Recording of Transactions — II

Cash Book

The Cash Book: Your Business's Financial Pulse

Imagine you run a small stationery shop. Throughout the day, you have dozens of transactions: a student buys a pen for ₹20, you pay the newspaper vendor ₹300, a customer buys notebooks worth ₹500, and you pay ₹150 for tea and snacks. If you were to journalize every single one of these small cash transactions, your journal would become incredibly long and cumbersome.

This is where special purpose subsidiary books come in. For transactions that are large in number and repetitive in nature, we maintain separate books. The most important of these is the Cash Book, because no business can function without cash transactions.

{{KEY: type=definition | title=Cash Book | text=A Cash Book is a special journal in which all transactions relating to cash receipts and cash payments are recorded in a chronological order. It serves the purpose of both a journal (as a book of original entry) and a ledger (as the Cash Account).}}

The Cash Book is unique because it holds a dual status.

• It's a Subsidiary Book (or book of original entry) because cash transactions are recorded here for the first time, directly from the source documents.
• It's also a Principal Book because it serves as the Cash Account itself. This means you do not need to open a separate 'Cash A/c' in the General Ledger.

{{VISUAL: diagram: A flowchart showing the Cash Book's dual role. One arrow points from 'Source Documents' to 'Cash Book (Journal Role)'. Another arrow from 'Cash Book' points to 'Trial Balance', with a label 'Ledger Role (Cash A/c)'.}}

The Single Column Cash Book

The simplest form of a cash book is the Single Column Cash Book. It's used when a business performs all its transactions purely in cash. As the name suggests, it has one amount column on each side to record cash receipts and cash payments.

The ruling of a Single Column Cash Book is just like a standard ledger account.

• The Debit (Dr.) side (left side) is used to record all cash coming into the business (receipts).
• The Credit (Cr.) side (right side) is used to record all cash going out of the business (payments).

The format looks like this:

Cash Book Dr.                                                                                           Cr.

• Date: The date of the transaction.
• Particulars (Receipts/Payments): The name of the account in respect of which cash is received or paid.
• L.F. (Ledger Folio): The page number of the ledger where the corresponding account is maintained.
• Amount: The amount of cash received or paid.

{{VISUAL: chart: The format of a Single Column Cash Book, with labels clearly pointing to each column (Date, Receipts, L.F., Amount) on both the Debit and Credit sides.}}

Posting from the Single Column Cash Book

Remember, the Cash Book itself is the Cash Account. So, the process of posting involves the other accounts mentioned in the particulars column. The rule is simple:

The account mentioned in the particulars column is given the opposite treatment in the ledger.

1. For Receipts (Debit side of Cash Book): If you receive cash from a person (say, Gurmeet), you debit the Cash Book and write 'To Gurmeet'. The posting will be on the credit side of Gurmeet's Account in the ledger, where you will write 'By Cash A/c'.
2. For Payments (Credit side of Cash Book): If you pay cash for an expense (say, Rent), you credit the Cash Book and write 'By Rent'. The posting will be on the debit side of the Rent Account in the ledger, where you will write 'To Cash A/c'.

{{VISUAL: diagram: A two-part diagram showing the posting process. Part 1 shows an entry on the Debit side of the Cash Book (To Sales A/c), with an arrow pointing to the Credit side of the Sales Account ledger (By Cash A/c). Part 2 shows an entry on the Credit side of the Cash Book (By Purchases A/c), with an arrow pointing to the Debit side of the Purchases Account ledger (To Cash A/c).}}

Balancing the Cash Book

Just like any ledger account, the cash book is balanced at the end of a period (usually a month).

1. Total both sides: Add up the amount columns on the debit (receipts) side and the credit (payments) side.
2. Find the difference: The debit side total will always be greater than or equal to the credit side total (since you can't pay more cash than you have). The difference is the closing balance.
3. Enter the closing balance: Write 'By Balance c/d' (carried down) in the particulars column on the credit (shorter) side and write the closing balance amount. This makes the totals of both sides equal.
4. Bring down the balance: On the first day of the next month, write 'To Balance b/d' (brought down) on the debit side and write the closing balance amount from the previous month. This becomes the opening balance for the new period.

{{KEY: type=points | title=Cash Book Rules | text=- All cash receipts are recorded on the Debit (Dr.) side.

• All cash payments are recorded on the Credit (Cr.) side.
• It serves as both a journal and the cash ledger account.
• The cash book can never have a credit balance because cash payments cannot exceed the cash available.}}

Solved Numericals

Let's apply these concepts to practical problems.

Example 1: Preparing a Single Column Cash Book

GIVEN: Prepare a Single Column Cash Book from the following transactions of M/s Sharma Electronics for January 2023.

SOLUTION: We will record all receipts on the debit side and all payments on the credit side.

Books of M/s Sharma Electronics Cash Book Dr.                                                                                                             Cr.

ANSWER: The closing cash balance for M/s Sharma Electronics on Jan 31, 2023, is ₹ 47,000.

Example 2: Cash Book and Posting to Ledger

GIVEN: Record the following transactions in the Cash Book of M/s Gupta General Store for December 2023 and post them to the relevant ledger accounts.

SOLUTION: First, we prepare the Cash Book.

Books of M/s Gupta General Store Cash Book Dr.                                                                                                             Cr.

Now, we post these to the respective ledger accounts. (Note: No Cash Account is opened in the ledger).

Ledger Accounts

Capital Account Dr.                                                                                                           Cr.

Furniture Account Dr.                                                                                                         Cr.

Sales Account Dr.                                                                                                           Cr.

{{KEY: type=exam | title=Posting from Cash Book | text=In exams, a common mistake is opening a Cash Account in the ledger after preparing a Cash Book. Remember, the Cash Book itself is the Cash Account, so never create a duplicate in the ledger.}}

{{VISUAL: photo: A real-world cash transaction, showing a customer handing Indian Rupee notes to a shopkeeper over a counter filled with goods.}}

Try It Yourself

1. Enter the following transactions in a Single Column Cash Book for M/s Verma Traders for March 2023:
   • Mar 01: Cash balance b/d - ₹ 25,000
   • Mar 08: Cash sales - ₹ 18,000
   • Mar 15: Paid to Rohan - ₹ 12,000
   • Mar 22: Purchased stationery - ₹ 2,000
   • Mar 30: Paid salaries - ₹ 10,000
2. From the following particulars, find out the total cash receipts and total cash payments for the month of April for Neha Enterprises.
   • Opening Cash Balance: ₹ 15,000
   • Cash Sales: ₹ 40,000
   • Cash Purchases: ₹ 22,000
   • Received from debtors: ₹ 10,000
   • Paid for electricity: ₹ 3,000
3. Why is a cash book called a book of 'original entry' as well as a 'principal book'?

