Cash Book and Banking Procedures: Cash Book, Cheques, Bank Accounts and Cash Control

Cash and bank balances are the most closely watched figures in any business, and they are the easiest to steal or to mistake. The cash book records every receipt into the bank account and every payment out of it.

This topic explains how the cash book is laid out and posted, how discounts and contra entries appear in it, and the banking practice behind it: current and interest-bearing accounts, cheques and pay-in slips, bank statements, transfers and cards, and the controls that keep cash safe.

The cash book is one of the most frequent Section B tasks in the past papers. A two- or three-column cash book to be written up from a month of transactions appeared in about one diet in four, and parts on methods of payment, cheques and control over cash appear alongside. The two- and three-column forms the examiner uses are given here as labelled background.

Read books of prime entry, sales and purchases and VAT in Nigeria first. The next topic covers petty cash.

The cash book

The cash book is often a book of prime entry. It records receipts and payments of cash into the business bank account. It has two sides, one for receipts and one for payments. Each side has several columns so that receipts and payments can be analysed, which makes it easier to build the journals for the double entry. A business can analyse the amounts in any way it chooses.

Because the bank account is also an account in the general ledger, the cash book is at the same time a book of prime entry and a ledger account. That is why the examiner can ask for it under either heading.

Cash receipts

Cash from cash sales is banked regularly and entered as a receipt in the cash book once it has been banked. Credit customers usually pay by cheque or bank transfer. A cheque is entered as a receipt when it is received and then banked regularly. At regular intervals the receipts side is totalled and the totals are posted to the general ledger.

The amounts received from credit customers are also credited to the customers’ accounts in the receivables ledger.

Some businesses use a column on the receipts side to record the revenue adjustment for a settlement discount that customers took even though they were not expected to. The discount is not an actual cash receipt, so the column is only a memorandum or reminder record. A simplified receipts side looks like this.

The journal is: Dr Bank ₦183,500, Cr Receivables control ₦177,500, Cr Sales ₦1,000, Cr Dividend income ₦5,000. The discounts are posted separately: Dr Discounts allowed ₦4,500, Cr Receivables control ₦4,500. The cash received from each customer and the discount allowed to each are credited to that customer’s account in the receivables ledger. Check: 177,500 + 1,000 + 5,000 = 183,500, and the memorandum column adds to 1,500 + 3,000 = 4,500.

Cash payments

Payments are recorded in a similar way. They go to the general ledger and, for payments to suppliers, to the supplier’s account in the payables ledger. A business may record discounts received in a memorandum column.

The journal is: Dr Payables control ₦147,200, Dr Expenses ₦74,500, Cr Bank ₦221,700. And separately: Dr Payables control ₦1,000, Cr Discounts received ₦1,000. The cash paid to each supplier and the discount received from each are debited to that supplier’s account in the payables ledger.

Two-column and three-column cash books

Background. These are the forms the examiner sets (for instance November 2014 Question 3, March/July 2020 Question 3 and May 2023 Question 5). A Two-column cash book has a discount column and a bank column on each side. A Three-column cash book adds a cash column, so it has discount, cash and bank. The rules are these.

• Receipts are on the debit (left) side and payments on the credit (right) side. The left side reads “Dr” and each entry names the account that holds the other side of the entry.
• The Discount allowed column is on the debit side. The Discount received column is on the credit side. They are memorandum totals. They are not balanced as part of the cash book.
• A Contra entry is a transaction between the cash and bank columns. Cash paid into the bank is a debit in the bank column and a credit in the cash column. Cash drawn from the bank is a debit in the cash column and a credit in the bank column. The entry appears on both sides of the cash book, and no other ledger account is involved.
• Each column is balanced separately. The cash column cannot have a credit balance, because a business cannot pay out more cash than it has. The bank column can have a debit balance (money in the bank) or a credit balance, an Overdraft.
• A direct credit, bank charge or standing order that appears on the bank statement and not in the cash book is entered when it becomes known.

At the end of the period the discount allowed total is posted: Dr Discount allowed (an expense), Cr Receivables control. The discount received total is posted: Dr Payables control, Cr Discount received (other income, or a reduction in expenses). The totals are posted separately and are not netted against each other.

This is what a Section A item has tested when it gives the totals of discounts allowed and received and asks what is true of them. The totals are not balanced in the cash book. Each goes to its own account in the general ledger.

