Bachelor of Education(Arts)

WEEK 6: BOOKS OF ORIGINAL ENTRY

JOURNAL

The word "journal" has been derived from the French word "jour". Jour means day. So journal means daily. It is also known Day Book because it contains the account of every day's transactions. Journal is a book that is maintained on a daily basis for recording all the financial entries of the day. Passing the entries is called journal entry. Journal entries are passed according to rules of debit and credit of double entry system. Journal is also known as day book as it is recording all transactions on a chronological order.

JOURNALIZING

The act of recording transactions in journal is called journalizing.

1	2	3	4	5
Date	Particulars.	L.F	Amount
			Debit	Credit
xx-xx-xx	-------A/C Dr. To-------A/C (-----Narration)	xx xx	xxxx	xxx

 

Column 1: It represents the date of transaction.

Column 2:      Line 1 (...) represents the name of account to be debited.

Line 2 (...) represents the name of account to be credited.

Line 3 (...) for narration of transaction

Column 3: Ledger Folio (L.F.) represents the page number of ledger account on which we post these entries.

Column 4: Amount(s) to be debited.

Column 5: Amount(s) to be credited.

Notes

• If there are multiple transactions in a day, the total amount of all the transaction through a single journal entry may pass with total amount.
• If debit or credit entry is the same and the corresponding entry is different, we may post a combined entry for the same. It is called ‘compound entry’ regardless of how many debit or credit entries are contained in compound journal entry.

For example,

1	2	3	4	5
Date	Particulars.	L.F	Amount
			Debit	Credit
xx-xx-xx	-------A/C Dr. -------A/C Dr. To-------A/C (-----Narration)	xx xx xx	xx      xx	xxx

 

 

Analysis and Treatment of Transactions

The following accounting entries are commonly used in every business and they come under the category of routine journal entries.

