Tutorial 2 Cash Cycle
5
Tutorial 2: Suggested solutions
Section A:
1. (a) Cash transactions are transactions where payment is made/collected
immediately (upon purchase/sale) whereas credit transactions are
transactions where payment is made/collected at a future date, based
on the credit period given, normally 30 days, 60 days, or 90 days.
(b) Discounts are deductions allowed by the supplier to the customer.
Trade discount is a percentage reduction granted to a customer from
the list price due to the purchase of a large quantity whereas cash
discount (discount received and discount allowed) is a percentage
reduction granted to the customer in order to encourage earlier
payment (earlier than the credit period given).
(c) Cash is money that belongs to the business. It is a current asset.
There are three types of cash in the business, i.e. cash at bank, cash in
hand and petty cash. Cash at bank is the money in the business’
current account with the bank. This account usually does not yield any
interest but offers cheque facility. Cash in hand is the money that the
business keeps in its premises for daily purchases. This is usually
controlled by the cashier. Petty cash is also money kept by the business
for daily small/petty purchases and is usually kept by the petty cashier.
2. (a) Cash Book is a book of prime entry, used to record all types of
cash and cheque transactions, i.e. actual cash received or paid, deposits
into the bank account and issuance of cheques from the bank account.
It is basically putting together side by side the bank, cash, discount
allowed and discount received accounts. On the debit side of the cash
book are the bank and cash items received and discount allowed
columns. On the credit side are the bank and cash items issued/paid and
discount received columns. Since it is four ‘T”accounts put side by
side, the Cash Book also functions as the General Ledger accounts for
cash account and bank account.
(b) The cash book is basically a few “T” accounts put together side by
side. For example, a three column cash book consists of 4 accounts i.e.
bank, cash, discount allowed and discount received. It is a book of
prime entry because this is where transactions are originally recorded
(recorded for the first time). For other transactions like sales and
purhases, the total of the monthly amounts of the books of prime entry
(sales journal and purchases journal) will be posted from the books of
prime entry to the respective “T”accounts (ledger) i.e. sales and
purchases accounts. Not so for the cash and bank closing totals as they
are already recorded in the respective “T”accounts in the cash book.
However, the totals of the discount allowed and discount received
accounts are still posted to their respective discount allowed and
discount received ledger accounts from the cash book.
(c) Bank overdraft is a special loan that had been approved by the bank
for the business to issue cheques more than the amount deposited into
the current account i.e. the current account can go negative without
havings its cheques issued being dishonoured.
The bank overdraft facility will specify the maximum limit available
for the business to use. Bank interest will be calculated based on the
actual amount of bank overdraft balance on a monthly basis.
3. (a) Petty cash book is both a book of original entry and a ledger. It is
used to record small cash payment for any immaterial expenses such
as taxi fare, purchase of stationery, postage, donation and etc. Normally
the cash float amount is not more than RM1000.The workings of the
petty cash book is similar to that of the cash book. The items are
analysed into various categories to enable easy posting to the various
expenses accounts at the end of every month.
(b) The imprest system is used to manage the petty cash of a business.
A float is firstly determined by the management for daily petty cash
payments. This is the maximum amount that is based on the needs of
the business. It is usually small i.e. less than RM1,000. The petty
cashier will receive this amount at the beginning of the month and then
Tutorial 2 Cash Cycle
6
use it to pay for petty items throughout the month. At the end of the
period, the cashier will reimburse the petty cashier the amount of petty
cash spent during the period so that the petty cashier will start with the
same amount of the petty cash float. All payments are usually
evidenced by petty cash vouchers.
Question 4
Cash Book
Date
Particular
Fol
Disc.
Cash
Bank
Date
Particular Fol
Disc.
Cash
Bank
Allw
Rec’d
May
RM
RM RM May
RM RM RM
1
Capital
800
1,000
2
Purchases
400
9
Sales
80
2
Rates
40
15
Capital
1,000
10
Transport 12
16
TR:
T
odds
30
570
14
Stationery 16
General Ledger
Capital Account
RM
May
RM
1
Cash
8
00
1
Bank
1,000
15
Bank
1,000
Purchases Account
May
RM
RM
2
Bank
400
24
Cash
28
Rates Account
May
RM
RM
2
Bank
40
Sales Account
RM
May
RM
9
Cash
80
Ken
neth
Co
May
RM
RM
10
Cash
12
28
Cash
10
May
RM
RM
May
RM
RM
20
Cash
120
May
RM
RM
31
Cash
5
May
RM
RM
31
Bank
200
