Cash Disbursement Journal

A cash disbursement journal refers to a financial record maintained by an organization's accountants containing the details of all expenditures paid by the firm. The entries are promptly recorded before being transferred to the general ledger and used to prepare other financial statements.

Also known as a cash payments journal, it consists of the payee's information, the mode of payment, the amount paid, the transaction number, the accounts involved, and other remarks. Such a journal's primary purpose is to ensure everything is evident in the future and to maintain proper records.

• A cash disbursement journal records all the cash payments made by the firm in chronological order.
• The entries are made instantaneously, as and when the payment is made. It follows the cash basis of accounting and not the accrual basis.
• Though there is no standard format for the journal, it can be created to make it convenient for the accountant who utilizes it for further purposes. But a double-entry system is mainly preferred.

A cash disbursement journal documents the payments made by a business. Entries are made at the time of each transaction, adhering to a chronological sequence. Consequently, it maintains an organized record of cash outflows, enabling the accounts department to monitor these financial transactions effectively.

Businesses have to deal with hundreds of transactions daily: some debit and some credit. Also, payments are made in different modes – cash, check, internet banking, card payments, etc. Thus, a journal that makes instant records helps manage the complexity of cash outflows.

This first-hand record will be regularly reconciled to verify if the accounts tally and that there are no mistakes or misappropriations in the books. The reconciliation can be done monthly, weekly, or even daily, depending on the volume of the transactions. Once this is done, the entries are posted to the general ledger. It facilitates the easy preparation of financial statements such as income statements, cash flow statements, profit and loss statements, balance sheets, etc.

Apart from this, cash payment journals also play an essential role in auditing. Maintaining a primary record and supporting documents like receipts, bank statements, etc., will help the auditor understand the transactions. Also, it will help quickly detect employee fraud or misappropriation of money.

The structure of the journal, frequency of reconciliation, etc., depends on the industry the company belongs to. It can include the payments made to suppliers, interest payments to the bank, purchase of assets, distribution of salaries to employees, etc.

Here is what a cash disbursement journal entry looks like:

These are some of the basic information that is usually included in a cash payments journal. But this can vary depending on the firm or accountant. There is no standard format, as the journal's objective is to make further reconciliation and accounting more accessible for the individual. So whatever works for them is acceptable. Here, the accounts payable account is debited, and the cash account is credited.

Let us study a few examples to understand the concept better.

Example #1

Suppose TechTech Solutions executed a $10,000 payment to XYZ Electronics via an Electronic Funds Transfer (EFT) for purchasing laptops to onboard new employees. This transaction was logged with the identifier "EFT-2023-001" in the cash payments journal.

This financial record captures essential details, including the date, payee, transaction description, amount, mode of payment, and transaction number. The entry serves multiple purposes, such as maintaining an accurate cash outflow record, aiding financial tracking, and contributing to preparing statements like the balance sheet.

The hypothetical scenario showcases how a cash payments journal is crucial in transparent financial reporting and strategic decision-making for TechTech Solutions.

Example #2

Suppose Brian serves as the accountant for a small company. He diligently manages a cash payments journal to document cash outflows promptly. At the end of each month, Brian conducts a thorough reconciliation of the journal's entries.

Let us understand through this sample of cash disbursement journal for the information given below:

23 February 2023 – Paid $2000 to ABC to purchase a computer via card.

19 January 2023 – Purchased a freezer from PQR and paid $5000 via check no. 123.

04 February 2023 – Paid $500 to XYZ as interest via Internet banking.

Here is a comparative study of the pros and cons of a cash payments journal.

When combined, the cash disbursement and cash receipts journals provide a comprehensive view of the business's cash flow, facilitating the preparation of essential financial statements. Let's understand the differences between them.

• A cash receipts journal is a financial record that documents cash received from various transactions. Conversely, the cash payments journal is the counterpart to the receipts journal, which records cash outflows.
• The cash account is credited in a cash payments journal entry, while the accounts payable account is debited. On the other hand, in a cash receipts journal entry, the cash account is debited, and the accounts receivable account is credited.

Frequently Asked Questions (FAQs)

This article has been a guide to What Is Cash Disbursement Journal. Here, we explain the concept along with its examples, format, advantages, and disadvantages. You may also find some useful articles here -

• Disbursement
• General Journal
• Cash Receipt