Cash Handling and Day Books in Practice

Learning objectives

• Record cash and bank movements using appropriate books of prime entry, ensuring transactions are complete, dated correctly, and supported by source documents.
• Distinguish clearly between cash sales, credit sales, cash purchases, and credit purchases, and record each in the correct book of prime entry.
• Maintain a three-column cash book (cash, bank, discounts), including discounts and internal transfers between cash and bank (contra entries).
• Operate a petty cash system using the imprest method, documenting payments, analysing spend, and reconciling the float.
• Use day books for routine credit transactions and post totals accurately to the relevant ledger accounts.
• Explain how cash-book and day-book entries flow into ledger balances and ultimately into the financial statements.

Overview & key concepts

Cash handling and day books sit at the “front end” of the accounting system: they capture high-volume, routine transactions quickly and in a consistent format. Because cash is easy to mishandle (through error or fraud), strong recording discipline and clear audit trails are essential. Day books reduce posting workload by grouping similar credit transactions, so that summaries are posted to general ledger accounts, while individual customer/supplier entries are maintained in personal accounts.

At this stage, accuracy depends on three fundamentals:

• Classify the transaction correctly (cash vs credit; receipt vs payment).
• Record the entry in the correct prime entry book (cash book or relevant day book).
• Post consistently to ledgers so that control accounts (where used) reconcile to underlying personal account balances.

Cash transactions

A cash transaction is one where settlement happens immediately (for example: notes and coins, instant bank transfer, or immediate card/merchant settlement). The key feature is that cash or bank changes at the same time as the sale or purchase is recognised.

Card sales are treated as cash sales, but they are usually recorded in the bank (or a merchant/clearing) column depending on when the funds are received and how the business’s system captures settlement.

Typical impacts:

• Cash sale: cash/bank increases; revenue increases.
• Cash expense: cash/bank decreases; expense (or asset) increases.

Credit transactions

A credit transaction is one where the invoice is raised (or received) now, but payment will occur later. The accounting system records the sale or purchase immediately, and recognises a receivable or payable until settlement occurs.

Typical impacts:

• Credit sale: receivables increase; revenue increases.
• Credit purchase: payables increase; expense/asset increases (depending on what was purchased).

Cash book

The cash book is a book of prime entry that records money received and money paid. In many systems it also functions as the ledger for cash and bank, because the cash and bank columns are effectively cash/bank accounts.

A key discipline: the cash book records money movements, not credit invoices. Credit invoices belong in day books and are posted to receivables/payables ledgers.

Three-column cash book

A three-column cash book typically includes:

• Cash column (physical cash on hand)
• Bank column (bank account movements)
• Discounts column (discounts allowed/received on settlement)

Discount columns are analysis columns: they help you post the discount element to the correct ledger accounts. They are not “cash” and do not affect cash/bank balances directly.

Contra entries

A contra entry records a transfer between cash and bank (for example, banking cash takings). It appears on both sides of the cash book so that cash decreases while bank increases (or vice versa). Because it is an internal transfer, it does not affect total assets—only the split between cash and bank.

Petty cash and the imprest system

Petty cash is a controlled cash float used for small, routine payments. Under the imprest system, the float is restored to an agreed fixed amount at regular intervals.

The reconciliation logic is:

Float (imprest amount) = Cash remaining + Vouchers/receipts awaiting reimbursement

An equivalent form that is often quicker in exam settings is:

Reimbursement required = Imprest amount - Cash remaining

Day books

Day books (books of prime entry) capture routine credit transactions:

• Sales day book: credit sales invoices issued to customers.
• Purchases day book: credit purchase invoices received from suppliers.
• Returns inwards (sales returns) day book: credit notes issued to customers for goods they returned (or an equivalent internal record supporting the credit note).
• Returns outwards (purchase returns) day book: supplier credit notes received after you return goods to suppliers.

Cash transactions do not go into day books.

Core theory and frameworks

1) Recording cash receipts and cash payments

Record money movements from source documents such as till summaries, remittance advices, bank notifications, receipts, and payment confirmations.

Practical checks that improve accuracy:

• Match each cash-book entry to a source document reference.
• Record receipts on the debit side and payments on the credit side (for cash/bank).
• Separate cash and bank movements into the correct columns.
• Treat discount columns as non-cash analysis columns, posted to discount accounts.

