Contents:
3 - Cash Transactions
As cash is an asset, increases in cash (income) are Dr entries, whilst reductions in cash (payments) are Cr entries.
Payments
When a cash payment is made, cash decreases, so we Cr cash with the amount of the payment. The corresponding Dr is to the relevant expense or fixed asset "T" account (increase an expense or a new fixed asset).
Receipts
When cash is received, the cash balance increases, so we Dr cash. The corresponding Cr is to the sales or other income "T" account (increase income). It could also be the disposal of a fixed asset - see later chapter.
Example
The best way to understand all this is by way of an example.
The following transactions occur, all in cash:
- 2.1.x5 Purchase stock for £2000
- 6.1.x5 Make sale for £3000
- 15.1.x5 Receive loan of £10000
- 19.1.x5 Purchase van for £9000
- 20.1.x5 Pay electricity bill of £400
We set up "T" accounts for cash, sales, loans, vehicles (fixed asset) & electricity. The convention is to include the date of the transaction, brief narrative (e.g. where the opposite entry is posted) & amount.
The cash "T" account is Credited with the 3 payments & Debited with the 2 receipts:
The "T" accounts for the income, expenses & fixed assets are also set up & the entries corresponding to the above cash entries entries as follows:
Look how the cash transactions are reflected with opposite entries in the corresponding "T" account. This is the basis of double-entry bookkeeping.
Closing off "T" accounts
Also notice how each account is balanced off - the carry-forward (c/f) amount makes the total of each side equal (a balancing figure). Whenever the total of a "T" account is referred to, it means the c/f amount. If the Dr (left) side is greater than the Cr (right) side, it is a Dr balance (or vice-versa).
The next section will look at how the entire bookkeeping system fits together.