discounts: R Burton Ksh.140; E Taylor Ksh.220; R Harris Ksh.800.
“ 4 Paid rent by cheque Ksh.120.
“ 6 J Cotton lent us Ksh.1,000 paying by cheque.
“ 8 We paid the following accounts by cheque in each case deducting a 2 ½ per
cent cash discount: N Black Ksh.360; P Towers Ksh.480; C Rowse Ksh.300.
“ 10 Paid motor expenses in cash Ksh.44.
“ 12 H Hankins pays his account of Ksh.77, by cheque Ksh.74, deducting Ksh.3 cash
discount.
“ 15 Paid wages in cash Ksh.160.
“ 18 The following paid their accounts by cheque, in each case deducting 5 per cent
cash discount: C Winston Ksh.260; R Wilson & Son Ksh.340; H Winter Ksh.460.
“ 21 Cash withdrawn from the bank Ksh.350 for business use.
“ 24 Cash Drawings Ksh.120.
“ 25 Paid T Briers his account of Ksh.140, by cash Ksh.133, having deducted Ksh.7
cash discount.
“ 29 Bought fixtures paying by cheque Ksh.650.
“ 31 Received commission by cheque Ksh.88.

Solution

Cash Book
Disc Cash Bank Disc Cash Bank
Bank allowed received
Bal b/d 230 4,756 Rent 120
R Burton 7 133 N Black 9 351
E Taylor 11 209 P Towers 12 468
R Harris 15 285 C Rowse 20 780
J Cotton: loan 1,000 Motor expenses 44

H Hankins 3 74 Wages 160

C Winston 13 247 Cash 350
R Wison & Son 17 323 Drawings 120

H Winter 23 437 T Briers 7 133

Bank 350 Fixtures 650
Commission 88 Balances c/d 123 4,833
89 580 7,552 48 580 7,552
 Discounts Received
3/1 Sundry Creditors 48

Discounts Allowed
3/1 Sundry 89
Debtors

PETTY CASH BOOK AND THE IMPREST SYSTEM OF ACCOUNTING

Petty Cash Book is a record of all the petty cash vouchers raised and kept by the cashier. The
petty cash vouchers will show summary expenses paid by the cashier and this information is
listed and classified in the petty cash book under the headings of the relevant expenses such as:

 Postage and stationery

 Traveling
 Cleaning expenses.

The format is as shown:

Petty Cash Book

Receipts Date Details Amount Payments/Analysis columns The

Postage Stationery Travelling Ledger

The balance c/d of the petty cash book will signify the balance of cash in hand or form part of
cash in hand. The totals of the expenses are posted to the debit side of the expense accounts. If a
firm operates another cashbook in addition to the petty cash book, then the totals of the expenses
will also be posted on the credit side of the cash in hand cashbook.
The Imprest system

This system of accounting operates on a simple principle that the cashier is refunded the exact
amount spent on the expenses during a particular financial period. At the beginning of each
period, a cash float is agreed upon and the cashier is given this amount to start with. Once the
cashier makes payments for the period he will get a total of all the payments made against which
he will claim a reimbursement of the same amount that will bring back the amount to the cash
float at the beginning of the period.

This is demonstrated as follows:

Ksh.
Start with (float) 1,000
Expenses paid (720)
Balance 280
Reimbursement 720
Cash float 1,000

Example 3
A cashier in a firm starts with Ksh.2,000 in the month of March (that is the cash float). I n the
following week, the following payments are made:
Ksh.
1st March – bought stamps for 80
2nd March – paid bus fare for 120
2nd March – cleaning materials 240
rd
3 March – bought fuel 150
3rd March – cleaning wages 300
th
4 March – bought stamps 200
4th March – paid L. Thompson (creditor) 400
th
5 March – fuel costs 150

On the 5th of March the cashier requested for a refund of the cash spent and this amount was
reimbursed back.

Required:
Prepare a detailed petty cash book showing the balance to be carried forward to the next period
and the relevant expense accounts, as they would appear on the General Ledger.
Solution
Receipts Date Detail Payments Expenses THE
LEDGER
Amount Postage Cleaning Travel
(Ksh.) (Ksh.) (Ksh.) (Ksh.) (Ksh.) (Ksh.)
2000 1/3 Bal b/d
1/3 Stamps 80 80
2/3 Bus Fare 120 120
2/3 Cleaning 240 240
Materials
3/3 Fuel 150 150
3/3 Cleaning wages 300 300
4/3 Stamps 200 200
4/3 L Thompson 400 400
5/3 Fuel 150 . . 150 .
1640 280 540 420 400
1640 5/3
5/3 Bal c/d 2000
3640 3640
2000 6/3 Bal b/d

BANK RECONCILIATION STATEMENTS

The cashbook for cash at bank records all the transactions taking place at the bank i.e. the
movements of the account held with the bank. The bank will send information relating to this
account using a bank statement for the firm to compare.