2) How day books feed the ledgers

Day books are lists of credit documents collected over a period (day/week/month). They let you keep detail where it is needed (each customer/supplier) while posting only summaries to the general ledger.

In practice you run two streams of posting:

• Personal accounts (detail):each credit invoice is posted to the relevant customer (receivable) or supplier (payable) account so the balance for that party is always up to date.
• General ledger (summary):the period total from the day book is posted to the related income/expense account and, where control accounts are used, to the receivables/payables control account.

This split is what makes control accounts work: the control account should equal the total of the personal ledger balances, provided all postings are complete and correctly classified.

3) Discounts allowed and discounts received

Prompt-payment discounts are recognised at settlement because that is when the cash actually paid/received becomes known.

The exam-critical double entry is:

• Clear the receivable/payable at the original invoice amount.
• Post the discount to a separate discount account.

Presentation in the statement of profit or loss varies by policy and format. Common approaches include showing discount allowed within selling/distribution costs or as an adjustment within revenue-related lines, and showing discount received as other income or as a reduction of purchases/related expenses. The key point is consistency and the correct impact on profit: discount allowed reduces profit; discount received increases profit (or reduces the related expense).

4) Petty cash control under imprest

Maintain three elements:

• A petty cash voucher/receipt for each payment
• A petty cash book (or analysis sheet) showing date, purpose, amount, and category
• Regular reconciliation to prove the float

The objective is control: every payment must be evidenced and categorised.

5) A quick posting map

• Cash book entries update cash and bank directly (and the opposite side is posted to income, expenses, receivables/payables, or transfer accounts as relevant).
• Day books collect credit documents: individual entries go to customer/supplier personal accounts; period totals go to the relevant general ledger accounts (and to control accounts where used).
• Discount columns in the cash book are posted to discount allowed/discount received accounts; they are not part of the cash/bank balances.

Worked example

Narrative scenario

Greenfield Supplies begins the month with a cash balance of £500 and a bank balance of £3,000.

During the month:

1. Cash sales of £1,200.
2. Credit sales of £2,500, with payment due in 30 days.
3. Purchase of office supplies for £300 cash.
4. Payment of £1,000 to a supplier in full settlement of a £1,050 invoice.
5. Receipt of £1,800 from a customer in full settlement of a £1,900 invoice.
6. Transfer of £400 from cash to bank.
7. Payment of wages £600 by bank transfer.
8. Petty cash expenses of £50 for office refreshments.
9. Bank charges of £20.
10. Cash withdrawal of £200 for petty cash.
11. Payment of £150 for utilities by bank transfer.
12. Receipt of £500 from a customer for a previous credit sale.

Required

• Record the transactions in the cash book and day books.
• Calculate the closing cash and bank balances.
• Identify discounts allowed and discounts received.
• Prepare a petty cash reconciliation.
• Explain the impact on the financial statements.

Solution

Step 1: Record credit sales in the sales day book

Sales day book (credit sales only):

• Credit sales invoices issued: £2,500

Posting summary:

• Dr Trade receivables £2,500
• Cr Sales revenue £2,500

Cash sales are excluded from the sales day book because they are settled immediately.

Step 2: Record money movements in the three-column cash book

Assumptions consistent with the narrative:

• Items stated as “cash” are recorded in the cash column.
• Items stated as “bank transfer” are recorded in the bank column.
• Settlements with discounts are recorded when cash/bank moves, with the discount analysed in the discounts column.
• The £200 “cash withdrawal for petty cash” is treated as a transfer from bank into the petty cash float (bank → petty cash). It does not pass through the main cash column balance.

Receipts side (money in)

• Cash sales £1,200 (cash column)
• Receipt from customer settling £1,900 invoice: £1,800 bank + £100 discount allowed
• Receipt from customer £500 for previous credit sale (bank column)
• Transfer from cash to bank (contra): £400 (bank column)

Payments side (money out)

• Office supplies £300 (cash column)
• Payment to supplier settling £1,050 invoice: £1,000 bank + £50 discount received
• Wages £600 (bank column)
• Bank charges £20 (bank column)
• Withdrawal for petty cash £200 (bank column)
• Utilities £150 (bank column)
• Transfer from cash to bank (contra): £400 (cash column)

Step 3: Ledger entries (double entry behind the books)

The cash book and day books are the prime entry records; the following entries show how they post into ledger accounts.

