More On Books of Original Entry – Cash Book

Cash Book is used to record cash transactions. However, due to the fact that there is a difference between cheques and the “hard cash”, normally these two types of transactions are recorded in two separate Books of Original Entry – Cheques transactions in Cash or Bank Book (I just refer to it as Cash Book) and “hard cash” transactions in Petty Cash Book.

For small businesses, a common format of Cash Book adopted is to present the “T” account and in multi-columns manner. For receipts, the transactions are recorded on the debit side of the Cash Book and for payments, on the credit side of the Cash Book. The total of each column at the end of each month would then be posted to the respective accounts in the General Ledger. The month end balance of each account would then be used to construct the Trial Balance before the Balance Sheet and the Income Statement are prepared (Method 1). However, when the daily collection from customers (it could be cash sales, collections from trade debtors or both), and also payments to suppliers are of large volume, recording of cash receipts in Cash Receipts Day Book or Journal and recording of cash payments in Payments Day Book or Journal may be a better option (Method 2).Refer to the examples in my previous post, “General Ledger? Journals? Day Books? Debtors Ledger? Creditors Ledger? Trial Balance?” and continue with the following additional transactions in the month of February 2007:-

Transactions in February 2007
  Date Descriptions Reference No. Amount Remark



Receive $3,000 from Big Co Ltd. OR01022007 3,000.00 Official Receipt No. OR01022007 issued.



Cash sales OR02022007 500.00 Official Receipt No. OR02022007 issued.



Collect rental of shop space for the month of February 2007 OR03022007 300.00 Official Receipt No. OR03022007 issued.



Purchase of stationery and printing of documents PV01022007 578.00 Cheque No: 20021 issued and payment voucher PV01022007 prepared to record payment



Cash purchases PV02022007 1,500.00 Cheque No: 20022 issued and payment voucher PV02022007 prepared to record payment



Cash purchases PV03022007 5,000.00 Cheque No: 20023 issued and payment voucher PV03022007 prepared to record payment



Cash Sales OR04022007 1,000.00 Official Receipt No. OR04022007 issued.



Sales on credit to Big Co Ltd. INV1005 2,000.00 Invoice no. 1005 issued.



Cash Sales OR05022007 6,000.00 Official Receipt No. OR05022007 issued.



Pay electricity biil for February 2007 PV04022007 157.89 Cheque No: 20024 issued and payment voucher PV04022007 prepared to record payment



Pay water bill for February 2007 PV05022007 37.87 Cheque No: 20025 issued and payment voucher PV05022007 prepared to record payment



Pay telephone bill for February 2007 PV06022007 46.68 Cheque No: 20026 issued and payment voucher PV06022007 prepared to record payment



Pay rental for February 2007 PV07022007 1,000.00 Cheque No: 20027 issued and payment voucher PV06022007 prepared to record payment

Method 1

Before proceed to recording the above transactions, you should first identify for each transaction what are the Books of Original Entry to use. All transactions EXCEPT transaction No. 8 are cash transactions and therefore Cash Book is to be used. For transaction No. 8 the Sales Day Book is the correct Book of Original Entry to be used.

 The Sales Day Book for the month of February 2007 is simple because there was only one transaction for the whole month:-

Sales Day Book

For ABC Co. Ltd, transaction No. 1 and No. 8 would have an impact on the amount owing by Big Co. Ltd. as at 28 February 2007. As there were no other transactions affecting the other trade debtors, the end balances brought forward from 31 January 2007 (refer to Balance B/F dated 1 February 2007) would also be the balance carried forward to the month of March 2007. The Sales Ledger after incorporating all the transactions in February 2007 would be as follows:-

Sales Ledger Or Debtors Ledger

The Cash Book of ABC Co. Ltd. is as follows:-

ABC Co. Ltd.

Cash at Bank

Northern Bank, Account No.: 123-456-789

Debit Side (Cash Receipts) Of the Cash Book

Debit Side (Cash Receipts) Of The Cash Book

Credit Side (Cash Payments) Of the Cash Book

At the end of February 2007, before ABC Co. Ltd. closes its books, all the transactions recorded in the Books of Original Entry (ie. The Sales Day Book and the Cash Book) would be added up and posted to the General Ledger by way of the following journal entries in the General Journals: –

After the posting of the transactions, the General Ledger would appear as follows:-

Did you notice that Rental Income, Electricity & Water, Telephone, Rent of Premises and Printing & Stationery are the new accounts created as a result of the transactions in the month of February 2007? All these accounts belong to the Income Statement and not the Balance Sheet as they are of income (Rental Income) and expense (Electricity & Water, Telephone, Rent of Premises and Printing & Stationery) in nature.