S/No.		Transaction Nature			Analysis and Treatment
1.		Capital			Capital account is personal account. Whenever the owner introduces capital in the form of cash, goods or assets, the entry will be as here under: Cash/Goods/Asset A/c     Dr.         xx     To Capital A/c                                   xx (Cash/goods/assets introduced as capital)
2.		Drawing Account			Drawing account is also a capital account. Whenever the owner of the business withdraws money for his personal use, it is called drawing. The balance of Drawing account is transferred to the capital account at the end of the accounting year. Drawing A/c              Dr.          xx       To Cash A/c                                  xx (Withdrawal of cash for personal use)
Notes: 1. Introduction of capital as well as withdrawal of capital may occur any time during the accounting year. 2. In addition to cash, there may be other expenses of the owner/proprietor which may pay directly on his behalf debiting his account. For example, payment of his insurance, taxes, rent, electricity or personal phone bills. 3. Business account and personal account of proprietor are different as owner of the business and business, both are separate entities.
3.	Trade Discount			Trade discount is allowed by seller to buyer directly on their sales invoice. Buyer in this case are usually whole-sellers., traders. or manufactures., who further sell this material to their customers. or use the material in their manufacturing process. Rate of discount may vary from customer to customer.  Treatment - No need to pass any journal entry in this case. The sale is booked on the net of trade discount. Similarly, if we get trade discount from our supplier, we book our purchase at the net of trade discount.
4.	Cash Discount			Cash discount is also allowed by seller to his buyer; still it does not come in the category of trade discount. Cash discount is a sort of scheme to inspire their debtors. to release their due payment in time. For example, a seller may allow 5% cash discount, if he gets payment within a week against the time limit of 45 days. Treatment - If A allowed a discount of 5% to B, then In the books of A: Cash A/c                        Dr.          xx Discount A/c                  Dr.          xx         To B A/c                                            xxx (5% discount allowed to B on payment of Ksh…..) In the books of B: A A/c                               Dr.       xxxx           To Discount A/c                             xx            To B A/c                                        xx (Payment of Ksh. xx made to A and getting a discount of 5%) Note-In the above case, discount is a loss to A and income to B
5.	Bad Debts			Part of credit sale which is unrecovered from debtors. due to some reason like insolvency, dishonesty, etc. are called bad debts of the company. Bad debts are loss to the company. Treatment: (1)   To book bad debts Bad Debts A/c                  Dr.              xx                To Debtor A/c                                   xx (Being loss on account of bad debts) (2)   To recover bad debts Cash A/c                     Dr.                  xx            To bad debts recovery A/c                 xx (Recovery of bad debts)
6.	Expenses on purchase of Goods			There are a few types of expenses incurred on the purchases of goods like inward freight, unloading charges, etc. Treatment: Inward freight/unloading charges A/c    Dr.   xx             To Cash A/c                                                   xx (Freight charges paid on sale of goods)
7.	Expenses on Sale of Goods			Expenses are also incurred while selling products to customers. such as freight outward, insurance charges, etc Treatment: Freight outward/Insurance Expenses A/c    Dr.      xx              To Cash A/c                                                        xx                                         (Freight charges paid on sale of goods)
8.	Expenses on Purchase of Assets			Sometimes we need to pay expenses on the purchase of fixed assets like transportation charges, installation charges, etc. Treatment: Expenses incurred on purchases of fixed asset are added in the value of fixed assets and could not be treated like expenses on purchases of goods: Fixed Asset A/c                                       Dr.        xx              To Cash A/c                                                      xx (Expenses incurred on purchase of asset)
9.			Payment of Expenses	Treatment: Expenses A/c                          Dr.         xx         To Cash A/c                                            xx
10.			Outstanding Expenses	Sometimes expenses remain outstanding at the end of the financial year, but due to the accrual basis of accounting, we need to book those expenses which are due for payment and to be paid in the next accounting year. For example, the salary due on the last day of the accounting year to be paid in the next year. Treatment: Salary A/c                                                Dr.       xx       To salary outstanding A/c                                           xx (Salary for the month of-------due)
11.			Prepaid Expenses	Sometimes we pay expenses in advance such as insurance paid three months before the closing of the accounting year. Since insurance is usually paid for the whole year, in this case, the insurance for nine months is treated as prepaid insurance. Similarly, rent for the fiKsh.t month of next accounting year may be paid in advance. Treatment: Prepaid Expenses A/c                           Dr.        xx             To Expenses /Cash A/c                                     xx (Prepaid expenses for month paid) Note: Expenses account is replaced with the respective head of expenses account
12.			Income Received	Treatment: Cash/Debtor A/c                                      Dr.     xx         To Income A/c                                                      xx (Income received in cash) Note: Income account will be replaced with the respective head of Income account.
13.			Banking Transactions	(1)   Cheque deposited in bank Cheque received from party is deposited in bank, Cheque direct deposit by party in our bank account, payment made by party through RTGS, or cash directly deposited by party in our bank account. The entry remains same in all the above cases. Bank A/c                                               Dr.       xx          To Debtor A/c                                                    xx (2)   Payment made to party through cheque Cheque issued to party or directly deposited in his bank account, or payment made through either by RTGS, or cash directly deposited in his bank account. Entry remains same in all the above cases except in the case of cash deposited in his bank account. Debtor A/c                                         Dr.            xx             To Bank A/c                                                       xx (Payment made through…..) If we deposit cash in his bank account, entry will be as follows: Debtor A/c                                       Dr.              xx              To Cash A/c                                                     xx (Payment made through…..) (3) Cash withdrawn for office Expenses Cash A/c                                         Dr.            xx        To Bank A/c                                                        xx                                                                                                                                                                (Cash withdrawn from bank for office use) 4. Cash deposited with Bank Cash A/c                                  Dr.             xx        To Cash A/c                                                  xx                                                                                                                                                                          (Cash withdrawn from bank for office use) Note: The above entries No. 3 & 4 are called ‘contra’ entries.     (5) Bank charge debited by bank Sometimes banks debit from our account against some charges for service provided by them. For example, cheque book issuing charges, demand draft issuing charges, Bank interest, etc. Bank Commission/Charges A/c         Dr.          xx               To bank A/c                                                    xx (Bank charges/commission/interest debited by bank)
14.			Interest on Capital	Interest on capital, introduced by sole proprietor or partners. of the firm: This entry is passed on the last date of the accounting year as follows: Interest on capital A/c                       Dr.          xx             To Capital A/c                                                  xx (Interest @..... on capital provide)
15.			Payment on behalf of others.	Some expenses may be on behalf of our debtors. or creditors.. Debtors./Creditors. A/c                      Dr.            xx                 To Cash/Expenses A/c                                xx (Expenses debited to party, paid on his behalf)
16.			Advance received against supply of goods/services	Sometimes the customers. pay an advance amount for the supply of goods/services, which need to be adjusted later: Bank/Cash A/c                                       Dr.         xx          To Advance from Customers. A/c                         xx (Advance received from Mr. X)
17.			Advance paid against supply of goods/services	As above, we may also pay an advance amount to our supplier against supply of goods/services: Advance against supply of goods A/c     Dr.     xx             To Cash/Bank A/c                                           xx (Advance paid against supply of goods/services)

