What is a Cash Receipt?
A cash receipt is a printed acknowledgment of the amount of cash received during a transaction involving the transfer of cash or cash equivalent. The original copy of this receipt is given to the customer, while the other copy is kept by the seller for accounting purposes.
In other words, it is generated when a vendor accepts cash or cash equivalentCash Or Cash EquivalentCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more from an external source, such as a customer, an investor, or a bank. Usually, the cash is acknowledged when money is taken from a customer to adjust the outstanding accounts receivable balanceOutstanding Accounts Receivable BalanceAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more that generates when the credit sale transaction happened. It can be seen as a collection of money that increases the cash and cash equivalent balance in a company’s balance sheet.
Format of Cash Receipt
Inherently, the following information features in this receipt:
- The date on which the transaction happened
- The unique number assigned to the document for identification
- The name of the customer
- The amount of cash received
- The method of payment, i.e., by cash, cheque, etc.;
- The signature of the vendor
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For eg:
Source: Cash Receipt (wallstreetmojo.com)
Examples of Cash Receipt Journal
Below we have taken some examples of cash receipt journalsCash Receipt JournalsThe cash receipts journal is that type of accounting journal which is only used to record all receipts of cash during an accounting period and works on the golden rule of accounting – debit what comes in and credits what goes out.read more.
Example #1
Let us take an example of a cash sale transaction.
Let us assume that a lemonade stand has been set up in the neighborhood during the summer to cater to customers during the weekends. It is a plain vanilla business model where the vendor sells a glass of lemonade for $5 with the expectation that customers pay the money immediately.
The lemonade vendor does not sell any glass of lemonade on credit; instead, an immediate cash receipt is recognized with the sale (debit the cash account, credit the sales account). In this example, the vendor sells each glass of lemonade against a $5 cash payment from the customer, and then the vendor issues the cash receipt to the customer.
Example #2
Now let us look at an example associated with a credit saleCredit SaleCredit Sales is a transaction type in which the customers/buyers are allowed to pay up for the bought item later on instead of paying at the exact time of purchase. It gives them the required time to collect money & make the payment. read more that results in receivable.
Let us assume that there is a big distributor of televisions who sells a variety of different brands of TV. The distributor has been in the business for a long time and has a strong business network. The distributor purchases the televisions from numerous television manufacturers, and due to the long-standing relationship, the distributor offers favorable credit termsCredit TermsCredit Terms are the payment terms and conditions established by the lending party in exchange for the credit benefit. Examples include credit extended by suppliers to buyers of products with terms such as 3/15, net 60, which essentially implies that although the amount is due in 60 days, the customer can avail a 3% discount if they pay within 15 days.read more that allow him to order televisions as and when required. The credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more provided is for 30 days. In this example, a television manufacturer would record a sale to the distributor after shipping the televisions to him; however, this is not when the manufacturer would record the receipt.
Instead, the manufacturer would record the sale transaction in the income statement and recognize a receivable balance in the balance sheet, which is due in 30 days (debit the receivable account, credit the sales account). The receipt would be finally issued only when the actual payment realizes in the form of cash or cheque. In that case, the outstanding receivable balance reduces, and the cash balance would increases (debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more the cash account, credit the receivable account).
Relevance and Uses
It is not only proof of ownership but also used for various other purposes. For example, there are instances where the retailer would ask a customer to produce the cash receipt so that the exchange or return of purchased items can be approved. In the case of product warranty also, the vendor may ask for the receipt issued at the time of product sale.
Another primary but essential benefit is the completeness of the accounting records that support the existence of recording transactions. One of the significant reasons for an audit is the lack of documents (such as cash receipts) to support the presence of the transaction. As such, having such receipts and proper filing will avoid the risk of auditRisk Of AuditAudit Risk refers to the probability of erroneous financial statements going unnoticed by the auditors, i.e., they issue an unqualified opinion to even the materially misstated financial statements. read more issues. Without these receipts, the accounting record is incomplete, which can be risky in the long run.
Also, a receipt asked during purchases or payments can be validly used to claim as an expense and then utilized as a deduction to sales in case the purchaser is a sales tax registered. The benefit of input tax (sales taxSales TaxThe government levies sales tax on the consumption of various goods and services as the percentage added to the product and services from which the government earns revenue and does the company's welfare. In the United States, 38 different states have different taxes, from Alaska (1.76%) to Tennessee (9.45%).read more on expenses) exceeds the output tax (sales tax on sales) then the vendor can claim for refund on the excess or difference.
Another importance of cash receipts is that at certain times, it can also be useful for tax purposes. It can be used to legally minimize or decrease tax payable. Since it can be used as expenses that are deducted to sales, it will reduce the payment due to lower net income.
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