Financial Accounting - Subsidiary Books

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Cash Book

Cash book is a record of all the transactions related to cash. Examples include: expenses paid in cash, revenue collected in cash, payments made to creditors, payments received from debtors, cash deposited in bank, withdrawn of cash for office use, etc.

In double column cash book, a discount column is included on both debit and credit sides to record the discount allowed to customers and the discount received from creditors respectively.

In triple column cash book, one more column of bank is included to record all the transactions relating to bank.

Note: In modern accounting, simple cash book is the most popular way to record cash transactions. The double column cash book or three column cash book is practically for academic purpose. A separate bank book is used to record all the banking transactions as they are more than cash transactions. These days, cash is used just to meet petty and routine expenditures of an organization. In most of the organizations, the salaries of employees are paid by bank transfer.

Note: Cash book always shows debit balance, cash in hand, and a part of current assets.

Single Column Cash Book

Cash book is just like a ledger account. There is no need to open a separate cash account in the ledger. The balance of cash book is directly posted to the trial balance. Since cash account is a real account, ruling is followed, i.e. what comes in – debit, and what goes out – credit. All the received cash is posted in the debit side and all payments and expenses are posted in the credit side of the cash book.

Format

CASH BOOK (Single Column)
Dr. Cr.
Date Particulars L.F. Amount Date Particulars L.F. Amount

Double Column Cash Book

Here, we have an additional Discount column on each side of the cash book. The debit side column of discount represents the discount to debtors of the company and the credit side of discount column means the discount received from our suppliers or creditors while making payments.

The total of discount column of debit side of cash book is posted in the ledger account of ‘Discount Allowed to Customers’ account as ‘To Total As Per Cash Book’. Similarly, credit column of cash book is posted in ledger account of ‘Discount Received’ as ‘By total of cash book’.

Format

CASH BOOK (Single Column)
Dr. Cr.
Date Particulars L.F. Discount Amount Date Particulars L.F. Discount Amount

Triple Column Cash Book

When one more column of Bank is added in both sides of the double column cash book to post all banking transactions, it is called triple column cash book. All banking transactions are routed through this cash book and there is no need to open a separate bank account in ledger.

Petty Cash Book

In any organization, there may be many petty transactions incurring for which payments have to be done. Therefore, cash is kept with an employee, who deals with it and makes regular payments out of it. To make it simple and secure, mostly a constant balance is kept with that employee.

Suppose cashier pays Rs 5,000 to Mr A, who will pay day-to-day organization expenses out of it. Suppose Mr A spend Rs 4,200 out of it in a day, the main cashier pays Rs 4,200, so his balance of petty cash book will be again Rs 5,000. It is very useful system of accounting, as it saves the time of the main cashier and provides better control.

We will soon discuss about ‘Analytical or Columnar Petty Cash Book’ which is most commonly used in most of the organizations.

Format

PETTY CASH BOOK
Amount Recieved C.B.F Date Particulars Amount Paid Stationery & Printing Cartage Loading Postage L.F.

Purchase Book

Purchase book is prepared to record all the credit purchases of an organization. Purchase book is not a purchase ledger.

Format

PURCHASE BOOK
Date Particulars Inward Invoice No. L.F. Amount

Sale Book

The features of a sale book are same as a purchase book, except for the fact that it records all the credit sales.

Format

SALE BOOK
Date Particulars Outward Invoice No. L.F. Amount

Purchase Return Book

Sometimes goods are to be retuned back to the supplier, for various reasons. The most common reason being defective goods or poor quality goods. In this case, a debit note is issued.

Format

PURCHASE RETURN BOOK
Date Particulars Credit Note No. L.F. Amount

Sale Return Book

The reason of Sale return is same as for purchase return. Sometimes customers return the goods if they don’t meet the quality standards promised. In such cases, a credit note is issued to the customer.

Format

SALE RETURN BOOK
Date Particulars Debit Note No. L.F. Amount

Bills Receivables Book

Bills are raised by creditors to debtors. The debtors accept them and subsequently return them to the creditors. Bills accepted by debtors are called as ‘Bills Receivables’ in the books of creditors, and ‘Bills Payable’ in the books of debtors. We keep them in our record called ‘Bills Receivable Books’ and ‘Bills Payable Book’.

Format

BILLS RECEIVABLE BOOK
Date Received From Term Due Date L.F. Amount

Bills Payable Book

Bills payable issues to the supplier of goods or services for payment, and the record is maintained in this book.

Format

BILLS PAYABLE BOOK
Date To Whom Given Term Due Date L.F. Amount

Key Features of Subsidiary Books

There is a difference between a purchase book and a purchase ledger. A purchase book records only credit purchases and a purchase ledger records all the cash purchases in chronical order. The daily balance of purchase book is transferred to purchase ledger. Therefore, purchase ledger is a comprehensive account of all purchases.

The same rule applies to sale book and sale ledgers.

  • It is quite clear that maintaining a subsidiary book is facilitation to journal entries, practically it is not possible to post each and every transaction through journal entries, especially in big organizations because it makes the records bulky and unpractical.

  • Maintenance of subsidiary books gives us more scientific, practical, specialized, controlled, and easy approach to work.

  • It provides us facility to divide the work among different departments like sale department, purchase department, cash department, bank department, etc. It makes each department more accountable and provides an easy way to audit and detect errors.