 

Typical uses of the journal

1 The purchase and sale of fixed assets on credit.

2 Writing off bad debts.

3 The correction of errors in the ledger accounts.

4 Opening entries. These are the entries needed to open a new set of books.

 5 Adjustments to any of the entries in the ledger

LEDGER:

When all the transactions of a given period have been journalized, the next thing is to classify them according to the accounts affected. All similar transactions must be brought together. For instance, all transactions relating to cash must be put in one place. Similarly, all transactions with a customer or a supplier must be assembled at one place. The book in which this classification is done is called the ledger. The ledger is a book which contains a condensed and classified record of all the pecuniary transactions of the business generally brought, transferred or posted from the books of original entry. Ledger is called the king of all books of accounts because all entries from the books of original entry must be posted to the various accounts in the ledger. It should be noted that journal contains a chronological record while ledger contains a classified record of all transactions.

 

POSTING

The act of separately transferring each entry from journal to the respective account in the ledger is called posting.

Ruling of Account in Ledger Account

FORMAT

In the books of M/s. ABC Company
Ledger account of M/s XYZ LTD.
Dr.				Cr.
Date	Particulars	LF	Amount	Date	Particulars	JF	Amount
xx/xx/20xx	To Balance b/d		Xxx	xx/xx/20xx	By Balance b/d		xxx
xx/xx/20xx	To Name of the debit account		Xxx	xx/xx/20xx	By Name of Credit account		xxx
xx/xx/20xx	To Balance c/d		Xxx	xx/xx/20xx	By Balance c/d		xxx
	Total		xxxx		Total		xxxx

 

FEATURES OF LEDGER:

1. It has two identical sides - left hand side and right hand side. The left hand side is called debit side and right hand side is called credit side.

2. Debit aspects of all the concerned transactions is recorded on the debit side, while credit aspect on credit side according to date.

3. The difference in the total of the two sides represents balance. The excess of debit side over credit side indicates debit balance, while excess of credit side over debit side indicates credit balance. If the total of the two sides are equal there will be no balance.

4. Usually balance is drawn at the year end and recorded on the deficit side to make the two sides equal. This balance is known as closing balance.

5. The closing balance of the current year will be the opening balance of the next year.

ADVANTAGES OF LEDGER:

1. It is the ledger through which successful application of double entry system of bookkeeping is ensured. Each and every transaction is divided into two parts - receiver and giver - and recorded in the two concerned accounts in ledger.

2. Transactions relating to different persons or concerns are recorded in the account of each person or concern separately. As a result, complete and reliable information is available in respect of each and every account.

3. Different types of income and expenses are recorded in different accounts separately. So, it is possible to ascertain the amount of income and expenditure under each head and the overall result at the yearend through trading and profit and loss account.

4. Separate account is opened for each item of assets and liabilities. It is, therefore, possible to ascertain the value of different assets and liabilities and the true financial position at the year-end through balance sheet.

5. Transactions being recorded primarily in journal and thereafter entered in ledger, the possibility of errors and defalcations are remote.

6. Valuable information and statistics are collected from ledger and supplied to the management to enable them to run the concern efficiently.

DIFFERENCE BETWEEN LEDGER AND JOURNAL:

The journal and the ledger are the most important books of the double entry system of accounting. Following are the points of difference between these two types of books:

1. The journal is the book of first entry (original entry); the ledger is the book of second entry. It is the goal where all the entries in the journal find their ultimate destination.