Cash sales £1,200

• Dr Cash £1,200
• Cr Sales revenue £1,200

Credit sales £2,500 (sales day book)

• Dr Trade receivables £2,500
• Cr Sales revenue £2,500

Office supplies (cash) £300

• Dr Office supplies expense (or consumables) £300
• Cr Cash £300

Supplier settlement: invoice £1,050 paid £1,000, discount received £50

• Dr Trade payables £1,050
• Cr Bank £1,000
• Cr Discount received £50

Customer settlement: invoice £1,900 received £1,800, discount allowed £100

• Dr Bank £1,800
• Dr Discount allowed £100
• Cr Trade receivables £1,900

Transfer of £400 from cash to bank (contra)

• Dr Bank £400
• Cr Cash £400

Wages paid by bank £600

• Dr Wages expense £600
• Cr Bank £600

Petty cash expenses (refreshments) £50

• Dr Refreshments expense £50
• Cr Petty cash £50

Bank charges £20

• Dr Bank charges expense £20
• Cr Bank £20

Transfer from bank to petty cash float £200

• Dr Petty cash £200
• Cr Bank £200

Utilities paid by bank £150

• Dr Utilities expense £150
• Cr Bank £150

Receipt £500 from customer for previous credit sale

• Dr Bank £500
• Cr Trade receivables £500

Step 4: Closing cash and bank balances

Cash column balance (main cash book cash):

Opening cash £500

• Cash sales £1,200
• Office supplies (cash) £300
• Transfer from cash to bank £400

Closing cash (cash book cash) = £1,000

Bank column balance:

Opening bank £3,000

• Customer receipt £1,800
• Receipt from customer £500
• Transfer from cash to bank £400
• Supplier payment £1,000
• Wages £600
• Bank charges £20
• Transfer to petty cash £200
• Utilities £150

Closing bank = £3,730

Note on petty cash: petty cash is a separate cash holding controlled through the imprest system. The £200 transfer is bank → petty cash and therefore reduces bank but does not increase the main cash column balance.

Month-end cash holdings therefore comprise:

• Cash (main cash book): £1,000
• Bank: £3,730
• Petty cash: £150

Step 5: Identify discounts allowed and discounts received

• Discounts allowed (customer): £100
• Discounts received (supplier): £50

Step 6: Petty cash reconciliation (imprest)

Assume the petty cash imprest amount is £200 (created by the £200 transfer from bank).

Petty cash position at month end:

• Float introduced: £200
• Less petty cash payments (refreshments): £50
• Petty cash remaining: £150

Reimbursement needed to restore float to £200:

Reimbursement required = Imprest amount - Cash remaining
Reimbursement required = £200 - £150 = £50

If reimbursement were made (not included in the listed transactions), the entry would be:

• Dr Petty cash £50
• Cr Bank £50

Step 7: Impact on the financial statements

Statement of financial position (assets and liabilities)

• Cash and cash equivalents increase overall, split between main cash (£1,000), bank (£3,730), and petty cash (£150).
• Trade receivables include the outstanding amount from credit sales not yet settled.

Receivables movement (based on the scenario):

• Credit sales raised: £2,500
• Less settlements credited to receivables: £1,900 and £500
• Closing trade receivables = £100

Trade payables:

• The supplier invoice of £1,050 is settled in full (via £1,000 payment plus £50 discount received), so no payable remains for that invoice.

Statement of profit or loss (performance for the month)

• Revenue recognised: cash sales £1,200 plus credit sales £2,500.
• Expenses recognised: office supplies, wages, utilities, refreshments, bank charges.
• Discount allowed reduces profit; discount received increases profit (or reduces related expense), with presentation depending on policy and format.

