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All business transactions, at the first stage, are recorded in the book of original entry i.e. Journal and then posted into the ledger under the double entry system of book-keeping. This procedure is easy and practicable in small business houses where the number of business transactions are less and when a single person can handle the business transactions. But it is practically very difficult, rather impossible, to record all the business transactions of a day in the Journal of a large business house where the number of business transactions are varied and enormous because of the following reasons:
1. The system of recording all transactions in a journal requires:
a. writing down of the name of the account involved as many times as the transactions occur; and
b. An individual posting of each account debited and credited and hence, involves the repetitive journalising and posting labour.
2. Such a system does not provide the information on a prompt basis.
3. The journal becomes bulky and voluminous.
4. Such a system does not facilitate the installation of an internal check system since the journal can be handled by only one person.
Therefore, to overcome the shortcomings of the use of the journal as the only book of original entry, the journal is subdivided into special journals. It is divided in such a way that a separate book is used for each category of business transactions which are repetitive in nature, similar and are sufficiently large in number. Special journals refer to the journals meant for recording specific business transactions of similar nature.
These special journals are also known as “Subsidiary Books” or “Day Books”. The main types of special journals are as follows:
1. Cash Book: It records all those transactions which are in cash or by cheques.
2. Purchases Book: It records all transactions relating to goods purchased on credit.
3. Sales Book: It records all transactions relating to goods sold on credit.
4. Purchases Return Book: It records return of goods to suppliers.
5. Sales Return Book: It records return of goods by the customers.
6. Bills Receivable Book: It records entries regarding bills receivables. The details of bills are given in this book.
7. Bills Payable Book: All bills which are accepted and payable by a business house are recorded in this book.
8. Journal Proper: Those transactions which are not recorded in any of the above mentioned books are recorded in the Journal Proper.
Before recording transactions in these day books, it is necessary to explain the special meaning given in business to the words ‘Goods’, ‘Purchases’ and ‘Sales’.
Goods: It refers to items forming part of the stock-in-trade of a business house which are purchased and are to be resold at a profit. A business house may purchase fixed assets or stationery for use in business, but they are not purchases of goods.
Purchases: It refers to the purchase of goods for resale, and not the purchase of assets or stationery. The Purchases Account, therefore, only contains purchases of goods for resale.
Sales: It refers to the sale of goods which form part of the stock-in trade of the business.
The advantages of using Special Journals are as under:
1. Facilitates division of work: The accounting work can be divided among many persons.
2. Time and labour saving in journalising and posting: For instance, when a Sales Book is kept, the name of the Sales Account will not be required to be written down in the Journal as many times as the sales transactions occur and at the same time, Sales Account will not be required to be posted again and again since, only a periodic total of Sales Book is posted to the Sales Account.
3. Permits the use of specialised skill: The accounting work requiring specialised skill may be assigned to a person possessing the required skill. With the use of a specialised skill, prompt, economical and more accurate supply of accounting information may be obtained.
4. Permits the installation of internal check system: The accounting work can be divided in such a manner that the work of one person is automatically checked by another person. With the use of internal check, the possibility of occurrence of error/fraud may be avoided.
A Cash Book is a special journal which is used for recording all cash receipts and cash payments. If a cash book is maintained, there is no need for preparing a cash account in the ledger. However, the other aspects of the transactions will be recorded in the ledger. Cash Book serves dual role of journal as well ledger. Cash Book is the book of original entry (Journal) since transactions are recorded for the first time from the source documents. It is a ledger in the sense that it is designed in the form of Cash Account and records cash receipts on the debit side and cash payments on the credit side.
1. Only cash transactions are recorded in the Cash Book.
2. It performs the functions of both journal and the ledger at the same time.
3. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.
4. The Cash Book, recording only cash transactions can never show a credit balance.
Cash Book can be of several kinds:
1. Single Column Cash Book- For recording cash transactions only.
2. Double (Two) Column Cash Book- For recording cash transactions involving gain or loss on account of discount.
3. Triple (Three) Column Cash Book- For recording cash and bank transactions involving gain or loss on account of discount.
4. Petty Cash Book- For recording petty expenses.
The Single Column Cash Book has one column of amount on each side. All cash receipts are recorded on the debit (left-hand) side and all cash payments are recorded on credit (right-hand) side. In fact, it is nothing but a Cash Account. Hence, there is no need to open Cash Account in the ledger. Posting from the debit (receipt) side of the Cash Book is done to the credit side of concerned accounts and from the credit (payment) side of the Cash Book to the debit side of concerned accounts.
Balancing the Cash Book: The Cash Book is balanced in the same manner as a ledger account. To verify the accuracy of the entries made and to confirm the authenticity of cash balance, it should be balanced daily. The balance as per Cash Book must tally with the actual cash in hand. In the Cash Book, the total of amount column of the debit side always exceeds the total of credit side. As such, the Cash Book always shows a debit balance, since we cannot pay more than we have with us. At the end of the period, the balance of the Cash Book is placed on the credit side by writing “By Balance c/d” and then the totals are shown on both side in one straight line. The total of each side should be the same.
