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Accounting for Cash Transactions

Filed under Bookkeeping. Fact checked on May 24, 2012.

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Keeping track of your cash, payables and records can be an organizational nightmare. Find out the most efficient ways to keep all the money and the records in line and updated appropriately.

If your company is anything like a typical small business, you deal with a variety of different types of cash transactions. Lumping all these transactions into one record may be tempting, but it's almost categorically a bad idea.

You'll want to divvy up your cash transactions into a number of different places:

  • Sales and Cash Receipts Journal: To simplify your recordkeeping, we recommend that you combine your sales and cash receipts in a single journal.
  • Daily Cash Sheet: If a lot of cash moves in and out of your business each day, you should also prepare a daily cash sheet to reconcile your cash received and paid out for the day. If you use a daily cash sheet, you can reconcile your cash receipts with your daily deposit into your bank account.
  • Bank Reconciliation: A bank reconciliation, at the end of every month, verifies the amount you have in your checking account. It will also help you find bookkeeping errors and could help prevent irregularities such as employee theft.
  • Cash Disbursements Journal: Your daily cash disbursements should be recorded here.
  • Petty Cash Fund: If your customers normally pay by check, you may need to set up this fund so you will have some cash on hand to pay miscellaneous small expenses. A petty cash fund isn't necessary if you use a cash register and always have currency on hand, as long you keep track of these small purchases.

Maintaining Daily Cash Sheets

A cash sheet is a daily reconciliation of cash received and cash paid out. If a good deal of your business is transacted in cash, such as in a retail store, you should prepare a cash sheet at the end of each day. Deposit all cash receipts in your bank account daily. 

Your daily cash receipts should generally be the same amount as your daily bank deposit. You should investigate and reconcile any discrepancies between the two amounts. Any reasons for a difference should be apparent on your cash sheet, such as a small amount of cash paid out for a miscellaneous expense.

Maintaining cash sheets provides an alert to any shortage or surplus of cash for the day. Some businesses opt to simply count the cash in the register at the end of the day without maintaining a cash sheet, leaving them clueless to any shortages or overages. A shortage could be the result of theft, or it could simply result from your failure to record a special transaction, such as an expense you paid in cash—but without a cash sheet, you'll never know.

Tools to Use

Among the Business Tools is a cash sheet for your use. Simply plug in your daily amounts to see instantly whether you have a cash shortage or surplus at the end of the day. You can use the spreadsheet over and over again for your daily needs.

Preparing a Bank Reconciliation

Preparing a bank reconciliation when you receive your bank statement every month lets you complete one of the most important aspects of your cash control procedures: verifying the amount of cash in your checking account.

The cash balance in your books will never agree with the balance shown on the bank statement. The delay in checks and deposits clearing the bank, automatic bank charges and credits you haven't recorded—and errors you may have made in your books—render the ideal impossible.

After preparing the bank reconciliation, you can be comfortable that the account balance shown on your books is up-to-date, and gain insight into any irregularities such as employee theft of funds.