Also take note that the total of the end balance of each trade debtor in the Sales Ledger as at 28 February of $24,000 (Big Co. Ltd = $2,000; Small Co. Ltd. = $10,000; Not So Big Co. Ltd. = $7,000; Not So Small Co. Ltd. = $5,000) is exactly the same as the end balance of the Trade Debtors account in the General Ledger? The procedure of adding all the end balances in the Sales Ledger and checked for its agreement to the end Trade Debtors balance in the General Ledger is called “Reconciliation of debtors balances to the General Ledger”. This is an important procedure to detect errors of recording transactions in relation to trade debtors.

Based on the end balances of each account in the General Ledger, a trial balance would then be prepared: –

The Income Statement for the two months ended 28 February 2007 (ie. Comprising the month of January 2007 & February 2007) and the Balance Sheet as at 28 February 2007 would then be prepared: –

Method 2

Instead of preparing the Cash Book in “T” account manner, a Cash Receipts Journal and also a Cash Payment Journal are used to record cash transactions.

Referring to the transactions in the month of February 2007, all transactions are cash transactions except for transaction No. 8 and they would be classified into either transaction of receipt in nature or payment and be recorded in the Cash Receipts Journal and the Cash Payment Journal accordingly:-

You would notice the format of the Cash Receipts Journal is exactly the same as the Debit side of the Cash Book as shown in Method 1 and on the other hand, the Cash Payment Journal is the same as the Credit side of the Cash Book. In our example for discussion here, the transactions in February 2007 are minimal and therefore you probably could not see any substantial difference between the two methods. However, just imagine if you are dealing with a business having daily collections of more than 500 cheques and cash from customers and similarly payment of the same volume, you would need a very “long” and “wide” Cash Book, if Method 1 were chosen. Other than the Cash Receipts Journal and Cash Payment Journal, which effectively replaces the Cash Book discussed under Method 1 above, the rest of the records including the Sales Day Book, Sales Ledger, General Journals and the accounts in the General Ledger are the same and therefore I would not shown them again.

The advantage of having a Cash Receipts Journal and a Cash Payment Journal system of recording over the “T” account Cash Book is that the business entity could delegate the two functions i.e. the recording of cash receipts and cash payment to two different persons, whereas under the Method 1 Cash Book system, it is difficult to have two persons sharing the same Cash Book especially if the Cash Book is in the form of hardcopy ledger and not in computer spreadsheet.

Based on what we have discussed thus far, you should be able to see that whenever there are large transactions involved, a separate journal or day book may be a better choice of recording instead of choosing the “One Book for All Transactions” Method. In addition, when you have more than one entity that the business is dealing with, and the business wish to monitor the status of the dealings with these entities concerned such as the situation whereby a business has sales transactions on credit with many customers or purchases transactions with many suppliers, a separate ledger account to be maintained for each of these entities may be required. Can you think of any other situations whereby a separate ledger is maintained for any particular items? Have you heard of Projects Ledger for those companies in which the main activities are project based such as housing developers or contractors? What about stock ledger? Stock cards? Fixed assets register and others? All these ledgers, listing, cards or records created are called generally “Subsidiary Ledgers or Records” in accounting. This is because all these records shows the details or breakdown of a particular account item recorded in the General Ledger and if the end balance of these subsidiary ledgers or records at a particular time are added together, the total amount calculated must tally with the end balance of the respective account recorded in the General Ledger-This is what we called “Reconciliation of Subsidiary Ledgers/Records to General Ledger” in accounting and this is an important internal control procedure that must be performed.

Accounting Documents & Accounting Cycles

It is important that you know the type of documents commonly used to record the occurrence of transactions (Can you think of any examples?). Some of them are:-

  • Official receipts

Normally you will get these when you make payment over the counter to the cashier

  • Cash bills

You seldom get these nowadays. However, if you made purchase of goods from a shop that has no cash register, normally you will get these as proof of payments.

  • Bills

Electricity, water, quit rent & assessment, services. Normally you received these and asked to pay by a specified date.

  • Invoices

Normally you receive these when you purchase physical goods. Same function as bills, invoices ask the recipients to pay by a specified date.

  • Delivery Orders

You get these when you receive the goods that you have ordered previously. However, delivery order is different from invoice, its function is to record the descriptions and quantity of the goods concern, whereas, invoice will state the unit price and also the terms of payments.

