BHT1333 HOSPITALITY ACCOUNTING 1 DEGREE (HOSPITALITY)

Lecture 5: The Cash Cycle Learning objectives:

Important Textbook Reading:
 Chapters 11, 12 & 13: Frank Wood & Alan Sangster “Business Accounting 1”
 Additional reference per approved unit plan
Extract of the “Accounting Cycle” – THE CASH CYCLE
After you have studied this chapter, you should be able to:
 Distinguish between the different types of business transactions and
parties to business transactions
 Distinguish between the different types of source documents
 Understand the nature of Cash Book and types of cash in business
 Prepare the Cash Book
 Record transactions in the Cash Book
 Posting from the Cash Book to the Ledgers
 Distinguish between discount allowed and discount received
 Explain the meaning of contra entries
 Distinguish between capital introduced and withdrawal
 Distinguish between the bank balance and bank overdraft

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

Invoice

Cash Bill Sales Ledger

Payment Voucher Cash Book General Ledger

Official Receipt Purchases Ledger

Cheque counterfoil
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BHT1333 HOSPITALITY ACCOUNTING 2 DEGREE (HOSPITALITY)

1. Types of business transactions Below are descriptions of the different types of customers:
i) Trade customers: Customers to whom the business sells trading
Business transactions can be classified into two types, i.e. either cash items, i.e. trade sales
term or credit term: ii) Other customers: Customers to whom the business disposes non-
i) Cash term: Payment is made/collected immediately (upon trade items
purchase/sale) iii) Trade receivables: Trade customers who are allowed to delay
ii) Credit term: Payment is made/collected at a future date, based on payment until the end of the credit term
the credit period given, normally 30 days, 60 days, or 90 days. iv) Other receivables: Other customers who are allowed to delay
payment until the end of the credit term
Business transactions involve the following different types of
purchasing and selling activities: 3. Source documents
i) Trade purchases: Purchases of items for the purpose of trading, i.e.
items to be subsequently sold to customers at a profit All business transactions must be evidenced by a source document, e.g.
ii) Other purchases: Purchases of items not for the purpose of items cannot change hands without an invoice being first generated to
trading, e.g. purchase of office equipment and stationeries for use in record the details of the transaction.
the office
iii) Trade sales: Sales of trading items The following are the relevant source documents in the cash cycle:
iv) Disposals: Non-trade items being sold e.g. old motor vehicle Source Explanation
disposed at a scrap value document
Invoice To inform customer the amount to be paid, amount of
2. Parties to business transactions discount given, whether cash term or credit term and
interest charges for late payment.
There are always two parties to every business transaction, i.e. the
supplier and the customer. Cash bill This is the same as Invoice, but is used only when
transaction is on cash terms (by cash or by cheque)
Below are descriptions of the different types of suppliers: customer only.
i) Trade suppliers: Suppliers from whom the business purchases
items for purpose of trading, i.e. trade purchases Payment To record the payment by cash or cheque.
ii) Other suppliers: Suppliers from whom the business purchases non- voucher
trade items, i.e. other purchases
iii) Trade payables: Trade suppliers who allow the business to delay Official receipt To acknowledge money has been collected.
payment until the end of the credit term
iv) Other payables: Other suppliers who allow the business to delay Cheque To record the amount paid on a particular numbered
payment until the end of the credit term counterfoil cheque (the counterfoil is the portion left after tearing
out the particular cheque).

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BHT1333 HOSPITALITY ACCOUNTING 3 DEGREE (HOSPITALITY)

4. Types of cash 6. Discounts

Cash is money that belongs to the business, therefore, it is a current Discounts are deductions allowed by the supplier to the customer. There
asset. There are three types of cash in the business, i.e. cash, bank and are two types of discounts:
petty cash (as illustrated below): i) Trade discount: percentage reduction granted to a customer from
the recommended list price due to the purchase of a large quantity.
Cash ii) Cash discount: a percentage reduction granted to the customer in
(Current asset) order to encourage paying (earlier than the credit period given)
within a specified period.

