6. Cash & Banking Transactions

Meaning of Cash & Banking Transactions

A cash transaction is the immediate payment of cash for the purchase of an asset. Some market stock transactions are considered cash transactions although the trade may not settle for a few days. A futures contract is not considered a cash transaction.

Banking transactions means cash withdrawals, deposits, account transfers, payments from bank accounts, disbursements under a preauthorized credit agreement, and loan payments initiated by an account holder at a communications facility and accessing his or her account at a Colorado bank.
Meaning of Bank Account
A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded.
Types of Bank Account
1. Current Account- A current account, also known as financial account is a type of deposit account maintained by individuals who carry out significantly higher number of transactions with banks on a regular basis. Current accounts also allows to make payments to creditors through the cheque facility offered by the bank.
2. Saving Account- A savings account is a bank account at a retail bank whose features include the requirements that only a limited number of withdrawals can take place, it does not have cheque facilities and usually do not have a linked debit card facility, it has limited transfer facilities and cannot be overdrawn.
3. Fixed Deposit Account- A fixed deposit is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.
Meaning of Cheques
A cheque, or check, is a document that orders a bank to pay a specific amount of money from a person’s account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where their money is held.
Parties of a Cheque
Basically, there are three parties to a cheque:
  • Drawer: The person who draws the cheque, i.e. signs and orders the bank to pay the sum.
  • Drawee: The bank on which the cheque is drawn or who is directed to pay the specified sum written on the cheque.
  • Payee: The beneficiary, i.e. to whom the amount is to be paid.


Types of Cheque

  1. Bearer Cheque- A bearer cheque does not have any name written on it, but just the amount authorized for withdrawal. Bearer cheque can be transferred by mere delivery; there’s need of endorsement. In simple words a cheque which is payable to any person who presents it for payment at the bank counter is called ‘Bearer cheque’.

2. Order Cheque- When the word “or bearer” printed on the cheque is cancelled, the cheque is called an order cheque. An order cheque is one which is payable to a particular person. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.

3. Crossed Cheque- A crossed cheque is a cheque that has been marked specifying an instruction on the way it is to be redeemed. A common instruction is for the cheque to be deposited directly to an account with a bank and not to be immediately cashed by the holder over the bank counter.

Types of Crossing

  1. General crossing- In a general crossing, simply two parallel transverse lines, with or without the words ‘not negotiable’ in between, may be drawn. Such a cheque is crossed generally. The effect of general crossing is that the payment of the cheque will not be made at the counter, it can be collected only through a banker.

2. Special crossing- In a special crossing, the name of a banker with or without the words ‘not negotiable’ is written on the cheque. Such a cheque is crossed specially to that banker. The effect to special crossing is that the paying banker will be the amount of the cheque only through the bank named in the cheque.

3. Account payee- An Account Payee Cheque is a highly secured type of cheque as the amount can only be deposited in the account of the payee. The payee cannot endorse this cheque to anyone else. Payee is the party to whom the final payment is made and his/her/its name is written on the cheque.


Cash Book

A cash book is a financial journal that contains all cash receipts and disbursements, including bank deposits and withdrawals. Entries in the cash book are then posted into the general ledger.


Types of Cash Book

  1. Single Column/Simple Cash Book- The single column cash book (also known as simple cash book) is a cash book that is used to record only cash transactions of a business. The single column cash book has only one money column on both debit and credit sides titled as “amount” which is periodically totaled and balanced like a T-account.

What is a Cash Book? Definition, Features, Advantages, Types ...

2. Double Columns Cash Book- The double column cash book (also known as two column cash book) has two money columns on both debit and credit sides – one to record cash transactions and one to record bank transactions. Hence, the double columns cash book may be three types:

i. Cash & Discount Columns

ii. Bank & Discount Columns

iii. Cash & Bank Columns

What is a Cash Book? Definition, Features, Advantages, Types ...

3. Triple Columns Cash Book- A triple column cash book or three column Cash Book is one which consists of three separate columns on the debit side as well as credit side for recording cash, bank and discount.

What is a Cash Book? Definition, Features, Advantages, Types ...