The above are the common types of documents you receive when you purchase goods/services (i.e. as a customer/consumer). On the other hand, to the issuing entities, all these documents are issued to their customers when there are sale transactions. Example, for a customer the invoice that he/she received is called specifically as “Purchase Invoices” or “Supplier Invoices”. On the other hand, for a company who sell goods to its customers, the invoices used are referred to as “Sales Invoices”.
  • Purchase Orders

Purchase orders are used to order goods from your suppliers in accordance with your specifications and quantity of the goods.

  • Customer Orders

Customer orders are used for the customers to fill up in ordering the goods.

  • Credit Notes

Credit notes are issued to customers to inform them that their account has been “credited” for the reasons specified in the credit notes (meaning is there is a reduction in the amount that the customer has to pay because of e.g. overcharging of price, defective goods returned, discounts etc.)

  • Debit Notes

Debit notes are issued to customers to inform them that their account has been “debited” for the reasons specified in the debit notes (in contrasts to credit notes, debit notes has the opposite function-the customer is informed that they have to pay more because of e.g. under charging of price, additional charge for miscellaneous services etc.)

  • Payment Vouchers

Payment vouchers are used to record payments made by the business entities in chronological orders, normally in respect of cheque payments.

  • Petty Cash Vouchers

Petty cash vouchers are used to record payments made by the business entities in chronological orders in respect of cash.

  • Goods Received Notes

Goods received notes are used to record receiving of goods purchased. Please take note that the function of Goods Received Notes (GRNs) is different compared to that of the Delivery Orders an entity received from its’ suppliers. Just imagine this – if the entity receives goods from different suppliers, lets say on average of 20 in a day, what would happened if it does not have a systematic way of recording the receiving of goods? HAVOC! However, for many small entities that have minimal purchase transactions, GRNs may not be used as each incident of receiving goods could still be monitored easily. For good control purposes, a receiving logbook is used to record the details of receiving goods (Date, Name of Supplier, Delivery Order Number, Description of goods).

  • Stock Cards & Stock Ledger

Stock cards are used to monitor physical movement of stocks. For better control purposes, stock cards are normally kept and recorded by storekeepers, and only quantity of stocks, stock codes and description of stocks are recorded on the stock cards WITHOUT the unit costs indicated. This is because it is not necessary for storekeepers to know the unit costs of stock (in a way to reduce the risk of pilferage of more expensive stock items). Stock cards are updated based on the evidence of stock-in (goods received notes and delivery orders from suppliers if no goods received notes system practised) and stock-out (delivery orders to customers) In addition to stock cards, some business entities also maintain another type of stock record – stock ledger. Stock ledger is updated with all the details of stocks including the stock code, descriptions, quantity and the total value of each type of stock based on supplier invoices received. At every fixed interval e.g. month end, the quantities of stocks reflected in the stock cards could then be checked and reconciled to the quantities of stocks recorded in the stock ledger and any variances to be investigated and followed-up.

For most business entities, the two most important activities are sales and purchases. And another important accounting cycle, which in a way is related to these two activities, is the cash receipt and payment cycle.A simplified activities chart for a trading company’s sales cycle is as follow:-

Sales Cycle  



In each activity, try to list down the type of documents used based on what you know thus far. Compare to the following:-

  • Receive customers’ inquiry

– This can be in many ways, walk-in, telephone, fax, email etc. For internal information record purposes, a separate file to keep track of customers’ inquiry is desirable because any form contact from potential customers should be treated seriously. However, this is not part of the accounting documents because no transactions occurred at this point in time.

  • Check availability of stocks

– Obviously, the store keeper will be contacted to make sure sufficient quantity of stocks are available (stock cards) or else exact date of new arrival of stocks should then be checked and communicated to the customers.

  • Inquire mode of payment

– No documents are used.

  • Check creditworthiness of customer if on credit

– Some form of database of customer maintained by the business entity would be referred to for existing customers. Those with outstanding balances unpaid should be checked as to any outstanding debts exceeding the credit period allowed and also as to the credit limit of the customers. For new customers, details required should be obtained and submitted to the approval of responsible personnel e.g. Sales Manager before accepting orders.

  • Check and agree on pricing

– Approved price list. This is also not part of the accounting documents. Cash purchases normally are cheaper compared to those on credit.

  • Complete customer orders

– Obviously the customer orders. Based on the customer orders, further arrangement such as packing of stocks, transportation arrangement & etc. will be arranged for the delivery of stocks to the customers.

