The subsidiary books may be defined as books where the transactions are entered first and then ledger accounts are opened. These subsidiary books are also known as ‘Books of Original Entry.’ This subdivision of books is essential due to the expanding size of the business.
Advantages of subsidiary books
Work is Assigned According to Ability : There are number of subsidiary books in place of one journal. Work is divided among the employees according to their ability.
Increase in Efficiency : Since each person is assigned a particular type of work and according to the capability and interest of the person concerned, he becomes quite efficient in his work. This leads to finish the work in lesser time and accurately.
Checking become Easy : When trial balance does not tally, errors can be detected fast and easily.
Posting becomes Easy : Since all the transactions of a particular nature are at one place, posting becomes easier. For example, if all credit sales are taken from sales book, only total of the book is be posted to sales account in the ledger.
Frauds are Easily Detected : By the use of subsidiary books the work is divided among various persons. Therefore, the possibility of fraud is greatly reduced. If only one book is maintained, i.e. the journal, only one person will be incharge of the whole show. In such a case, it is cashier to commit a fraud.
Flexibility : The number of books can be increased or decreased according to the requirement. It is not compulsory to maintain all the eight books.
Fixation of Responsibility : It is easier to fix responsibility for the errors committed because each work is done by separate person.
All Information Available at One Place : All the subsidiary books of account are available at one place. As such, every type of information is available at one place and without delay.
Following subsidiary books are maintained generally in a business :
Purchases Book : All the credit purchases of goods are recorded in this book. Here goods means articles purchases to sale at profit. It does contain purchase of assets like plant and machinery.
Purchases Returns Book : All the goods returns to suppliers due to some defects are recorded in this book. It is also known as Returns Outwards Book.
Sales Book : This journal is meant for recording of all credit sales of goods dealt in by the firm.
Sales Returns Book : It is also called Returns Inwards Book. All the goods returned by the parties are entered in this book. The good are returned when the customer is not satisfied with the quality, price or packing of the goods.
Bills Receivable Book : All the bills accepted by the customers for credit purchases are entered in this book.
Bills Payable Book : All the bills of exchange accepted for payments, when the goods are purchased on credit from the suppliers are entered by them in this book.
General Proper : This book is meant for recording all those transactions for which no special journal is maintained.
The following transactions are recorded in the journal proper:
1. Goods taken by the proprietor for personal use.
2. Bad debts.
3. Credit purchases and credit sales of fixed assets.
4. Depreciation on fixed assets.
5. Interest on capital.
6. Accrued commission or commission due but yet to be received.
7. Income received in advance, such as interest or rent received in advance.
8. Prepaid expenses, such as insurance paid in advance.
9. Outstanding expenses, such as rent, wages, salary, commission, etc.
Cash book
This book is used to record all transactions relating to cash receipts and cash payment. The number of cash receipts and payment quite large in every enterprise and it is practically impossible for one person to so maintain a separate book for cash transactions. This book enables to ascertain the balance of cash in hand and cash at bank at one glance. It also contains information about the daily cash and cheque receipts, payments and closing balance at the end of each day. As such, it is a very popular book and is maintained in almost all the enterprises whether big or small.
A combined book
It serves the purpose of journal as well as ledger (cash account). Since cash book is considered as a book of original entry, cash transaction are recorded in cash book and not in the journal. Since it is also a ledger account, posting to cash account is not required. In this way, it is both an original book and principal book.
Distinction between cash book and cash account
Cash book is a perfect substitute of cash account. It both of them cash transactions are recorded datewise. Both of these enable an enterprises to ascertain cash balance on any date. Still there are some differences between the two as follows :
1. Cash book is a separate book maintained for recording cash transactions. But cash account is just one of the accounts recorded in a ledger.
2. Cash book records both the aspects of a transaction. Cash account records only one aspect of transaction i.e. Cash.
3. Cash book is a book of original entry because all cash transactions are first of all recorded in it and then posted from cash book to various accounts in the ledger and posting is done in this account from journal.
4. There is need to open a cash account in the ledger when transactions of cash are recorded in cash book.
It is necessary to open a cash account in ledger when transaction of cash are recorded in journal.
Similarities with journal
1. Transactions in the journal are recorded in chronological order just like in cash book.
2. Except for cash account transactions in the cash book are posted to the concerned accounts in the ledger as is the case with journal.
3. A cash book also contains ledger folio column just like a journal.
4. Just like a journal, transactions in the cash book are recorded for the first time from source documents.
Similarities with ledger
1. Cash book itself serves as cash account. Therefore cash account is not opened in the journal. Hence, the cash book is a part of ledger also.
2. Cash book is balanced just like a ledger.
3. The words ‘To’ and ‘By’ are written in a cash book just like a ledger account.
4. Cash book has two equally divided sides having similar columns like that of a ledger. The left side of cash book (receipts side) is the debit side and the right side (payment side) is the credit side like a ledger account.
