Cash

Objective A: Recording Cash Transactions

The bank account in the general ledger records all cash and bank transactions. It is debited when money comes in (receipts) and credited when money goes out (payments). This follows the standard rule for asset accounts.

Common receipts (debits to bank):

• Cash received from customers
• Capital introduced by the owner
• Loan proceeds received
• Interest received

Common payments (credits to bank):

• Payments to suppliers
• Wages and salaries
• Rent and utility payments
• Loan repayments
• Drawings by the owner

The cash book serves a dual purpose — it is both a book of prime entry (recording cash transactions as they occur) and part of the general ledger (the bank account). In many businesses, the cash book has two columns: one for cash transactions and one for bank transactions.

It is important to note that the bank account in the entity's own ledger shows the opposite perspective to the bank statement. When the entity has money in the bank, the bank ledger account shows a debit balance (an asset). The bank statement, however, shows a credit balance because from the bank's perspective, it owes the money to the entity (a liability of the bank).

Objective B: Petty Cash

Businesses often maintain a petty cash fund for small, routine expenses such as postage stamps, taxi fares, office refreshments, and minor stationery purchases. These amounts are too small to justify writing a cheque or making a bank transfer.

The petty cash system typically operates on the imprest system:

1. A fixed amount (the imprest amount) is withdrawn from the bank and placed in a petty cash box — e.g., £200.
2. As small expenses are incurred, cash is taken from the box and a petty cash voucher is completed, recording the amount, date, purpose, and the person responsible.
3. At regular intervals (e.g., weekly or monthly), the petty cash box is topped up to the original imprest amount. The top-up amount equals the total of vouchers issued during the period.

The need for a petty cash record arises because:

• It provides accountability for small cash expenditures
• It creates an audit trail for minor transactions
• It prevents the main bank account from being cluttered with very small transactions
• It supports internal controls by limiting the amount of cash accessible to staff