After learning entries for deposit, withdrawal and dishonour, in we’ll take a look at payments made through issue of cheque, withdrawal for personal use, etc. in Banking transactions-2.
5. Cheque received and discount allowed. Cheque deposited on the same day.
We are aware of the fact that many sellers / traders offer cash discounts to encourage quick payment by their customers. Such discount is also allowed in case the payment is made via issue of cheque.
As for the journal entry, we find an increase in our bank balance (an asset) which is debited and discount allowed on payment is a loss, which is debited as well. With the payment, we also have to cancel / decrease the customer’s dues (an asset) which is recorded by crediting the customer’s name in our entry.
If you notice, this entry is similar to the one we learnt in our discussion on discount in case of credit transaction. The only difference is that instead of cash, the bank item is used.
In case the cheque is dishonoured, we would need to rollback the cancellation of the customer’s dues and the discount allowed. To do so, we can simply reverse the entry.
6. When payment is made to creditors by issue of cheque.
For traders, especially wholesalers and retailers, it is common to make payments via issue of cheque. When a cheque is issued, for accounting purposes, that the creditor to whom the cheque has been issued will deposit the cheque on the same day.
If so, we will find a decrease in our bank balance, which is credited and of course, making payment means that our liability towards the creditor decreases to the extent of payment made, which is debited.
This is more or less the reverse of the above case where we flip the lens and now look at the transaction through the eyes of the buyer / customer.
7. When expenses are paid by issue of cheque.
At the beginning of every month, a person with a small bag tied across his waist comes to your door, hands out a small white paper and says, “Sir, this is your light bill. Please pay it at the earliest.” And, if you don’t, say bye-bye to your electricity.
Presently, if your electricity bill is ₹ 10,000 or more, it is compulsory to pay it via cheque, RTGS, etc. to facilitate transparency and money tracking (The ₹ 10,000 limit may differ in different states but you get the point). Now, supposing that our bill does exceed the limit of ₹ 10,000 and we issue a cheque for the same, how do we record it in our books of accounts?
Expenses, as and when they arise, are tagged debit and since the payment is made using cheque, we would find a decrease in our bank balance, which is credited.
8. When cash in bank is withdrawn for personal use.
Recall the entry we made for withdrawal of money from bank where we debited the Cash item and credited the Bank item. There, the cash withdrawn was sent into the drawer of shop to be used for business purposes.
However, in this case, the phrase ‘For personal use’ indicates that the owner has withdrawn the money not into the shop’s drawer but into his own pocket / bank account. This may be done to pay for Life Insurance Premium, children’s school or tuition fees, etc.
Since the money meant for business has been used for personal purposes, it gives the right to the business (a separate entity as per the Business Entity Concept) to deduct the sum from the owner’s capital, part of the owner’s Equity in the business.
To record this, a separate accounting item called ‘Drawings’ is used. Since it denotes a decrease in Equity, it receives the debit tag and on the credit, we have the Bank item from where the money was withdrawn.
That is it for Banking Transactions-2.
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