What is a Cash Disbursements Journal? Definition Meaning Example

Moreover, the company may disburse cash to settle the liability of company. The company has to record cash out and decrease company liability. Cash disbursement is the process of cash payment from the company. When the company makes cash disbursement, they have to record cash outflow. The other side of the recording will depend on the nature of the transaction. Besides above payments, refunds of cash arising from the return of goods by customers are also recorded in cash disbursements journal.

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2. The first transaction, the company disbursed cash of $ 5,000 to purchase the assets which is the inventory.
3. Some examples of outflows are accounts payable, materials payable, and operating expenses, as well as all cash purchases and disbursements to a petty cash fund.

The cash disbursement journal contains a variety of columns to record the cash outflows of the business. The cash disbursements journal (also known as cash payments journal) is a special journal that is used by a business to manage all cash outflows. In other words, a cash disbursements journal is used to record any transaction that includes a credit to cash. All cash inflows are recorded in another journal known as cash receipts journal. Regularly, and in some cases on a daily basis, the line items in the cash disbursement journal are used to update a business’s subsidiary ledgers.

The ending balance in the cash disbursement journal should be compared to the related ending balance in the general ledger as part of the month-end closing process. If there is a disparity, it is likely to be caused by additional entries piling up in the journal that were not posted to the general ledger. It is also possible that a journal entry was made directly to the general ledger account that was not also entered in the journal. The total of all of the cash disbursements for the month would be recorded in the general ledger Cash account (Figure 7.27) as follows.

Understanding a cash disbursement journal

Now that most businesses use digital technology, the step of posting to journals is performed by the accounting software. The transactions themselves end up on transaction files rather than in paper journals, but companies still print or make available on the screen something that closely resembles the journals. If a company had many transactions, that meant many journal entries to be recorded in the general journal. We would enter these four types of transactions into their own journals, respectively, rather than in the general journal. Thus, in addition to the general journal, we also have the sales journal, cash receipts journal, purchases journal, and cash disbursements journals.

Once the journal is set up, businesses will enter each cash payment into the journal as it occurs. The journal can then be used to generate reports on spending and to track outgoing cash flow. The first transaction, the company disbursed cash of $ 5,000 to purchase the assets which is the inventory. The journal entry is debiting inventory of $ 5,000 and credit cash on hand $ 5,000. For each type of company, a cash disbursement journal will look very different. A retailer’s cash disbursement journal would include inventory, accounts receivables, accounts payables, salaries, and wages.

Written by True Tamplin, BSc, CEPF®

The information in the sales journal was taken from a copy of the sales invoice, which is the source document representing the sale. The sales invoice number is entered so the bookkeeper could look up the sales invoice and assist the customer. One benefit of using special journals is that one person can work with this journal while someone else works with a different special journal. Because you’re spending cash or cash equivalents, you will need to decrease the cash or cash equivalents account.

What are the benefits of using a cash payment or cash disbursement journal?

Because every credit sales transaction is recorded in the same way, recording all of those transactions in one place simplifies the accounting process. Note there is a single column for both the debit to Accounts Receivable and the credit to Sales, although we need to post to both Accounts Receivable and Sales at the end of each month. There is also a single column for the debit to Cost of Goods Sold and the credit to Merchandise Inventory, though again, we need to post to both of those. The cash disbursement journal will include a “discounts received” column if there are cash payments to suppliers that may enjoy a discount, perhaps for early payment. Thus, the invoice amount is recorded, along with the discount received and the cash payment. Only the discounts receive column total is posted to the general ledger.

Create and update a cash disbursement journal whenever you purchase something with cash or a cash equivalent. Purchasing inventory or office supplies, paying out dividends, or making business loan payments with cash or cash equivalents are examples of disbursements. The transaction will decrease the company cash and decrease the liability as well. The liability can be the accounts payable, tax payable, accrued, and other long-term debt.

For a refresher on perpetual versus periodic and related accounts such as freight-in, please refer to Merchandising Transactions. The cash disbursements journal is an essential tool in financial management. Business owners use it to see how much cash has been disbursed and where it went, and calculating the percentage that went to inventory versus what went to paying other bills. The cash disbursement journal includes the check numbers for all checks that were written during the previous month, which has led many accounting software packages to refer to the journal as a check register. These packages either have preset forms for the cash disbursements journal, or easily customizable forms to accommodate business needs.

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Management can use this journal to not only see how much cash has been disbursed, it can also track what cash is being used for. In other words, management can look through the cash disbursements journal and see what ratio of cash is being spend on inventory compared to the amount of cash being spent on paying other bills. When it comes to recording cash disbursements, be as specific as possible.

The Accounts Payable section is used to record the amount for which the supplier’s account is debited. This journal includes a date, check number (in most cases, a check is written instead of physical cash being paid or disbursement is made in any other form of immediate payment), and the name of the payment recipient. Next, you would specify what the payment was made for by recording the name of the account being debited and its reference (PR) number. The journal has a Date column, a Check Number column, a Payee column, and at least two credit columns, one for cash and one for purchase discounts.

A notation would be made in the reference column to indicate the payment had been posted to Baker Co.’s accounts receivable subsidiary ledger. After Baker Co.’s payment, the cash receipts journal would appear as in Figure 7.21. The reason is that some transactions do not fit in any special journal. However, most firms enter those transactions in the general journal, along with other transactions cash disbursement journal that do not fit the description of the specific types of transactions contained in the four special journals. The general journal is also necessary for adjusting entries (such as to recognize depreciation, prepaid rent, and supplies that we have consumed) and closing entries. In the purchases journal, using the perpetual method will require we debit Inventory instead of Purchases.