Common pitfalls and misunderstandings

• Treating credit sales as cash sales: issuing an invoice does not create cash; it creates a receivable.
• Posting discounts incorrectly: clear receivables/payables at the invoice amount and post discounts separately.
• Forgetting discount columns are not cash: they do not affect cash/bank balances.
• Recording internal transfers twice: a contra entry appears once on each side of the cash book.
• Mixing petty cash with main cash without control: petty cash should be tracked separately and reconciled.
• Treating cash withdrawals as expenses: moving money from bank to petty cash is a transfer, not a cost.
• Missing bank charges: charges often appear only on bank statements, so regular review is essential.
• Posting day book totals incorrectly: summaries go to general ledger (and control accounts where used); individual documents go to personal accounts.
• Putting cash sales into day books: day books are for credit documents.

Summary and further reading

Cash books, petty cash, and day books are practical tools for capturing transactions efficiently while maintaining control and audit trail. Correct classification (cash vs credit) drives the correct initial entry, and correct posting ensures ledger balances reconcile and financial statements are reliable.

To strengthen performance in this topic, practise:

• Setting up a three-column cash book and balancing it.
• Posting discounts correctly on settlement.
• Reconciling petty cash under imprest.
• Posting day book totals and understanding how control accounts relate to personal accounts.

Further reading can include introductory financial accounting texts covering books of prime entry, internal controls over cash, and the flow from source documents to ledgers and financial statements.

FAQ

What is the practical difference between a cash transaction and a credit transaction?

A cash transaction changes cash or bank immediately, so it is recorded in the cash book at the point it occurs. A credit transaction creates a receivable or payable first (recorded in a day book), with cash/bank movement recorded later when settlement happens.

How does a three-column cash book help accuracy?

It separates cash and bank movements and analyses settlement discounts without mixing them into cash figures. This supports correct posting and simplifies reconciliation.

What do contra entries achieve?

They capture internal transfers between cash and bank so both balances remain accurate. A contra entry changes the split between cash and bank but does not change total assets.

When should prompt-payment discounts be recorded?

On settlement. The receivable or payable is cleared at the original invoice amount, and the discount is posted separately as discount allowed or discount received.

Why does the imprest system support control?

It fixes the expected float and forces regular proof of cash: what is missing from the tin must be supported by vouchers. This reduces the risk of unrecorded spending and makes reconciliation straightforward.

What are the most common posting errors with day books?

Posting cash sales into the sales day book, forgetting to post summaries to general ledger accounts, and failing to post individual documents to customer/supplier personal accounts (leading to differences against control accounts).

Summary (Recap)

This chapter covered how to record and control cash and bank movements using a three-column cash book, including discounts and internal transfers. It also explained how day books capture routine credit transactions and reduce posting workload through summary posting and personal-account detail. Finally, it set out how the imprest petty cash system maintains control over small payments through vouchers, analysis, and reconciliation. The worked example demonstrated correct recording, balancing, discount treatment, petty cash reconciliation, and the resulting effects on ledger balances and financial statements.

Glossary

Cash transaction
A transaction where settlement happens immediately, causing an instant change in cash or bank.

Credit transaction
A transaction where an invoice is recognised now, but payment occurs later, creating a receivable or payable until settlement.

Cash book
A book of prime entry used to record receipts and payments through cash and bank, often serving as the cash and bank ledger accounts.

Three-column cash book
A cash book format with cash, bank, and discount columns, enabling settlement discounts to be analysed alongside money movements.

Contra entry
An entry showing a transfer between cash and bank recorded on both sides of the cash book to keep both balances accurate.

Petty cash
A controlled cash float used for small payments, supported by vouchers and reconciled regularly.

Imprest system
A petty cash approach where the float is restored to a fixed amount at intervals, based on evidence of payments made.

Sales day book
A book of prime entry used to record credit sales invoices issued to customers.

Purchases day book
A book of prime entry used to record credit purchase invoices received from suppliers.

Returns inwards day book
A record of credit notes issued to customers for goods returned, used to reduce receivables and record sales returns.

Returns outwards day book
A record of supplier credit notes received after goods are returned to suppliers, used to reduce payables and record purchase returns.

Discount allowed
A reduction granted to a customer at settlement, recorded separately from the original invoice and reducing profit.

Discount received
A reduction obtained from a supplier at settlement, recorded separately from the original invoice and increasing profit (or reducing the related expense).