Cash Disbursements Journal

What is a Cash Disbursements Journal?

The cash disbursements journal, also called the cash payments journal, is a journal used record and track all the cash payments or disbursements by a company. In other words, all cash outflows are recorded in the cash disbursements journal.

The cash disbursement journal is a detailed record of the cash payments made by a business. The journal itemizes when check and other types of payments are made, as well as the amounts paid, the names of the recipients, and the accounts charged. This journal is a good source document for tracking down the specifics regarding individual payments. The information in the cash disbursement journal is periodically summarized and forwarded to the general ledger.

What Does Cash Disbursements Journal Mean?

A cash disbursement journal is a method of recording all cash flows for your business.

Many entrepreneurs start out their small business spending and receiving cash payments. Unlike credit card payments, there is not an automatic system recording each transaction. It’s up to you to keep track of those business expenses.

All cash purchases or cash equivalents get documented in your cash payment journal:

  • Merchandise inventory
  • Shipping costs
  • Equipment costs
  • Payments to vendors
  • Business loan payments

Each transaction gets submitted as a disbursements journal entry before being posted to the general ledger or accounts payable ledger.

By keeping a journal for your business expenses, not only can you see how much cash is being disbursed, but you can track what cash is being used for–allowing you to better strategize your business spending.

Some examples of cash payments that are recorded in a cash disbursements journal are the following:

  • Payment made to creditors (e.g. accounts payable, loans payable, etc.)
  • Cash purchases of merchandise or materials
  • Acquisition of capital assets which is paid in cash
  • Payment of cash dividends
  • Cash payment for expenses such as rent, utility costs, salaries and wages, etc.
  • Refunds for cash sales that were returned
  • Cash payment for interest and other finance charges

Establishing a Cash Disbursements Journal

Columns should be organized to include each of the following transactions:

  • Date
  • Check number
  • Explanation
  • Cash credit
  • Other credit
  • Account debited
  • Accounts payable debit
  • Other debit

The payment columns may also be more specific to the nature of the business. For example, some businesses may only need one column to record cash amounts, whereas others may rely on additional columns for accounts payable or discounts received on cash purchases. In any case, there should always be an “other” column to record amounts which do not fit into any of the main categories.

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:

cash disbursements journal
Cash disbursements journal

Explanation of the columns used in cash disbursements journal

  1. Date column: The date at which a payment is made to someone is entered in date column.
  2. 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.
  3. Payee column: The payee name (the person or entity to whom the payment is being made) is entered in this column.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Accounts payable column: The amount by which a supplier’s account is debited is written in this column.

Posting entries from cash disbursements journal to ledger account

The cash disbursements journal is posted to ledger accounts as follows:

  1. 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.
  2. 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.

Why Prepare and Maintain a Cash Disbursements Journal?

To reiterate what is written above, a business may want to maintain a cash disbursements journal if it has a large volume of cash outflow transactions.

Even so, there is no strict guideline as to who is allowed to prepare and maintain a cash disbursements journal.

You may prepare one for your business even its volume of cash outflow transactions is low.

With a cash disbursements journal, you can segregate all of a business’s cash outflow transactions.

This includes actual cash payments as well as check payments.

Since all cash outflow transactions are recorded in one place, it makes them easier to manage.

It can also be a good source of information regarding individual payment transactions.

A cash disbursements journal is summarized at the end of the period, usually a month.

The total cash outflow is then posted to the general ledger, along with the total cash inflow (which can be derived from the cash receipts journal).

A summary of total cash outflows and inflows may also be prepared to check the net cash flow of a certain period.

Ideally, total cash inflow should be greater than total cash outflow but that isn’t always the case in reality. This is especially true for businesses that are greatly affected by seasonal factors.

Management can use the cash disbursements journal to assess the business’s cash outflow.

It can also be used to examine whether there are expenses that are unusual or unauthorized. This way, it’s easier to track mistakes or errors.