Cash book Petty cash book Cash discounts are:

i) Discount received: cash discount received from trade payables and
it represents an income (profit) because we pay a lesser amount.
Cash account Bank account Petty cash account
(kept in the office (current account) (small amount kept Example: Credit purchases from Encik Baba RM700. Paid cheque to
by main Cashier) by Petty Cashier) settle the full amount with a 5% discount when paying within 15 days.
Dr (RM) Cr (RM)
Dr Trade payables: Encik Baba 700
5. Cash Book Cr Discount received 35
Cr Bank 665
Cash Book is a book of prime entry, used to record all types of cash Payment to Encik Baba with 5% cash
and cheque transactions, i.e. actual cash received or paid, deposits into discount within 15 days
the bank account and issuance of cheques from the bank account.
ii) Discount allowed: cash discount given to trade receivables and it
Cash Book also functions as the General Ledger accounts for cash represents an expense (loss) because we receive a lesser amount.
account and bank account.
Example: Credit sales to Encik Ali RM800. Received cheque to settle
Format: The three-column Cash Book the full amount with a 5% discount when received within 15 days.
Cash Book Dr (RM) Cr (RM)
Date Particular Folio Discount Cash Bank Date Particular Folio Discount Cash Bank
Allowed Received
Dr Bank 760
RM RM RM RM RM RM Dr Discount allowed 40
Bank √ 500 Cash √ 500 Cr Trade receivables: Encik Ali 800
Cash √ 600 Bank √ 600 Payment received from Encik Ali with 5%
cash discount within 15 days

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BHT1333 HOSPITALITY ACCOUNTING 4 DEGREE (HOSPITALITY)

7. Contra entries 9. Withdrawal of cash or cheque

Transfer of cash to bank or vice-versa. The business owner may withdraw cash or cheque from the business for
personal use. This is called drawings. A ledger account is opened in the
Example 1: Withdraw RM500 from bank as cash for office use. General Ledger for drawings.
Dr (RM) Cr (RM)
Dr Cash 500 Example: Encik Kamal issues a cheque of RM800 to pay for his
Cr Bank 500 personal life insurance premium.
Transfer from bank to cash for office use Dr (RM) Cr (RM)
Dr Drawings 800
Example 2: Deposit cash RM600 into the bank account. Cr Bank 800
Dr (RM) Cr (RM) Drawings by cheque
Dr Bank 600
Cr Cash 600 10. Closing the Cash Book
Deposit cash into bank account
At the end of every month, the Cash Book is closed in order to do
8. Capital contribution posting of totals to the General Ledger.

The business owner contributes capital into the business. The capital The Cash account will always be a positive balance (debit balance)
contribution is either in the form of cash or cheque. A ledger account is because this is the amount that is left inside the office (kept by Cashier).
opened in the General Ledger for capital.
The Bank account may give a positive (debit) or negative (credit)
Example: Encik Kamal paid a cheque of RM150,000 as capital into the balance:
business. i) Debit balance (Bank balance): there is excess cash left inside the
Dr (RM) Cr (RM) bank account for the business to use in the following months.
Dr Bank 150,000 ii) Credit balance (Bank overdraft): the business had used more than
Cr Capital 150,000 the available cash kept inside the bank account.
Capital contributed by the business owner
Note: 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. 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.

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BHT1333 HOSPITALITY ACCOUNTING 5 DEGREE (HOSPITALITY)

Collection cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Issue either the cash

bill or invoice to the
customer 7 If collection is received
from Trade
Receivables – post to
Sales Ledger

2 Receive the payment

in cash or cheque and
issue official receipt
as acknowledgement
5 Record on the debit
side of the Cash Book
8 Other collections
except Trade
Receivables – post to
the relevant account in
the General Ledger

3 Deposit the cheque

into bank account
9 At the end of every
month, total collected
from Trade
Receivables – post to
General Ledger

