Recording of Transactions - IIClass 11 Financial Accounting 1 Notes

Need for Special Purpose Books

As a business grows, the number of transactions can become very large. Recording every single transaction in one book, the Journal, can become slow and inefficient. To handle this, the Journal is subdivided into Special Journals, also known as daybooks or subsidiary books.

Think of it like sorting your mail. Instead of putting all letters, bills, and flyers into one big pile, you sort them into separate folders. In accounting, we do the same for repetitive transactions.

The main special purpose books are:

• Cash Book: For all cash and bank transactions.
• Purchases Book: For all credit purchases of goods.
• Sales Book: For all credit sales of goods.
• Purchases Return Book: For goods returned to suppliers.
• Sales Return Book: For goods returned by customers.
• Journal Proper: For any transaction that doesn't fit into the other books.

Using these books is more economical and allows for a division of labor, making the accounting process faster and more accurate.

Cash Book

The Cash Book is a special journal where all transactions involving cash receipts and cash payments are recorded. It's one of the most important books for any organization, big or small.

Single Column Cash Book

The simplest form of a cash book is the Single Column Cash Book. It has one amount column on each side: the debit (Dr.) side for receipts and the credit (Cr.) side for payments. It is used when a business handles all its transactions purely in cash.

• Receipts (Debit Side): The left side of the cash book records all cash coming into the business.
• Payments (Credit Side): The right side records all cash going out of the business.

Posting from the Single Column Cash Book When you post entries from the cash book to the ledger, the process is straightforward:

1. For every receipt recorded on the debit side of the Cash Book (e.g., "Cash received from Gurmeet"), you go to that person's account in the ledger (Gurmeet's Account) and credit it.
2. For every payment recorded on the credit side of the Cash Book (e.g., "Insurance paid"), you go to that expense account in the ledger (Insurance Account) and debit it.

Double Column Cash Book

Most businesses today have a large number of bank transactions. To record these efficiently, a Double Column Cash Book is used. It has two amount columns on each side: one for Cash and one for Bank.

• All cash receipts and payments are recorded in the 'Cash' column.
• All payments into the bank and payments made by cheque are recorded in the 'Bank' column.

Key Concepts for Double Column Cash Book

• Contra Entry: A transaction that involves both the cash and bank accounts is called a contra entry. Since both aspects are recorded within the cash book itself, they are not posted to the ledger. The letter 'C' is written in the L.F. (Ledger Folio) column to indicate a contra entry.

  • Cash deposited into the bank: Debit the Bank column and Credit the Cash column.
  • Cash withdrawn from the bank for office use: Debit the Cash column and Credit the Bank column.

• Bank Overdraft: Sometimes a business can withdraw more money than it has in its bank account, based on an arrangement with the bank. This results in a credit balance in the bank column, known as a bank overdraft.

• Cheques:

  • When a cheque is received and deposited on the same day, the amount is entered directly into the debit side of the 'Bank' column.
  • If a cheque is received but deposited on a later day, it is first treated as cash. You debit the 'Cash' column on the day you receive it. On the day you deposit it, you make a contra entry: debit the 'Bank' column and credit the 'Cash' column.
  • Dishonour of a cheque: If a cheque you deposited bounces (is returned unpaid), the entry is reversed. The amount is entered on the credit side of the 'Bank' column to show the money leaving your account.

Petty Cash Book

Businesses make many small, frequent payments for things like postage, stationery, or taxi fares. Recording each of these in the main cash book would make it very bulky and time-consuming for the main cashier.

To solve this, businesses often use a Petty Cash Book, managed by a petty cashier.

The Imprest System The Petty Cash Book usually operates on the Imprest System. Here’s how it works:

1. At the start of a period (e.g., a month), the head cashier gives the petty cashier a fixed amount of money, say ₹2,000. This is the imprest amount.
2. The petty cashier makes all small payments from this amount and records them in the Petty Cash Book, which has separate columns for different types of expenses (e.g., Postage, Conveyance, Stationery).
3. At the end of the period, the petty cashier totals the expenses. Let's say they spent ₹1,780.
4. The head cashier then reimburses the petty cashier for the exact amount spent (₹1,780). This brings the petty cash balance back up to the original imprest amount of ₹2,000 for the next period.

