The analysed cash book and nominal ledger

Published on May 29, 2017   11 min

Other Talks in the Series: Accounting Records and Accounts

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Hello, this is Huw Morgan from the Alliance Manchester Business School. This is the third talk in a series of lectures on Accounting Records.
In this lecture, we will be looking at how the multi-column cashbook assists in recording the dual entries of the accounting equation into the nominal ledger, which forms the basis of the financial statements.
In the previous session, we saw how a small cash-based business like Shaun's can maintain basic accounting records using a single entry cashbook. Simple controls can ensure accuracy by reconciling the closing cash position, or bank balance. The accounting equation can be used to generate a statement of financial position every time there is a movement in cash. Although it's a rather laborious method and there is the risk that some transactions not involving cash could be overlooked.
Any increase in cash must result in a change in another element of the financial statements. When cash is introduced by Shaun (the owner), this will result in a claim by the owner under equity. When cash is provided by Jim, then there is an obligation on the business to pay this back. When cash is received from trading and customers, the sales should hopefully result in profit once expenses incurred in generating these sales are also accounted for. However, we discovered a weakness in basing our financial statements purely on the cashbook. Whilst all cash-based transactions will be recorded, other non-cash transactions may be overlooked. For example, Shaun introduced a van worth £3,000 into the business, which should be recorded as an asset with a corresponding increase in equity. So a second book of prime entry, the "journal" ensures that such non-cash items and accounting adjustments are initially recorded.