  • In modern days, the latest computer technology has set its base all over the world. More and more competent accounts professionals are offering their services. Accuracy, quick results, and compliance of law are the key factors of any organization. No one can ignore these factors in a competitive market.

Bank Reconciliation

On a particular date, reconciliation of our bank balance with the balance of bank passbook is called bank reconciliation. The bank reconciliation is a statement that consists of:

  • Balance as per our cash book/bank book
  • Balance as per pass book
  • Reason for difference in both of above

This statement may be prepared at any time as per suitability and requirement of the firm, which depends upon the volume and number of transaction of the bank.

In these days, where most of the banking transactions are done electronically, the customer gets alerts for every transaction. Time to reconcile the bank is reduced more.

Format

BANK RECONCILIATION STATEMENT
Particulars Debit Bank Balance as per Bank Book Credit Bank Balance as per Bank Book (overdraft)
Balance as per Bank Book
1. Add: Cheque issued to parties but not presented in bank
2. Less: Cheque deposited in bank but not cleared yet
3. Less: Bank Charges debited by bank but not entered in our books of accounts
4. Less: Bank interest charged by bank but not entered in our books of accounts
5. Add: Payment direct deposited by party without intimation to us
Balance as per Bank Pass Book/ Statement

Trial Balance

Trial balance is a summary of all the debit and credit balances of ledger accounts. The total of debit side and credit side of trial balance should be matched. Trial balance is prepared on the last day of the accounting cycle.

Trial balance provides us a comprehensive list of balances. With the help of that, we can draw financial reports of an organization. For example, the trading account can be analyzed to ascertain the gross profit, the profit and loss account is analyzed to ascertain the profit or Loss of that particular accounting year, and finally, the balance sheet of the concern is prepared to conclude the financial position of the firm.

Format

TRIAL BALANCE
S.No. Ledger Accounts L.F. Debit(Rs.) Credit(Rs.)
1 ADVANCE FROM CUSTOMERS
2 ADVANCE TO STIFF
3 AUDIT FEES
4 BALANCE AT BANK
5 BANK BORROWINGS
6 BANK INTEREST PAID
7 CAPITAL
8 CASH IN HAND
9 COMMISSION ON SALE
10 ELECTRICITY EXPENSES
11 FIXED ASSETS
12 FREIGHT OUTWARD
13 INTEREST RECEIVED
14 INWARD FREIGHT CHARGES
15 OFFICE EXPENSES
16 OUTSTANDING RENT
17 PREPAID INSURANCE
18 PURCHASES
19 RENT
20 REPAIR AND RENUWALS
21 SALARY
22 SALARY PAYABLE
23 SALE
24 STAFF WELFARE EXPENSES
25 STOCK
26 SUNDRY CREDTIORS
27 SUNDRY DEBITORS
TOTAL

Financial Statements

Financial statements are prepared to ascertain the profit or loss of the business, and to know the financial position of the company.

Trading, profit & Loss accounts ascertain the net profit for an accounting period and balance sheet reflects the position of the business.

All the above has almost a fixed format, just put all the balances of ledger accounts into the format given below with the help of the trial balance. With that, we may derive desired results in the shape of financial equations.

Trading & Profit & Loss Account of M/s ABC Limited

For the period ending 31-03-2014
Particulars Amount Particulars Amount
To Opening Stock By Sales
To Purchases By Closing Stock
To Freight charges By Gross Loss c/d
To Direct Expenses
To Gross Profit c/d
Total Total
To Salaries By Gross Profit b/d
To Rent
To Office Expenses By Bank Interest received
To Bank charges By Discount
To Bank Interest By Commission Income
To Electricity Expenses By Net Loss transfer to Balance sheet
To Staff Welfare Expenses
To Audit Fees
To Repair & Renewal
To Commission
To Sundry Expenses
To Depreciation
To Net Profit transfer to Balance sheet
Total Total
Balance sheet of M/s ABC Limited

as on 31-03-2014
Liabilities Amount Assets Amount

Capital XX

Add:Net Profit XX

Fixed Assets XXXX

Less:Description XX
Bank Borrowings Current Assets -
Long Term Borrowing Stock
Current Liabilities - Debtors
Advance Form Customers Cash In hand
Sundry creditors Cash at Bank
Bills Payable Bills receivables
Expenses Payable
Total Total

Owner’s Equity

The equation of equity is as follows:

Owner Equity = Assets – liability

The owner or the sole proprietor of a business makes investments, earns some profit on it, and withdraws some money out of it for his personal use called drawings. We may write this transaction as follows:

Investment (capital) ± Profit or Loss – drawings = Owner’s Equity

Current Assets

Assets that are convertible into cash within the next accounting year are called current assets.

Cash in hand, cash in bank, fixed deposit receipts (FDRs), inventory, debtors, receivable bills, short-term investments, staff loan and advances; all these come under current assets. In addition, prepaid expenses are also a part of current assets.

Note: Prepaid expenses are not convertible into cash, but they save cash for the next financial or accounting year.

Current Liabilities

Like current assets, current liabilities are immediate liabilities of the firm that are to be paid within one year from the date of balance sheet.

Current liabilities primarily include sundry creditors, expenses payable, bills payable, short-term loans, advance from customers, etc.

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