Record cash and bank transactions, including capital, drawings and expenses, using double entry

What this dot point is asking

SEAB wants you to record everyday cash and bank transactions with double entry, including capital introduced, drawings, expenses paid, and contra entries when cash is banked. The central insight is that cash (notes and coins) and bank (the account balance) are separate assets with separate accounts, and moving money between them is recorded twice, once in each, as a contra.

The answer

Cash and bank are separate accounts

• Cash account - the business's physical notes and coins (cash in hand or in the till).
• Bank account - the balance held in the business's bank account.

Both are assets, so both increase on the debit side and decrease on the credit side. A cheque always affects bank; physical money affects cash.

Capital and drawings

Capital introduced increases the owner's equity; drawings reduce it. Drawings has its own account; it is never recorded straight into the capital balance mid-period.

Paying expenses

When the business pays an expense, the expense increases (debit) and the asset paid from decreases (credit):

• Pay rent by cheque: Debit Rent, Credit Bank.
• Pay wages in cash: Debit Wages, Credit Cash.

Contra entries (cash banked or withdrawn)

When cash is paid into the bank, value moves from one asset to another:

• Cash banked: Credit Cash (down), Debit Bank (up).
• Cash withdrawn from bank for office use: Credit Bank (down), Debit Cash (up).

Because both halves of the entry are inside the cash book, each is marked with the letter C for contra.

Examples in context

Example 1. Topping up the till. A shop withdraws \500$ from the bank for change in the till. Bank (asset) falls, so it is credited; cash (asset) rises, so it is debited. Both halves are in the cash book, so each is a contra marked C. No expense or income arises - value has simply moved from one asset to another.

Example 2. Owner funds and then draws. An owner pays \10,000$into the business bank (Debit Bank, Credit Capital), then later takes$\$1\,000$ cash for personal use (Debit Drawings, Credit Cash). Capital rose equity by \10,000$and drawings cut it by$\$1\,000$; the two are kept in separate accounts so the owner's net stake is clear.

Try this

Q1. State the double entry for the owner paying \4,000$ into the business bank as capital. [2 marks]

• Cue. Debit Bank \4,000$; Credit Capital$\$4\,000$.

Q2. Give the double entry, with contra labels, for paying \1,500$ of cash into the bank. [2 marks]

• Cue. Credit Cash \1,500$(C); Debit Bank$\$1\,500$ (C).

Q3. State the double entry for the owner taking \250$ cash as drawings, and its effect on equity. [3 marks]

• Cue. Debit Drawings \250$; Credit Cash$\$250$; it reduces owner's equity by \250$.