Cash book Always shows Debit balance
The debit side of the Cash book shows receipts and credit side shows cash payments. Cash book always shows debit balance because payments cannot exceed the available cash. There is a possibility of cash book having zero balance when receipts are equal to payment of cash. But there cannot be credit cash balance because cash receipts are always greater than the payment side showing debit balance.
Kinds of cash book
1. Simple or Single Column or One Column Cash book.
2. Double Column Cash book.
3. Triple Column Cash book or Bank Column Cash book.
4. Petty Cash book.
Single column cash book
When all receipts and payments are in cash only, the cash book contains only one column each side beings debit and credit. It is called simple cash book or single column cash book.
Double column cash book
Double column Cash book are of three types :
(i) Cash book with cash discount columns
(ii) Cash book with bank and discount columns.
(iii) Cash book with cash and bank columns.
Balancing of cash book and carry forward
Cash book may be balanced as per the needs of the enterprises. It may be daily, weekly or monthly. The normal practice is to take the balance daily to the balance shown in cash book with that of actual amount of cash with enterprise.
The balancing of cash book should be done taking into consideration the following facts :
(i) The receipts are entered in the debit side.
(ii) The payments are entered in the credit side.
(iii) The difference is written on the credit side as by ‘Balance c/d.’ It makes the total of the two sides equal and the total is written in both the columns.
(iv) The receipts or debit column is always bigger than the payments or credit side.
(v) The closing balance became opening balance of cash in hand. It is written as ‘To Balance b/d’ on the receipts or debit side of the cash book as first entry of the day.
Cash discount
Cash discount is allowed or received when payment is received or made. It is necessary to record this fact at the place where the cash transaction is entered.
Cash discount received
When payment is made to the party before the expiry of fixed period a certain amount of discount is allowed by the creditor. Suppose, goods worth Rs. 40,000 was purchased from Rahul in terms of 10% discount if payment is made within 10 days, the account of the creditor can be cleared by paying Rs. 4000 less within the stipulated period. It means Rs. 36000 only will be paid in cash and discount of Rs. 4000 will be availed.
Cash Discount allowed
Cash discount is allowed to the buyers if they make payment within the stipulated period. It is an incentive to the customer for prompt payment. If goods worth Rs. 60,000 is sold for payment with in three days @ discount of 10%. The customer will get a discount of Rs. 6000. He will have to pay Rs. 54,000 only if he makes payment before the expiry of discount limit.
With Bank and Discount Columns
Double Column Cash book is maintained when the bank account is opened by the enterprise. In real life, an enterpriser prefers transactions through bank. ‘In the modern business, transactions are settled mainly by cheques.’
Advantages of bank account
1. Money deposited in bank earns interest.
2. Saves business from keeping large amount of cash which is risky.
3. Money deposited with the bank is safer than that in the cash box
4. Payments by cheque are quite easy and fast.
5. Cheques serves as a witness in case of a dispute between the parties.
6. Businessman can make use of various facilities provided by the bank.
Definition of cheque
A cheque is defined by Negotiable Instrument Act as—“A cheque is unconditional order, drawn upon a specific banker, signed by the maker, directing the banker to pay on demand a certain sum of money only to the order of a person.”
Cheques are generally crossed in practice. The payment of a crossed cheque cannot be made direct to the party on the counter. It is paid only through a bank. A cheque is known to be crossed when two parallel transversal lines are drawn across the cheque.
The following are the various types of crossing providing different degrees of safety to the payment. There are two types of crossing of cheques, namely general crossing and special crossing.
In case of an ‘A/c Payee Only’ Crossing, the amount of cheque can be deposited only in the account of the person whose name appears on the cheque. It is called general crossing. When the name of the bank is written between two parallel lines, it became a special crossing and payment can be made only to the bank whose name has been specified.
Bank draft
A Bank draft is written order for payment of a certain amount of money to a person in whose favour the draft has been issued. It is also known as banker’s cheque. This facility is provided by banks for sending money from one place to another at a nominal commission. This facility can be availed of by any body. It is a safe method of rewriting of funds from one place to other.
Bank overdraft
This facility is provided by banks to their customers on current accounts for borrowing money. Overdraft is the drawing out from a bank account more money than is deposited by the customer with the permission of bank officials. It is a short term loan granted by banks to their customers. Interest is charged on the amount thus withdrawn by customers.
Overdraft is shown as debit balance in the pass book and credit balance in the customer’s cash book.
With Cash and Bank Columns
Opening Balance
Since the cash column always shows debit balance, its is written as ‘To Balance b/d’ on the receipts or debit side of the cash book. But the opening balance of the Cash book can be debit or credit. In case debit balance of bank account is given, it is written as ‘To Balance b/d’ in the bank column. On the other hand if the bank column shows overdraft or credit balance, the first entry will be ‘By balance b/d’ in the credit or payment side of the cash book.