Answer Key:

1. Closing Balance (Balance c/d) = ₹ 19,000
2. Total Cash Receipts = ₹ 50,000; Total Cash Payments = ₹ 25,000
3. It is a book of original entry because transactions are recorded for the first time. It is a principal book because it also serves as the Cash Account, a part of the ledger.

Purchases (Journal) Book

Purchases (Journal) Book

Imagine a large electronics store. They buy hundreds of TVs, refrigerators, and mobile phones every month, all from different suppliers and all on credit. Recording each of these purchases in the main Journal would be incredibly repetitive and time-consuming. This is where special purpose books, also known as subsidiary books, come into play.

The Purchases (Journal) Book is one such subsidiary book, designed specifically to record one type of transaction efficiently: the credit purchase of goods.

{{KEY: definition | title=Purchases (Journal) Book | text=A special purpose subsidiary book used to record all credit purchases of goods. 'Goods' refers to the items in which the business deals or trades.}}

What Goes into the Purchases Book?

It's crucial to understand what is recorded here and what is excluded. The rule is simple but strict.

{{KEY: points | title=Inclusions vs. Exclusions in Purchases Book | text=

• Included: Only the purchase of goods on credit. Goods are items bought for the purpose of resale (e.g., TVs for an electronics dealer, stationery for a bookstore).
• Excluded: Cash purchases of goods (these go into the Cash Book).
• Excluded: Purchase of assets on credit (e.g., furniture, machinery, delivery van). These are recorded in the Journal Proper.
• Excluded: Purchase of assets for cash (these go into the Cash Book).}}

The primary source document for recording an entry in the Purchases Book is the invoice or bill received from the supplier.

Handling Trade Discount

Suppliers often offer a trade discount, which is a reduction in the list price of goods, usually for bulk purchases. This discount is not recorded separately in the accounting books. Instead, we record the transaction at the net amount.

Net Amount = List Price - Trade Discount

For example, if goods with a list price of ₹10,000 are bought with a 10% trade discount, the discount is ₹1,000. The purchase will be recorded in the Purchases Book at the net amount of ₹9,000.

Format of the Purchases Book

The Purchases Book has a simple, columnar format designed for clarity and ease of posting.

{{VISUAL: diagram: The format of a Purchases Journal, showing columns for Date, Invoice No., Name of Supplier, L.F., and Amount.}}

Here's what each column means:

• Date: The date on which the goods were purchased.
• Invoice No.: The reference number of the invoice received from the supplier.
• Name of Supplier (Account to be credited): The name of the business or person from whom the goods were purchased on credit. This is the account that will be credited in the ledger.
• L.F. (Ledger Folio): The page number of the ledger where the supplier's account is located. This is filled in during posting.
• Amount: The net amount of the purchase after deducting any trade discount.

Posting from the Purchases Book to the Ledger

Recording entries in the Purchases Book is only the first step. The next is to transfer this information to the main ledger. This is a two-part process.

{{VISUAL: diagram: A flowchart showing the process of posting from the Purchases Journal to the Ledger. An arrow from individual entries points to 'Credit of Supplier's A/c', and an arrow from the journal total points to 'Debit of Purchases A/c'.}}

1. Posting to Individual Supplier Accounts:

   • This is typically done daily.
   • Each individual entry from the Purchases Book is posted to the credit side of the respective supplier's account in the ledger.
   • This is because the supplier is a creditor, and our liability to them has increased. An increase in liability is credited.

2. Posting the Total to the Purchases Account:

   • This is done periodically, usually at the end of the month.
   • The total of the 'Amount' column of the Purchases Book is posted to the debit side of the Purchases Account in the ledger.
   • This is because purchases represent an expense for the business. An increase in expense is debited. The narration used is typically "Sundries as per Purchases Book".

{{KEY: concept | title=Ledger Posting from Purchases Book | text=Individual amounts are credited to the respective Supplier's Account (as they are creditors). The periodic total of the Purchases Book is debited to the Purchases Account (as it is an expense). This maintains the double-entry principle.}}

Purchases Return and Debit Notes

What happens if the goods you purchased are defective or not as per your order? You return them to the supplier. These transactions are recorded in a separate book called the Purchases Return (Journal) Book.

When goods are returned, the business prepares a Debit Note and sends it to the supplier.

{{KEY: definition | title=Debit Note | text=A document sent by a purchaser to a seller to inform them that their account has been debited for the value of the goods returned. It serves as the source document for recording entries in the Purchases Return Book.}}

{{VISUAL: photo: A realistic sample of a Debit Note issued by a business to its supplier for returned goods, showing details like item description, quantity, price, and reason for return.}}

Conversely, when a seller receives returned goods, they issue a Credit Note to the buyer, confirming that the buyer's account has been credited (i.e., their debt has been reduced).

{{VISUAL: photo: A realistic sample of a Credit Note received from a supplier, acknowledging the return of goods and the credit applied to the business's account.}}

{{KEY: exam | title=Debit Note vs. Credit Note | text=Remember: The BUYER (who is returning goods) issues a Debit Note. The SELLER (who is receiving the returned goods) issues a Credit Note. This is a very common topic for 1-mark questions.}}

The fundamental purpose of subsidiary books like the Purchases Book is to subdivide the journal, making the accounting process more systematic, efficient, and less prone to errors.

Solved Numericals

Let's apply these concepts to practical problems.

Example 1: Preparing a Purchases Book

GIVEN: M/s. Modern Garments, a clothing store in Delhi, has the following credit purchase transactions for April 2023. Prepare their Purchases Book.

• April 05: Purchased from M/s. Rahul Textiles, Mumbai (Invoice No. 201): 100 T-shirts @ ₹300 each. Trade Discount 10%.
• April 12: Bought furniture on credit from M/s. Royal Furnishers for ₹50,000 (Invoice No. F-88).
• April 18: Purchased from M/s. Priya Apparels, Noida (Invoice No. 734): 50 Jeans @ ₹800 each and 80 Shirts @ ₹500 each. Trade Discount 15%.
• April 25: Purchased goods for cash from a local supplier for ₹15,000.

