Recording of Transactions - II

2.1 Core concepts

As a business grows, journalising every single transaction in a single book becomes cumbersome and error-prone. For quick, efficient and accurate recording, the Journal is sub-divided into special journals, each meant for transactions of a similar nature; these are called daybooks or subsidiary books (NCERT §4 introduction, p. 99). The six books are the Cash Book, the Purchases (Journal) Book, the Purchases Return (Return Outwards) Book, the Sales (Journal) Book, the Sales Return (Return Inwards) Book, and the Journal Proper for residual transactions (NCERT §4 intro, p. 99). Their benefits are division of labour, quick reference and efficient analysis.

The Cash Book (§4.1, p. 100) is the most important subsidiary book because cash is at the centre of every transaction. It records all transactions relating to cash receipts and cash payments. NCERT highlights a critical dual nature: the cash book serves the purpose of both the journal and the (cash) ledger account — it is also called a book of original entry. When a cash book is maintained, cash transactions are not entered in the journal at all, and no separate cash account or bank account is opened in the ledger (NCERT §4.1, p. 100). This is the foundation for the famous CUET MCQ on why no separate cash ledger is opened.

The Single Column Cash Book (§4.1.1, p. 100) has only one amount column on each side and records cash transactions in chronological order — receipts on the debit (left) side, payments on the credit (right) side. The posting rule is the mirror of journal posting: accounts that appear on the debit side of the cash book are credited in their respective ledgers (because cash was received from them), and accounts that appear on the credit side of the cash book are debited in their respective ledgers (because cash was paid to them) (NCERT §4.1.1, p. 101).

The Double Column Cash Book (§4.1.2, p. 103-108) adds a second amount column on each side — one for cash and one for bank — and is used when bank transactions are frequent. Because the bank column serves the purpose of the bank account, no separate bank ledger is opened. Three peculiarities of this format must be remembered. First, a contra entry: when cash is deposited into the bank or withdrawn from the bank, both aspects of the entry appear within the cash book itself; such entries are marked with the letter "C" in the L.F. column and are not posted to the ledger again (NCERT §4.1.2, p. 105). Second, the bank column can show a credit balance — this is called Overdraft and happens when withdrawals exceed deposits; the cash column, in contrast, can never show a credit balance because actual cash payments cannot exceed cash receipts plus opening balance (NCERT §4.1.2, p. 106; §4.1.4, p. 114). Third, cheques received have a careful treatment: if deposited in the bank on the same day, they are entered in the bank column (Dr.); if deposited on a later day, they are entered as cash (Dr.) on the date of receipt and then a contra entry is made on the date of deposit. A dishonoured cheque is entered on the credit side, bank column, restoring the customer's account (NCERT §4.1.2, p. 105-106).

The Petty Cash Book (§4.1.3, p. 109) is maintained by a petty cashier to record the large number of small, repetitive payments — postage, cartage, conveyance, telegrams, refreshments and so on — that would otherwise clutter the main cash book. The Imprest System is the bedrock practice: a definite sum (the imprest amount) is given to the petty cashier at the start of a period; when he has spent a substantial portion, the head cashier reimburses him exactly the amount spent, so the imprest is restored at the start of the next period (NCERT §4.1.3, p. 109). The petty cash book itself has analytical payment columns — Postage, Telephone & Telegram, Conveyance, Stationery, Miscellaneous — plus a Remarks column. Periodic totals are posted by debiting each expense head and crediting Petty Cash A/c (NCERT §4.1.3, p. 109-114). Worked example: imprest ₹2,000 on May 1, spent ₹1,487 during May, reimbursed ₹1,487 on June 1 — restoring the ₹2,000 imprest.

Balancing of the Cash Book (§4.1.4, p. 114). The cash book is balanced like a ledger account — the difference between the two sides is entered on the shorter side as Balance c/d and carried over as Balance b/d. The cash column will always have a debit balance; the bank column may have either a debit balance (favourable) or a credit balance (overdraft).

Purchases (Journal) Book (§4.2, p. 119-120) records only credit purchases of goods. Cash purchases go to the cash book; credit purchases of fixed assets (office furniture, machinery, building) go to the Journal Proper — not to the Purchases Book — because the Purchases Book is reserved for goods-in-trade. Entries are made at the net invoice amount: trade discount is not separately recorded because it has already been deducted on the invoice. Monthly total is posted to the debit of Purchases A/c; individual supplier accounts are credited daily (NCERT §4.2, p. 119-121).