Ideally, the records as per the bank and the cashbook should be the same and therefore the
balance carried down in the cashbook should be the same as the balance carried down by the
bank in the bank statement.

In practice however, this is not the case and the two (balance as per the bank and firm) are
different. A bank reconciliation statement explains the difference between the balance at the
bank as per the cashbook and balance at bank as per the bank statement.

Causes of the Differences:

a. Items Appearing in the Cashbook and Not Reflected in the Bank Statement
i. Un-presented Cheques: Cheques issued by the firm for payment to the creditors
or to other supplies but have not been presented to the firm’s bank for payment.
ii. Un-credited deposits/cheques: These are cheques received from customers and
other sources for which the firm has banked but the bank has not yet availed the
funds by crediting the firm’s account.
iii. Errors made in the cashbook
These include:
 Payments over/understated
 Deposits over/understated
 Deposits and payments mis-posted
 Over-casting and under-casting the Bal c/d in the cashbook.

b. Items appearing in the bank statement and not reflected in the cashbook:
i. Bank charges: These charges include service, commission or cheques.
ii. Interest charges on overdrafts.
iii. Direct Debits (standing orders) e.g. to pay Alico insurance.
iv. Dishonored cheques

A cheque would be dishonored because:

 Stale cheques
 Post – dated cheques
 Insufficient funds
 Differences in amounts in words and figures.
v. Direct credits
vi. Interest Income/Dividend incomes
vii. Errors of the Bank Statement (Made By the Bank)

Such errors include:

 Overstating/understating.
 Deposits
 Withdrawals

The Purposes of a Bank Reconciliation Statement

1. To update the cashbook with some of the items appearing in the bank statement e.g. bank
charges, interest charges and dishonoured cheques and make adjustments for any errors
reflected in the cashbook.
2. To detect and prevent errors or frauds relating to the cashbook.
3. To detect and prevent errors or frauds relating to the bank.

Steps in Preparing a Bank Reconciliation Statement

1. To update the cashbook with the items appearing in the bank statement and not appearing
in the cashbook except for errors in the bank statement. Adjustments should also be
made for errors in the cashbook.
2. Compare the debit side of the cashbook with the credit side of the bank statement to
determine the un-credited deposits by the bank.
3. Compare the credit side of the cashbook with the debit side of the bank statement to
determine the un-presented cheques.
4. Prepare the bank reconciliation statement which will show:
a) Un-presented cheques
b) Un-credited deposits
c) Errors on the bank statement
d) The updated cashbook balance.
The format is as follows:
(Format 1)

Name:
Bank Reconciliation Statement as at 31/12
Ksh. Ksh.
Balance at bank as per cashbook (updated) x
Add: Un-presented cheques x
Errors on Bank Statement (see note 1) x x
x
Less: Un-credited deposits x
Errors on Bank Statement (see note 2) x (x)
Balance at bank as per Balance Sheet x

Note 1: These types of errors will have an effect of increasing the balance at bank e.g. an
overstated deposit or an understated payment by the bank.
Note 2: These types of errors will have an effect of decreasing the balance at bank e.g. an
understated deposit or an overstated payment by the bank, or making an unknown payment.

Format 2
Name:
Bank Reconciliation Statement as at 31/12
Ksh. Ksh.
Balance at bank as per bank statement x
Add: Un-credited deposits x
Add errors on bank statement (note 2) x x
x
Less: Un-presented cheques x
Errors on bank statement (note 1) x (x)
Balance at bank as per cashbook (updated) x
===

Example 1
Draw up a bank reconciliation statement, after writing the cashbook up to date, ascertaining the
balance on the bank statement, from the following as on 31 March 2020:
Ksh.’000’
Cash at bank as per bank column of the cashbook (Dr) 38,960
Bankings made but not yet entered on bank statement 6,060
Bank charges on bank statement but not yet in cashbook 280
Un-presented cheques C Clarke 1170
Standing order to ABC Ltd entered on bank statement, but not in cash book 550
Credit transfer from A Wood entered on bank statement, but not yet in cashbook 1,890
Solution
Cashbook – Bank
Ksh.’000’ Ksh.’000’
31/3 Bal b/d 38960 Bank charges 280
ABC (standing order) 550
A Wood (credit transfer) 1890 31/3 Bal C/D 40,020
40,850 40,850

Bank Reconciliation as at 31/03/2020

Ksh.’000’
Balance at bank as per cashbook 40,020
Add: Un-presented cheques 1,170
41,190
Less: Un-credited deposits (6,060)
Balance at bank as per Balance Sheet 35,130
=====
Example 2
The following are extracts from the cashbook and the bank statement of Nkobe. You are
required to:

a) Write the cashbook up to date, and state the new balance as on 31 December 2020, and
b) Draw up a bank reconciliation statement as on 31 December 2020.

