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Basic cash transactions

Published on May 29, 2017   13 min
Hello. This is Huw Morgan from the Alliance Manchester Business School. This is the second talk in a series of lectures on accounting records. In this lecture, we will be looking at the uses of a single entry cashbook and its limitations.
This session introduces you to Shaun, who begins his business using a simple cashbook to record the transactions made with cash. We shall use his first month of trading to see how the cashbook can be used as a form of internal control, a check to reduce the risk that no transactions are omitted or no cash is missing. We will then apply the accounting equation mentioned in the first session to each cash transaction and show how the financial statements could be generated from this basic cashbook. We will also discover that there are certain limitations using the single entry cashbook particularly when transactions may be made without a change in cash. A new concept is introduced in this session called the matching concept.
Our friend, Shaun has started up a business running a lemonade stand in a series of music festivals. He has injected some cash to start the business, and his uncle Jim has also lent him some cash to get started. After a month in business, Shaun still hasn't really considered what sort of accounting records he should keep. In fact, he's been so busy getting the business up and running, the only records he has after his first month of trading is a handful of receipts and a summary of his daily takings from the three festivals he attended in June, his first month of trading. So what would be appropriate accounting records to keep at this stage? Well, the answer depends on a number of issues. Firstly, what type of business is Shaun operating? Secondly, who intends to use the accounting records, and for what purpose? Shaun is operating as a sole proprietor. Being the smallest type of business, and being owner-managed, Shaun's business will tend to have fewer external financial accounting reporting requirements. The users of his financial statements will be limited to himself, the government who want to collect tax on any profit he earns, and his uncle Jim, who has lent the business cash, which he presumably wants back with interest. Shaun will therefore need to maintain sufficient accounting records to meet these users' requirements, unless we require the preparation of a statement to financial position, to inform the users of its financial position at the end of the accounting period, and an income statement to show the performance of the business in making profit in that period.