Methods of making and receiving payment

A business can pay suppliers and receive payments from customers in several ways. These are the main ones:

• Cash, including coins.
• Cheque, a written order to the bank to pay.
• Banker’s draft, an instrument issued by a bank.
• Bank transfer or electronic fund transfer (EFT), by online banking, mobile banking or at a branch.
• Debit card, at a point-of-sale terminal, online or at an automated teller machine (ATM).
• Credit card, which uses funds borrowed from the issuer.
• ATM transfers, using a card and PIN.
• Direct debits and third-party payments, which a current account allows.

The banking system

Banking systems and services have changed how entities manage their money. The system has three parts.

• Commercial banks provide savings accounts, loans and credit facilities to individuals and businesses.
• Central banks regulate the money supply and oversee monetary policy so that the financial system is stable.
• Non-banking financial institutions specialise in services such as investment and insurance, and complement the commercial banks.

Services include Online banking, which lets customers manage accounts, transfer funds, pay bills and track transactions from a distance, Mobile banking through apps, and Digital payment systems, which include NEFT, RTGS and UPI, for fast and secure transfers. Customers can also apply for loans and credit cards and use investment and insurance products.

The additional benefits are 24-hour account access, remote management of finances, better security through encryption and two-factor authentication, and greater efficiency. Technology keeps changing the industry: Artificial intelligence (AI)-powered assistants give personalised financial insight, Banking as a Service links banks to fintech firms, and core banking systems manage accounts, transactions and risk.

Bank accounts

The two main types of account are the current account and the interest-bearing account.

The current account

A current account, also called a demand deposit account, is for individuals and businesses that handle many transactions of high volume. Its features are:

• Unlimited transactions, with no cap on deposits or withdrawals.
• An overdraft facility, which allows withdrawals beyond the balance and gives liquidity and flexibility.
• No interest on balances, in general.
• A minimum balance, usually higher than for savings accounts and varying by bank.
• Cheque and debit card facilities for payments and access to funds.
• Online and mobile banking.
• Direct debits and third-party payments, which help business operations.

Bank statements

At regular intervals, usually monthly, the bank sends a Statement of account. It lists cash deposits (lodgements), cheque and electronic payments, bank charges, and direct transfers and dividend warrants received on behalf of the customer. The statement is compared with the cash book in the bank reconciliation, which is the subject of a later topic.

Opening a current account

A reporting entity must provide:

1. a written application stating the type and purpose of the account;
2. two or more reference letters from holders of current accounts;
3. completed mandate cards;
4. specimen signatures of the authorised signatories, used to verify cheques;
5. two or more passport-sized photographs;
6. for a company, a copy of the Memorandum and Articles of Association; for a partnership, the partnership deed; for an unincorporated body, its constitution;
7. an extract of the minutes of the meeting that approved the account;
8. the initial deposit the bank requires;
9. evidence of tax compliance, such as recent tax returns;
10. the Bank Verification Number (BVN);
11. identity proof of the authorised signatories, such as a driver’s licence or national ID card; and
12. proof of the entity’s address, such as a certificate of incorporation, a lease or a utility bill.

Cheques

A cheque is a written order directing a bank to pay a specified amount from the account holder’s funds to a named person or to the bearer.

Features and types

A cheque shows the Payee’s name, who should receive the payment, the Drawer’s signature, which authorises it, the Date of issue, which fixes when it becomes valid, and the Amount, written in figures and in words to avoid errors.

Benefits and uses

Cheques give a Record, a paper trail for accountability. They give Security, because a lost or stolen cheque can be cancelled or stopped. And they give Control, because the drawer decides the exact amount and the payee. They are used for business-to-business transactions, large payments such as rent or security deposits, and formal payments such as donations or grants. Digital payment systems are increasingly preferred for speed, security and convenience.

Dishonoured cheques

A dishonoured cheque is one that the bank refuses to pay. It causes inconvenience and financial strain for the payee. The reasons include:

• insufficient funds in the drawer’s account;
• a signature that does not match the bank’s records;
• a Stale cheque, presented after its validity period, usually three to six months;
• a Post-dated cheque presented before the date written on it;
• a closed or frozen account; and
• a stop-payment instruction from the drawer.

The consequences are inconvenience for the payee, bank penalties or charges for the drawer, damage to the drawer’s credit reputation, and possible legal action by the payee in serious or repeated cases.