2. The journal is the book of chronological record; the ledger is the book for the analytical record.

3. The journal, as a book of source entry, ordinarily has greater weight as legal evidence than the ledger.

4. The unit of classification of data within the journal is the transaction; the unit of classification of data within the ledger is the account.

5. The process of recording in the journal is called journalizing; the process of recording in the ledger is called posting.

BALANCING OF ACCOUNTS (CLOSING OF ACCOUNTS)

After all transactions have been posted to the various accounts in the ledger, the next step is to balance the ledger accounts. The difference between the two sides of an account is known as balance. In the words of Kohler “Balance is the difference between the total debits and total credits of an account or total of an account containing only debits or credits”. If debit side of an account is more than the credit side, the balance is called debit balance. If credit side is more than the debit side, the balance is called ‘credit balance’. The following steps should be taken in balancing an account:

1. Take totals of both the sides roughly.

2. Find out the difference between total debit and total credit.

3.If the total debit is more, put the difference (i.e. closing debit balance) on the credit side amount column by writing the words ‘By Balance c/d (c/d indicates‘ carried down’)in particulars column. If the total credit is more, put the difference (i.e. closing credit balance) on the debit side amount column by writing the words ‘To Balance c/d ’in particulars column

4. After putting the difference in the appropriate side of an account, add both the sides of the account (alternatively, put the larger total on both sides).Draw a line above and below the total.

5. Bring down the debit balance on the debit side by writing the words “To Balance/d (b/d indicates' brought down') in the particulars column. Similarly bring down the credit balance on the credit side by writing the words ‘By Balance b/d’ in the particulars column

Thus ‘c/d indicates closing balance and ‘b/d’ indicates opening balance. Closing debit balance e is first written on the credit side (i.e. on closing date).On the next or opening date it becomes an opening balance and it appears on the debit side i.e., opening debit balance is shown on the debit side. Similarly closing credit balance is first written on the debit side (i.e. On closing date).On the next or opening date it becomes an opening credit balance and it appears on the credit side i.e. opening credit balance is shown on the credit side. Posting the Opening Entry: Separate accounts should be opened for each opening asset, opening liability and capital. All opening assets show debit balances while, opening liabilities and capital (unless there is deficiency) show credit balances .In each account of opening assets opening debit balance should be written with the words “To Balance b/d”. Similarly in each account of opening liabilities and also in capital account, opening credit balance should be written with the words ‘By Balance b /d’. If capital a/c shows a debit balance (overdrawn), such opening balance will appear on the debit side with the words 'To Balance b/d'.

BALANCING OF DIFFERENT TYPES OF ACCOUNTS

Balancing and closing of personal accounts:

Some personal accounts are closed (i.e., nil balance).Others may show either a debit balance or a credit balance. If a personal account shows a debit balance, it indicates the amount owing from him (i.e., he is a debtor).On the contrary, if a personal account shows a credit balance, it indicates the amount owing to him (i.e., he is a creditor) Capital is a personal account. It generally shows a credit balance. If there is a deficiency in capital it will show a debit balance. Similarly drawings account is a personal account. It always shows a debit balance. Bank account may show either a debit balance (i.e., deposit) or accredit balance (i.e., overdraft) Balancing and Closing of Real Accounts:

Real accounts are the accounts of assets.

Asset account will not be closed if they are existing in the business. These show debit balances.

Balancing of Nominal Accounts:

Nominal accounts are not balanced. At the end of every accounting period they are closed by transferring to Trading A/c or Profit and Loss A/c.

Accounts of all direct expenses are closed by transferring the total to Trading A/c by writing the words ‘By Trading A/c’ on the credit side of the accounts of direct expenses. Sales account is closed by transferring the total to Trading A/c by writing the words ‘To Trading A/c' on the debit side of sales account. All accounts of indirect expenses are closed by transferring the total to Profit and Loss A/c by writing the words ‘By Profit and Loss A/c' on the credit side of indirect expense accounts. All accounts of incomes are closed by transferring the total to Profit and Loss A/c by writing the words ‘To Profit and Loss A/c’ on the debit side of income accounts.