4. Petty Cash Book- Petty cash is a system that funds and tracks small purchases such as parking meter fees that aren’t suitable for check or credit card payments. A petty cash book is a ledger kept with the petty cash fund to record amounts that are added to or subtracted from its balance.There are two types of petty cash book.They are:

i. Simple Petty Cash Book- Simple Petty Cash Book is just like the main cash book. Cash received by the petty cashier is recorded on debit side and all payments for petty expenses are recorded on credit side in one column.

ii. Analytical Petty Cash Book- It is an extension of simple petty cash book. In this book, the amount received is recorded in debit side and the payments are recorded in the credit side into a number of heads. Each payment is recorded twice, one on the total column and next on individual expense column.

System of Petty Cash

There are two systems of petty cash. They are:

  1. Ordinary Petty Cash System- In this system, the petty cashier is given a certain amount of cash. After spending nearly the whole amount of cash, the petty cashier submits the detail of expenditures & returns the unspent balance to the cashier. The cashier checks the details and again if necessary, the cashier again gives a certain sum of money to the petty cashier for petty expenses for the next period.

2. Imprest Petty Cash System- An imprest system of petty cash means that the general ledger account Petty Cash will remain dormant at a constant amount. If the amount of petty cash is $100, then the Petty Cash account will always report a debit balance of $100. The petty cash custodian will cash the check and add the amount to the other cash.


Bank Statement/Pass Book

A passbook or bankbook is a paper book used to record bank or building society transactions on a deposit account. Traditionally, a passbook is used for accounts with a low transaction volume, such as savings accounts.


Meaning of Contra Entry

The entries which affect both sides of Cash Book, are known as contra entries. For example, withdrawn of cash from bank for office use, on one-hand increases the cash column of the receipt side, on the other hand decreases the bank column of payment side of the cash book. Similarly, depositing cash into the bank increases the bank column of receipt side but decreases the cash column of the payment side. In this way, if bank column increases with corresponding decrease in cash column, or the opposite relationship exists due to any entry; such an entry is called contra entry.

To notify the contra entry, the alphabet “C” is mentioned in LF column in both sides of the Cash Book.


Examples of Contra Entry

In the below table, we have mentioned different types of business transactions and some of them are contra entry. We have identified one’s which are contra entry with reason.

Remember the contra entry rule ‘Both Cash and Bank should be affected in any given transaction’

Entries Is it Contra Entry? Reasoning
Transferred cash to petty cash 2,500 indo rupiah Yes Affects both two account – a Cash account and Petty cash
Cash sales 1,750 Indo rupiah No Affects only one account – cash account
Paid to Mr.Yash by cheque 3750 Indo rupiah No Affects only one account – cash account
Received a cheque from M/s Zain and Bros., 4,500 paid into the bank No Cheque received is equivalent to cash. Affects only one account – Bank account
Received cheque from Mr Alex 6,000 Indo rupiah paid into the bank No Cheque received is equivalent to cash. Affects only one account – Bank account
Cash purchases 2,500 Indo rupiah No Affects only one account – cash account
Paid rent by cheque 2,500 Indo rupiah No Affects only one account – cash account
Cash is withdrawn from bank for office use 2,500 Indo rupiah Yes Affects two accounts – Cash and Bank account –
Cash sales 3,750 Indo rupiah No Affects only one account – cash account
Stationery purchased 1,000 Indo rupiah No Affects only one account – cash account
Cash sales 6750 Indo rupiah No Affects only one account – cash account
Deposited 10,000 Indo rupiah to the bank account Yes Affects two accounts – Cash and bank account –
Withdrew cash for personal use 1,000 Indo rupiah No Affects only one account – cash account
Salaries paid by cheque 9000 Indo rupiah No Affects only one account – cash account

Examples of Contra Entry

1. Cash 50,000 withdrawn for an official purpose from the bank. Journal entry for this transaction will be

Cash A/C 50,000
 To Bank A/C 50,000

In the above example, both entries, debit, and credit, are a contra entry of each other, they both offset each other. The narration is not required for such an entry and only a “C” is written in the left column which depicts that it is a contra entry.

2. Cash 10,000 received from a debtor is deposited into the bank

Bank A/C 10,000
 To Cash A/C 10,000

The above amount is recorded in the bank column (debit) side of the double column cash book.

A contra entry is also used in the Intercompany netting to offset receivables and payables between 2 different legal entities/subsidiaries of a company so that one final (net) amount remains.


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