Keeping a cash book: The basics of cash book ac­count­ing

You should document the operating income and ex­pen­di­tures of your company well, not least because doing so helps to assess its success and financial state. At the end of the fiscal year, the IRS also needs a detailed final balance sheet for your company in order to determine the amount and type of your taxation. But how do daily account dealings look? To be able to document your cash payments in ac­cor­dance with reg­u­la­tions, you need a cash book. But what exactly is that? And who is required to use cash book ac­count­ing? Here, we outline the most important fun­da­men­tals and explain how to correctly keep your cash book.

Many business owners now earn their money through cash-free payments (such as transfers, direct debits, credit card payments, etc.). But cash payment is still fairly common. To make sure that the IRS receives all of the in­for­ma­tion required for each trans­ac­tion, you need to record your cash receipts. This is done using the cash book.

The cash book is one of the most important ad­di­tion­al books for business ac­count­ing. You don’t even need to be an ac­coun­tant to un­der­stand the fun­da­men­tals of proper cash book ac­count­ing. In general, you just need to focus on the following principle:

Expressed simply: Ac­count­ing, including the cash book, serves as a tax base for companies. Because of this, each cash book entry (receipts, ex­pen­di­tures, document numbers, tax rates, etc.) needs to be un­der­stand­able and com­pre­hen­si­ble to the tax au­thor­i­ties.

To avoid issues when being audited, the IRS has a com­pre­hen­sive list of rec­om­men­da­tions for record­keep­ing - when in doubt, just keep it all. Holding onto any and all sup­port­ing business documents will keep you from getting caught in the trap of un­sub­stan­ti­at­ed claims on your tax returns. It’s also rec­om­mend­ed to keep all of your records neatly organized in chrono­log­i­cal order based on the tax year and according to the type of income or expense. The following table provides an overview of the doc­u­men­ta­tion rec­om­mend­ed by the IRS:

The following video will help you better un­der­stand the interplay between your cash drawer and the balance sheet:

Source: https://www.youtube.com/watch?v=NkbCHQKxXXY

Cash book ac­count­ing isn’t required of everyone. You only really need to keep a cash book if you operate using double-entry ac­count­ing, which is never legally required in the U.S. However, it is rec­om­mend­ed for larger busi­ness­es.

If you run a small business, or simply choose not to use double-entry ac­count­ing and stick to simple ac­count­ing rules instead, you don’t nec­es­sar­i­ly need to keep a cash book. In this case, the IRS just needs a profit cal­cu­la­tion in sim­pli­fied form of cash-basis ac­count­ing.

Even if you’re not required to keep a cash book, you should still consider it. For small and medium-sized busi­ness­es where cash is usually paid in exchange for services, cash book ac­count­ing offers one decisive advantage: An exact overview of the financial situation of your company.

At its core, cash book ac­count­ing is fairly simple: Every­thing that you take in or give out in cash needs to be entered into the cash book, chrono­log­i­cal­ly and com­plete­ly, and a profit cal­cu­la­tion needs to be added up at the end. Once you un­der­stand the process, you’ll quickly develop your own routine. But before you start getting familiar, you should first know exactly how a cash book is built.

To be able to neatly document your cash business, you need a con­sis­tent­ly struc­tured cash book. All entries need to contain the following in­for­ma­tion:

✓ Date of the trans­ac­tion
✓ Receipt number for clearly assigning the document to the trans­ac­tion
✓ Booking text (short de­scrip­tion of the trans­ac­tion)
✓ Receipt and currency of the cash revenue or ex­pen­di­ture
✓ Applied tax rate (sales tax)
✓ Current cash balance and debit balance

The current cash balance indicates the value of the actual cash count. This is de­ter­mined with the help of the cash drawer count protocol. This simply means recording your own balance. List the contents of your cash drawer according to the value of the in­di­vid­ual bills and coins, and then add the amounts. It’s important that in the end, the debit entries in your cash book cor­re­spond to the actual value of the cash count.

With the right cash book template, you can start right away with your cash book ac­count­ing. Simply enter the required in­for­ma­tion into the cor­re­spond­ing fields, according to the in­struc­tions. Be sure to balance your cash journal every day, and carefully enter all of the data along with the relevant documents. When creating a cash book entry, note the following points:

✓ The cash book may only contain cash trans­ac­tions.
✓ Enter the exact date as well as the opening balance of the previous day, month, or year.
✓ Cash income goes in the “Revenue” column, and cash out goes in “Ex­pen­di­ture”.
✓ Enter all cash trans­ac­tions chrono­log­i­cal­ly. Sub­se­quent mod­i­fi­ca­tions are not allowed.
✓ At the end, check whether the debit balance cor­re­sponds to the actual value of the cash count.
✓ Make sure that your cash balance never displays less than 0 dollars.

Thanks to pro­fes­sion­al software solutions, cash book ac­count­ing has become rel­a­tive­ly simple. Entry into an elec­tron­ic cash book means not only less effort but also more safety when it comes to the annual audit. Then, in the case that the IRS is unclear about something, you can quickly answer all of their questions without having to first go through your cash book. Above all, it’s important that your cash book meets all of the re­quire­ments of the tax office. It doesn’t so much matter whether you’re creating your cash book based on an Excel table or with the help of a pro­fes­sion­al finance software. Pro­fes­sion­al finance software allows you to keep your books in an efficient, time-saving, and accurate manner. It reliably stores all cash book entries and directly creates the cor­re­spond­ing documents. All of the documents required by the tax office are available for download. For example, if you operate an open checkout in your company, you can create a cash report with just a click and forward it directly to the tax office. At the same time, you always have an accurate overview of the financial situation of your company. In general, there are three different types of cash book ac­count­ing software:

Depending on how big your business is, whether it’s ac­count­able or not, and how much your business operates with cash trans­ac­tions, a special cash book software will make more or less sense for your business. For busi­ness­es or as­so­ci­a­tions that aren’t ac­count­able, cash books in the form of simple Excel spread­sheets are perfect, while large companies that do require book­keep­ing benefit sub­stan­tial­ly from the many features of cash book software.

Errors in the cash book indicate improper financial ac­count­ing and aren’t accepted by the IRS. If there are vi­o­la­tions that break the law or policy - i.e. due to missing in­for­ma­tion or sub­se­quent changes - the IRS can react in the following ways:

• The submitted documents are returned to you with an in­vi­ta­tion to correct the missing or incorrect in­for­ma­tion.
• The IRS shall make in­de­pen­dent ad­just­ments to penalties by means of partial or overall ap­praisals.

Depending on the range and severity of the vi­o­la­tions, you could face the following penalties or criminal pro­ceed­ings:

• With­draw­al of tax con­ces­sions (i.e. input tax)
• Un­fa­vor­able estimates of the tax basis
• Criminal pros­e­cu­tion for tax evasion

Please note the legal dis­claimer relating to this article.