SOLUTION:

First, we need to identify which transactions belong in the Purchases Book.

• April 05: Credit purchase of goods. Include.
• April 12: Credit purchase of an asset (furniture). Exclude. This will be recorded in the Journal Proper.
• April 18: Credit purchase of goods. Include.
• April 25: Cash purchase of goods. Exclude. This will be recorded in the Cash Book.

Working Notes (Calculations):

1. April 05: M/s. Rahul Textiles

   • List Price of 100 T-shirts @ ₹300 = ₹30,000
   • Less: Trade Discount @ 10% (10% of 30,000) = ₹3,000
   • Net Amount to be Recorded = ₹27,000

2. April 18: M/s. Priya Apparels

   • List Price of 50 Jeans @ ₹800 = ₹40,000
   • List Price of 80 Shirts @ ₹500 = ₹40,000
   • Total List Price = ₹80,000
   • Less: Trade Discount @ 15% (15% of 80,000) = ₹12,000
   • Net Amount to be Recorded = ₹68,000

ANSWER:

In the Books of M/s. Modern Garments Purchases (Journal) Book

Example 2: Ledger Posting

GIVEN: Using the Purchases Book from Example 1, show the posting to M/s. Priya Apparels' Account and the Purchases Account in the ledger.

SOLUTION:

We will post the individual entry to the creditor's account and the total to the Purchases Account.

ANSWER:

Ledger

M/s. Priya Apparels Account Dr. Cr.

Purchases Account Dr. Cr.

Note: The posting for M/s. Rahul Textiles would be similar, with a credit of ₹27,000 in their account.

Try It Yourself

1. Record the following in the Purchases Book of M/s. Gupta & Sons for Jan 2024:

   • Jan 10: Bought from M/s. Brown & Co. on credit: 10 registers @ ₹120 each. (Invoice 110)
   • Jan 20: Purchased a computer on credit from M/s. Tech Solutions for ₹45,000.
   • Jan 25: Bought from M/s. Paper Mills on credit: 5 reams of paper @ ₹500 each. Trade discount 5%. (Invoice 252)

2. Why is the purchase of office furniture on credit not recorded in the Purchases Book?

3. From which document are entries made in the Purchases Return Book?

Answer Key:

1. Total of Purchases Book = ₹3,575 (₹1,200 from Brown & Co. + ₹2,375 from Paper Mills). The computer purchase is excluded.
2. Because furniture is an asset for the business, not 'goods' (items meant for resale). It is recorded in the Journal Proper.
3. Debit Note.

Purchases Return (Journal) Book

Recording Purchases Return

In business, not every transaction goes perfectly. Imagine you run a mobile phone shop and order 100 new smartphones from a supplier. What happens if, upon delivery, you find that 5 of the phones have cracked screens or don't switch on? You wouldn't pay for defective goods. Instead, you would return them. This process of returning goods to a supplier is known as a purchase return or returns outward.

Just like credit purchases have a special journal (the Purchases Book), returns of these credit-purchased goods also have their own special journal to keep the records clean and organized.

{{VISUAL: photo: A warehouse worker inspecting a box of damaged electronic goods received from a supplier, preparing to return them with a checklist.}}

The Purchases Return (Journal) Book

The Purchases Return (Journal) Book is a subsidiary book used to record all transactions related to the return of goods that were originally bought on credit. It is crucial to remember that this book only records the return of goods purchased on credit. The return of goods purchased for cash is handled through the Cash Book.

Goods may be returned for several reasons:

• They are defective or damaged.
• They are not of the quality or specification ordered.
• They were delivered late.
• They were sent in excess of the quantity ordered.

{{KEY: definition | title=Purchases Return Book | text=A special purpose journal used to record the return of goods that were originally purchased on credit. It is also known as the Returns Outward Book.}}

The All-Important Source Document: The Debit Note

How do you officially inform your supplier that you have returned goods and will be paying them less? You can't just send the goods back; you need a proper document. This document is called a Debit Note.

When a buyer returns goods to a seller, the buyer prepares a Debit Note and sends it along with the returned goods. This note informs the seller that their account has been debited (reduced) by the value of the goods returned. Each Debit Note is serially numbered for record-keeping. It is the primary source document for making an entry in the Purchases Return Book.

Debit Note vs. Credit Note

While the buyer sends a Debit Note, the seller, upon receiving the returned goods and the Debit Note, issues a Credit Note. A Credit Note is an acknowledgement from the seller that they have received the goods and have credited the buyer's account, reducing the amount the buyer owes them.

{{KEY: concept | title=Debit Note | text=A document sent by a buyer to a seller to notify them that their account is being debited. In the context of purchase returns, it serves as the source document, indicating that the supplier's account is debited because goods have been returned.}}

{{VISUAL: diagram: A side-by-side comparison of a Debit Note and a Credit Note, highlighting key fields like 'To', 'From', 'Reason for return/credit', and 'Amount'.}}

Format and Posting

The format of a Purchases Return Book is simple and focuses on the key information needed.

Purchases Return (Journal) Book

Let's understand the posting process. It's a two-step flow:

1. Individual Supplier Accounts: Each entry from the Purchases Return Book is posted to the debit side of the respective supplier's account in the ledger. This reduces the amount we owe to that specific supplier. This is usually done daily.
2. Purchases Return Account: At the end of a period (e.g., a month), the 'Amount' column of the Purchases Return Book is totalled. This total is then posted to the credit side of the Purchases Return Account in the ledger.

Why Debit the Supplier and Credit Purchases Return? When we purchase goods, we credit the supplier (a liability). When we return goods, we do the opposite: we debit the supplier to reduce that liability. The Purchases Return account is a contra-expense account that reduces our total purchases, and it has a natural credit balance.

{{KEY: points | title=Posting from Purchases Return Book | text=- Individual entries are posted to the debit side of the respective supplier's account in the ledger.

• The periodical total (e.g., monthly total) is posted to the credit side of the Purchases Return Account.}}

{{VISUAL: diagram: A flowchart showing the process of a purchase return. Step 1: Defective goods identified. Step 2: Debit Note prepared. Step 3: Entry made in Purchases Return Book. Step 4: Posting to Supplier's A/c (Debit) and Purchases Return A/c (Credit).}}

Solved Numericals

Let's apply this knowledge with some practical examples.

