Learning Objectives
- Understand the concept of special purpose books (subsidiary books)
- Learn to prepare different types of cash books
- Understand petty cash book and the imprest system
- Learn to prepare purchases book, sales book, and returns books
- Know the difference between journal proper and subsidiary books
Key Concepts
Subsidiary Books (Special Purpose Books)
When the volume of transactions is large, recording every transaction in the journal becomes impractical. Therefore, the journal is subdivided into subsidiary books or special purpose books, each designed to record a specific type of transaction. The main subsidiary books are:
- Cash Book: Records all cash and bank transactions.
- Purchases Book: Records only credit purchases of goods.
- Sales Book: Records only credit sales of goods.
- Purchases Returns (Returns Outward) Book: Records goods returned to suppliers.
- Sales Returns (Returns Inward) Book: Records goods returned by customers.
- Bills Receivable Book: Records all bills received from debtors.
- Bills Payable Book: Records all bills accepted by the business.
- Journal Proper: Records all transactions that do not fit into any other subsidiary book (e.g., opening entries, closing entries, adjustment entries, rectification entries).
Cash Book
The Cash Book is both a subsidiary book and a ledger account. It records all cash receipts on the debit side and all cash payments on the credit side. Types of cash books:
- Single Column Cash Book: Has only one amount column on each side for cash transactions. Similar to a Cash Account in the ledger.
- Double Column Cash Book (Cash and Bank): Has two columns on each side -- one for cash and one for bank. Records both cash and bank transactions. A contra entry occurs when cash is deposited into the bank or withdrawn from the bank (marked with "C" in the L.F. column).
- Triple Column Cash Book (Cash, Bank, Discount): Has three columns on each side -- cash, bank, and discount. The discount column on the debit side records discount allowed (to debtors), and the discount column on the credit side records discount received (from creditors). Discount columns are not balanced; they are totalled and posted to the respective discount accounts in the ledger.
Petty Cash Book
A Petty Cash Book is maintained to record small, routine expenses such as postage, stationery, conveyance, and refreshments. It operates under the Imprest System, where a fixed sum (imprest amount) is given to the petty cashier at the beginning of the period. At the end of the period, the petty cashier is reimbursed for the exact amount spent, restoring the original imprest amount.
Purchases Book and Sales Book
The Purchases Book records only credit purchases of goods dealt in by the business. Cash purchases are recorded in the Cash Book. Purchases of assets are not entered here. Each entry includes the date, supplier name, invoice number, and amount.
The Sales Book records only credit sales of goods. Cash sales go into the Cash Book. Sales of old assets are not entered in the Sales Book.
Returns Books
The Purchases Returns Book (Returns Outward) records goods returned to suppliers with details of the debit note issued. The Sales Returns Book (Returns Inward) records goods returned by customers with details of the credit note received.
Summary
When transaction volume is high, the journal is subdivided into subsidiary books for efficient recording. The Cash Book is unique as it serves as both a subsidiary book and a ledger account. Single, double, and triple column cash books handle varying levels of complexity. Contra entries arise when transactions affect both cash and bank. The Petty Cash Book operates on the imprest system for small expenses. Purchases Book records credit purchases of goods only, Sales Book records credit sales of goods only, and returns books track goods returned to or by the business. Journal Proper handles residual entries like opening, closing, and adjustment entries.
Important Terms
- Subsidiary Books
- Special purpose books used to record specific types of transactions, subdividing the general journal.
- Cash Book
- A book that records all cash and bank transactions, functioning as both a subsidiary book and a ledger.
- Contra Entry
- An entry where both debit and credit aspects affect cash and bank accounts (e.g., cash deposited into bank).
- Imprest System
- A system of managing petty cash where a fixed amount is given at the start and reimbursed for the amount spent.
- Debit Note
- A document sent to the supplier when goods are returned, requesting a reduction in the amount owed.
- Credit Note
- A document sent to the customer when goods are returned, acknowledging the reduction in amount receivable.
Quick Revision
- Subsidiary books subdivide the journal for efficiency; each records a specific type of transaction.
- Cash Book is both a subsidiary book and a ledger -- no separate cash account needed in the ledger.
- Contra entries (cash to/from bank) are marked with "C" in the L.F. column.
- Discount columns in triple column cash book are totalled, not balanced.
- Purchases Book: credit purchases of goods only; Sales Book: credit sales of goods only.
- Petty Cash Book uses the Imprest System -- petty cashier is reimbursed for expenses at period end.
- Journal Proper handles opening entries, closing entries, transfer entries, and rectification entries.
Practice Tips
- Practice preparing triple column cash books with at least 15-20 transactions including contra entries.
- Remember: credit purchases of assets do NOT go in the Purchases Book -- they go in Journal Proper.
- Always identify contra entries and mark them correctly with "C" in the folio column.
- Practice the imprest system with numerical problems -- calculate the amount to be reimbursed.