Chapter 4: Recording of Transactions – II (Cash Book & Special Purpose Books) — Study Notes

1. Subdivision of Journal (Special Purpose Books)

In large businesses, recording all transactions in a single Journal becomes practically impossible and cumbersome. Therefore, the Journal is subdivided into specialized books called Subsidiary Books or Books of Original Entry.

Advantages of Subsidiary Books: - Division of work. - Specialization and efficiency. - Easy detection of errors. - Quick availability of information.

2. Cash Book

The Cash Book is a special purpose book used to record all cash receipts and cash payments. Important Note: The Cash Book serves as both a Journal and a Ledger. When a Cash Book is maintained, a separate Cash Account is not opened in the Ledger.

Types of Cash Books:

1. Simple Cash Book (Single Column): Contains only one amount column on both sides for Cash.
2. Two-Column Cash Book: Contains two amount columns (Cash and Bank) on both sides.
3. Petty Cash Book: Used to record small, repetitive cash payments (e.g., postage, stationery, tea) managed by a petty cashier under the Imprest System.

Contra Entries (Two-Column Cash Book)

A contra entry is a transaction that affects both the Cash and Bank balances simultaneously, resulting in a debit on one side and a credit on the other side of the Cash Book. It is denoted by the letter 'C' in the L.F. column. Examples: - Cash deposited into the Bank. - Cash withdrawn from the Bank for office use.

3. Purchases Book (Purchases Journal)

Used to record only credit purchases of goods (items in which the business deals). - Cash purchases of goods are recorded in the Cash Book. - Credit purchases of assets (like machinery or furniture) are recorded in the Journal Proper.

4. Sales Book (Sales Journal)

Used to record only credit sales of goods. - Cash sales are recorded in the Cash Book. - Sale of old assets on credit is recorded in the Journal Proper.

5. Purchases Return Book (Return Outward Book)

Used to record goods returned by the business to the suppliers (creditors). A Debit Note is prepared and sent to the supplier indicating that their account has been debited.

6. Sales Return Book (Return Inward Book)

Used to record goods returned by the customers (debtors) to the business. A Credit Note is prepared and sent to the customer indicating that their account has been credited.

7. Journal Proper (General Journal)

This book records those transactions that cannot be recorded in any of the specific subsidiary books mentioned above. Examples of entries in Journal Proper: 1. Opening Entries: Bringing forward balances from the previous year. 2. Closing Entries: Transferring nominal accounts to Trading and P&L A/c. 3. Rectification Entries: Correcting accounting errors. 4. Transfer Entries: Transferring amounts from one account to another (e.g., Drawings to Capital). 5. Adjusting Entries: Outstanding expenses, accrued income, depreciation, etc. 6. Miscellaneous: Credit purchase/sale of fixed assets, goods withdrawn for personal use, goods lost by fire.