Example 1: Single Return Transaction

GIVEN: M/s Rahul Textiles purchased goods from M/s Goyal Fabrics for ₹50,000 on credit. On May 10, 2023, they returned goods worth ₹5,000 as they were not as per the sample. They issued Debit Note No. 021. Show the entry in the Purchases Return Book and the ledger accounts.

SOLUTION:

Step 1: Record in Purchases Return Book

Books of Rahul Textiles Purchases Return (Journal) Book

Step 2: Post to Ledger Accounts

Goyal Fabrics Account Dr. Cr.

Purchases Return Account Dr. Cr.

Example 2: Multiple Returns in a Month

GIVEN: Prepare the Purchases Return Book for M/s Modern Electronics for April 2023 from the following transactions:

• April 08: Returned 2 defective printers to M/s Compucare Ltd. worth ₹12,000 (Debit Note No. 105).
• April 17: Returned goods to M/s Surya Lamps for ₹3,500 as they were of the wrong specification (Debit Note No. 106).
• April 25: Returned damaged keyboards to M/s Compucare Ltd. for ₹4,000 (Debit Note No. 107).

Also, show the posting to the Purchases Return Account.

{{VISUAL: photo: A sample filled-out Purchases Return Journal page from a physical accounting book, showing neat handwritten entries for several transactions.}}

SOLUTION:

Step 1: Prepare the Purchases Return Book

Books of Modern Electronics Purchases Return (Journal) Book

Note: Individual postings of ₹12,000 and ₹4,000 would be made to the debit of Compucare Ltd.'s account, and ₹3,500 to the debit of Surya Lamps' account on their respective dates.

Step 2: Post the total to the Purchases Return Account

Purchases Return Account Dr. Cr.

{{KEY: exam | title=Common Mistake | text=Students often confuse the Purchases Return Book with the Sales Return Book. Remember, Purchases Return is for goods you (the business) return to your suppliers (Returns Outward).}}

Try It Yourself

1. On Jan 15, 2023, M/s Furniture Mart returned 5 chairs costing ₹800 each to M/s Royal Woodcrafts, which were purchased on credit. What will be the entry in the Purchases Return Book?
2. A business returned goods worth ₹2,000 to a supplier. Which document will the business prepare and send to the supplier?
3. From the following, prepare a Purchases Return Book of M/s Garment House for July 2023:
   • July 10: Returned goods to M/s Classic Wear, ₹7,000.
   • July 22: Returned goods to M/s Modern Apparels, ₹3,000. What is the total amount that will be credited to the Purchases Return Account at the end of July?

Answer Key:

1. An entry for ₹4,000 (5 chairs × ₹800) will be made, debiting Royal Woodcrafts.
2. Debit Note.
3. The total amount credited to the Purchases Return Account will be ₹10,000.

Sales (Journal) Book

Sales (Journal) Book & Sales Return (Journal) Book

In the previous section, we explored how businesses record their credit purchases in a special journal called the Purchases Book. Now, let's turn our attention to the other side of the transaction: sales. Just as with purchases, it's inefficient to record every single credit sale in the main journal. This is where the Sales (Journal) Book comes in.

The Sales (Journal) Book

The Sales Book (also known as the Sales Day Book or Sales Journal) is a subsidiary book used to record one specific type of transaction: the credit sale of merchandise.

Remember the distinction:

• Cash sales of goods are recorded in the Cash Book.
• Credit sales of assets (like old furniture or machinery) are recorded in the Journal Proper.
• Only credit sales of the goods the business deals in are recorded in the Sales Book.

The primary source document for recording an entry in the Sales Book is the Sales Invoice or bill that the business issues to its customer. This invoice contains all the necessary details: date, invoice number, customer's name, description of goods, quantity, rate, and the total amount.

{{VISUAL: photo: A clear, sample sales invoice issued by a business, showing details like the seller's and buyer's name, invoice number, date, items sold, quantity, rate, and total amount payable.}}

The format of the Sales Book is designed to capture this information systematically.

{{KEY: definition | title=Sales (Journal) Book | text=A book of original entry where all credit sales of merchandise (goods in which the firm deals) are recorded before being posted to the ledger.}}

Format and Posting

The structure of a Sales Book is straightforward:

Let's break down the posting process, which is the cornerstone of the double-entry system:

1. Posting to Customer Accounts: Entries from the Sales Book are posted to the debit side of the individual customers' accounts in the ledger. This is usually done daily to keep customer balances up-to-date. Why debit? Because the customer is a debtor who owes money to the business.
2. Posting to Sales Account: At regular intervals (usually at the end of the month), the 'Amount' column of the Sales Book is totalled. This total amount is then posted to the credit side of the Sales Account in the ledger. The particulars would read "By Sundries as per Sales Book".

{{VISUAL: diagram: A flowchart showing the process of posting from Sales Book to the Ledger. Box 1: "Record Credit Sale in Sales Book". Arrow to Box 2: "Debit the individual Customer's Account (Daily posting)". Arrow from Box 1 to Box 3: "Total the Sales Book (Monthly)". Arrow from Box 3 to Box 4: "Credit the Sales Account with the total amount".}}

The Sales Return (Journal) Book

What happens when a customer returns goods they bought on credit? Perhaps the goods were defective, of the wrong specification, or damaged in transit. Such transactions are recorded in another special journal: the Sales Return (Journal) Book (or Returns Inward Book).

The source document for recording a sales return is the Credit Note. When a seller accepts returned goods, they issue a Credit Note to the customer, confirming that the customer's account has been credited (i.e., their debt has been reduced).

{{KEY: concept | title=Credit Note vs. Debit Note | text=A Credit Note is prepared by the seller and sent to the buyer when goods are returned. It's an acknowledgement that the buyer's account is being credited. Conversely, a Debit Note is prepared by the buyer and sent to the seller to request a credit, indicating they have debited the seller's account in their own books.}}

Format and Posting

The format is similar to the Sales Book, but it tracks Credit Note numbers instead of Invoice numbers.

{{VISUAL: photo: A sample credit note document, showing the credit note number, date, customer name, reason for return, details of the goods returned, and the amount credited.}}

The posting process for sales returns is the reverse of sales:

1. Posting to Customer Accounts: Individual entries are posted to the credit side of the respective customer's account in the ledger. This reduces the amount they owe.
2. Posting to Sales Return Account: The periodic total of the Sales Return Book is posted to the debit side of the Sales Return Account in the ledger.

