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 HMRC 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 HMRC 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 HMRC 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 organised in chro­no­lo­gic­al order and according to the type of income or expense. The following table provides an overview of the doc­u­ment­a­tion re­com­men­ded by the HMRC:             

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.K. 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 HMRC just needs a profit cal­cu­la­tion in sim­pli­fied form of cash-basis ac­count­ing.

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 (VAT rate)
✓ Current cash balance and debit balance

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 pounds.

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 tax au­thor­it­ies are 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 HMRC. If there are vi­ol­a­tions that break the law or policy - i.e. due to missing in­form­a­tion or sub­sequent changes - the tax office can penalise you. The best way to avoid penalties is by filing payments on time and ensuring that they are accurate. If you file your tax return and later realise there is a mistake, it is your duty to notify the HMRC of the error. An overview of tax penalties is available on their website. Depending on the range and severity of the vi­ol­a­tions, you could face the following penalties or criminal pro­ceed­ings:

• Extra tax due
• If a penalty arises because of a lack of reas­on­able care, the penalty will be between 0% and 30% of the extra tax due
• If the error is de­lib­er­ate, the penalty will be between 20% and 70% of the extra tax due
• If the error is de­lib­er­ate and concealed, the penalty will be between 30% and 100% of the extra tax due
• Penalties based on foreign jur­is­dic­tion (in the case of offshore penalties)
• Criminal pro­sec­u­tion for tax evasion

It is important to keep in mind that penalties can be reduced by helping the HMRC correct the errors, so it is always in your best interest to notify the tax office if you catch a mistake in your tax records.

Please note the legal dis­claim­er relating to this article.