Purchases Return (Return Outwards) Book (§4.3, p. 121-123) records goods returned to suppliers. The source document is the Debit Note, prepared by the buyer to indicate that the supplier's account has been debited for the value of returned goods. Individual supplier accounts are debited; the periodical total is credited to Purchases Return A/c — not to Purchases A/c (NCERT §4.3, p. 121-123).

Sales (Journal) Book (§4.4, p. 124-125) records only credit sales of merchandise. Cash sales go to the cash book. The source document is the sales invoice/bill. Monthly total is credited to Sales A/c; individual customer accounts are debited daily.

Sales Return (Return Inwards) Book (§4.5, p. 125-126) records goods returned by customers. The source document is the Credit Note, prepared by the seller (often in red ink). Customer accounts are credited individually; the periodical total is debited to Sales Return A/c.

Debit Note vs Credit Note (NCERT §4.3 Box 2, p. 122 & §4.5, p. 125). A Debit Note is prepared by the buyer when returning goods to the supplier — it debits the supplier's account. A Credit Note is prepared by the seller when goods are received back from the customer — it credits the customer's account. The CUET examiner reverses these regularly.

GST treatment in subsidiary books (NCERT §4.5 Illustrations 7 & 8, p. 131-133). Analytical Purchases / Sales Books carry separate columns for CGST, SGST and IGST apart from the basic Purchases/Sales column. For intra-state transactions both CGST and SGST are added (at half the GST rate each); for inter-state transactions the full rate is charged as IGST. GST is computed on the net amount after trade discount — never on the list price. NCERT's Akash-Rajasthan-Kishan-Jaipur worked example shows ₹10,120 net invoice attracting 2.5% CGST + 2.5% SGST = ₹253 + ₹253, total ₹10,626.

Journal Proper (also Journal Residual) (§4.6, p. 133-134) is the residual book for transactions that do not fit any special journal: (1) Opening entries showing opening balances of assets, liabilities and capital; (2) Adjustment entries — outstanding expenses, prepaid expenses, depreciation, accrued income, income received in advance; (3) Rectification entries for correction of errors; (4) Transfer / closing entries — drawings to capital, expense and revenue balances to Trading and P&L; (5) Other entries — dishonour of cheque, credit purchase / sale of non-goods items, goods withdrawn by proprietor, goods given as free samples, endorsement and dishonour of bills, consignment / joint venture transactions, loss of goods by fire / theft / spoilage.

Balancing of Accounts (§4.7, p. 135). At the end of an accounting period, the two sides of each account are totalled; the difference is written on the shorter side as Balance c/d (carried down) and carried as Balance b/d (brought down) to the next period. Accounts of expenses, losses, gains and revenues are not balanced — they are closed by transfer to the Trading and Profit & Loss Account, consistent with their classification as temporary accounts.

2.2 Definitions to memorise

2.3 Diagrams / processes to remember

Fig. 4.1 — Single Column Cash Book (NCERT p. 100). Date / Receipts / L.F. / Amount on the debit side; Date / Payments / L.F. / Amount on the credit side. Receipts on the left, payments on the right.

Fig. 4.2 — Pay-in-slip (NCERT p. 104). Used to deposit cash or cheques into a bank account; the counterfoil is retained by the depositor as proof.

Fig. 4.4 — Types of Cheque Crossing (NCERT p. 105). General crossing (two parallel lines), A/c Payee only (must be deposited into payee's account), Special crossing (with a named bank).

Fig. 4.5 — Double Column Cash Book (NCERT p. 106). Cash and Bank columns on both sides; contra entries marked "C"; the bank column may show overdraft.

Fig. 4.6 — Purchases (Journal) Book (NCERT p. 119). Date / Invoice No. / Name of Supplier (to be credited) / L.F. / Amount.

Fig. 4.7(a) — Purchases Return Book (NCERT p. 121). Date / Debit Note No. / Name of Supplier (to be debited) / Amount.

Fig. 4.7(b) and 4.7(c) — Specimen Debit Note and Credit Note (NCERT p. 122). Memorise the heading on each.

Fig. 4.8 — Sales (Journal) Book (NCERT p. 124). Date / Invoice No. / Name of Customer (to be debited) / L.F. / Amount.

Fig. 4.9 — Sales Return Book (NCERT p. 125). Date / Credit Note No. / Name of Customer (to be credited) / Amount.

