01 · Explore
Need for Special Purpose Books
As a business expands, recording every transaction in a single Journal becomes cumbersome and inefficient.
In a small business, a single Journal may suffice. However, as the volume of transactions grows, journalising each entry individually leads to a bulky record and increases the risk of errors. To manage this, the Journal is sub-divided into special journals, also known as subsidiary books or daybooks.
These books are designed to record transactions of a similar nature. For instance, all cash transactions are grouped in one book, while credit sales are recorded in another. This division of labour allows multiple people to work on the accounts simultaneously, enhancing speed and accuracy.
Transactions that do not fit into any specific subsidiary book, such as opening entries or credit purchases of fixed assets, are recorded in a residual book called the Journal Proper.
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What is another name for special purpose journals?
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02 · Explore
Single Column Cash Book
The Cash Book is a book of original entry used to record all cash receipts and payments.
A Single Column Cash Book contains only one amount column on each side (Debit and Credit). The Debit (left) side is used for recording cash receipts, while the Credit (right) side is used for cash payments. It serves as both a journal and a ledger account, meaning no separate Cash Account is required in the ledger.
Transactions are recorded chronologically. At the end of a period, usually a month, the book is balanced. The total of the receipts side will always be equal to or greater than the payments side, as a business cannot pay out more cash than it has in hand.
Recording and Balancing Cash
Total Receipts (88,200) - Total Payments (64,800) = Balance c/d (23,400)
In the Roopa Traders example, the total of the debit side (opening balance + receipts) is 88,200. The sum of all actual payments is 64,800. The difference of 23,400 is the closing cash balance (Balance c/d), which makes the credit side total equal to the debit side total of 88,200.
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Why is a separate Cash Account not needed in the ledger when a Cash Book is maintained?
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03 · Explore
Double Column Cash Book
Modern businesses conduct most transactions through banks, necessitating a Cash Book with both Cash and Bank columns.
The Double Column Cash Book features two amount columns on each side: one for cash and one for bank transactions. This allows the business to track its physical cash and its bank balance in a single record. Bank deposits and withdrawals are recorded using 'Contra Entries'.
A Contra Entry (marked with 'C' in the L.F. column) occurs when a transaction affects both cash and bank accounts within the same book. For example, depositing cash into the bank is recorded on the Debit side of the Bank column and the Credit side of the Cash column. These entries are not posted to the ledger because the dual aspect is already captured in the Cash Book.
Unlike the cash column, the bank column can have a credit balance. This indicates a 'Bank Overdraft', where the business has withdrawn more money than it deposited.
| Transaction | Debit Side Entry | Credit Side Entry | Type |
|---|---|---|---|
| Cash deposited in bank | Bank Column | Cash Column | Contra (C) |
| Cash withdrawn for office | Cash Column | Bank Column | Contra (C) |
| Cheque received & deposited same day | Bank Column | None | Receipt |
| Cheque issued to supplier | None | Bank Column | Payment |
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What does a credit balance in the bank column of a cash book indicate?
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04 · Explore
Petty Cash Book and Imprest System
Small, repetitive expenses like postage and cartage are managed through a Petty Cash Book to avoid cluttering the main Cash Book.
Large organizations appoint a petty cashier to handle small disbursements. This cashier usually operates on the 'Imprest System'. Under this system, the head cashier provides a fixed sum (imprest amount) at the start of a period. At the end of the period, the petty cashier is reimbursed the exact amount spent, restoring the balance to the original imprest sum.
The Petty Cash Book is analytical, featuring multiple columns for different types of expenses such as stationery, postage, and conveyance. This simplifies the posting process, as only the periodic totals of these columns need to be debited to the respective expense accounts in the ledger.
The Imprest System Cycle
- 1
Initial Advance
Head cashier gives a fixed sum (e.g., 2,000) to the petty cashier.
- 2
Small Payments
Petty cashier pays for minor expenses like refreshments, stamps, or taxi fares.
- 3
Submission
Petty cashier presents the record of expenses to the head cashier.
- 4
Reimbursement
Head cashier pays back the total amount spent (e.g., 1,487) to restore the original sum.
The sequential flow of funds in the Imprest System of petty cash management.
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What is the 'Imprest Amount'?
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05 · Explore
Purchases (Journal) Book
The Purchases Book is used exclusively for recording credit purchases of goods.
Only credit purchases of 'merchandise' (goods intended for resale) are recorded here. Cash purchases are recorded in the Cash Book, and credit purchases of assets (like furniture) are recorded in the Journal Proper. The source document for this book is the 'Inward Invoice' received from the supplier.
Entries are made using the net amount of the invoice, after deducting trade discounts. Periodically, the total of the Purchases Book is debited to the Purchases Account in the ledger, while individual supplier accounts are credited daily.
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What is the source document for recording entries in the Purchases Book?
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06 · Explore
Sales (Journal) Book
The Sales Book records all credit sales of merchandise made by the firm.
Similar to the Purchases Book, the Sales Book only records credit sales of goods. Cash sales are excluded as they are entered in the Cash Book. The source document is the 'Outward Invoice' or bill issued to the customer.
The total of the Sales Book is credited to the Sales Account at the end of the month. Individual customer accounts are debited with the respective amounts to reflect their debt to the firm.
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Question
If a business sells old furniture on credit, is it recorded in the Sales Book?
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07 · Explore
Purchases and Sales Return Books
These books record the return of goods to suppliers or from customers.
The Purchases Return Book (Return Outwards Book) records goods returned to suppliers due to defects or poor quality. A 'Debit Note' is prepared and sent to the supplier, signifying that their account is being debited. Individual supplier accounts are debited with the amount of returns, and the total of this book is credited to the Purchases Return Account.
The Sales Return Book (Return Inwards Book) records goods sent back by customers. The firm issues a 'Credit Note' to the customer, acknowledging that their account is being credited. Individual customer accounts are credited, and the total of this book is debited to the Sales Return Account.
| Document | Issued By | Purpose | Book Affected |
|---|---|---|---|
| Debit Note | Buyer | Returning goods to supplier | Purchases Return Book |
| Credit Note | Seller | Receiving returned goods | Sales Return Book |
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What is a Credit Note?
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08 · Explore
Journal Proper
The Journal Proper is the 'residual' journal for transactions that cannot be placed in other special journals.
The Journal Proper is used for specific types of entries that do not involve cash or the routine credit purchase/sale of goods. These include Opening Entries (to record balances at the start of the year), Adjustment Entries (like outstanding rent or depreciation), and Rectification Entries (to correct errors).
Other entries recorded here include the credit purchase or sale of fixed assets, goods withdrawn by the owner for personal use (Drawings), and the loss of goods due to fire or theft.
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Name three types of entries recorded in the Journal Proper.
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