Advantages of a Petty Cash Book

• Saves Time: The chief cashier isn't burdened with minor payments.
• Better Control: It provides better control over small cash disbursements.
• Convenient Recording: It keeps the main cash book clean and focused on significant transactions.

Posting from the Petty Cash Book Instead of posting each small expense individually, the totals of each expense column (e.g., total postage, total conveyance) are posted to their respective ledger accounts at the end of the period. The total amount spent is credited to the Petty Cash Account in the ledger.

Balancing of Cash Book

The cash book is balanced just like a ledger account. The totals of the debit (receipts) side and credit (payments) side are calculated. The difference is written on the side with the lower total to make both sides equal, and this difference is called the 'Balance c/d' (carried down).

Purchases (Journal) Book

The Purchases Book is used to record all credit purchases of goods. "Goods" refers to the items that the business buys with the intention of reselling.

• Cash purchases of goods are recorded in the Cash Book.
• Credit purchases of assets (like furniture or machinery) are recorded in the Journal Proper.

The source documents for entries in this book are the invoices or bills received from suppliers. The entry is made for the net amount after deducting any trade discount.

Posting from the Purchases Book

1. Entries are posted daily to the credit side of each individual supplier's account in the ledger.
2. At the end of the month, the total of the Purchases Book is posted to the debit side of the Purchases Account in the ledger.

Purchases Return (Journal) Book

When a business returns goods to a supplier (perhaps because they are defective or not as per the order), the transaction is recorded in the Purchases Return Book. This is also known as the Return Outwards Book.

The source document for this is a Debit Note, which is prepared by the business and sent to the supplier to inform them that their account has been debited for the value of the returned goods.

Posting from the Purchases Return Book

1. Individual entries are posted daily to the debit side of the supplier's account.
2. The monthly total is posted to the credit side of the Purchases Return Account.

Sales (Journal) Book

The Sales Book is used to record all credit sales of goods.

• Cash sales are recorded in the Cash Book.
• Credit sales of assets are recorded in the Journal Proper.

The source document is the sales invoice that the business issues to its customers.

Posting from the Sales Book

1. Entries are posted daily to the debit side of each individual customer's account in the ledger.
2. The monthly total of the Sales Book is posted to the credit side of the Sales Account.

Sales Return (Journal) Book

When a customer returns goods they bought on credit, the transaction is recorded in the Sales Return Book, also known as the Return Inwards Book.

The source document is a Credit Note, which the business sends to the customer to inform them that their account has been credited for the value of the goods they returned.

Posting from the Sales Return Book

1. Individual entries are posted daily to the credit side of the customer's account.
2. The monthly total is posted to the debit side of the Sales Return Account.

Journal Proper

The Journal Proper (or Journal Residual) is the book used for recording transactions that cannot be entered in any of the other special purpose books. It acts as a catch-all for non-repetitive or unique transactions.

Types of entries recorded in the Journal Proper include:

• Opening Entries: To record the assets, liabilities, and capital at the beginning of a new accounting year.
• Adjustment Entries: Made at the end of the accounting period to account for things like outstanding expenses or prepaid insurance.
• Rectification Entries: To correct errors made in recording transactions.
• Transfer Entries: To transfer balances from one account to another, such as closing the Drawings account by transferring it to the Capital account.
• Other Entries:
  • Purchase or sale of assets on credit.
  • Goods withdrawn by the owner for personal use.
  • Goods given away as free samples.
  • Loss of goods due to fire or theft.

Balancing the Accounts

At the end of an accounting period, ledger accounts are balanced to determine their net position. Balancing an account involves these steps:

1. Total the debit side and the credit side of the account.
2. Find the difference between the two totals.
3. Write the difference on the side with the smaller total, so that both sides now have the same total. This difference is labeled 'Balance c/d' (carried down).
4. In the next accounting period, this amount is brought down to the opposite side of the account and labeled 'Balance b/d' (brought down).

If the debit side total is larger, the account has a debit balance. If the credit side total is larger, it has a credit balance. Accounts for expenses and revenues are not balanced this way; instead, they are closed by transferring their balances to the Trading and Profit and Loss Account.