Recording of Transactions - II

Written and reviewed by Devendra Dubey, Mathematics & Commerce faculty at UniDrill (M.Sc. Mathematics, Osmania University · 10 years teaching). Based on NCERT Accountancy Class XI (Financial Accounting Part I), Chapter 4.

One journal for 150 sales a day?

Pooja runs a wholesale cloth shop in Jaipur. On a busy day she makes 150 credit sales, receives dozens of cheques, returns a few bales to a supplier and pays small bills for tea and stamps. If every event went into one journal, the book would be a jungle, one clerk would be stuck with it all day, and finding any fact would take hours.

The fix is to split the journal into special purpose books, also called day books or subsidiary books, each for one kind of transaction. A clerk can handle each book, entries are fast, and totals can be posted in bulk. The six books are the Cash Book, Purchases Book, Purchases Return Book, Sales Book, Sales Return Book and Journal Proper.

The routing in one line: is it cash? → Cash Book. A credit purchase or sale of goods? → Purchases or Sales Book. Goods returned? → Returns Book. Anything else → Journal Proper.

Which book for which transaction

Cash sales and cash purchases belong to the Cash Book, not to the Sales or Purchases Book. Credit transactions in things other than goods belong to the Journal Proper.

Pause and predict: Pooja buys 10 chairs for her office on credit from Quality Furniture Ltd. Which book records it?

Check your answer: Journal Proper. The Purchases Book is only for goods bought to sell. Chairs for use are an asset, so Furniture is debited and Quality Furniture Ltd. is credited in the Journal Proper.

The cash book

Cash is part of almost every transaction, so the Cash Book is the most important subsidiary book. It is special because it works as both a journal and a ledger: it is a book of original entry, and the balance of cash can be read from it directly. That is why, when a cash book is kept, no separate cash account or bank account is opened in the ledger.

Receipts go on the debit (left) side and payments go on the credit (right) side. In a double column cash book, three features matter.

To post the cash book, every account on its debit side is credited in the ledger (cash came from it) and every account on its credit side is debited (cash went to it). It is the mirror of ordinary journal posting.

Beyond the textbook. For the exam: the bank column records cheques and deposits. In reality: the same bank column takes every movement through the bank, whether it is a cheque, a bank transfer or a UPI payment. Only the source document changes. Why it matters: a transaction that moves money through your bank account is a bank column entry, whatever the channel.

Beyond the textbook. For the exam: a bank overdraft is the credit balance in the bank column. In reality: an overdraft is a short term loan from the bank, so on a balance sheet it appears as a liability and not as a negative bank balance. Why it matters: it explains why interest is charged on it, which returns in the next chapter on bank reconciliation.

Petty cash and the imprest system

A head cashier should not spend time on postage stamps and tea. A petty cashier handles such small, frequent payments. Under the imprest system, he is given a fixed sum, the imprest, at the start of a period. When most of it has been spent, the head cashier reimburses exactly the amount spent, which restores the imprest. The petty cash book has an analysis column for each head: postage, telephone and telegram, conveyance, stationery and miscellaneous.

The purchases and sales books, returns and notes

The Purchases Book takes only credit purchases of goods, at the net invoice amount, because trade discount has already been deducted on the invoice. Each supplier is credited as the entry is made, and the month's total is posted to the debit of Purchases A/c.

The Purchases Return Book records goods sent back to suppliers, with a debit note as the source document. The buyer prepares it to show that the supplier's account is being debited. The total is credited to Purchases Return A/c, never to Purchases A/c.

The Sales Book takes credit sales of goods, and the monthly total is credited to Sales A/c. In the Sales Return Book a credit note, prepared by the seller, shows that the customer's account is credited, and the total is debited to Sales Return A/c.

Beyond the textbook. For the exam: a credit note is issued when goods come back from a customer. In reality: under GST a supplier also issues a credit note to reduce an earlier invoice for other reasons, such as a discount given after the sale or a correction of the price. Why it matters: "credit note" means the customer's dues have been reduced; goods returned is just the most common reason.

GST in the purchases and sales books

An analytical Purchases or Sales Book adds separate columns for CGST, SGST and IGST next to the basic amount. GST is computed on the net invoice amount, after trade discount, never on the list price. For intra state transactions, CGST and SGST are each half of the rate. For inter state transactions, the full rate is charged as IGST. On the purchase side the tax paid is recorded as Input CGST, SGST or IGST. On the sales side the tax collected is recorded as Output CGST, SGST or IGST.

The Journal Proper

Everything that does not fit a special book goes into the Journal Proper.

Balancing the accounts

At the end of the period each account is totalled and the difference is placed on the shorter side as Balance c/d, then brought down as Balance b/d. Expense, loss, gain and revenue accounts are not balanced; they are closed by transfer to the Trading and Profit and Loss Account.