The preventive measures are to keep enough funds in the account before issuing cheques, to check the details (date, amount, signature) before issuing, to tell the payee in advance of any problem, and to avoid post-dated or stale cheques unless clearly agreed. In the books, a dishonoured cheque received from a customer is reversed: Dr Receivables, Cr Bank.

Pay-in slips

A pay-in slip is a form used to deposit cash or cheques into a bank account. The bank usually issues it and the depositor completes it. It shows the date, the bank and branch, the recipient’s account number, the depositor’s name, address and signature, the amount in figures and in words, the payment method (cash or cheque), and the cheque details where relevant.

Cheque details are usually written on the back. The teller signs and returns a duplicate copy as proof of the deposit, and the business can reconcile it with its cash book. Mobile banking, ATMs and online banking are replacing pay-in slips because they allow deposits without paperwork.

Interest-bearing accounts

Interest-bearing accounts earn interest on the funds held. They are low-risk, which suits capital preservation, they offer liquidity, and they help to spread risk across a portfolio.

Savings accounts

A savings account gives modest interest and easy access to funds. It enables easy withdrawals, usually has no overdraft facility, often needs the depositor to be present at the bank, does not normally require references unless it receives cheques (for example a salary account), uses pay-in slips and withdrawal forms, and is not tied to a fixed term.

Term deposits

A term deposit places a fixed sum with a bank for a set period at a fixed rate. The types are Fixed deposits, with fixed rates over specified periods, generally higher than savings, and Certificates of deposit, similar but often negotiable.

The common features are that funds are locked in for the term, interest is higher than on savings, the investment is low-risk, the deposit is repayable on maturity with an option to roll over on written request, references are usually not required, and statements are generally not issued, so details are given at maturity or on request. Term deposits suit people and businesses saving for specific goals.

Cash handling, storage and security

Proper handling, storage and security of cash reduce the risk of theft, fraud and error. These are the practices.

• Cash handling. Set and update policies for receiving, counting, storing and depositing money. Segregate duties, so that different people handle different parts of cash management. Encourage electronic payment and keep little cash in tills or offices. Use secure bags or containers to move cash and verify the identity of those handling it.
• Cash storage. Use suitable safes, allowing for fire resistance, size and durability. Use point-of-sale and back-office safes for excess cash. Audit and reconcile regularly to detect discrepancies. Store cash in dry, secure places.
• Cash security. Restrict access to storage areas to authorised people. Change safe combinations and PIN codes regularly. Install closed-circuit television (CCTV) and alarms and employ security staff where needed. Train staff in cash handling and in spotting suspicious behaviour. Use counterfeit-detection devices and transaction monitoring. Reconcile physical cash, receipts and deposit records often.

Background: internal control over cash receipts. May 2024 asked candidates to examine the control procedures over cash receipts.

A full answer adds to the points above that:

• receipts are issued in sequence for every amount received and the numbers are accounted for
• cash is banked intact and promptly, usually the same day, and not used to pay expenses
• the person who receives cash is not the person who records it or reconciles the bank account
• a second person checks the daily takings against the receipts
• the bank statement is reconciled to the cash book regularly by someone independent
• surprise counts of cash in hand are made

Each one answers a specific risk, such as unrecorded receipts, delayed banking, or concealment of theft by manipulating the records.

Inter-bank transfers, debit cards and credit cards

An inter-bank transfer moves funds between accounts held at different banks. The channels are ATMs, electronic fund transfers, debit cards and credit cards.

• ATMs. A self-service terminal that lets customers withdraw cash, check balances, transfer between accounts and start inter-bank transfers, without a cashier. The customer inserts a card, enters a PIN, chooses transfer, and enters the recipient’s bank details and the amount.
• Electronic fund transfers (EFT). The movement of money from one account to another without cash or cheques, started through online banking, mobile apps or at a branch. The sender gives the recipient’s full name, bank name, account number and bank verification details such as a routing or sort code. Funds are credited within a time that depends on the system.
• Debit cards. They let customers pay or transfer directly from the bank account at point-of-sale terminals, through apps and online banking, and at ATMs. The amount is debited at once.
• Credit cards. They let users borrow from the issuer to make payments. They give instant credit and need repayment, often with interest and service fees, and may carry extra charges and limits. They are less used for direct inter-bank transfers.

Understanding each channel and its advantages and limits lets an entity choose the most suitable method for its needs.