4 If cheque is
dishonoured, must
chase customer again
for collection
6 Record on the credit
side of the Cash Book

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BHT1333 HOSPITALITY ACCOUNTING 6 DEGREE (HOSPITALITY)

Illustration 1: Collection cycle Journal entries Dr (RM) Cr (RM)

June 2 Dr Cash 2,500
Date Transactions Cr Sales 2,500
June 2Cash sales of RM2,500 Cash sales
5Sold an old office typewriter for RM150 for cash
12 Received a cheque from Motor Trader as full settlement 5 Dr Cash 150
of an outstanding invoice of RM5,000 from disposal of an Cr Disposal of Office Equipment 150
old delivery van last month Disposal of old office typewriter for cash
19 Received a cheque from Elaine as full settlement of an
outstanding invoice of RM8,000 and deducting cash 12 Dr Bank 5,000
discount of 5% Cr Other Receivables: Motor Trader 5,000
21 Informed by the bank that Elaine’s cheque was Payment received from Motor Trader
dishonoured due to insufficient funds in her bank account
19 Dr Bank 7,600
General Ledger Dr Discount Allowed 400
Sales Account Cr Trade Receivables: Elaine 8,000
RM June RM Payment received from Elaine
2 Cash 2,500
21 Dr Trade Receivables: Elaine 8,000
Cr Bank 7,600
Disposal of Office Equipment Account Cr Discount Allowed 400
RM June RM Dishonoured cheque from Elaine
5 Cash 150
Cash Book
Date Particular Fol Disc. Cash Bank Date Particular Fol Disc. Cash Bank
Other Receivables: Motor Trader Account Allw Rec’d
RM June RM June RM RM RM June RM RM RM
12 Bank 5,000 2 Sales 2,500 21 TR:Elaine 7,600
Disposal
Sales Ledger 5 of Office 150
Trade Receivables: Elaine Account Equipment
June RM June RM OR:Motor
12 5,000
21 Bank 7,600 19 Bank 7,600 Trader
21 Disc. Allw 400 19 Disc. Allw 400 19 TR: Elaine 400 7,600
21 TR: Elaine (400)

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BHT1333 HOSPITALITY ACCOUNTING 7 DEGREE (HOSPITALITY)

Payment cycle

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Receive either the

cash bill or invoice
from the supplier

2 Prepare the payment

voucher

3 The boss signs

approval on the
payment voucher 7 If payment is made to
Trade Payables – post
to Purchases Ledger

4 Pay cash or write

cheque to supplier
(supplier signs on
payment voucher and
6 Record on the credit
side of the Cash Book
8 Other payments except
Trade Payables – post
to the relevant account
in the General Ledger
issues official receipt)

5 Keep as evidence, the

payment voucher and
cheque counterfoil (if
payment is made by
9 At the end of every
month, total paid to
Trade Payables – post
to General Ledger
cheque) and official
receipt from supplier

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BHT1333 HOSPITALITY ACCOUNTING 8 DEGREE (HOSPITALITY)

Illustration 2: Payment cycle Journal entries Dr (RM) Cr (RM)

June 3 Dr Purchases 3,800
Date Transactions Cr Cash 3,800
June 3Cash purchases of RM3,800 Cash purchases
4Purchased computer for office use RM4,000 by cheque
11 Paid a cheque to Ricoh Enterprise as full settlement of an 4 Dr Office Equipment 4,000
outstanding invoice of RM12,000 for last month’s Cr Bank 4,000
purchase of photocopier machine for office use Purchased computer for office use
18 Paid a cheque to Jack as full settlement of an outstanding
invoice of RM6,000 and deducting cash discount of 6% 11 Dr Other Payables: Ricoh Enterprise 12,000
30 Paid office rent RM2,500 by cheque Cr Bank 12,000
Payment to Ricoh Enterprise for last
General Ledger month’s purchase of photocopier machine
Purchases Account
June RM RM 18 Dr Trade Payables: Jack 6,000
3 Cash 3,800 Cr Bank 5,640
Cr Discount Received 360
Office Equipment Account Payment to Jack with 6% cash discount
June RM RM
4 Bank 4,000
30 Dr Office Rent 2,500
Cr Bank 2,500
Other Payables: Ricoh Enterprise Account Payment of office rent for June 2010
June RM RM
11 Bank 12,000
Cash Book
Date Particular Fol Disc. Cash Bank Date Particular Fol Disc. Cash Bank
Office Rent Account
June RM RM Allw Rec’d
30 Bank 2,500 RM RM RM June RM RM RM
3 Purchases 3,800
Purchases Ledger Office
4 4,000
Trade Payables: Jack Account Equipment
June RM RM 11 OP: Ricoh 12,000
18 Bank 5,640 18 TP: Jack 360 5,640
18 Disc. Rec’d 360 Office
30 2,500
Rent

