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.