The Effect of a Cash Receipt in a General Ledger
A cash receipt is the amount of money that your business receives from a cash sale, advance payment or debtor’s remittance. Customers may either pay cash at the point of sale or deposit the cash to your bank account. You need to post cash receipts as debit amounts to the cash account and credit the corresponding destination accounts in the general ledger. A general ledger is a summary of all the accounts of the business entity. The general ledger accounts can be classified into broad categories comprising assets, liabilities, owners’ equity, expenses and revenues.
Cash paid at the point of sale represents an increase in the value of assets and revenue. You should post this amount to the general ledger as a debit increase in the cash account and as a credit increase in the revenue account. The revenue account records a credit increase because revenue has been realized at the point of sale. Moreover, the rules of double entry require assets to debited with increases and revenues credited with increases, and vice versa.
Sometimes, your customers may pay cash in advance for goods or services that you will deliver at a later date. Such advance payment is revenue that you have received but not earned. The rule of the thumb, as provided for by the accrual basis of accounting, is that you recognize revenue when it is earned rather than when it is received. Therefore, a cash receipt for advance payment is a liability that increases the debit amount of the cash account in the general ledger. It also increases the corresponding revenue advance account by a similar credit amount.
The cash you receive from debtors affects the cash account and accounts receivable in the general ledger. You have to debit one of the accounts with a cash increase and credit the corresponding account with a decrease, despite both accounts being asset accounts. In this case, you should increase the cash account with a debit amount of the cash receipt and reduce the accounts receivable by a similar credit amount. This is because the accounts receivable account had already recognized the revenue at the time it was earned.
The effects of a cash receipt on a general ledger are entirely premised on double entry accounting procedures. Each debit amount that you post to the cash account must be followed by a corresponding credit entry for the corresponding liability, expense, revenue or capital account. It is for this reason that you should always journalize the debit and credit entries of your small business transactions prior to posting them in the general ledger.