Recording of Transactions - II

Detailed Notes on Recording Transactions - II

Overview of Special Purpose Books

In accounting, as organizations grow, transactions increase in volume and complexity, making it necessary to adopt organized systems for recording transactions. Special purpose books facilitate this by allowing specific categories of transactions to be recorded in designated journals, thus enhancing efficiency and accuracy. The primary special purpose books include:

• Cash Book
• Purchases Book
• Sales Book
• Purchases Return Book
• Sales Return Book
• Journal Proper

1. Cash Book

A cash book is a special journal that records all transactions involving cash receipts and payments. It serves as both the journal and the ledger for cash transactions.

• Single Column Cash Book This form contains one column for cash receipts and another for cash payments. All cash transactions are recorded in chronological order, and the book is balanced periodically based on cash inflows and outflows.

• Double Column Cash Book This includes two columns: one for cash transactions and another for bank transactions. It is particularly useful for businesses with significant bank dealings.

  • Contra Entries are marked for transactions that are both deposit and withdrawal events, ensuring that underlying journal accounts are not cluttered with these dual entries.

2. Purchases Book

The purchases book records all credit purchases of goods. Cash purchases are recorded in the cash book instead. The total of this book is periodically posted to the debit side of the Purchases Account in the ledger. Each supplier's account is updated daily from the bills received.

3. Sales Book

Similar to the purchases book, the sales book captures all credit sales. The cash sales are recorded in the cash book. The total of sales is recorded monthly and posted to the credit side of the Sales Account in the ledger.

4. Purchases Return Book

A purchases return book is maintained for recording any goods returned to suppliers. This is crucial in handling defective or unwanted merchandise. The recorded totals will credit the Purchases Return Account while debiting the supplier’s account in the ledger.

5. Sales Return Book

Opposite to the purchases return, the sales return book logs goods returned by customers. Credit notes from customers authorize these returns. Periodic totals are credited to the Sales Return Account and each customer’s account updated accordingly.

6. Journal Proper

The journal proper is used for recording transactions that do not fall under the other special journals. It includes:

• Opening entries for new accounting periods
• Adjustment entries for updating accounts
• Rectification entries to correct previous errors
• Transfer entries for accounts closed at the end of the fiscal year

Balance Accounting

Periodic balancing of accounts is essential to determine net financial positions in accounts, ensuring that the two sides (debit and credit) match. This allows businesses to maintain transparency and accuracy in their financial reporting.

• Balancing involves:
  • Summing total debit and credit transactions and adjusting as necessary, often resulting in either a debit or credit balance which is carried forward or closed off according to the account types.

Key Procedures in Maintaining Special Purpose Books

1. Recording: Each transaction should be recorded accurately in the appropriate book.
2. Posting: At the end of specified periods, totals from special purpose books are posted to relevant ledger accounts.
3. Balancing: Regularly balance accounts to maintain accuracy and aid in financial reviews.

Key Terms

• Contra Entry: An entry that reflects both deposit and withdrawal in a double-column cash book.
• Petty Cash Book: Used to manage minor expenditures efficiently to reduce workload on the main cash book.
• Trade Discounts: Price reductions offered to buyers by sellers that are not recorded in the purchase or sales accounts.

Having specialized journals allows for division of labor in accounting, streamlining financial management and ensuring precise record-keeping in growing businesses.

1. Cash Book covers all cash transaction records, serving both journal and ledger roles.
2. Double Column Cash Book helps distinguish between cash and bank transactions within the same record.
3. Purchases Book captures only credit purchases; cash purchases go into the cash book.
4. Sales Book logs all credit sales transactions, with cash sales recorded in the cash book.
5. Purchases Returns Book documents goods returned, impacting creditors and purchases accounts.
6. Sales Returns Book records goods returned by customers, adjusting sales accurately.
7. Journal Proper serves as a catch-all for transactions not recorded in other journals.
8. Balancing ensures accurate tracking of debits and credits, maintaining consistency in accounts.
9. Contra Entries assist in managing transactions that affect cash and bank simultaneously.
10. Petty Cash Book aids in recording small, repetitive expenses separately from larger financial activities.