Worked examples

Worked example: a double column cash book. Sharma and Co. begins April with cash ₹40,000 and bank ₹50,000. Record and balance the following.

Cash: $40{,}000 + 15{,}000 + 10{,}000 - 25{,}000 - 12{,}000 - 9{,}000 = 19{,}000$. Bank: $50{,}000 + 25{,}000 + 30{,}000 - 8{,}000 - 10{,}000 - 40{,}000 - 30{,}000 = 17{,}000$. Both sides of each column total the same.

Posting to the ledger: Sales and Anil are credited (they appear on the debit side of the cash book). Rent, Gupta, Mehta, Salary and Anil (for the dishonour) are debited. The two C entries are not posted. Anil's account therefore shows a credit of ₹30,000 for the receipt and a debit of ₹30,000 for the dishonour, which restores his debt.

Common wrong entry. Entering the dishonour on the debit side of the bank column, or posting the contra entries to Cash and Bank accounts in the ledger. A dishonoured cheque reduces the bank balance, so it is a credit. Contra entries need no ledger posting because both accounts are already inside the cash book.

If the bank column had opened with ₹12,000 Dr, received ₹28,000 and paid out cheques of ₹60,000, the balance would be $12{,}000 + 28{,}000 - 60{,}000 = -20{,}000$, an overdraft of ₹20,000. It is entered on the debit side as Balance c/d to make the totals equal.

Pause and predict: A cash book shows a credit balance of ₹5,000 in its cash column. What does that tell you?

Check your answer: There is a mistake. Cash cannot be overdrawn, so a credit balance in the cash column is impossible. Only the bank column can show one, as an overdraft.

Worked example: petty cash under the imprest system. On May 1 the petty cashier receives an imprest of ₹2,000. His payments in May are below. Find the amount reimbursed and show the entries.

Cash left with the petty cashier is $2{,}000 - 1{,}487 = 513$. The head cashier reimburses exactly ₹1,487, so the petty cashier again holds $513 + 1{,}487 = 2{,}000$.

Common wrong entry. Reimbursing the full ₹2,000. The petty cashier would then hold ₹2,513, which is more than the imprest, and the system loses its control.

Worked example: purchases, returns and posting. Verma Garments of Delhi has these April events with Gupta Textiles and Mehra and Sons.

Credits to suppliers from the Purchases Book (₹30,000) equal the debit to Purchases A/c (₹30,000). The debit to Gupta (₹3,000) equals the credit to Purchases Return (₹3,000). Gupta's account balances as follows.

Verma owes Gupta a net ₹15,000. Net purchases for the month are $30{,}000 - 3{,}000 = 27{,}000$.

Common wrong entry. Putting the ₹40,000 furniture in the Purchases Book, which would inflate purchases to ₹70,000, or entering ₹20,000 (list price) for Gupta's invoice. Only goods in trade go to the Purchases Book, and the amount is the net invoice.

Worked example: GST in the books. Akash of Rajasthan sells readymade clothes to Kishan Traders, Jaipur: list price ₹11,000, trade discount 8%, CGST 2.5% and SGST 2.5%. Akash also sells to a Delhi customer a lot with net invoice ₹1,00,000 at 5% IGST. Separately, a Delhi trader buys goods worth ₹1,00,000 from a Delhi supplier at 18% GST.

Common wrong entry. Charging GST on the list price. At 5% that gives ₹550 instead of ₹506. Another slip is adding CGST and SGST on the inter state sale. Tax is always worked on the amount after trade discount.

Worked example: Journal Proper entries. A trader needs these entries.

The opening entry checks: assets $50{,}000 + 30{,}000 + 20{,}000 = 1{,}00{,}000$ equal creditors ₹15,000 plus capital ₹85,000. Goods that leave the business for the owner, for samples or by fire are credited to Purchases, because the stock is no longer available to sell.

Common wrong entry. Crediting Sales for goods taken home by the proprietor. No customer has paid for them, so recording a sale invents revenue. The credit goes to Purchases and the debit to Drawings.

Pause and predict: Pooja sends back goods worth ₹3,000 to a supplier. Who prepares the debit note, and whose account does it debit?

Check your answer: Pooja, the buyer, prepares it, and it debits the supplier's account because Pooja now owes the supplier ₹3,000 less.

Exam traps

Formula and format sheet

60-second revision

Where this chapter connects

The cash book's bank column is the starting point of Bank Reconciliation Statement, where it is compared with the bank's own record. The totals posted from every book end up in the ledger and in the Trial Balance and Rectification of Errors. The debit and credit rules behind each entry come from Recording of Transactions I, and the GST columns rest on the tax structure in Theory Base of Accounting.