Recording of Business Transactions, JOURNAL, LEDGER, SUBSIDIARY BOOK (CASH BOOK), OTHER SUBSIDIARY BOOK, BANK RECONCILIATION STATEMENT H.S. 1ST YEAR ACCOUNTANCY NOTES AHSEC ASSAM Higher Secondary UNIT-3

Unit – 3

Recording of Business Transactions

JOURNAL

Q1. What is journal? What are its features?

Ans: Journal is a book of original entry in which all business transaction are recorder systematically. Journal means a book which records all monetary transactions on daily basis. The transactions are recorded is in chronological order i.e. in the order of their occurrence.

     According to Erlic. L. Kohler,”The journal is a book of original entry in which are recorded transactions not provided for in specialized journals”

Following are the features of journal:

1. It is a book of original entry because transaction is recorded at first stage in this book.

2. It is also known as day book or diary because transactions are recorded in it on day to day basis as and when they take place.

3. The journal is only a subsidiary book, subordinate to the ledger which is principal book of accounts.

4. It keeps a chronological record of all transactions i.e., arranged according to the order of occurrence.

5. The journal gives a complete picture of each business transaction and thus maintains the identity of the transaction.

Q2. What are the advantages and disadvantages of journal?

Ans: Followings are the advantages of journal:

1. Transactions recorded date-wise with explanation: All business transactions are entered in journal in chronological order i.e., order of occurrence. Thus chances of omitting a transaction are reduced.

2. Reliable evidence: As the transactions taking place and recording are at the same time, therefore chances of manipulating the facts are minimized.

3. Detection of arithmetical errors: In case the total of amount columns on the debit and credit do not tally, it is a sure and quick indication that some error has been committed. The same can be examined at the earliest.

4. Ensures that double entry rules have been followed: Each transaction before it is recorded in journal, is analyzed for the aspects involved; accounts to be debited and credited and also the debit and credit amount.

5. Provides primary source of data: Journal is directly written on the basis of vouchers. So, the information contained in the journal is a primary source of financial statistics of the business.

Followings are the disadvantages of journal:

1. Bulky and Voluminous: The journal will be quite bulky and voluminous, if the business has so many transactions.

2. Daily cash balance not possible: It is not possible to ascertain daily cash balance from journal. Separate book is to be maintained for this purpose.  

3. Difficult to locate a transaction: It is difficult and time consuming to locate a transaction in the journal, if date of transaction is forgotten.

3. Time consuming posting: It is time consuming to post each and every transaction from the journal to the ledger.

Q3. What is journalizing? State the steps involved in journalizing.

Ans: Journalism is the process of recording journal entries in the journal. It is a systematic act of entering the transaction in a day book in order of their occurrence i,e,. date-wise or event-wise. After analyzing the business transactions, the following steps in journalizing are followed:

a. Find out what accounts are involved in business transaction.

b. Ascertain what is the nature of accounts involved?

c. Ascertain the golden rule of debit and credit is applicable for each of the accounts involved.

d. Find out what account is to be debited which is to be credited.

e. Record the date of transaction in the ‘Date Column’.

f. Write the name of the account to be debited very near to the left hand side in the ‘particular column’ along with the word ‘Dr’ on the same line against the name of the account in the ‘particular column’ and the amount to be debited in the ‘Debit amount column’ against the name of the account.

g. Record the name of the account to be credited in the next line preceded by the word ‘To’ at a few space towards right in the ‘particulars column’ and the amount to be credited in the ‘Credit amount column’ in front of the name of the account.

h. Record narration (i.e. a brief explanation of the transaction) within brackets in the following line in ‘particulars column’.

i. A thin line is drawn all through the particulars column to separate one journal entry from the other and it shows that the entry of a transaction has been completed.

 

LEDGER

Q1. What is Ledger? What are its features?

Ans: Ledger is the principal or primary book of accounts. It is the most important book in accounting system. It contains all the accounts to which the transactions recorded in the books of original entry are transferred (posted). Ledger is the ultimate destination of all transactions. It is also called book of final entry.

          According to L.C.Cropper, “The book which contains a classified and permanent record of all the transactions of a business is called ledger.”

Followings are the features of Ledger:

1. It is the principal or primary books of accounts.

2. The transactions are classified under appropriate heads, called accounts.

3. The accounts contain the condensed and summarized record of all the related transactions.

4. The information contained in the ledger account can be used to draw the conclusion regarding the status of any account.

5. It is the basis of preparing the final accounts. Hence, it cannot be avoided.

Q2. What are the difference between journal and ledger?

Ans.  Following are the difference between journal and ledger:

Journal	Ledger
a. It is a book of primary entry.	a. It is book of final entry.
b. As soon as the transaction originates, it is recorded in journal.	b. Transactions are posted in the ledger after the same have been recorded in the journal.
c. Transactions are recorded in order of occurrence i.e., strictly in order of date.	c. Transactions are classified according to the nature and are grouped in the concerned accounts.
d. Narration is written for each entry.	d. Narration is not required.
e. Final accounts cannot be prepared directly from journal.	e.Ledger is the basis of preparing final accounts.
f. Accuracy of the books cannot be tested.	f. Accuracy of books is tested by means of list of balances.

 

Q3. What is journal folio?

Ans. It is the page number of the journal from where entries are posted in this ledger account.

 

SUBSIDIARY BOOK (CASH BOOK)

 

Q1. What is cash book? What are its features?

