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.
The usual examples of cash outflows in a business are given below:
- Payment of cash for cash purchases.
- Payment of cash for previous credit purchases i.,e. payment to accounts payable or creditors
- Payment of cash for various expenses like rent, advertisement, carriage, wages and salaries etc.
- Payment of cash for the purchase of a tangible or intangible asset.
- Cash refunds for goods returned by customers.
- Payment of cash for donations, charities and Zakat etc.
Format of cash disbursements/payments journal
In cash disbursements journal, the cash payments are usually categorized as payments to accounts payable and payments for other purposes. The format of a cash disbursements journal and explanation of all the columns provided there in is given below:
Explanation of the columns used in cash disbursements journal
- Date column: The date at which a payment is made to someone is entered in date column.
- Check number column: In large businesses, the payments are mostly made by checks. If the payment is made by a check, this column is used to enter the check number belonging to the payment.
- Payee column: The payee name (the person or entity to whom the payment is being made) is entered in this column.
- Account debited column: Every cash transaction results in a credit to cash account and a debit to some other account. Account debited column is used to enter the title of the account to be debited in the accounts payable subsidiary ledger or general ledger as a result of the payment of cash.
- Posting reference (PR) column: All accounts in subsidiary and general ledger are properly numbered. Posting reference (abbreviated as PR) column is used to write the number of the account mentioned in account debited column.
- Cash column: The amount of cash paid is entered in cash column. This amount must be net of any purchases discount received from suppliers of inventory etc.
- Inventory column: Inventory column is used to enter the purchases discount allowed by suppliers of inventory. As the discount taken form suppliers reduces our inventory cost, the inventory account in the general ledger is credited by the total of this column at the end of the period.
- Other accounts column: The cash paid for any purpose other than credit purchases is recorded in this column. Examples include payment for inventory purchased on cash, payment for purchase of assets and payment of salaries, carriage and other expenses etc.
- Accounts payable column: The amount by which a supplier’s account is debited is written in this column.
Posting cash disbursements journal to ledger accounts
The cash disbursements journal is posted to ledger accounts as follows:
- The individual amounts in the accounts payable column are posted daily (or immediately, if a computer software is used) to accounts payable subsidiary ledger and the individual amounts in other accounts column are posted daily (or immediately, if a computer software is used) to relevant accounts in the general ledger.
- The totals of cash, inventory and accounts payable columns are posted at the end of the period (usually one month) to the relevant accounts in the general ledger. The total of other accounts column is not posted to any account.
Consider the following example for a better understanding of how entries in a cash disbursements journal are made and how the posting to accounts payable subsidiary ledger and general ledger is performed.