Double Entry Ledger Accounts and Cash Books
Double Entry Ledger Accounts and Cash Books
Double Entry Ledger Accounts
Double Entry Bookkeeping:
- This is a system in which every financial transaction is recorded in two accounts: the debit account and the credit account.
- It’s based on the concept that every transaction has an equal and opposite effect on at least two different accounts.
Debit and credit entries:
- A debit entry is an addition to an asset account or a reduction in a liability or equity account.
- A credit entry is an increase in a liability or equity account, or a decrease in an asset account.
Balancing Accounts:
- In a balanced ledger account, the total debit entries should equal the total credit entries.
- If they do not balance, it indicates an error in recording transactions.
Purpose of Double Entry Accounting:
- It helps businesses keep their financial records accurate and reliable.
- The accountability enables detection of mistakes or fraud easily.
Cash Books
Definition:
- A cash book is a financial document that records all cash transactions of a business.
- They include receipts (cash coming in) and payments (cash going out).
Parts of a Cash Book:
- Each cash book typically has two sides: the debit side (for cash coming in) and the credit side (for cash going out).
- Each entry includes details like date of the transaction, description, invoice number, and amount.
Balancing Cash Books:
- At the end of a specific period (e.g. a month or year), the cash book’s entries are totalled, and the balance carried forward to the next period.
- Discrepancies between the cash book balance and the actual cash on hand could indicate a mistake or fraud.
Importance of Cash Books:
- It provides a snapshot of a business’s cash flows.
- Regularly maintaining and reconciling cash books helps businesses monitor their financial health and keep their cash management in check.