Preparation of Journal and Cash book including Banking Transaction

The Journal and Cash Book are two fundamental books of original entry in accounting. They are used to record all business transactions in a systematic and chronological manner. While the Journal records all types of transactions (cash and non-cash), the Cash Book records only those transactions that involve cash or bank. The accuracy of financial records largely depends on the correct preparation of these books.

1. Journal

A Journal is the primary book in which all financial transactions are recorded for the first time in chronological order. It is also called the book of original entry or day book. Each transaction is recorded in a journal by applying the rules of debit and credit based on the double-entry system of accounting.

Format of Journal Entry:

Explanation:

• Date: The date of the transaction.

• Particulars: The accounts involved with a narration (brief explanation).

• L.F. (Ledger Folio): Reference to the ledger page.

• Debit/Credit Amount: The respective amounts recorded on each side.

Rules of Debit and Credit:

1. Personal Accounts:

   • Debit the receiver

   • Credit the giver

2. Real Accounts:

   • Debit what comes in

   • Credit what goes out

3. Nominal Accounts:

   • Debit all expenses and losses

   • Credit all incomes and gains

Example Journal Entries:

2. Cash Book

A Cash Book is a specialized book that records all cash receipts and payments, including bank transactions. It serves both as a book of original entry and a ledger account for cash and bank. The balance of the Cash Book always shows the available cash or bank balance in hand.

Types of Cash Book:

1. Single Column Cash Book: Records only cash transactions.

2. Double Column Cash Book: Records both cash and bank transactions.

3. Triple Column Cash Book: Records cash, bank, and discount transactions.

3. Double Column Cash Book (with Banking Transactions)

Format:

Example of Cash Book with Banking Transactions:

Explanation of Entries:

1. Capital Introduced (Jan 1): Both cash and bank balances increase.

2. Furniture Purchased (Jan 2): Cash decreases.

3. Rent Paid (Jan 3): Cash decreases as rent is an expense.

4. Cash Sales (Jan 4): Cash increases as goods are sold for cash.

5. Cheque Received (Jan 5): Bank balance increases.

6. Cash Deposited into Bank (Jan 6): Cash decreases, bank increases.

7. Cash Withdrawn from Bank (Jan 7): Bank decreases, cash increases.

8. Payment to Creditors by Cheque (Jan 8): Bank decreases.

9. Interest Received (Jan 10): Bank increases.

10. Salary Paid (Jan 10): Cash decreases.

Balancing the Cash Book:

At the end of a period, both cash and bank columns are balanced separately. The cash balance always shows a debit balance because cash cannot be negative. The bank column may show either a debit (favorable) or credit (overdraft) balance.

Importance of Cash Book:

1. Efficient Cash Management: Helps monitor inflow and outflow of cash and bank funds.

2. Error Detection: Enables cross-verification with bank statements.

3. Legal Record: Acts as documentary proof for all cash and banking transactions.

4. Quick Reference: Provides immediate information about available cash and bank balances.

5. Basis for Ledger Posting: Facilitates preparation of ledger accounts and financial statements.