SUBSIDIARY BOOKS

 

INTRODUCTION

 

It has already been explained that Journal is the book of Prime entry. It means all business transactions are to be first recorded in journal. But for big organizations, it will not be that much easy. Subsidiary books are nothing but a ledger, which can be maintained by big organization concerns. It is also known as sub- division of journal. Subsidiary books includes that cash book, purchase book, Purchase returns book, sales book, sales return book, Bills Receivable book, Bills Payable book and journal proper. In every trading concern, the transactions, however numerous they may be, can be grouped into small number of classes. They consist chiefly of receipts and payments of cash, purchases and sales of goods, returns of goods purchased and sold bills receivable and bills payable. The journal is divided in such a way that a separate book is used for each class of transactions.

 

The important subsidiary books used in modern business world are the following:

1. Cash Book: It is used to record all cash receipts and payments.

2. Purchases Book: It is used to record all credit purchases.

3. Sales Book: It is used to record all credit sales

4. Purchases returns book: It is used to record all goods returned by us to our suppliers.

5. Sales Returns Book: It is used to record all goods returned to us by our customers.

6. Bills Receivable Book: It is used to record all accepted bills received by us.

7. Bills payable Book: It is used to record all bills accepted by us to our creditors.

8. Journal Proper: It is used for recording those transactions for which there is no separate book. All these subsidiary books are called books of original entry, as transactions in their original form are entered therein.

 

 

ADVANTAGES OF SUBSIDIARY BOOKS

The advantages of having several books of original entry in place of one journal may be stated to as follows:

1. It may be impossible to record each transaction into the ledger as it occurs. Subsidiary books record the details of the transactions and therefore, help the ledger to become brief.

2. As similar transactions are recorded together in the same book, future reference to any of them becomes easy.

3. The chance of fraudulent alteration in an account is reduced as the book of original entry keeps records of the transactions in a chronological order.

4. The work of posting can be entrusted to several clerks at the same time and thus the ledger of a large business can be written up much more quickly.

5. As each journal contains separately transactions of similar nature any desired analysis can be made conveniently.

 

 

1. Cash Book:

 

Cash book is a book of original entry in which transactions relating only to cash receipts and payments are recorded in detail. When cash is received it is entered on the debit or left hand side. Similarly, when cash is paid out the same is recorded on the credit or right hand side of the cash book.

The cash book, though it serves the purpose of a cash book of original entry viz., cash journal really it represents the cash account of the ledger separately bound for the sake of convenience. It is more a ledger than a journal. It is journal as cash transactions are chronologically recorded in it. It is a ledger as it contains a classified record of all cash transactions. The balances of the cash book are recorded in the trial balance and the Balance Sheet.

 

Vouchers:

For Every entry made in the cash book there must be a proper voucher. Vouchers are documents containing evidence of payment and receipts. When money is received generally a printed receipt is issued to the payer but counterfoil or the carbon copy of it is preserved by the cashier. The copy receipts are called debit vouchers, and they support the entries appearing on the debit side of the cash book. Similarly when payment is made a receipt is obtained from the payee. These receipts are known as credit vouchers. All the debit and credit vouchers are consecutively numbered. For ready reference the numbers of the vouchers are noted against the respective entries. A column is provided on either side of the cash book for this purpose.

 

 

Balancing Cash Book:

The cash book is balanced at the end of a given period by inserting the excess of the debit on the credit side as "by balance carried down" to make both sides agree. The balance is then shown on the debit side by "To balance brought down" to start the next period. As one cannot pay more than what he actually receives, the cash book recording cash only can never show a credit balance.

 

Format:

The following is the simple format of a cash book:

 

Date	Particulars	L.F	Amount Ksh.	Date	Particulars	L.F	Amount Ksh.

 

 

Types of cash book

a)      Single Column Cash Book:

Single column cash book records only cash receipts and payments. It has only one money column on each of the debit and credit sides of the cash book. All the cash receipts are entered on the debit side and the cash payments on the credit side. While writing a single column cash book the following points should be kept in mind:

1. The pages of the cash book are vertically divided into two equal parts. The left hand side is for recording receipts and the right hand side is for recording payments.

2. Being the cash book with the balance brought forward from the preceding period or with

what we start. It appears at the top of the left side as "To Balance" or "To Capital" in case of a new business.

