15.02.13 Subsidiary and Cash Books - Concept Notes

7/29/2019 15.02.13 Subsidiary and Cash Books - Concept Notes

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FINPREP - Concept Notes

Chapter Name Subsidiary and Cash Books

Chapter No. 2B

For Private Circulation to registered students. Page 1 of 14

FINPREP

A CPT preparatory program from

Concept Notes

Subject: Accounting


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Chapter No. 2B


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Chapter No. 2B


2.3. Subsidiary Books

2.3.1. Introduction: Subsidiary books are called "Books of Original Entry" or " Books of Prime Entry" Subsidiary books tackle the function of "recording". No journal entries are passed in the subsidiary books. Transactions are listed in

the books and the totals are posted into the respective accounts in the ledger.

2.3.2. Types of Subsidiary Books: The various types of subsidiary books are:


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Chapter No. 2B


2.3.2.1. Purchase Day Book: The purchase invoice is the source document for making an entry in the purchases

day book

Cash purchases are not recorded here. They are directly recorded in the cash book Credit purchases of capital assets/items are not recorded in the purchases day

book. They are recorded in journal proper

The amount due on credit purchases of goods net of trade discount is entered inthe purchases day book.

The total of the purchases day book is posted to the debit side of the "PurchasesAccount" in the general ledger.

Suppliers'/creditors' accounts are credited on an individual basis for the amountof credit purchases.

Let us look at an example. From the following details for Jan 2011, calculateamount to be posted to the Purchases account in Mohit's books:

Therefore, the amount to be debited to "Purchases" account is Rs.29, 300 (Rs.5,

000+Rs.4, 500+Rs.9, 000+Rs.10, 800)


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Chapter No. 2B


Now, let us assume that credit purchases of 100 dozens of "P" pens @Rs.120 perdozen and 200 dozens of "R" pens @ Rs.300 per dozen were made. Purchases are

subject to VAT @10%. Freight charged is Rs.150. How will we record this in the

purchases day book?

The format of the purchases day book is as under:

2.3.2.2. Sales Day Book: The sale invoice is the source document for making an entry in the sales day book. Cash sales are not recorded here. They are directly recorded in the cash book Credit sales of capital assets/items are not recorded in the sales day book. They

are recorded in journal proper

The amount due on credit sales of goods net of trade discount is entered in thesales day book.

The customers'/debtors' account will be debited on an individual basis with theamount of credit sales.

The total of the sales day book is posted to the credit side of the "Sales Account"in the general ledger.

Record the following transaction in the sales day book: Sold to M/s Ajanta Electricals, Delhi, 5 pieces of TV @Rs.16, 000 each less trade

discount @10%. All sales are subject to VAT @10%.


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Chapter No. 2B


The amount to be credited to Sales Account in the General Ledger is Rs.72, 000

and Rs.7, 200 VAT, will be credited to VAT Payable account

2.3.2.3. Purchases Returns Day Book: Purchase returns day book is also called Returns Outward Day Book When goods earlier purchased on credit are returned to the supplier, they are

recorded in this book.

Return of goods earlier purchased for cash are not entered in this book Return of goods to the supplier for which cash is received are not entered in this

book

Fixed assets returned to suppliers are not entered in this book The source document for making an entry in the purchase returns day book is

"Debit Note"

What is a debit note? A debit note is a document that is sent by the buyer ofgoods to the seller of goods. For example, A is the buyer of chocolates from B. A

returned some chocolates to B. While returning them, A will debit B's account in

his books. To inform this debit, A will send a debit note to B.

Suppliers'/creditors' accounts are debited on an individual basis for the amount ofpurchase returns

The total of the purchase returns day book will be credited to the "PurchaseReturns" account in the General Ledger.

From the following information calculate (1) Total purchases posted to A'spurchases account and (2) Total purchase returns posted to A's Purchase Returns

Account


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Chapter No. 2B


2.3.2.4. Sales Returns Day Book: Sales returns day book is also called Returns Inward Day Book When goods earlier sold on credit are returned by the customer, they are

recorded in this book.

Sometimes, cash is refunded to the customers when goods are returned. Suchtransactions are not entered in this book.

Return of goods that were earlier sold for cash are not recorded in this book. Fixed assets returned by buyers are not entered in this book. The source document for making an entry in the sales returns day book is "Credit

Note"

What is a credit note? It is a document that is sent by the seller to the buyer whengoods sold are returned. For example, A is the buyer of chocolates from B. B

received back some chocolates from A. When he gets back the chocolates he will

credit A's account in his books. To inform him of this credit, he will issue a credit

note to A.


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Chapter No. 2B


The customers'/debtors' account will be credited on an individual basis with theamount of sales returns.

The total of the sales returns day book will be debited to the "Sales Returns"account in the General Ledger.

2.3.2.5. Journal Proper: Transactions which cannot be recorded in any of the specific subsidiary books, will

be recorded in journal proper

For example, when capital is introduced into the business in kind; credit purchaseof assets; rectification entries; transfer of balances in nominal accounts to the

trading and P&L account at year end.

