Recording of Transactions - II — Study Notes

1. Introduction

In a large business it is neither convenient nor efficient to record every transaction in a single journal. To handle the huge volume of transactions, the journal is divided into a number of subsidiary books, each dealing with transactions of a particular type. This division is known as the subdivision of the journal. The main subsidiary books are the cash book, purchases book, sales book, purchases return book, sales return book, bills receivable book, bills payable book and journal proper. This chapter explains these subsidiary books in detail, with special emphasis on the various types of cash books and the petty cash book.

The specialisation of books saves time, divides the work among different clerks and provides a scientific system of recording. Each subsidiary book records only one class of transactions, and its total is posted to the ledger at the end of the period. This reduces the number of postings considerably and makes the books of account more informative and easier to verify.

2. Subdivision of Journal

The journal is divided into subsidiary books on the basis of the nature of transactions. The most common division is:

3. The Cash Book

The cash book records all receipts and payments of cash and is both a journal and a ledger. It is a journal because all cash transactions are first recorded in it, and it is a ledger because the cash account is not separately maintained in the ledger. There are three types of cash books:

1. Single column cash book: records only cash transactions. It has columns for date, particulars, ledger folio and the amount of receipts on the debit side and payments on the credit side. The balance is normally a debit balance showing cash in hand.

2. Double column or two column cash book: has an additional bank column on both sides. The cash column and the bank column are maintained side by side. Transactions with the bank such as deposits and withdrawals are recorded in the bank column.

3. Three column cash book: contains an additional discount column on both sides. The discount column records discounts allowed (on the debit side) and discounts received (on the credit side). The discount columns are totalled and transferred to the discount account; the cash and bank columns are balanced separately.

Contra Entries

Transactions that affect both the cash and bank columns are called contra entries. For example, cash deposited into the bank and cash withdrawn from the bank. In a contra entry, the transaction is written on both sides of the cash book, and the letter "C" is written in the ledger folio column to indicate that no posting is required.

4. Petty Cash Book

The petty cash book records small payments such as postage, stationery, conveyance and telegrams. These small expenses are paid through a petty cashier to whom the main cashier hands over a fixed sum known as the imprest or float. At the end of the period, the petty cashier submits the accounts and is reimbursed for the amount spent so that the float is restored.

The imprest system works as follows:

$$Amount \ spent = Opening \ float - Cash \ in \ hand$$

$$Reimbursement = Amount \ spent$$

The petty cash book has a separate column for each class of small expense, so that the total of each expense can be posted to the ledger at once. This saves time and provides a regular check on petty expenses.

5. Purchases Book and Sales Book

The purchases book (or purchases journal) records only credit purchases of goods. Cash purchases are recorded in the cash book. The source documents for this book are invoices received from the suppliers. The format contains columns for date, particulars (name of the supplier), invoice number, ledger folio and amount.

The sales book (or sales journal) records only credit sales of goods. Cash sales are recorded in the cash book. The source documents are copies of invoices issued to the customers. At the end of the month the totals of these books are posted to the purchases account and the sales account respectively.

6. Purchases Return Book and Sales Return Book

The purchases return book records goods returned to the suppliers. The buyer sends a debit note to the supplier, and the seller in turn issues a credit note. The total of the purchases return book is posted to the credit of the purchases return account.

The sales return book records goods returned by the customers. The seller sends a credit note to the customer. The total of this book is posted to the debit of the sales return account.

A debit note is prepared when goods are returned to the supplier, while a credit note is prepared when goods are received back from the customer.

7. Bills of Exchange Books

A bill of exchange is a written instrument containing an unconditional order to pay a certain sum of money at a specified date. The bills receivable book records the bills drawn by the business on its debtors. The bills payable book records the bills accepted by the business. These books reduce the work of the ledger by recording all bills in one place. The total of the bills receivable book is debited to the bills receivable account, and the total of the bills payable book is credited to the bills payable account.

8. Journal Proper

The journal proper records all those transactions which cannot be entered in any other subsidiary book. Examples include:

1. Opening entries (at the beginning of the year).
2. Closing entries (at the end of the year).
3. Adjustment entries for outstanding, prepaid and accrued items.
4. Rectification entries for errors.
5. Transfer entries between accounts.
6. Credit purchase or sale of assets other than goods, such as furniture.

9. Advantages of Subsidiary Books

1. The work of recording is divided among different books and hence among different clerks.
2. Recording becomes quick and accurate because similar transactions are recorded together.
3. Posting to the ledger is reduced because only the totals of the books are posted.
4. Each book provides complete information about one class of transactions.
5. A proper system of internal check and division of responsibility is possible.
6. Frauds and errors are easier to detect because the books can be compared.

Quick Revision Tables

Table 1: Subsidiary Books and Their Use

Table 2: Types of Cash Book

Table 3: Notes and Entries

Mind Map

Important Diagrams (SVG)

Diagram 1: Subsidiary Books of a Business

Diagram 2: Working of the Imprest System of Petty Cash

Common Mistakes

1. Cash purchases and cash sales are wrongly entered in the purchases and sales books; these books record only credit transactions.
2. Credit purchase of an asset such as machinery is entered in the purchases book, whereas it should be recorded in the journal proper because the purchases book records only goods.
3. The discount column of the cash book is balanced like the cash column; the discount columns are totalled and posted to the discount account, not balanced.
4. Contra entries are posted to the ledger, but they need no posting because both sides are within the same cash book.
5. The petty cashier's reimbursement is recorded as income, while it is simply the restoration of the float and not a gain.
6. Debit note and credit note are interchanged; a debit note is sent by the buyer while a credit note is sent by the seller.
7. The three column cash book is drawn with the discount column between the particulars and the cash column on both sides, and students often place the discount column wrongly.

Exam Tips

1. Write the format of the three column cash book clearly with Discount, Cash and Bank columns on both sides.
2. Show a solved contra entry example such as "cash deposited into bank: Bank Dr., To Cash" marked with the letter C.
3. Under the imprest system, state that reimbursement = amount spent and the float is restored to the original figure.
4. Give the exact document names: debit note for goods returned by the buyer and credit note for goods returned by the seller.
5. List the eight subsidiary books and give one example transaction for each.
6. In the petty cash book question, prepare columns for each expense and show the totals posted to the ledger.
7. Mention that the purchases book and sales book record only the credit transactions of goods, not of other assets.

Conclusion

The subdivision of the journal into subsidiary books makes the recording of transactions systematic, quick and economical in large businesses. The cash book serves as both a journal and a ledger for cash and bank transactions, and the petty cash book controls small payments through the imprest system. Purchases, sales, returns and bills books specialise the recording of their respective transactions, while the journal proper handles all residuary entries. This scientific arrangement reduces the work of posting, divides responsibility and strengthens internal control, making the books more reliable.