{{VISUAL: diagram: Two T-accounts. The first, "Customer's A/c," shows a credit entry from the Sales Return Book. The second, "Sales Return A/c," shows a debit entry for the monthly total. Arrows indicate the flow of information.}}

By maintaining separate Sales and Sales Return accounts, a business can easily track its gross sales versus the value of goods being returned, which is a key performance indicator.

{{KEY: exam | title=Trade Discount Reminder | text=Remember that trade discount is shown as a deduction in the invoice and in the subsidiary book itself, but it is NOT recorded as a separate entry in the ledger accounts. The sale is recorded at the net amount (List Price - Trade Discount).}}

Solved Numericals

Let's apply these concepts with some practical examples.

Numerical Example 1: Preparing a Sales Book and Posting

GIVEN: M/s. Reliable Stationers sold the following items on credit during May 2023. Prepare the Sales Book and post the entries to the ledger.

• May 10: Sold to M/s. Global Booksellers (Invoice No. 201):
  • 100 notebooks @ ₹ 80 each
  • 50 pen sets @ ₹ 120 each
• May 18: Sold to Premier School Supplies (Invoice No. 202):
  • 20 boxes of A4 paper @ ₹ 450 per box
• May 25: Sold to M/s. Global Booksellers (Invoice No. 205):
  • 40 registers @ ₹ 150 each
  • Less: 10% Trade Discount

SOLUTION:

First, we will prepare the Sales Book.

Books of M/s. Reliable Stationers Sales (Journal) Book

Posting to Ledger Accounts:

Dr.                 M/s. Global Booksellers Account                 Cr.

Dr.                 Premier School Supplies Account                 Cr.

Dr.                         Sales Account                         Cr.

Numerical Example 2: Sales and Sales Return

GIVEN: From the following transactions of M/s. Modern Electronics for June 2023, prepare the Sales Book and Sales Return Book. Also, show the ledger account of Techno World.

• June 05: Sold to Techno World on credit (Invoice No. 55):
  • 10 Monitors @ ₹ 8,000 each
  • 5 Printers @ ₹ 12,000 each
• June 12: Techno World returned 2 monitors as they were damaged (Credit Note No. 12).
• June 20: Sold to Digital Hub on credit (Invoice No. 56):
  • 20 Keyboards @ ₹ 700 each

SOLUTION:

Books of M/s. Modern Electronics Sales (Journal) Book

Sales Return (Journal) Book

Posting to Ledger Account of Techno World:

Dr.                       Techno World Account                       Cr.

Try It Yourself

1. Prepare a Sales Book for M/s. Furniture Mart from the following transactions for July 2023:

   • July 01: Sold to Amit Traders on credit (Invoice No. 331): 5 chairs @ ₹1,200 each.
   • July 15: Sold goods for cash to Rohan ₹ 8,000.
   • July 20: Sold to Verma & Co. on credit (Invoice No. 332): 2 tables @ ₹3,000 each and 10 chairs @ ₹1,100 each.
   • July 25: Sold an old computer (asset) on credit to HCL Ltd. for ₹15,000.

2. From the following, prepare a Sales Return Book of M/s. Garment Palace for March 2023:

   • March 10: M/s. Style Zone returned 10 shirts @ ₹400 each, sold on credit. (Credit Note No. 21)
   • March 25: Ritu Boutique returned 5 Kurtis @ ₹850 each, due to defects. (Credit Note No. 22)

3. The monthly total of the Sales Return Book is posted to which side of the Sales Return Account in the ledger?

Answer Key:

1. Total of Sales Book: ₹ 23,000 (Cash sale and sale of asset will not be recorded in the Sales Book).
2. Total of Sales Return Book: ₹ 8,250.
3. Debit side.

Sales Return (Journal) Book

Sales Return (Journal) Book

Imagine you run an online clothing store. A customer buys a shirt but finds it's the wrong size. They send it back. This event, where a customer returns goods they previously bought, is a common occurrence in business. When these goods were originally sold on credit, the return must be recorded systematically. This is where the Sales Return Book comes in.

The Sales Return Book, also known as the Returns Inward Book, is a special journal used to record the return of goods by customers that were originally sold on credit. Just like the Purchases Book, it simplifies the recording process by having a dedicated book for one type of frequent transaction.

The Source Document: Credit Note

How do you officially acknowledge that a customer has returned goods and you owe them money (or have reduced their debt)? You issue a Credit Note.

{{KEY: type=definition | title=Credit Note | text=A Credit Note is a document sent by the seller to the buyer, acknowledging that the buyer's account has been credited for the value of the goods returned. It serves as the primary source document for recording entries in the Sales Return Book.}}

A credit note is prepared by the seller (your business) and sent to the customer. It typically includes:

• The date of the return
• The name of the customer
• Details of the goods returned (quantity, description, rate)
• The net value of the returned goods
• A unique serial number for reference

{{VISUAL: photo: A sample filled-out Credit Note from a stationery supplier to a school, showing details like item name "A4 Paper Reams", quantity returned, price per ream, and the total credited amount.}}

It's important to distinguish this from a Debit Note, which we learned about in Purchase Returns.

{{KEY: type=exam | title=Credit Note vs. Debit Note | text=A common 1 or 2-mark question asks for the difference between a Credit Note and a Debit Note. Remember: The seller prepares the Credit Note for returns inward, and the buyer prepares the Debit Note for returns outward.}}

Format and Posting

The format of the Sales Return Book is simple and designed to capture all necessary information from the Credit Note.

{{VISUAL: diagram: The standard format of a Sales Return (Journal) Book, with columns labeled: Date, Credit Note No., Name of the Customer (Account to be Credited), L.F., and Amount.}}

The columns are:

• Date: The date the goods were returned.
• Credit Note No.: The serial number of the credit note issued.
• Name of the Customer: The name of the customer who returned the goods. This is the account that will be credited.
• L.F. (Ledger Folio): The page number of the customer's account in the ledger.
• Amount: The net value of the goods returned.

Ledger Posting from the Sales Return Book

Once entries are made in the Sales Return Book, they must be posted to the ledger to complete the double-entry process. This happens in two stages:

1. Individual Postings: Each entry from the Sales Return Book is posted to the credit side of the respective customer's personal account in the ledger. This reduces the amount the customer owes to the business. In the particulars column, we write "By Sales Return A/c".