3. Record the transactions in order of date.

4. If any amount of cash is received on an account, the name of that account is entered in the particulars column by the word "To" on the left hand side of the cash book.

5. If any amount is paid on account, the name of the account is written in the particulars column by the word "By" on the right hand side of the cash book.

6. It should be balanced at the end of a given period.

 Posting:

The balance at the beginning of the period is not posted but other entries appearing on the debit side of the cash book are posted to the credit of the respective accounts in the ledger, and the entries appearing on the credit side of the cash book are posted to the debit of the proper accounts in the ledger.

Format of the Single Column Cash Book:

Following is the format of the single column cash book:

Date	Particulars	L.F	Amount Ksh.	Date	Particulars	L.F	Amount Ksh.

b)     Two Column Cash Book/Double Column Cash Book:

 

 A double column cash book or two column cash book is one which consists of two separate columns on the debit side as well as credit side for recording cash and discount. In many concerns it is customary for the trader to allow or to receive small allowance off or against the dues. These allowances are made for prompt settlement of accounts. In certain business almost all receipts or payments are accompanied by such discounts and in order to avoid unnecessary postings separate columns in the cash book are introduced to record the discounts received or allowed. These discount columns are memorandum columns only. They do not form the discount account. The discount column on the debit side of the cash book will record discounts allowed and that on the credit side discounts received.

 

Posting:

 

The cash columns will be posted in the same way as single column cash book. But as regards discount column, each item of discount allowed (Dr. Side of the cash book) will be posted to the credit of the respective personal accounts. Similarly each item of discount received will be posted to the debit of the respective personal account. Total of the discount column on the debit side of the cash book will be posted to the debit side of the discount account in the ledger and the total of discount column on the credit side of the cash book on the credit side of the discount account. The discount columns are not balanced like cash column of the tow column cash book.

Format of the Double Column Cash Book:

 

Date	Particulars	V.N	L.F	Discount	Cash	Date	Particulars	V.N	L.F	Discount	Cash

 

(c). Three Column Cash Book:

A three column cash book or treble column cash book is one in which there are three columns on each side - debit and credit side. One is used to record cash transactions, the second is used to record bank transactions and third is used to record discount received and paid. When a trader keeps a bank account it becomes necessary to record the amounts deposited into bank and withdrawals from it. For this purpose one additional column is added on each side of the cash book. One of the main advantages of a three column cash book is that it is very helpful to businessmen, since it reveals the cash and bank deposits at a glance

Writing a Three column Cash Book:

Opening Balance:

Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the cash book and bank columns. If the opening balance is credit balance (overdraft) then it will be put in the credit side of the cash book in the bank column.

Cheque or Cash Received:

If a cheque is received from any person and is paid into the bank on the same date it will appear on the debit side of the cash book as "To a Person". The amount will be shown in the bank column. If the cheque received is not deposited into the bank on the same date then the amount will appear in the cash column. Cash received will be recorded in the usual manner in the cash column.

Payment by Cheque or Cash:

When we make payment by cheque, this will appear on the credit side "By a person" and the amount in the bank column. If the payment is made in cash it will be recorded in usual manner in the cash column.

Contra Entries:

If an amount is entered on the debit side of the cash book, and the exact amount is again entered on the credit side of the same account, it is called "contra entry". Similarly an amount entered on the credit side of an account also may have a contra entry on the debit side of the same account.

Contra entries are passed when:

1.      Cash is deposited into bank by office: It is payment from cash and receipt in bank. Therefore, enter on credit side, cash column "By Bank" and on debit side bank column "To Cash". The reason for making two entries is to comply with the principle of double entry which in such transactions is completed and therefore, no posting of these items is necessary. Such entries are marked in the cash book with the letter "C" in the folio column.

2.       Cheque is drawn for office use: It is payment by bank and receipt in cash. Therefore, enter on the debit side, cash column "To Bank" and on credit side, bank column "By Cash".

Bank Charges and Bank Interest Allowed:

Bank charges appear on the credit side, bank column "Bank Charges." Bank interest allowed appears on the debit side, bank column "To Interest".