  • Store prepares stocks for delivery

– Initially based on customer orders to prepare stocks. Update stock cards based on actual quantity of stock-out based on delivery orders to customers.

  • Generate delivery orders

– Obviously the delivery orders to customers.

  • Generate sales invoices

– Obviously the sales invoices to customers.

  • Delivery to customers

– The physical stocks together with the delivery orders and the sales invoices to the customers.

Note: Some of the documents generated are made more than one copy. For example, the customer orders could be printed in three copies – the original to the customer, a copy to store and another kept by the sales department. This is dependent on the requirement of each business entity. A document flowchart could also be drawn up to show how the accounting documents are generated and used throughout the whole sales cycle (Not shown here). It is very often that sales invoices are handed over to the customer together with the delivery orders and the goods because payment is expected to be received faster compared to if the sales invoices are generated and given to the customers at a date subsequent to delivery of goods. 


Purchases Cycle

A simplified activities chart for a trading company’s purchases cycle (assume purchase on credit term) is as follow:-



In each activity, try to list down the type of documents used based on what you know thus far. Compare to the following:-

  • Raise purchase requisition

– Dependent on the nature of the businesses, when stocks level reach re-ordering level, for “back-to-back” orders where no stocks are kept, when receiving customers’order.

  • Contact suppliers and obtain quotations

– Dependent on the policy of the business entities concerned, some require minimum three quotations to be obtained from different supplier for comparison.

  • Select supplier in accordance with policy set

– Dependent on the policy of the business entities, selection of supplier may not necessary based the lowest price quoted, past dealings that give indication of quality of goods, speed of delivery & etc. should also be considered in selecting supplier.

  • Generate purchase orders

– Once the supplier is selected, purchase orders are generated.

  • Placing orders with supplier

– Approved purchase order is given to the selected supplier.

  • Receiving goods together with delivery orders and invoices

– Checking the correct specification, condition and quantity of good received by matching to the purchase order raised previously.

  • Generate goods received notes

– Obviously the goods received notes and also update the stock cards.

  • Delivery notes, invoices and goods received notes to Accounts Department for checking and payment

– Delivery notes, supplier invoices and good received notes would be handled over to the Accounts Department for checking and prepare payment. Stock ledger will be updated

Note: Purchase orders are generated in multiple copies – example, the original copy to the supplier, one copy kept by the Purchasing Department, one copy to the Store and one copy to the Accounts Department. Sometimes, the delivery orders and invoices received from the supplier are handed over from the store receiving goods to the Purchasing Department instead of directly to the Accounts Department. The Purchasing Department would perform the checking role on the purchases. Once approved by the Purchasing Department, the Accounts Department would proceed straight to updating stock ledger and payment.

Cash Receipt and Payment Cycle
I will not show this cycle in terms of activities chart as the procedures involved are much simpler compared to the sales and purchase cycles. However, the typical procedures in receiving cash and payments would be discussed.

Receiving cash

Dependent on the nature of business, the mode of receiving payment from customers includes cash, cheque, direct deposit to the bank account via wire-transfer & credit card. Can you think of others? The most important control checkpoint in receiving payments from customers is to be able to account for each and every single payment received and ensure that it is deposited into the bank account of the business entity. For this purpose, pre-numbered official receipt is used. For cash collected from customers, it should be counted at the end of the day and be deposited into the bank account of the business entity the soonest possible. A listing of official receipt indicating the total receipts of the day should then be prepared, matched to the bank deposit slips and properly approved. Similarly for other form of receipts, cheques, credit cards, wire transfer & etc. as soon as they are deposited into the bank account of the business entity, checking of the money deposited to the official receipts MUST BE DONE. The most frequent problem that I have encountered in respect of receipts from customers is in the situation whereby customers deposited payment directly into the bank account of the business entity. If no systematic procedures established with regard to this, the result is unidentified receipts appearing in the bank statements and it could result in unnecessary time and effort spent to trace the identity of the payee. Proper deposit form should be distributed to each customer who wish to make payment in this manner and make sure that a copy is completed properly with all the required payment details and forward a copy to the business entity.


Payments could be made for purchases in the form of cash for small sum and cheques for larger amounts. For cash payments, petty cash vouchers are used and each payment must be supported by the relevant supporting documents such as bills and official receipts. For cheque payments or wire-transfers, payment vouchers are used. All the relevant payment supporting documents such as invoices, bills & etc. must be enclosed together and properly checked and approved.

In addition to the above, can you name the common types of documents that are used by business entities? (different business entities in different industries may have their own special type of documents pertaining to their industries)