Step-By-Step Instructions for Preparing a Bank Reconciliation

  1. Prepare a list of deposits in transit. Compare the deposits listed on your bank statement with the bank deposits shown in your cash receipts journal. On your bank reconciliation, list any deposits that have not yet cleared the bank statement. Also, take a look at the bank reconciliation you prepared last month. Did all of last month's deposits in transit clear on this month's bank statement? If not, you should find out what happened to them.
  2. Prepare a list of outstanding checks. In your cash disbursements journal, mark each check that cleared the bank statement this month. On your bank reconciliation, list all checks from the cash disbursements journal that did not clear. Also, take a look at the bank reconciliation you prepared last month. Are there any checks that were outstanding last month that still have not cleared the bank? If so, be sure they are on your list of outstanding checks this month. If a check is several months old and still has not cleared the bank, you may want to investigate further.
  3. Record any bank charges or credits. Take a close look at your bank statement. Are there any special charges made by the bank that you have not recorded in your books? If so, record them now just as you would have if you had written a check for that amount. By the same token, if there are any credits made to your account by the bank, those should be recorded as well. Post the entries to your general ledger.
  4. Compute the cash balance per your books.Foot the general ledger cash account to arrive at your ending cash balance.
  5. Enter bank balance on the reconciliation. At the top of the bank reconciliation, enter the ending balance from the bank statement.
  6. Total the deposits in transit. Add up the deposits in transit, and enter the total on the reconciliation. Add the total deposits in transit to the bank balance to arrive at a subtotal.
  7. Total the outstanding checks. Add up the outstanding checks, and enter the total on the reconciliation.
  8. Compute book balance per the reconciliation.Subtract the total outstanding checks from the subtotal in step 6 above. The result should equal the balance shown in your general ledger.
Alpha Company
Bank Reconciliation
March 31, 2013
Balance per bank statement $ 4,672.98
Deposits in Transit
Date Amount
3/30 $ 500.25  
3/31 $ 1,890.33 $ 2,390.58
Subtotal $ 7,063.56
Outstanding Checks
Check Number Amount
1656 $ 22.50  
1693 $ 150.00  
1696 $ 32.00  
1697 $ 1,902.00  
1698 $ 1,105.80 $ 3,212.30
Balance per books $ 3,851.26

In the above example, if the general ledger cash account does not show a balance of $3,851.26, you will need to track down the cause of the difference.

Tools to Use

In the Business Tools area, you can find a reconciliation spreadsheet to make bank reconciliations easy for you. Try using it as a starting point for your own bank reconciliations.

If your bank reconciliation doesn't balance, you need to find the error or errors. The possible causes of a bank balance error comprise:

  • Total outstanding checks added incorrectly. Double check your addition of the total outstanding checks.
  • Total deposits in transit added incorrectly. Double check your addition of deposits in transit.
  • Bank balance transposed. Did you start with the correct amount at the top of your reconciliation? Double check by comparing it to the month end balance on your bank statement.
  • Failed to record all items clearing the bank statement. Look at your bank statement carefully. Are there any items, such as miscellaneous bank charges or automatic deposits or withdrawals that were not recorded in your books?
  • Journals added incorrectly. Double check your addition of cash receipts and cash disbursements.
  • Failed to record a check or deposit. Did you record all checks and deposits in your journals? This should have been apparent when you were preparing your lists of deposits in transit and outstanding checks.
  • Incorrectly recorded an amount. Compare each item on the bank statement with your journal entry for that item. Did you enter the correct amount?

Maintaining a Cash Disbursements Journal

A cash disbursements journal is where you record your cash (or check) paid-out transactions. It can also go by a purchases journal or an expense journal.

While you may, if you search heard enough, find print cash disbursement journals, we strongly recommend keeping this journal on your computer or in the cloud, like you do with most of your financial journals. Your accounting software will probably include some type of disbursement and purchase journals customizable to your business needs.

Using Accrual Accounting and Cash Disbursement Journals

If you use the accrual basis of accounting, as we recommend, you'll record expenses in the cash disbursement journal at the time you pay for goods or services, or in the purchase journal if you purchase on credit.

Example

You own a variety store. You purchase from your main supplier, on account, items totaling $7,800. Most of the purchase is inventory for resale, but also included are $100 of office supplies. Make the following entry in your purchases journal:

  Debit Credit
Purchases 7,700
Office supplies expense 100  
Accounts payable
7,800

Next month, after receiving a statement from your supplier, you write a check to settle your account. Make the following entry in your purchases journal:

  Debit Credit
Accounts payable 7,800  
Cash   7,800

Cash Disbursements Journal Examples

If your business is a retail store, your journal entries might look something like this:

(Note: All dollar amounts have been rounded off to the nearest dollar.)