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BHT1333 HOSPITALITY ACCOUNTING 9 DEGREE (HOSPITALITY)

Contra entries & drawings

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Prepare the payment

voucher and obtain
boss approval

2 Contra entries: Either

issue cheque to
withdraw cash or
withdraw cash to
deposit into bank

3 Drawings: Either issue

cheque or withdraw
cash to pay owner

4 Sign on payment
voucher to
acknowledge receipt
6 Record in the Cash
Book
7 Contra entries do not
require posting; only
post to drawings
account in the General
Ledger

5 Keep as evidence, the

payment voucher
and/or cheque
counterfoil and/or bank
deposit slip

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BHT1333 HOSPITALITY ACCOUNTING 10 DEGREE (HOSPITALITY)

Capital contribution

The 7 Books
Source Documents of Prime Entry The 3 Ledgers

1 Receive the cash or

cheque from business
owner

2 Deposit the cheque

into bank account

3 Issue official receipt

5 Record in the Cash
Book
6 Post to the capital
account in the General
Ledger

4 Keep as evidence, the

bank deposit slip and
official receipt

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BHT1333 HOSPITALITY ACCOUNTING 11 DEGREE (HOSPITALITY)

Illustration 3: Contra entries, capital & drawings

Date Transactions Journal entries Dr (RM) Cr (RM)
June 1 Owner injects / contributes capital of RM80,000 for the June 1 Dr Bank 80,000
business Cr Capital 80,000
2 Withdraw RM3,000 cash for office use Capital injection / contribution by owner
18 Paid a cheque RM1,200 for owner’s son’s school fees
30 Deposit RM1,000 cash into bank account 2 Dr Cash 3,000
Cr Bank 3,000
Transfer from bank account to cash

18 Dr Drawings 1,200
Cr Bank 1,200
Drawings for personal use

30 Dr Bank 1,000
Cr Cash 1,000
Transfer from cash to bank account

General Ledger Cash Book

Capital Account Date Particular Fol Disc. Cash Bank Date Particular Fol Disc. Cash Bank
RM June RM Allw Rec’d
1 Bank 80,000
June RM RM RM June RM RM RM
1 Capital 80,000 2 Cash √ 3,000
Drawings Account 2 Bank √ 3,000 18 Drawings 1,200
June RM RM 30 Cash √ 1,000 30 Bank √ 1,000
18 Bank 1,200

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BHT1333 HOSPITALITY ACCOUNTING 12 DEGREE (HOSPITALITY)