2. Periodical Total Posting: At the end of a period (e.g., a month), the 'Amount' column of the Sales Return Book is totalled. This total is posted to the debit side of the Sales Return Account in the ledger. In the particulars column, we write "To Sundries as per Sales Return Book".

{{KEY: type=points | title=Posting Rules for Sales Return Book | text=- Individual Customer Accounts are Credited. (Reduces their liability to pay)

• Sales Return Account is Debited with the periodic total. (It's a contra-revenue account, reducing total sales)}}

Think of it this way:

• Sales is a revenue (credit balance). A return of sales is the opposite, so the Sales Return Account must have a debit balance.
• A customer (Debtor) is an asset (debit balance). When they return goods, the asset value decreases, so we credit their account.

{{VISUAL: diagram: A flowchart showing the posting process. An arrow points from an individual entry in the Sales Return Book to the Credit side of a Customer's T-Account. Another arrow points from the total of the Sales Return Book to the Debit side of the Sales Return T-Account.}}

By maintaining a separate Sales Return Book, a business can easily track the total value of goods being returned by customers, which can be a key indicator of product quality or customer satisfaction.

Solved Numericals

Let's apply these concepts to practical problems.

Example 1

M/s Gupta Electronics provides the following information about goods returned by customers during January 2023. Prepare the Sales Return Book and post the entries to the ledger.

• Jan 10: M/s Verma & Sons returned 2 electric kettles @ ₹ 800 each (Credit Note No. 51).
• Jan 18: Shanti General Store returned 1 toaster that was defective @ ₹ 1,200 (Credit Note No. 52).
• Jan 25: M/s Verma & Sons returned 1 iron @ ₹ 750 (Credit Note No. 53).

Solution:

First, we will prepare the Sales Return Book for M/s Gupta Electronics.

Books of M/s Gupta Electronics

Sales Return (Journal) Book

Now, we will post these entries to the respective ledger accounts.

Ledger Posting

M/s Verma & Sons Account Dr.                                                                                                   Cr.

Shanti General Store Account Dr.                                                                                                   Cr.

Sales Return Account Dr.                                                                                                   Cr.

Example 2

M/s Vineet Stores sold goods to various customers. Some of these were returned in December 2017. Prepare the Sales Return Book.

• GIVEN:
  • Dec 15: Goods returned from M/s Rohit Stores as per credit note no. 201:
    • 2 Kids Books @ ₹ 60 each
    • 1 Animal Book @ ₹ 50 each
  • Dec 22: Goods returned from M/s Mega Stationers as per credit note no. 204:
    • 2 Colour Books @ ₹ 30 each
  • Dec 28: M/s Abha Traders returned 10 Note Books @ ₹ 35 each. These were part of an order on which a 5% trade discount was given (Credit Note no. 205).

Solution:

We need to calculate the net amount for each return, especially considering the trade discount for Abha Traders.

Calculation for Abha Traders:

• Gross value of returned goods = 10 books × ₹ 35/book = ₹ 350
• Less: Trade Discount @ 5% = 5% of ₹ 350 = ₹ 17.50
• Net Amount of Return = ₹ 350 - ₹ 17.50 = ₹ 332.50

Books of M/s Vineet Stores

Sales Return (Journal) Book

The total of the Sales Return Book, ₹ 562.50, will be debited to the Sales Return Account. Each individual amount (₹ 170, ₹ 60, ₹ 332.50) will be credited to the respective customer's account.

Try It Yourself

1. What is the source document for recording transactions in the Sales Return Book and who prepares it?
2. M/s Sharma Sarees recorded the following returns in July:
   • July 05: Neha Boutique returned 5 silk sarees @ ₹ 2,000 each. A trade discount of 10% was applicable. (Credit Note No. 112)
   • July 20: Ritu Garments returned 10 cotton sarees @ ₹ 500 each, which were damaged in transit. (Credit Note No. 113) Prepare the Sales Return Book for M/s Sharma Sarees.
3. Explain the rule for posting the total of the Sales Return Book to the ledger. Which account is affected and how?

Answer Key:

1. The source document is the Credit Note, prepared by the seller.
2. Total of Sales Return Book: ₹ 14,000 (Neha Boutique: ₹ 9,000; Ritu Garments: ₹ 5,000).
3. The total of the Sales Return Book is posted to the debit side of the Sales Return Account.

Journal Proper

The Journal Proper: The All-Purpose Journal

Imagine a business has several specialized notebooks: one for cash transactions (Cash Book), one for credit purchases of goods (Purchases Book), one for credit sales of goods (Sales Book), and so on. These special journals handle the most common, high-volume transactions, making bookkeeping efficient.

But what about transactions that don't fit into any of these categories? Where do we record the purchase of a new office computer on credit? Or how do we correct a mistake made last week? This is where the Journal Proper comes in. It serves as the "catch-all" or residual journal for recording any transaction that cannot be entered in any other subsidiary book.

{{VISUAL: diagram: A flowchart showing a business transaction. It asks questions in sequence: "Is it a cash transaction?" (→ Cash Book), "Is it a credit purchase of goods?" (→ Purchases Book), "Is it a credit sale of goods?" (→ Sales Book). If the answer is "No" to all, the final arrow points to "Record in Journal Proper".}}

Types of Entries in the Journal Proper

The Journal Proper is not for random entries; it is used for specific types of transactions that are infrequent but essential for accurate accounting.

1. Opening Entry

At the beginning of a new financial year, a business doesn't start from zero. It has existing assets (like cash, furniture, stock) and liabilities (like loans, amounts owed to suppliers) from the previous year. The first entry passed in the new year's books is the opening entry, which records all these opening balances.

• All asset accounts are debited.
• All liability accounts are credited.
• The difference between the total assets and total liabilities is credited to the Capital Account. This entry is based on the fundamental accounting equation: Assets = Liabilities + Capital.

{{KEY: type=concept | title=Opening Entry | text=An opening entry is the first journal entry made in a new accounting period. Its purpose is to bring the closing balances of all assets, liabilities, and capital from the previous period's Balance Sheet into the new set of books.}}

2. Adjustment Entries

To get a true and fair view of the business's financial performance and position, we must account for all expenses and incomes related to the current year, whether cash was paid/received or not (this is the accrual basis). Adjustment entries are made at the end of the accounting period to update the ledger accounts.