  • On February 2, you paid your electric bill of $177.
  • Also on February 2, you bought merchandise inventory on account from Ash Wholesale at a cost of $9,500.
  • On February 5, you spent $82 at Atkins Service Station to fill up your delivery vehicles with gas. You charge it all to the account you maintain with Atkins.
  • On February 8, you write a check for $9,500 in payment of the bill you receive from Ash.
  • On February 10, you write a check for $82 to Atkins Service Station to settle your account there.
  • Upon completion of this journal page, you should foot all seven amount columns. Since you are using a double-entry accounting system, you can see if all entries were recorded correctly. Check to see if the sum of the debits equals the sum of the credits. Total debits: 0 + 9,582 + 9500 + 82 + 177 = 19,341. Total credits: 9,759 + 9,582 = 19,341.
PURCHASES JOURNAL FOR: FEBRUARY 2013
  Cash Accounts Payable  
Date Descrip. Dr. Cr. Dr. Cr. Purch. Dr. Delivery Expense Dr. Utilities Exp. Dr.
2 Edison Util. - electricity   177         177
2 Ash Whlsle - inventory       9,500 9,500    
5 Atkins Serv. Station - gas       82   82  
8 Ash Whlsle - on account   9,500 9,500        
8 Atkins Serv. - on account   82 82        
Totals 0 9,759 9,582 9,582 9,500 82 177

If the sum of the debit columns doesn't equal the sum of the credit columns, you have a problem that you should track down right away. You may have entered one of the amounts in the wrong column. You might have simply added incorrectly when computing the totals. It is usually easy to pinpoint the error because the debits should equal the credits for each transaction.

Your purchases journal may have many more columns than this sample because you probably will have more expense classifications.

Maintaining a Petty Cash Fund and Dealing with Accounts Receivable

Nearly all businesses need cash a small amount of cash on hand to pay miscellaneous small expenses. The easiest way to keep this money available is through a petty cash fund, unless, of course, yours is a retail business with cash on hand.

If you are in the retail business and need to access a little dough from time to time, carefully record all cash paid out of the cash register and prepare a cash sheet at the end of the day to help control cash paid out of the register.

Steps for Creating a Petty Cash Fund

  1. Start a petty cash fund by writing a check to "Petty Cash." Cash the check.
  2. Physically place the cash in a petty cash drawer or petty cash box.
  3. As you pay for expenses out of petty cash, keep an itemized list of each expenditure.
  4. When the cash is almost depleted, add up the expenses on your itemized list.
  5. Write another check to "Petty Cash" for the total of the expenses. That check should replenish the fund back to the initial balance.

How to Use a Petty Cash Fund

Let's assume you decide to set up a petty cash fund to pay small expenses that you don't pay by check or debit card. You feel a petty cash fund of $100 is necessary, so you write a $100 check payable to "Petty Cash." You physically place the $100 in a petty cash box. Make the following entry in your cash disbursements journal:


Debit Credit
Petty cash 100
Cash
100

Two weeks later, you review the petty cash box and find $25.00 left. You add the items listed on the expenditures list, and you are happy to find that they add up to $75.00 (25 + 75 = 100). You write a check, payable to "Petty Cash," for $75.00. The cash is placed in the petty cash box. This replenishes the fund back to $100. Using the list of petty cash expenditures as your source document, make the following entry in your cash disbursements journal:


Debit Credit
Office supplies 13.20
Auto expenses 39.00
Misc. labor 15.00
Misc. expenses 7.80
Cash
75.00

The petty cash drawer or box should be locked when not in use. Only one person should have access to the petty cash, so that one person is held accountable for it.

Understanding Accounts Receivable

Accounts receivable (often abbreviated A/R) are simply unpaid customer invoices and any other money owed to you by your customers. The sum of all your customer accounts receivable is listed as a current asset on your balance sheet.

Your accounting software should automatically keep an accounts receivable ledger account for each customer. The accounts receivable ledger, which can also double as a customer statement, serves as a record of each customer's charges and payments.

Maintaining Accounts Receivable Records

When a customer purchases something, you'll want to:

  1. Record the sale in the sales and cash receipts journal. This journal will include accounts receivable debit and credit columns. Charge sales and payments on account are entered in these two columns, respectively.
  2. Each day, the credit sales recorded in the sales and cash receipts journal are posted to the appropriate customer's accounts in the accounts receivable ledger. This allows you to know not only the total amount owed to you by all credit customers, but also the total amount owed by each customer.
  3. Entries made in the sales and cash receipts journal are also totaled at the end of the month, and the results are posted to the accounts receivable account in your general ledger. This account is your accounts receivable "control account." "Control" means is that after all your posting is completed, the total amount of customer balances in the accounts receivable ledger will be the same as the balance in the control account in the general ledger. If they aren't the same, you can tell that you made an error somewhere along the line.