The method of posting three column cash book into the ledger is as follows:

 

1. The opening balance of cash in hand and cash at bank are not posted.

2. Contra Entries marked with "C" are not posted.

3. All other items on the debit side will be posted to the credit of respective accounts in the ledger and all other items on the credit side will be posted to the debit of the respective accounts.

4. As regards discounts the total of the discount allowed will be posted to the debit of the discount account in the ledger and total of the discount received to the credit side of the discount account.

 

 Format of the Three Column Cash Book:

                    

Date	Particulars	L.F	Discount	Cash	Bank	Date	Particulars	L.F	Discount	Cash	Bank

 

(d). Petty Cash Book:

 In almost all businesses, it is found necessary to keep small sums of ready money with the cashier or petty cashier for the purpose of meeting small expenses such as postage, telegrams, stationary and office sundries etc. The sum of money so kept in hand generally termed as petty cash and book in which the petty cash expenditures are recorded is termed as petty cash book.

In large business houses, the cashier has to handle every day a large number of receipts and payments and if in addition to this he is further saddled with petty cash payments, his position becomes embarrassing. Besides, it is most common to find with large commercial establishments that all receipts and payments are made through bank. Since expenses like postage, telegrams, traveling etc, cannot be made by means of cheques, the maintenance of a small cash balance to meet these petty payments becomes all the more necessary.

A petty cash book is generally maintained on a columnar basis - a separate column being allotted for each type of expenditure. There is only one money column on the debit side and all sum received from time to time by the petty cashier from the chief cashier are entered in it. The credit side consists of several analysis columns. Every payment made by the petty cashier is entered on this side twice - Firstly it is recorded in the total column and then to the appropriate column to which the expense is concerned. The total of the "total column" will naturally agree with the total of all subsidiary columns. The difference between the total of the debit items and that of the "total column" on the credit side at any time will represent the balance of the petty cash in hand and this should tally with the petty cashier's actual holding of cash.

The posting from the petty cash book to the respective accounts in the ledger are made directly in total at the end of every month or any other fixed period.

 

The Imprest System:

The more scientific method of maintaining petty cash so for introduced into practice is the imprest system. Under this system a fixed sum of money is given to the petty cashier to cover the petty expenses for the month. At the end of a month the petty cashier submits his statement of petty expenses to the chief cashier. The chief cashier on the receipt of such statement refunds to the petty cashier the exact amount spent by him during the month, thus making the imprest for the next month the same as it was at the beginning of the current month.

 

It is to be noted that the amount of cash in the hands of the petty cashier is a part of the cash balance; therefore it should be included in the cash balance when the latter is shown in the trial balance and the balance sheet. It should also be kept in mind that petty cash book is not like the cash book. It is a branch of cash book.

Advantages of Imprest System:

The main advantages of imprest system of petty cash are as follows:

 

1. As the petty cashier has to produce to the chief cashier the petty cash book for inspection, it acts as a healthy check on the petty cashier.

2. As the petty cashier has to account for his expenses, before he can draw further sums, the petty cash book remains up to date.

3. As the petty cashier cannot draw as and when he likes, it prevents unnecessary accumulation of cash in his hand thus the chances of defalcation of cash are minimized.

Format of the Petty Cash Book

Amount Received	Date	Particulars	V.N	Total	Postage	Printing& Stationery	Carriage	Travelling Expenses	Misc.

 

2.         Purchases Day Book:

Purchases book or purchases day book is a book of original entry maintained to record credit purchases. You must note that cash purchases will not be entered in purchases day book because entries in respect of cash purchases must have been entered in the cash book. At the end of each month, the purchases book is totaled. The total shows the total amount of goods purchased on credit. Purchases book is written up daily from the invoices received. The invoices are consecutively numbered. The invoice of each number is noted in the purchases book.

Rule

It is not ruled like the ordinary journal. The first column in this book is for date. In the second column, the name of the supplier or the seller, quantity of each article bought, description of the article, rate etc., are recorded. Sometimes a separate column to record the details of the transactions is added in the purchases day book. The third column is for invoice number. The fourth column is for ledger folio. The last column gives the total amount to the supplier.

 Posting:                          

The total of the purchases book is posted to the debit of purchases account. Names of the suppliers appear in the purchases book. These parties have supplied the goods. They are, therefore, credited with the amount appearing against their respective names. The double entry will thus be completed.