Common examples include:

• Rent Outstanding: Rent for the period is due but not yet paid.
• Prepaid Insurance: Insurance premium paid in advance for the next period.
• Depreciation: Recording the wear and tear (decrease in value) of assets like machinery or vehicles.
• Commission Received in Advance: Income received this year that relates to the next year.

{{VISUAL: photo: A calendar page showing December 31st circled. A sticky note on it reads "Record Adjustments: Depreciation on office furniture, Outstanding salaries for staff".}}

3. Rectification Entries

Errors can happen during the recording or posting of transactions. For example, a purchase from 'Rohan' might be wrongly posted to 'Sohan's' account. To correct such mistakes without scribbling or erasing, a formal rectification entry is passed in the Journal Proper. This entry cancels the effect of the error and records the correct transaction.

4. Transfer Entries

At the end of the accounting year, the balances of all nominal accounts (expenses, losses, incomes, gains) must be closed. This is done by transferring their balances to the Trading and Profit & Loss Account.

Similarly, the balance of the Drawings Account (money or goods withdrawn by the owner for personal use) is not carried forward to the next year. Instead, it is transferred to (and deducted from) the Capital Account. All these closing and transfer entries are recorded in the Journal Proper.

{{VISUAL: diagram: A simple flow diagram showing several accounts like 'Salaries A/c', 'Rent A/c', 'Sales A/c', 'Interest Received A/c' with arrows pointing towards a central box labeled "Trading and Profit & Loss Account", indicating the transfer of balances.}}

{{KEY: type=exam | title=Common Question Type | text=CBSE questions often provide a list of transactions and ask you to identify which ones will be recorded in the Journal Proper. Be especially careful to distinguish between the credit purchase of 'goods' (Purchases Book) and 'assets' (Journal Proper).}}

5. Other Miscellaneous Entries

This category covers a variety of unique transactions:

{{KEY: type=points | title=What Goes into the Journal Proper? | text=- Opening Entries to start a new financial year.

• Adjustment Entries for accruals and prepayments.
• Rectification Entries to correct errors.
• Transfer / Closing Entries to close nominal accounts.
• Miscellaneous transactions like credit purchase of assets, drawings in kind, or loss of goods.}}

{{VISUAL: diagram: An infographic with icons representing different miscellaneous transactions pointing to a central book labeled "Journal Proper". Icons could be a computer (asset purchase), a shopping bag (drawings), a fire symbol (loss of goods), and a small box (free sample).}}

Solved Numericals

Let's apply our understanding with some practical examples.

Example 1: Passing an Opening Entry

GIVEN: On April 01, 2023, the financial position of M/s Gupta Traders was as follows:

• Cash in Hand: ₹30,000
• Bank Balance: ₹75,000
• Stock of Goods: ₹50,000
• Debtors (Anil): ₹20,000
• Creditors (Sunil): ₹35,000
• Loan from Bank: ₹60,000

Pass the necessary opening entry in the Journal Proper.

WORKING:

1. Identify Assets and Liabilities:

   • Assets: Cash, Bank, Stock, Debtors (Anil)
   • Liabilities: Creditors (Sunil), Loan from Bank

2. Calculate Capital (Balancing Figure):

   • Total Assets = ₹30,000 + ₹75,000 + ₹50,000 + ₹20,000 = ₹1,75,000
   • Total Liabilities = ₹35,000 + ₹60,000 = ₹95,000
   • Capital = Total Assets - Total Liabilities = ₹1,75,000 - ₹95,000 = ₹80,000

SOLUTION:

Journal of M/s Gupta Traders

Example 2: Recording Miscellaneous Transactions

GIVEN: Journalise the following transactions for M/s Sharma Electronics for May 2023:

1. May 10: Purchased office furniture on credit from Modern Furnishers for ₹45,000.
2. May 15: Proprietor withdrew goods (a microwave oven) worth ₹8,000 for personal use.
3. May 22: Goods worth ₹3,000 were destroyed in a fire.

SOLUTION:

Journal of M/s Sharma Electronics

Notice that when goods are withdrawn or lost, the Purchases Account is credited. This is done to reduce the amount of purchases available for sale, as these goods are no longer part of the business's inventory.

Try It Yourself

1. On April 01, 2023, a business had the following balances: Machinery ₹1,00,000; Bank ₹50,000; Creditors ₹40,000. What will be the amount of Capital in the opening entry?
2. A firm purchases a new Air Conditioner for the office for ₹60,000 on credit from Cool Breeze Pvt. Ltd. Which accounts will be debited and credited in the Journal Proper?
3. Goods costing ₹1,500 were given away as charity. Pass the journal entry.

Answer Key: 1. Capital will be ₹1,10,000 (Cr.). 2. Debit Air Conditioner A/c (or Office Equipment A/c) ₹60,000; Credit Cool Breeze Pvt. Ltd. A/c ₹60,000. 3. Debit Charity A/c (or Donations A/c) ₹1,500; Credit Purchases A/c ₹1,500.

Balancing the Accounts

Balancing the Accounts

At the end of an accounting period, after all transactions have been posted from the journal and subsidiary books to the ledger, each ledger account is like a detailed story. A Cash account tells the story of all cash inflows and outflows. A Sales account tells the story of all revenues earned. But to get a clear picture for preparing the final financial statements, we need a summary of each story—a final number. This process of finding the net position of an account is called balancing.

What Does "Balancing" Mean?

Think of a weighing scale. You have weights (transactions) on both the debit and credit sides. Balancing an account means calculating the difference between the total of the debit side and the total of the credit side, and then placing this difference on the side that is "lighter" or shorter, to make both sides equal.

This balancing figure represents the net effect or the closing position of that account for the period. It's the summary we need to move forward.

{{KEY: type=definition | title=Balancing of an Account | text=The process of totaling the debit and credit columns of an account and finding the difference between them to ascertain the net balance at the end of an accounting period.}}

The Step-by-Step Process of Balancing

Balancing any account follows a systematic procedure. Let's break it down into simple, repeatable steps:

1. Total Both Sides: Add up all the amounts in the debit column and, separately, all the amounts in the credit column of the ledger account. Do this on a scrap piece of paper or with a pencil first.

2. Find the Difference: Compare the two totals. The difference between the higher total and the lower total is the balance of the account.

3. Enter the Balance: Write this difference amount in the amount column of the side with the lower total. In the particulars column, write "By Balance c/d" (if entered on the credit side) or "To Balance c/d" (if entered on the debit side). The abbreviation c/d stands for "carried down".