Petty Cash Book Analytical Layout (NCERT p. 112). Columns: Postage / Telephone & Telegram / Conveyance / Stationery / Miscellaneous, plus Total Payment and Remarks.

Analytical Purchases Book with GST (NCERT p. 132). Columns: Details / Total / Purchases (net of trade discount) / Input CGST / Input SGST / Input IGST. GST is added on the post-trade-discount base.

Process — Routing a transaction to its correct book. (i) Is it a cash transaction? → Cash Book. (ii) A credit purchase of goods? → Purchases Book. (iii) A credit sale of goods? → Sales Book. (iv) A return of goods? → Purchases Return Book (outwards) or Sales Return Book (inwards). (v) Everything else (opening, adjustment, rectification, closing, drawing-of-goods, non-goods credit purchase/sale, dishonour) → Journal Proper.

Process — Posting from subsidiary books. Individual supplier/customer accounts in the ledger are posted from the daily entries; periodical (usually monthly) totals are posted to the impersonal accounts — Purchases A/c (Dr), Sales A/c (Cr), Purchases Return A/c (Cr), Sales Return A/c (Dr), and the corresponding GST control accounts.

2.4 Common confusions / NTA trap points

1. Cash sales vs credit sales. Cash sales go to the Cash Book (not Sales Book); only credit sales of merchandise go to the Sales Book. NTA distractors regularly put "cash sales" in the Sales Book (NCERT §4.4, p. 124).
2. Trade discount vs cash discount. Trade discount is deducted on the invoice and never appears in any book; cash discount is recorded (in cash book as Discount Allowed / Discount Received) (NCERT §4.2 vs §4.1).
3. Credit purchase of furniture / machinery is NOT in Purchases Book. It goes to Journal Proper because Purchases Book is for goods (merchandise) only (NCERT §4.2, p. 119; §4.6).
4. Contra entry direction. Marked "C" in L.F. and not posted to the ledger again — the bank/cash column itself serves as the ledger (NCERT §4.1.2, p. 105).
5. Overdraft = credit balance of bank column. The cash column can never have a credit balance (NCERT §4.1.4, p. 114).
6. Debit Note ≠ Credit Note. Debit Note is sent by the buyer on a purchase return; Credit Note is sent by the seller on a sales return. Students often swap these (NCERT §4.3 Box 2, p. 122).
7. Intra-state vs Inter-state GST. Intra-state → CGST + SGST (each at half the rate); Inter-state → IGST (full rate). NTA loves testing the split with small numerical illustrations (NCERT §4.5 Illus. 7 & 8, p. 131-133).
8. Periodic total of Returns Books. Periodic total of Purchases Return Book → Purchases Return A/c (not Purchases A/c). Periodic total of Sales Return Book → Sales Return A/c (not Sales A/c) (NCERT §4.3 & §4.5).
9. Imprest reimbursement. Reimbursement = exact amount spent, not the imprest amount itself. ₹2,000 imprest, ₹1,487 spent → reimburse ₹1,487 (NCERT §4.1.3, p. 109).
10. GST base. GST is charged on the net invoice (after trade discount), not on the list price (NCERT §4.5 Illus. 8, p. 132).
11. Cheque deposit timing. Cheque deposited on date of receipt → bank column. Cheque deposited later → cash column on receipt, then a contra entry on deposit date (NCERT §4.1.2, p. 105).
12. Sales of an old asset is NOT in Sales Book. Sale of an old machine on credit goes to Journal Proper because Sales Book is only for merchandise sales (NCERT §4.4 & §4.6).

2.5 Journal entry templates

The journal entries below complement the subsidiary books — they are the journal equivalents the student should be able to reconstruct on demand, especially for Journal Proper entries that do not have a special book.

(a) Cash deposited into bank — contra entry (NCERT §4.1.2, p. 105)

(b) Cheque received and deposited the same day (NCERT §4.1.2, p. 105)

(c) Dishonour of cheque (NCERT §4.1.2, p. 106)

(d) Reimbursement of petty cashier under imprest system (NCERT §4.1.3, p. 109)

(e) Credit purchase of furniture for office use — Journal Proper (NCERT §4.6)

(f) Goods withdrawn by proprietor for personal use — Journal Proper (NCERT §4.6)

(g) Credit sale with intra-state GST (NCERT §4.5 Illus. 8, p. 132)

(h) Credit sale with inter-state IGST (NCERT §4.5 Illus. 7)