Cashbook
2020 Dr Ksh. 2020 Cr Ksh.
Dec 1 Balance b/d 1,740 Dec 8 A Dailey 349
Dec 7 J Map 88 Dec 15 R Mason 33
Dec 22 J Cream 73 Dec 28 G Small 115
Dec 31 K Wood 249 Dec 31 Balance c/d 1,831
Dec 31 M Barrett 178
2,328 2,328

Bank Statement
2009 Dr Cr Balance
Ksh. Ksh. Ksh.
Dec 1 Balance b/d 1,740
Dec 7 Cheque 88 1,828
Dec 11 A Dailey 349 1,479
Dec 20 R Mason 33 1,446
Dec 22 Cheque 73 1,519
Dec 31 Credit transfer: J Walters 54 1,573
Dec 31 Bank charges 22 1,551
Solution
Cashbook Adjusted
2020 Ksh. 2020
Ksh.
31/12 Bal b/d 1,831 31/1 Bank charges 22
31/12 J. Walters (C/T) 54 31/12 Bal C/D 1,863

1,885 1,885

Nkobe
Bank Reconciliation Statement as at 31/12/2020
Ksh. Ksh.
Balance at bank as per cashbook – bank 1,863
Add: Un-presented cheques – (G Small) 115
1,978
Less: Un-credited deposits
K Wood 249
M. Barret 178 (427)
Balance at bank as per balance sheet 1,551

OR:
Balance at bank as per balance sheet 1,551
Add: Un-credited deposits:
K. Wood 249
M. Barret 178
1,978
Less: Un-presented cheques (115)
Balance at bank as per cashbook – bank 1,863

Example 3
(a) Explain the term “bank reconciliation” and state the reasons for its preparation.
(b) Salim, a sole trader received his bank statement for the month of June 2020. At that date the
bank balance was Sh. 706,500 whereas his cash book balance was Sh.2,366,500.
His accountant investigated the matter and discovered the following discrepancies:
1. Bank charges of Sh.3, 000 had not been entered in the cashbook.
2. Cheques drawn by Salim totaling Sh.22,500 had not yet been presented to the bank.
3. He had not entered receipts of Sh.26, 500 in his cashbook.
4. The bank had not credited Mr Salim with receipts of Sh.98, 500 paid into the bank on
30 June 2020.
5. Standing order payments amounting to Sh.62, 000 had not been entered into the
cashbook.
6. In the cashbook Salim had entered a payment of Sh.74, 900 as Sh.79, 400.
7. A cheque for Sh.15, 000 from a debtor had been returned by the bank marked “refer
to drawer” but had not been written back into the cashbook.
 8. Salim had brought forward the opening cash balance of Sh.329, 250 as a debit
balance instead of a credit balance.
9. An old cheque payment amounting to Sh.44, 000 had been written back in the
cashbook but the bank had already honored it.
10. Some of Salim’s customers had agreed to settle their debts by paying directly into his
bank account. Unfortunately, the bank had credited some deposits amounting to
Sh.832, 500 to another customer’s account. However acting on information from his
customers Salim had actually entered the expected receipts from the debtors in is
cashbook.
Required:
i. A statement showing Salim’s adjusted cashbook balance as at 30 June 2020.
ii. A bank reconciliation statement as at 30 June 2020.

Solution
a) Bank reconciliation is an attempt to explain the difference between the cash at bank balance
as per the cashbook and the cash at bank balance as per the bank statement.
Reasons for preparing a bank reconciliation statement are:
1. To update the cashbook with some of the relevant entries in the bank statement.
2. To detect and prevent errors or frauds that relate to the cashbook.
3. To detect and prevent any errors or frauds that relate to the bank.

b) ADJUSTED CASHBOOK

2020 Sh. 2020 Sh.

Bal b/d 2,366,500 Bank charges 3,000
Receipts omitted 26,500 Standing orders 62,000
Payment overstated 4,500 Debtors (dishonored cheques) 15,000
Error on opening balance 329,250
Balance C/F 329,250
Cheque payment 44,000
Balance C/D 1,615,000

2,397,500 2,397,500

SALIM
Bank Reconciliation Statement as at 30 June 2020.
Sh. Sh.
Cash at bank as per the updated cashbook 1,615,000
Add: Un-presented cheques 22,500
1,637,500
Less: Un-credited cheques 98,500
Error on bank statement 832,500 (931,000)
Balance as per the bank statement 706,500