4. Equalize the Totals: Now, total both the debit and credit columns again. They should be equal. Draw a double line beneath both totals to signify that the account is balanced for the period.

5. Bring Down the Balance: On the opposite side of where you wrote "Balance c/d", below the double lines, enter the balance for the next accounting period. In the particulars column, write "To Balance b/d" (if on the debit side) or "By Balance b/d" (if on the credit side). The abbreviation b/d stands for "brought down". This becomes the opening balance for the next period.

{{VISUAL: diagram: A T-shaped ledger account showing the placement of 'Balance c/d' on the shorter side to equalize totals, and 'Balance b/d' on the opposite side for the next period.}}

{{KEY: type=points | title=Steps for Balancing a Ledger Account | text=- Step 1: Total the debit and credit columns independently.

• Step 2: Calculate the difference between the two totals.
• Step 3: Write the difference as 'Balance c/d' on the side with the lower total.
• Step 4: Rule off the account by totaling both sides, which will now be equal.
• Step 5: Bring down the balance ('Balance b/d') on the opposite side for the next period.}}

Debit Balance vs. Credit Balance

The side on which the balance is "brought down" (b/d) determines whether the account has a debit or credit balance.

• A Debit Balance occurs when the total of the debit side is greater than the credit side. The Balance b/d will appear on the debit side. Asset and Expense accounts typically have debit balances.
• A Credit Balance occurs when the total of the credit side is greater than the debit side. The Balance b/d will appear on the credit side. Liability, Capital, and Revenue accounts typically have credit balances.

An Important Exception: Closing Nominal Accounts

Not all accounts are balanced. Accounts of expenses, losses, revenues, and gains (i.e., Nominal Accounts) are not carried forward to the next year. Their purpose is to measure the profit or loss for the current year only.

Therefore, at the end of the accounting period, these accounts are closed, not balanced. Closing means their balance is transferred to the Trading and Profit & Loss Account. Instead of writing "Balance c/d", the entry would be "By Trading A/c" or "To Profit & Loss A/c", which makes the account total equal and its final balance zero.

{{VISUAL: diagram: A simple flowchart illustrating the end-of-period treatment for different types of accounts: Personal/Real accounts are balanced, while Nominal accounts are closed.}}

{{ZOOM: title=Balancing vs. Closing | text=Balancing is for accounts whose balances need to be carried forward to the next financial year (Assets, Liabilities, Capital). These are permanent accounts. Closing is for temporary accounts (Expenses, Incomes) whose balances are reset to zero at the year-end by transferring them to the Profit & Loss Account to calculate the net profit or loss.}}

Solved Numericals

Let's apply these concepts by preparing and balancing a few ledger accounts based on the transactions listed in the NCERT example for April 2017.

Example 1: Burari Ltd. Account (A Creditor)

GIVEN: The following transactions related to M/s Burari Ltd. occurred in April 2017:

• Apr. 06: Bought goods on credit, ₹6,400 (after trade discount).
• Apr. 12: Returned goods to them, ₹632.
• Apr. 21: Purchased more goods on credit, ₹2,280 (after trade discount).
• Apr. 25: Made full and final payment by cheque after a discount of ₹320.

WORKING: First, let's calculate the amount due to Burari Ltd. before the final payment. Total Purchases = ₹6,400 + ₹2,280 = ₹8,680 Less: Purchase Returns = ₹632 Net Amount Due = ₹8,680 - ₹632 = ₹8,048

The final payment was made after receiving a discount of ₹320. Amount Paid by Cheque = Net Amount Due - Discount Received Amount Paid by Cheque = ₹8,048 - ₹320 = ₹7,728

Now, let's post these to the ledger account.

SOLUTION:

Dr.                                   Burari Ltd. Account                                       Cr.

ANSWER: The Burari Ltd. account is settled and has no closing balance. Both the debit and credit sides total ₹8,680. The account is squared off.

{{VISUAL: diagram: The fully balanced ledger account for 'Burari Ltd.' from the solved numerical, with totals underlined, showing how the account is settled and closed.}}

Example 2: Ramneek Account (A Debtor)

GIVEN: The following transactions related to M/s Ramneek occurred in April 2017:

• Apr. 07: Sales on account, ₹1,740.
• Apr. 10: Goods returned by Ramneek, ₹440.
• Apr. 20: More sales on account, ₹2,400.
• Apr. 21: Received cheque of ₹3,700 in full and final settlement.

WORKING: Let's calculate the amount receivable from Ramneek. Total Sales = ₹1,740 + ₹2,400 = ₹4,140 Less: Sales Returns = ₹440 Net Amount Receivable = ₹4,140 - ₹440 = ₹3,700

The cheque received was for ₹3,700, which is the exact amount due. So, there is no discount allowed in this case.

SOLUTION:

Dr.                                       Ramneek Account                                     Cr.

ANSWER: The Ramneek account is also fully settled and has no closing balance. Both sides total ₹4,140.

{{KEY: type=exam | title=Full and Final Settlement | text=Whenever you see the phrase 'full and final settlement', it's a signal. Compare the amount paid/received with the amount due. The difference is either 'Discount Allowed' (if you received less) or 'Discount Received' (if you paid less).}}

{{VISUAL: chart: A side-by-side comparison of a balanced 'Furniture A/c' (Real) versus a closed 'Rent A/c' (Nominal). The Furniture account shows a 'Balance b/d', while the Rent account's balance is transferred 'By Profit & Loss A/c'.}}

Balancing is the bridge between recording transactions and preparing the final summary reports like the Trial Balance and Balance Sheet. It's the moment we find out where each account stands.

Try It Yourself

Based on the transactions given in the NCERT text extract:

1. Prepare the ledger account for M/s Handa Co. and balance it.
2. Prepare the Furniture Account for the month of April and find its closing balance.
3. Prepare the Sales Account for April. Since it is a nominal account, show how it would be closed by transferring to the Trading Account at the end of the year (assume April 30 is the year-end for this exercise).

Answer Key:

1. Handa Co. A/c is settled and has zero balance (Total ₹2,450 on both sides).
2. Furniture A/c will have a debit balance of ₹14,000 (Balance c/d).
3. Sales A/c credit total is ₹10,410. It will be closed by debiting it with To Trading A/c ₹10,410.