Contra entries
When cash is withdrawn from the bank or when cash is deposited in to the bank for use in the office, each transaction effects both ‘Cash Column’ and ‘Bank Column’. The transaction is, therefore, recorded on both sides (cash and bank) of the cash book. Such entries are the double and complete entries in the Cash and bank columns of the cash book, and are called, ‘Contra Entries’. The word ‘C’ is written in ‘L.F.’ column of two cash book.
When cash is taken out from the bank column cash column is debited and bank column of the cash book is credited. Similarly, if cash is deposited in the bank, bank account is debited and cash account is credited. When a cheque is received, it may be deposited on another day. In case it is deposited on the same day, two amounts is recorded in the bank column of the cash book. If the cheque is deposited on another day, it is treated as cash on the date of receipt, it is treated as cash received and recorded in the cash column on receipts side. On the date of depositing the cheque into the bank, entry for deposit will be passed i.e. the entry will be recorded on the receipts side in the bank column of the cash book and on the payment side in the cash column. This is a ‘Contra’ entry.
Dishonour of cheque received
In case, a cheque is dishonoured and intimated the bank will return the dishonoured cheque, and debit the firm’s account. On receipt of such cheque/intimation from the bank, the firm should make an entry on the credit side of the cash book by entering the amount of the dishonoured cheque in the bank column and the name of the party (from whom the cheque was received) in the particulars column. This entry will restore the position prevailing before the receipt of the cheque from the party and its deposit in the bank. Dishonour of a cheque is return of check unpaid, generally due to insufficient funds in party’s account with the bank.
Interest/commission charged allowed & direct collection of interests dividends by the bank : In case the bank debits the firm on account of interest, commission or other charges for bank services, the entry will be on credit side, in bank column. On the other hand, if the bank credits the firms’s account for direct collection of interests, dividends etc. the entry will be made on the receipts (debit) side of the cash book in the cash column.
The bank column of the cash book is balanced in the same way as the cash column.
Amount withdrawn for personal use of the proprietor is not a contra transaction. It will affect only the bank column of the cash book. As such it will be recorded on payment (credit) side of the Cash book. The entry will be as ‘By Drawing A/c’ and the amount will be written in the bank column.
Endorsement of a Cheque : Sometimes, a cheques received from a customer is not deposited in to the bank. It may be given to some other person known as ‘endorsed’. When the cheque is received, it is entered into the cash column on receipts side of the cash book. On endorsement it will be entered into the cash column on credit side of the cash book.
Triple column Cash book
This type of Cash book is similar to the Cash book having Cash and Bank Columns except on additional Column on each side is provided for recording discount. Discount is nominal account. Discount allowed is written on the credit side and discount received is entered in to the debit side of the Cash book. The discount column is not balanced. The rules for a Triple Column Cash book are the same as in the case of Cash book having Bank and Cash Columns.
Petty Cash book
In every organization, a large number of small payments, such as, for cartage, postage, conveyance and other expenses are made. There are mostly repetitive transactions. If all these transactions are handled by the cashier and are recorded in the main Cash book, it becomes very cumbersome for one person. To avoid this stage, large enterprises appoint one more cashier. He maintains a separate book, known as Petty Cash book, to record such transactions. The petty cashier, usually, is given a fixed amount at regular intervals from the Chief Cashier for making small payments.
Imprest system of Petty cash
The petty cashier works on the imprest system. He is paid a certain amount as advance by the chief cashier to make small payments. The amount paid to the petty cashier as advance is known as ‘Imprest System’. The amount is generally paid in the beginning of each month. The period may be a week, or a fortnight, or a month. At the end of the period, the petty cashier is given cash equal to the amount spent so that in the beginning of the next period, he has the same amount that was given to him in the beginning of the month. The word ‘prest’ means advance given to a person.
Merits of petty cash book
Simple : Recording of entries in a petty cash book is simple. It can be handled easily by any sensible person.
Reduced chance of Fraud and Mistake : Since the petty cash book is periodically checked by the chief cashier there are reduced chance of fraud and mistakes.
Easy in Posting : The total of each small payments are recorded in the ledger. It makes ledger posting easy.
Saving Time and Labour : As chief cashier is not supposed to deal with petty expenses there is saving of time and labour. The chief cashier can concentrate on important matters.
Analytical or columnar petty Cash book
In this cash book, a separate column is prepared for each class of most common expenses. Number of columns depends on the nature and need of the enterprise. All expenses are written on the credit side. Those expenses which don’t accrue frequently are grouped in to the miscellaneous column. This column followed by remarks column. It this column nature of payment recorded in Sundry Expenses Column is written.
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