Adjustment entries are also recorded in journal proper. That is, entries that recorddepreciation, provision for doubtful debts, prepaid expenses, outstanding

expenses

2.3.3. Trade Discount: Trade discount is computed on List Price The price after deducting the trade discount is called Invoice Price Trade discount is not accounted for in books. Directly the invoice price is

accounted for.

2.3.4.

Cash Discount: Cash discount is offered by the seller is payment is received before due date. Cash discount is accounted for in the books. It is an expense for the seller and an

income for the buyer.

For example, goods worth Rs.5,000 sold by L @10% trade discount and 1% cashdiscount on payment within 10 days. L received the payment within 7 days.


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Chapter No. 2B


2.4. Cash Books

2.4.1. Introduction to Cash Books: Cash book is a type of subsidiary book but is considered in accounts as a principal

book.

Cash book is a subsidiary book because all cash transactions are recorded directlyin the cash book.

Cash book is also a principal book because it serves as an account. It gives us thebalance of cash in hand and at bank at the end of the period. These balances are

entered in the Trial Balance.

The cash book records all cash receipts and cash payments.

The cash book does not record credit purchases, credit sales, and outstandingexpenses.

The main objective of preparing a cash book is to ascertain the cash and bankbalances of the business.

2.4.2. Kinds of Cash Book2.4.2.1. Simple Cash Book:

A simple cash book has cash column on both sides. The debit side (left handside) of the account is for recording receipts of cash. The credit side (righthand side) of the account is for recording payments of cash.

When this type of cash book is maintained, a separate account for banktransactions is maintained in the General Ledger.

The closing balance in a simple cash book will always be a favorable balancei.e. it will appear on the credit side of the account at the end of the period.

The opening balance in a simple cash book will be recorded on the debit sideas "To balance b/d".

2.4.2.2. Double Column Cash Book: A double column cash book has two columns on either side of the account.

The two columns could be cash and bank on either side or 'cash' and

'discount allowed' on the debit side and 'cash' and 'discount received' on the

credit side. The format is as follows:


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Chapter No. 2B


In case of a double column cash book with cash and discount columns, thebank transactions will be recorded in a separate bank account in the general

ledger.

In case of a double column cash book with cash and discount columns, theopening balance will always be a debit balance.

The discount columns are not balanced. They are only totaled and areentered in the discount accounts in the ledger.

The total of the discount column on the debit side of the cash book is thetotal of the discount allowed to customers and the total of the discount

column on the credit side shows the total of the discount received from

suppliers.

In case of double column cash book with cash and bank columns, thediscount transactions are recorded in the discount accounts in the general

ledger.

The opening balance of bank can either be a debit balance or a creditbalance but cannot be both. Cash will always have debit balance.

If the business has more than one bank account, it can have separatecolumns for each bank account.


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Chapter No. 2B


2.4.2.3. Three Column Cash Book A three column cash book as separate columns for discount, cash and bank

on either side. The format is as under:

Cash deposited into bank or cash withdrawn from bank for business purposesare recorded in the three column cash book by means of "Contra entries".

These are inter column entries. If we look at the above table there are twotransactions for which contra entries have been passed.

* This contra entry is for cash deposited into bank. The accounting entry is

Bank Account Debit

To cash account

Hence, the bank column on the debit side of the cash book is entered and the

cash column on the credit side of the cash book is entered.

# This contra entry is for cash withdrawn from bank for business use. The

accounting entry is

Cash account Debit

To bank account

Hence, the cash column on the debit side is entered and the bank column on

the credit side is entered.


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Chapter No. 2B


2.4.3. Posting in the Cash Book: From the following particulars calculate the closing balance of cash

To solve this problem, we have to prepare a cash book as follows:

From the following transactions recorded in a double column cash book havingcash and discount columns, calculate (i) Closing balance on 31st Jan and (ii) the

amount of discount allowed


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We have to prepare a two column cash book to find out the solution:

Calculate the balance in the bank account at the end of the month from thefollowing transactions


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The solution is obtained by opening a bank account as follows:

2.4.4. Petty Cash Book: Petty cash book is a subsidiary book. It is used to keep record of petty cash

expenses like postage, minor repairs, auto charges, photocopying charges etc.

The balance in the petty cash book is an asset and is included in the BS on theassets side as part of "Cash Balances".

2.4.5. Imprest System of Petty Cash: Usually the imprest system is followed for petty cash. The petty cashier is

entrusted with a certain sum of cash, say Rs.500 at the beginning of a week. After

that week, the petty cashier submits a statement of expenses by him, say, Rs.430

which will be reimbursed by the main cashier to him so that the imprest is

restored. The petty cashier will now have Rs.500 (Rs.70 cash in hand +

reimbursement of Rs.430) at the beginning of the next week to meet the expenses

during the next week.

The amount to be reimbursed by the main cashier to the petty cashier to make upthe imprest will be equal to the total expenses incurred by the petty cashier.

15.02.13 Subsidiary and Cash Books - Concept Notes

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