II. Very Short Answer Questions

Question 1.
What is cash book?
Answer:
Cash book is the book in which only cash transactions are recorded in the chronological order. The cash book is the book of original entry or prime entry as cash transactions are recorded for the first time in it. Cash transactions here may include bank transactions also. Cash receipts are recorded on the debit side while cash payments are recorded on the credit side.

Question 2.
What are the different types of cash book?
Answer:
The main cash book may be of various types and following are the three most common types.

  1. Simple or single column cash book (only cash column)
  2. Cash book with cash and discount column (double column cash book)
  3. Cash book with cash, discount and bank columns (three column cash book)


Question 3.
What is simple cash book?
Answer:
Single column cash book or simple cash book, like a ledger account has only one amount column, i.e., cash column on each side. Only cash transactions are recorded in this book. All cash receipts and payments are recorded systematically in this book.

Question 4.
Give the format of ‘Single column cash book’.
Answer:
Simple Cash Book

Question 5.
What is double column cash book?
Answer:
It is a cash book with cash and discount columns. As there are two columns, i.e., discount and cash columns, both on debit and credit sides, this cash book is known as ‘double column cash book’.

Question 6.
Give the format of ‘Double column cash book’.
Answer:
Cash book with cash and discount columns

Question 7.
What is three column cash book?
Answer:
A three column cash book includes three amount columns on both sides, i.e., cash, bank and discount. This cash book is prepared in the same way as simple and double column cash books are prepared. The transactions which increase the cash and bank balance are recorded on the debit side of the cash and bank columns respectively. Opening balance of cash and favourable bank balance appear as the first item on the debit side of the three column cash book in case of existing business. If the business is a new one, capital contributed in cash and/or bank deposit appear as the first item on the debit side.

Question 8.
What is cash discount?
Answer:
Cash discount is allowed to the parties making prompt payment within the stipulated period of time or early payment. It is discount allowed (loss) for the creditor and discount received (gain) for the debtor who makes payment. The discount is allowed when payment is received or made and hence, the entry for discount is also passed with the entry of payment. The earlier the payment, the more may be the discount. Cash discount motivates the debtor to make the payment at an earlier date to avail discount facility.


Question 9.
What is trade discount?
Answer:
Trade discount is a deduction given by the supplier to the buyer on the list price or catalogue price of the goods. It is given as a trade practice or when goods are purchased in large quantities. It is shown as a deduction in the invoice. Trade discount is not recorded in the books of accounts. Only the net amount is recorded.

Question 10.
What is a petty cash book?
Answer:
Business entities have to pay various small expenses like taxi fare, bus fare, postage, carriage, stationery, refreshment and other sundry items. These are small payments and repetitive in nature. If all these small payments are recorded in the main cash book, it will be loaded with lot of entries. Hence, all petty payments of the business may be recorded in a separate book, which is called as petty cash book and the person who maintains the petty cash book is called the petty cashier.

III. Short Answer Questions

Question 1.
Explain the meaning of imprest system of petty cash book.
Answer:
Under this system, a fixed amount necessary or sufficient to meet petty payments determined on the basis of past experience is paid to the petty cashier on the first day of the period. (It may be a week or fortnight or month). The amount given to the petty cashier in advance is known as “Imprest Money”.

The word imprest means payment in advance. The petty cashier makes payments from this amount and records them in petty cash book. At the end of a particular period, the petty cashier submits the petty cash book to the head cashier.

The head cashier scrutinizes the petty payments and gives amount equal to the amount spent by petty cashier so that the total amount with the petty cashier is now equal to the amount he had received in the beginning as advance. Under the system, the total cash with the petty cashier never exceeds the imprest at any time during the period.

Question 2.
Bring out the differences between cash discount and trade discount.
Answer:
IN BOOK

Question 3.
Write the advantages of maintaining petty cash book.
Answer:
Following are the advantages of maintaining petty cash book:

  1. There can be better control over petty payments.
  2. There is saving of time of the main cashier.
  3. Cash book is not loaded with many petty payments.
  4. Posting of entries from main cash book and petty cash book is comparatively easy.

Question 4.
Write a brief note on accounting treatment of discount in cash book.
Answer:
In the discount columns, cash discount, i.e., cash discount allowed and cash discount received are recorded. The net amount received is entered in the amount column on the debit side and the net amount paid is entered in the amount column on the credit side. For the seller who allows cash discount, it is a loss and hence it is debited and shown on the debit side of the cash book. For the person making payment, discount received is a gain because less payment is made and it is credited and shown on the credit side of the cash book.


Question 5.
Briefly explain about contra entry with examples.
Answer:
To denote that there are contra entries, the alphabet ‘C’ is written in L.F. column on both sides. Contra means that particular entry is posted on the other side (contra) of the same book, because Cash account and Bank account are there in the cash book only and there are no separate ledger accounts needed for this purpose. The alphabet ‘C’ indicates that no further posting is required and the relevant account is posted on the opposite side.

IV. Exercises

1 AND 2



3 AND 4


5


6. 


7. 


8. 



Textbook Case Study Solved

Vetri is a sole trader selling food products. He maintains a simple cash book. He sells and purchases goods both on cash and credit. He maintains the cash book by himself. He allows discount and receives discount. He has his personal bank account. He also has so many petty expenses. Now, he wants to establish his business. But he wants to maintain the cash book all by himself.
Now, discuss on the following points:

Question 1.
What could be the reason that Vetri maintains the cash book by himself?
Answer:
He is a sole trader, he need not show the accounts to anybody else, he wants to know about profit or loss for himself only. So he maintains cash book only.

Question 2.
Is it convenient for him to record all the cash transactions in the simple cash book?
Answer:
No, it is not convenient for him to record all the cash transactions in the simple cash book.

Question 3.
Will his personal bank account serve the purpose of his business transactions?
Answer:
No, his personal bank account will not serve the purpose of his business transactions.


Question 4.
Suggest him some better ways of maintaining the cash transactions.
Answer:
Suggestions:

He may maintain triple column cash book, because he can know all cash transactions is a same account.
Instead of personal bank account he can open business bank account (i.e.) current account.

Question 5.
When his business becomes large, what other books will he be maintaining?
Answer:
He will be maintaining the following other books:

  1. Triple column cash book.
  2. Petty cash book (Analytical).
  3. Purchases book for credit purchases
  4. Sales book for credit sales.
  5. Purchases returns book.
  6. Sales returns book.
  7. Business book account (i.e. current account to be maintained).
  8. Proper journal for other assets maintaining:
    • All cash transactions recorded in cash book.
    • All petty expenses are to recorded in analytical petty cash book.
    • All credit transactions to recorded in special purpose books (i.e. purchases book, sales book, purchases return book and sales returns book and proper journal.