 

Format:

The following is the format of purchases day book:

 

Date	Particulars	Inv.No.	L.F	Amount

 

1.      Purchases Returns Book:

Purchases returns book is a book in which the goods returned to suppliers are recorded. It is also called returns outward book or purchases returns day book. Goods may be returned because they are of the wrong kind or not up to sample or because they are damaged etc. The ruling of this book is absolutely the same as of purchases day book. The book and entries are made therein just the same as those made in the purchases day book.

Posting:

The total of the purchases returns or returns outwards book is credited to returns outward account or purchases return account (being the goods sent out). Individual suppliers to whom goods are returned are debited (because they receive the goods).

Debit Note:

 When the goods are returned to the suppliers, intimation is sent to them through what is known as a debit note. These debit notes serve as vouchers for these entries. A debit note is a statement sent by a businessman to another person, showing the amount debited to the account of the later. Debit notes are usually serially numbered and are prepared in the same form as that of the invoice.

 

Format of Purchases Returns Book:          

Date	Particulars	D/N	L.F	Amount

 

2.      Sales Day Book:

A sales book is also known as sales day book is a book of original entry in which are recorded the details of credit sales made by a businessman. Total of sales book shows the total credit sales of goods during the period concerned. Usually the sales book is totaled every month. The sales day book is written up daily from the copies of invoices sent out.

Posting:

The total of the sales book is credited to sales account. Customers whose names appear in the sales book are debited with the amount appearing against their names. Double entry is thus completed.

Format of Sales Day Book:

                    

Date	Particulars	Inv.No.	L.F	Amount

 

3.      Sales Returns Book:

Sales returns book is also called returns inwards book. It is used for recording goods returned to us by our customers. The ruling of this book is exactly as for sales day book.

 Posting:

The returns inwards book or sales returns book is debited to returns inwards account or sales returns account. The customers who have returned the goods are credited with the amount shown against their names.

 Credit Note:

Customers who return goods should be sent a credit note. It is a statement sent by a business to another person showing the amount credited to the account of the later. Credit notes are serially numbered and are similar in form to the invoices. These are usually printed in red ink. Credit notes issued to customers are vouchers for the entries appearing in the sales returns book.

           

Format of Sales Returns Book:

 

Date	Particulars	C/N	L.F	Amount

 

 

4.      Bills Receivable Book:

Bills receivable book is used to record the bills received from debtors. When a bill is received, details of it are recorded in the bills receivable book.

Posting:

In the ledger the account of the person from whom each bill is received is credited with the amount of that bill and the periodical total of the book is posted to the debit of bills receivable account. The bills receivable book is ruled according to the requirements of a particular account.

 

 

 

 Format of Bills Receivable Book:

 

Bills Receivable Book

                     

Date	From whom Received	Term	Due date	L.F	Amount

 

 

5.      Bills Payable Book:

Bills payable book is used to record bill accepted by us. When a bill drawn by our creditor is accepted particulars of the same are recorded in this book.

Posting:

In the ledger, the account of each person whose bill has been accepted is debited with the amount of the bill. The monthly total of the bills accepted is credited to the bills payable account ledger.

Format of Bills Payable Book:  

Bills Payable Book

 

Date	From whom Given	Term	Due date	L.F	Amount

6.      Journal Proper:

Journal proper is book of original entry (simple journal) in which miscellaneous credit transactions which do not fit in any other books is recorded. It is also called miscellaneous journal. The form and procedure for maintaining this journal is the same that of simple journal.

The use of journal proper is confined to record the following transactions:

1. Opening entries

2. Closing entries

3. Transfer entries

4. Adjustment entries

5. Rectification entries

6. Entries for which there is no special journal

7. Entries for rare transactions.

 Transaction for which there is No Special Journal:

When a trader cannot record the entries in the above mentioned sub-journals, the same are entered in the journal proper.

The common transactions which cannot be recorded in any of the book of original entry are:  Distribution of goods as free sample.

 Distribution of goods as charity.

 Goods destroyed by fire.

 Goods stolen away by employees.

 Exchange of one asset for another asset etc.