In every business organisation, there are a number of payments which involve small amounts e.g. payments for postage, telegrams, carriage, cartage etc. If all these transactions are recorded in the Cash Book, it will increase the head cashier’s work manifold and it will make the Cash Book unnecessarily bulky and uneasy. Normally, one person is handed over a small amount to meet the petty expenses of a given period (say, week, fortnight or month) and is authorised to make such payments and to record them in a separate Cash Book. Such person, amount and Cash Books are called as “Petty Cashier”, ‘Imprest’ and ‘Petty Cash Book’ respectively. The Petty Cash Book may or may not be maintained on ‘Imprest System’. Under both the systems (i.e. Imprest and Non-imprest), the petty cashier submits the Petty Cash Book to the Head Cashier who examines the Petty Cash Book. Under the Imprest system, the Head Cashier makes the reimbursement of the amount spent by the Petty Cashier but under Non-imprest system, the Head Cashier may handover the Cash to the Petty Cashier equal to/more than/less than the amount spent. Usually, the Petty Cash Book is maintained on the basis of imprest system.
Advantages of the Imprest System: The system of petty cash payments along with the imprest system offers the following advantages:
1. The money in the hands of the petty cashier is limited to the imprest amount.
2. As the periodical reimbursements are the actual expenses paid and not mere advances on account only, they are as such brought prominently to the notice of Chief Cashier.
3. The Chief Cashier, by handing over a fixed sum, is relieved of the cumbersome work of petty disbursements.
4. The main cash book is not unnecessarily clogged with the large number of small items. Even in the ledger, only the totals are posted.
5. At all time, the amount of cash in hand plus expenses not reimbursed must equal the imprest amount, thus, facilitating a simple check.
6. The maximum liability of the petty cashier can never exceed the imprest amount.
7. The regular check of the petty cash book creates a sense of responsibility in the petty cashier. All the heads of expenses are totalled periodically and such periodic totals are individually posted to the debit side of the concerned ledger accounts in the ledger by writing ‘To Petty Cash A/c’ in the particulars column. The Petty Cash Account in the ledger is credited with the total expenditure incurred during the period by writing ‘By Sundries as per Petty Cash Book’ in the particulars column. The ledger folio number is written under every total amount of expense to indicate that the entry has been posted in the ledger. In the folio column of the ledger account, the page number of the petty cash book is written.
Purchases Book (also known as Invoice Journal/Bought Journal/Purchases Journal) is used for recording only the credit purchases of goods and merchandise in which the business is dealing in, i.e. goods purchased for resale purpose for earning revenue. It records neither the cash purchases of goods nor the purchase of any asset other than the goods or merchandise. When we purchase goods on credit we receive a statement from the supplier giving the particulars of the goods supplied by him. The statement is known as an Invoice. The invoice states the quality, price and the value of goods supplied. It also states the discount allowable (trade and cash) and the condition under which payment is expected. The entries in the purchase book are made on the basis of invoices received from the supplies with the amounts net of trade discount/quantity discount. Trade discount is a reduction granted by the supplier from the list price of goods and services on business consideration such as quantity bought, trade practices other than for prompt payment. The object of allowing trade discount is to enable the retailer to sell the goods to the customer at list price and still leaving margin for meeting business expenses and his profit. Entries in the books of both supplier as well as retailer are made on the basis of net amount i.e. invoice price less trade discount.
After recording transactions in the Purchases Book, the posting in ledger accounts will be made. The posting from the Purchases Book is made as follows:
1. Debit the Purchases Account with the periodical totals of the Purchases Book. On the debit side of the Purchases Account, 121 write “To total as per Purchase Book” or “To Sundries” in the particulars column.
2. Personal accounts of each individual supplier is credited with the net amount of Inward Invoice recorded in Purchases Book by writing “By Purchases”.
Sales Book or Sales Journal is written up to record all the credit sales. Sales Book records only those goods which are sold on credit and the goods in question must be those, which the firm generally deals in. If there are cash sales they are recorded in Cash Book and sale of assets are recorded in the Journal proper. The entries in the Sales Book are made from the copies of the invoice which have been sent to customers along with the goods. Such copies of the invoices may be termed as Outward Invoice. Each such outward invoice should be numbered consecutively and the reference be given in the Sales Book along with the entry 124 The Sales book is totalled periodically. The net amount of the invoices in Sales Book is posted to the ledger as follows:
1. Debit the personal accounts of the customers with the value of sales to them.
2. Credit Sales Account with the periodical total.
Where a payment for a business transaction is not made immediately but is deferred or postponed for a few months, a bill of exchange payable some time ahead may be drawn by the creditor (seller) on his debtor (purchaser). The bill of exchange is then accepted by the debtor indicating that he would pay the amount specified therein on the expiry of the period stated on the bill. To the creditor, who draws the bill upon his customer, it is termed as Bills Receivable representing money to be received at a future date; to the debtor, the bill on acceptance becomes a Bills Payable indicating that the money has to be paid at a future date. Transactions involving the drawing, the acceptance and negotiation of bills are recorded in Bills Receivable and Bills Payable Books respectively. Bills Receivable Book is used to record the details of bills receivable on which the business enterprise will receive the amounts from other parties in future. The entries to be made in this book include the name of the acceptor (debtor), the terms, due date, the amount and other details 133
Posting: The total of the amount column of the Bills Receivable Book is debited to the Bills Receivable Account while the amount of each bills receivable is posted to the credit of the account of the party from whom it is received.
This is also a book of original entry and is used to record the particulars of all the bills payable accepted by the business enterprise for the purpose of paying at a future date amounts due by it (the business enterprise or trader) to its or his creditors. The entries to be made in this book relate to the name of the drawer, the name of the payee, the period, the due date, and other particulars. Then the acceptance is duly returned to the drawer.
Posting: The amount of each bill is posted to the debit side of the drawer’s account in the ledger and the total of the amount column of the Bills Payable Book is posted to the credit of Bills Payable Account in the ledger.
Journal Proper is a residuary book in which those transactions are recorded which cannot be recorded in any other subsidiary book such as Cash Book, Purchases Book, Sales Book, Purchases Returns Book, Sales Returns Book, Bills Receivable Book, and Bills Payable Book. The various examples of transactions entered in a Journal Proper are given below:
1. Opening entry: An Opening Entry is passed in the journal for bringing the balances of various assets, liabilities and capital appearing in the Balance Sheet of the previous accounting period, in the books of current accounting period.
2. Closing entries: Closing Entries are passed in the journal for closing the nominal accounts by transferring them to the Trading and Profit and Loss Account. These are needed at the end of the accounting year, when the final accounts are prepared.
3. Transfer entries: Transfer Entries are passed in the journal for transferring an amount from one account to another account, i.e. Transfer of Total Drawings from Drawings Account to Capital Account.
4. Adjusting entries: Adjusting Entries are passed in the journal to bring into the books of accounts certain unrecorded items like closing stock, depreciation on fixed assets, outstanding and prepaid items. These are needed at the time of preparing the final accounts.
5. Rectifying entries: Rectifying Entries are passed in the journal to rectify the various errors committed while posting, totalling, balancing etc.
6. Miscellaneous entries: This include the following:
a. Capital brought in kind. If the proprietor of the business brings in his capital contribution in kind and not in cash, such transaction can be recorded only in the Journal Proper and not in the Cash Book since this transaction does not involve any cash inflow.
b. Purchase of Assets (other than Stock-in-trade) on credit (e.g., land, building, plant and machinery, furniture and fixture). Such transactions can neither be recorded in the Purchase Book (since no goods have been purchased) nor recorded in the Cash Book (since this transaction does not involve any cash outflow).
c. Sales of Assets (other than Stock-in-trade) which were sold on credit. Such transaction can neither be recorded in the Sales Book (since no goods have been sold) nor can be recorded in the Cash Book (since this transaction does not involve any cash inflow).
d. Return of Assets (other than Stock-in-trade) which were sold on credit. Such transactions cannot be recorded in the Return Inwards Book since no goods have been returned.
e. Return of Assets (other than Stock-in-trade) which were bought on credit. Such transactions cannot be recorded in the Return Outwards book since, no goods have been returned.
f. Endorsement of Bills Receivable to a creditor.
g. Dishonour of Bills Receivables (not discounted with bank).
h. Cancellation of Bills Payable.
i. Abnormal Loss of Stock-in-trade/other assets by theft,accident, fire, etc.
j. Writing-off Bad Debts.137
To overcome the shortcoming of the use of the Journal as the only book of original record, the Journal is sub-divided into special journals. Special journals refers to the journals meant for recording specific business transactions of similar nature which are known as ‘subsidiary books or ‘day books’. The main types of special journals are– (i) cash book (ii) purchases book; (iii) sales book; (iv) purchase return book; (v) sales return book; (vi) bills receivable book; (vii) bills payable book; and (viii) journal proper. Cash book is a special journal which is used for recording all cash receipts and payments. Purchase book is used for recording only the credit purchases of goods and merchandise in which the business in dealing in. Sales book is used to record all the credit sales, purchase return book is used to record the goods returned by the enterprise and sales return book is used to record the goods returned by the customers. Bills receivable book and bills payable book are used to record the details of B/R and B/P respectively. Any entry which is to taking place in the above mentioned book is being recorded in the book ‘Journal Proper’.
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