The ideas in more depth

Why the cash book is both a book and a ledger

A day book only lists. A ledger account holds the balance. The cash book lists every receipt and payment in date order, so it is a book of prime entry. Its columns are totalled and balanced like an account, so it is the bank account in the ledger.

It is one of the few places where no separate posting to a bank account is needed, because the cash book already is that account.

Contra entries and the double entry

A contra entry has both of its sides inside the cash book, one in the cash column and one in the bank column. For that reason it has no effect on any other ledger account, and total cash plus bank does not change.

Overdraft and the sign of the balance

A bank column with a credit balance means the business has taken out more than it paid in, so the bank is owed money. In the statement of financial position the overdraft is a current liability. A cash balance should never be a credit.

The arithmetic of a cash book

Closing balance = opening balance + receipts − payments. If the closing balance, opening balance and receipts are given, payments are the balancing figure. For example, opening ₦70,000, receipts ₦210,000 and closing ₦30,000 give payments of ₦70,000 + ₦210,000 − ₦30,000 = ₦250,000.

Why so much detail on cheques

A cheque is a promise that has not yet been kept. Until the bank pays it, the business has not received the money. That is why a dishonoured cheque is reversed, why a stale cheque needs replacing, and why cheques that are in the cash book and not yet on the bank statement need a bank reconciliation.

Sources and references

• The two- and three-column cash books, contra entries, the posting of the discount columns and the internal controls over cash receipts are background taken from the past-paper questions listed below.

Worked example: a cash book at Yaba Pharmacy

1. Discounts. Dike settles ₦200,000 by paying ₦193,200, so the discount allowed is ₦6,800. Zara is paid ₦98,000 for ₦100,000, so the discount received is ₦2,000.
2. Cash column.
   Debits: balance 40,000 + sales 90,000 + from bank 30,000 + sales 120,000 = 280,000.
   Credits: to bank 70,000 + wages 25,000 + electricity 18,000 = 113,000.
   Balance carried down: 167,000 debit.
3. Bank column.
   Debits: balance 250,000 + from cash 70,000 + Dike 193,200 + capital 150,000 = 663,200.
   Credits: Zara 98,000 + to cash 30,000 + rent 60,000 = 188,000.
   Balance carried down: 475,200 debit.
4. Contra entries. The 70,000 and the 30,000 each appear in both columns, on opposite sides. They cancel in total.
5. Discount postings. Dr Discount allowed ₦6,800, Cr Receivables control ₦6,800. Dr Payables control ₦2,000, Cr Discount received ₦2,000. Dike’s account is credited with ₦200,000 (193,200 cash and 6,800 discount) and Zara’s account is debited with ₦100,000.
6. Proof.
   Opening cash and bank 40,000 + 250,000 = 290,000.
   External receipts: cash sales 90,000 + 120,000, Dike 193,200, capital 150,000 = 553,200.
   External payments: wages 25,000, electricity 18,000, Zara 98,000, rent 60,000 = 201,000.
   Closing = 290,000 + 553,200 − 201,000 = 642,200.
   The two closing balances give 167,000 + 475,200 = 642,200.
   The proof agrees.

Common mistakes in the exam

• Putting a contra entry on one side only. It appears on both sides, in different columns.
• Balancing the discount columns as if they were part of the cash book. Each total goes to its own account.
• Netting discount allowed against discount received.
• Writing a cash payment into the bank column, or a cheque payment into the cash column.
• Showing a credit balance in the cash column. If it happens, an entry is wrong.
• Treating a credit balance in the bank column as money in the bank. It is an overdraft.
• Listing cash handling controls without saying which risk each one answers.
• Confusing crossed and open cheques, or stale and post-dated ones.

Quick revision

• Cash book: receipts debit, payments credit. Book of prime entry and ledger account.
• Two-column: discount and bank. Three-column: discount, cash and bank.
• Discount allowed total: Dr Discount allowed, Cr Receivables control. Discount received total: Dr Payables control, Cr Discount received.
• Contra: cash to bank is Dr Bank, Cr Cash. Bank to cash is Dr Cash, Cr Bank.
• Bank credit balance: overdraft. Closing = opening + receipts − payments.
• Cheque types: bearer, order, crossed, open. Dishonour: insufficient funds, signature, stale, post-dated, closed account, stop payment.
• Controls: policies, segregation of duties, safes, CCTV, training, frequent reconciliation.
• Debit card uses own funds. Credit card uses borrowed funds.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.

Section A style: multiple choice

Section B style: written questions

A further written question

Model answers

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