This lesson explains how a cash receipts journal is used by a business, what types of transactions are posted in a cash receipts journal, and how to keep those transactions balanced.
Cash Receipts Journal
In accounting, journals are used to record similar activities and to keep transactions organized. One of the journals is a cash receipts journal, a record of all of the cash that a business takes in. It is reserved specifically for activities that involve receiving cash. In most businesses, there are cash receipts of some type. You may sell items or provide services that people pay for with cash, which may range from food or books to massages or even a ride in a taxicab.
Cash can be difficult to track, and if it is not properly accounted for, businesses could experience employee theft or misplaced money. Some business owners may use cash for expenses or purchases and forget to account for it properly. This is not only an improper business practice, but it may cause other issues, like incorrect income reporting to the I.R.S., and create many inaccuracies in a business' accounting records. Keeping accurate and consistent records is critical, especially with the cash receipts journal.
In a cash receipts journal, there are debit and credit entries. Because accounting transactions always need to remain in balance, there must be an opposite transaction when the cash is posted. When cash is received, one of the other accounts - sales, accounts receivable, inventory - must also have a transaction listed.
When cash is received, a cash entry is posted as a debit. In order to balance the transaction, a credit must be posted. A debit entry indicates that cash is increasing. A credit entry indicates another account is decreasing.
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Let's say you own a cute little toy store and have many regular customers. In fact, you have a few customers who come in several times a week to buy books or toys from your store. You allow those customers to keep a running tab, and they pay you once a month. You typically have many cash receipts during the day for toy, books and candy. You keep track of your sales in your cash register every day and then manually post the day's transactions at the end of the day. At the close of business today, you are ready to review your day's business and make the appropriate entries in your accounting records.
You took in $485 in cash throughout the day. Of that money, $425 was for items purchased in the store. The remaining $60 was received to pay the running tabs of several of your customers. The transactions will be posted as follows:
Cash Receipts: Debit for $485 Inventory: Credit for $425 Accounts Receivable: Credit for $60
In this transaction, your cash increased and therefore required a debit posting. On the opposite side, your inventory went down because you have less inventory available now after selling some of your items, and your accounts receivable decreased because you received money to pay off $60 of outstanding accounts. Therefore, those postings required a credit.
A cash receipts journal is used to record all cash receipts of the business. All cash received by a business should be reported in the accounting records. In a cash receipts journal, a debit is posted to cash in the amount of money received. An additional posting must be made to balancing the transaction. Therefore, a credit is needed for one or more other accounts that are affected by collecting cash. The cash receipts journal is an important tool to keep track of cash collected by a business.
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