If you extend credit to your customers and maintain a sales and cash receipts journal by hand, ensure your accounting software integrates posting to the accounts receivable ledgers with the recording of sales and cash receipts transactions automatically. Referred to as the "one-write" system, this time-saver also reduces the chance of posting errors.

Keeping an Accounts Receivable Ledger

You must maintain an accounts receivable ledger account for each customer you extend credit to. Post your sales invoice charges from the sales and cash receipts journal to the customer ledgers at the end of each day. Also, whether you use a cash register or a separate cash receipts book, be sure to post cash receipts on account to the appropriate ledgers at the end of the day. Of course, your software should be able to take care of this automatically.

If you like a paper trail, keep all your accounts receivable ledgers in one binder and let the copies of the accounts receivable ledgers also serve as the statements you mail to your customers in request for payment. If  mail them out as statements, begin a new ledger sheet every month.

The monthly ledger sheet should start with a balance forward, which is the ending balance from the previous month. If your ledger sheets will not be doubling as your customer statements, you don't need to start a new sheet every month. Just keep a permanent ledger for each customer that maintains a running total of the customer balance.

For most businesses, statements should be sent once a month to all customers with an account balance and include:

  • a beginning balance (the previous month's ending balance)
  • all invoices charged during the month
  • payments on account during the month
  • any debit memos or credit memos
  • an ending balance
  • a due date

Keeping Track of Your Control Account

When you mail statements to your customers every month, you should reconcile your accounts receivable ledgers with the accounts receivable control account. The control account is the total accounts receivable balance from your general ledger.

 The beginning accounts receivable total, plus charge sales for the month, minus payments on account for the month, should equal the ending accounts receivable total. Compare this amount to the sum of the individual customer accounts receivable ledgers. This will help you discover any errors in your customer statements before you mail them out. Your accounting software should notify you of discrepancies automatically.

Handling Your Accounts Payable

Accounts receivable can be a little fun—after all, it's all about raking in your hard-earned dough. Accounts payable (often called A/P), on the other hand, focuses on the unpaid bills of the business—that is, the money you owe your suppliers and other creditors. The sum of the amounts you owe to your suppliers is listed as a current liability on your balance sheet.

Preparing Your Accounts Payable Paperwork

If you use the accrual basis of accounting, as we recommend, expenses are recorded in the cash disbursements journal at the time the goods or services are paid for or in the purchase journal if you buy on credit. If you deal with a given supplier many times during the month, you don't have to record every purchase. You could accumulate all bills for the month from that supplier, then record one transaction in the purchases journal at the end of the month.

You should keep an accounts payable ledger account for each supplier. Expenses from the cash disbursements journal are, at the end of each day, posted to the appropriate accounts payable ledger. The accounts payable ledger is a record of what you owe each vendor. Ensure your accounting software automatically keeps separate ledgers as well as the general ledger. 

The general ledger contains an accounts payable account, which is your accounts payable control account. The cash disbursements journal has accounts payable credit and debit columns. Credit purchases and payments on account are entered in these two columns, respectively. At the end of the month they are totaled and posted to the control account in the general ledger.

Keeping Up with Your A/P Ledgers

Accounts payable ledgers will help you control your expenditures and payables. If you maintain accurate payable ledgers, it will be easy for you to double check the bills you get from your suppliers.

At the end of the month, reconcile your accounts payable ledgers with the accounts payable control account. The control account is the total accounts payable balance from your general ledger. The beginning accounts payable total, plus purchases on account during the month, minus payments on account during the month, should equal the ending accounts payable total. Compare this amount to the sum of the individual accounts payable ledgers. This will help you discover any errors you made in recording your payables. A reconciliation might also help you catch any errors on vendor bills.

An accounts payable aging report is a good cash management tool that should be prepared periodically. It will help you plan the timing and amount of your cash disbursements.

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