Illustration 4: Closing the Cash Book

Cash Book General Ledger
Date Particular Fol Disc. Cash Bank Date Particular Fol Disc. Cash Bank Trade Payables Control Account
Allw Rec’d June RM RM
30 Bank 5,640
June RM RM RM June RM RM RM
30 Disc. Rec’d 360
1 Capital 80,000 2 Cash √ 3,000
2 Bank √ 3,000 3 Purchases 3,800 Discount Received Account
Office RM June RM
2 Sales 2,500 4 4,000
Equipment 30 Trade Payables 360
Disposal
5 of Office 150 11 OP: Ricoh 12,000
Equipment
OR:Motor Trade Receivables Control Account
12 5,000 18 Drawings 1,200 June RM June RM
Trader
30 Bank 7,600 30 Bank 7,600
19 TR: Elaine 400 7,600 18 TP: Jack 360 5,640
30 Disc. Allw 400 30 Disc. Allw 400
21 TR: Elaine (400) 21 TR:Elaine 7,600
Office
30 Cash √ 1,000 30 2,500 Discount Allowed Account
Rent
June RM June RM
30 Bank √ 1,000 30 Trade Receivables 400 30 Trade Receivables 400
30 Bal c/d 850 57,660
0 5,650 93,600 360 5,650 93,600
July
1 Bal b/d 850 57,660
Dr (RM) Cr (RM)
Dr Bank 7,600
Journal entries Dr (RM) Cr (RM) Dr Discount Allowed 400
June 30 Dr Trade Payables Control Account 6,000 Cr Trade Receivables Control Account 8,000
Cr Bank 5,640
Cr Discount Received 360 Dr Trade Receivables Control Account 8,000
Month-end posting from Cash Book Cr Discount Allowed 400
Cr Bank 7,600
Month-end posting from Cash Book

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BHT1333 HOSPITALITY ACCOUNTING 13 DEGREE (HOSPITALITY)

Lecture Illustration
Cash Book
Record in a three-column Cash Book for Syarikat Daya Sdn. Bhd. the Date Particular Fol Disc. Cash Bank Date Particular Fol Disc. Cash Bank
following transactions and show the posting at the end of the month to the Allw Rec’d
relevant General Ledger accounts. July RM RM RM July RM RM RM
1 Capital 20,000 2 Bank √ 18,000
July
2 Cash √ 18,000 5 F. deposit 8,000
1 Commence business with cash RM20,000 as capital.
9 Sales 3,600 6 Purchases 2,100
2 Open a current account with MB Bank and deposits RM18,000 cash. 19 Loan 5,000 10 Furniture 2,300
5 Issued a cheque amount RM8,000 to open a fixed deposit account for T. R.:
one year term. 23 Cahaya 200 3,800 13 Entertainm. 1,000
Enterprise
6 Bought goods for cash RM2,100. 25 Bank √ 6,500 17 Gen. Exp. 1,500
9 Cash sales of RM3,600. 20
T. P.: Mimi
300 5,700
Trdg.
10 Bought tables and chairs RM2,300 by cheque from Jaya Furniture Co.
21 Drawings 400
13 Withdrew cash RM1,000 for business entertainment. 25 Cash √ 6,500
17 Paid general expenses by cash RM1,500. 26 Office eqm 3,000
19 Loan received from MB Bank RM5,000, deposited into bank account. 27 Utilities 800
20 Daya settled the amount of RM6,000 owing to Mimi Trading by 27 Wages 700
Cheque, deducting cash discount of 5%. 28 Rent 1,200
30 Salary 2,500
21 Withdrew cash RM400 from bank for personal usage.
31 Bal c/d 3,000 200
23 Received a cheque from Cahaya Enterprise for the settlement of debts
200 30,100 26,800 300 30,100 26,800
amounted to RM4,000, deducting cash discount of 5%.
Aug
25 Withdrew cash RM6,500 from bank for office use. 1 Bal b/d 3,000 200
26 Cash RM3,000 paid to Speed Computer Sdn. Bhd. for a set of
computer for office used.
27 Paid office utilities RM800 and wages RM700 by cash.
28 Cheque amount of RM1,200 for office rental.
30 Paid salary RM2,500 by cheque.

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BHT1333 HOSPITALITY ACCOUNTING 14 DEGREE (HOSPITALITY)

General Ledger

Trade Payables Control Account Trade Receivables Control Account

July RM RM RM July RM
31 Bank 5,700 31 Bank 3,800
31 Disc. Rec’d 300 31 Disc. Allw 200

Discount Received Account Discount Allowed Account

RM July RM July RM RM
31 Trade Payables 300 31 Trade Receivables 200

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