Ans. Cash book consists of cash and bank accounts taken out of ledger and maintained separately; thus it is a substitute of ledger for cash and bank accounts. It is also a book of original entry because cash and bank transactions are not recorded in other subsidiary book. This book enables us to know the balance of cash in hand and at bank at any point of time.

Following are the features of cash book:

1. Only cash / bank transactions are recorded in cash book.

2. It performs the role of both journal and the ledger.

3. Receipts are recorded on the debit side and payments on the credit side.

4. Transactions are recorded in chronological order.

 

Q2. What are the distinctions between cash account and cash book?

Ans.  Following are the distinctions between cash account and cash book:

CASH ACCOUNT	CASH BOOK
a. It is an account in the ledger.	a. It is a separate book of accounts forming part of an accounting system.
b. In cash account posting is not followed by narration.	b. In cash book entries are followed by narration also.
c. It only records one aspect of transaction involving cash and bank.	c. It records both the aspects of this transaction in cash and bank columns to complete double entry posting.

 

Q3. What are the difference between Trade discount and Cash discount?

Ans.  Following are the difference between Trade discount and Cash discount:

TRADE DISCOUNT	CASH DISCOUNT
a. It is reduction granted by supplier from the list price of goods or services.	a. It is reduction granted by supplier from the amount due.
b. It is allowed by the manufacturer to the wholesalers to the retailers.	b. It is allowed by a creditor to a debtor.
c. Its object is to promote the sales and leave a fair margin of profit to the retailers.	c. Its object is to encourage the debtors to make prompt payment.
d. It is allowed only at the time of sale whether for cash or on credit.	d. It is allowed only when there is cash/bank receipt or payment before due date.
e. It is shown by way of deduction in the invoice itself.	e. It is not shown in the invoice.

 

Q4. What is contra entry?

Ans. The term contra in Latin, means the other side. When both the debit and credit aspects of a transaction are recorded simultaneously in the same book but in different columns, each entry on the debit side and on the credit side is called contra entry.

 

Q5. What is petty cash book? What are its features?

Ans. It is the book which is used for the purpose of recording the payment of petty cash expenses.

Following are the features of petty cash book:

a. The amount of cash received from head cashier is recorded on the left hand side column.

b. Payment of petty cash expenses are recorded on the right hand side in the respective columns.

c. It never has a credit balance because the cash payment can never exceed the cash receipts.

d. Its balance represents unspent petty cash in hand.

e. Recording is done on the basis of internal as-well-as external vouchers.

 

Q6. What are the different systems of petty cash?

Ans: Following are the different systems of petty cash:

1. Ordinary system of petty cash: In this system an advance is given to the petty cashier as per his needs. The amount of advance and period of advance may not be a fixed one or a fixed amount may be advanced at regular intervals, irrespective of the amount actually spent. This system is very flexible.

2. Imprest system of Petty cash: In this system, an amount estimated as necessary in order to meet the expected possible petty expenses for a certain period is fixed, called ‘Imprest’ or ‘float’. Every time so many amounts are advanced to the petty cashier to make a fixed balance in his hands in the beginning of each period.

Q7. What are features of imprest system of Petty cash?

Ans: Following are the features of imprest system of petty cash:

1. Estimation by head cashier: The head cashier estimates the total cash expenses for a particular period.

2. Advances by head cashier: The head cashier advances the estimated amount to petty cashier in the beginning of the period.

3. Submission of petty cash book by petty cashier: The petty cashier submits the petty cash book along with supporting vouchers the head cashier at the end of the periods.

4. Examination of petty cash book by head cashier: The chief cashier examines the petty cash book

5. Reimbursement of amount spent: The head cashier makes the reimbursement of the amount spent by the petty cashier.

 

OTHER SUBSIDIARY BOOK

Q1. What are the difference between Purchase book and Purchase account?

Ans: Following are the difference between Purchase book and Purchase account:

PURCHASE BOOK	PURCHASE ACCOUNT
a. It is a book of original entry.	a. It is a part of the ledger.
b. It is in the form of statement, not having debit or credit sides.	b. It is in the form of an account, having debit and credit sides.
c. It records only the credit purchase of goods.	c. It records the credit as well as cash purchase of goods.
d. It is a memorandum book which does not form part of double entry system.	d. It is an account which is part of double entry system.
e. It requires totaling of the book, not balancing.	e. It requires balancing of account.

 

Q2. What are the difference between sales book and sales account?

Ans. Following are the difference between sales book and sales account:

SALES BOOK	SALES ACCOUNT
a. It is a book of original entry.	a. It is a part of the ledger.
b. It is in the form of statement, not having debit or credit sides.	b. It is in the form of an account, having debit and credit sides.
c. It records only the credit purchase of goods.	c. It records the credit as well as cash purchase of goods.
It is a memorandum book which does not form part of double entry system.	It is an account which is part of double entry system.
It requires totaling of the book, not balancing.	It requires balancing of account.

 

Q3. What are the difference between debit note and credit note?

Ans.  Following are the difference between debit note and credit note:

DEBIT NOTE	CREDIT NOTE
a. A debit note is prepared and sent by a customer to his supplier.	a. A credit note is prepared and sent by a supplier to his customer.
b. A debit note serves as intimation for goods returned.	b. A credit note serve as an acknowledgement of goods received back.
c. It informs supplier that his account has been debited with the amount shown.	c. It informs the customer that his account has been credited with the amount shown.

 

Q4. Short notes

Classification of subsidiary books:

a. Cash book: It records all those transactions which are in cash or by cheques.

b. Purchase book: It records all transactions relating to goods purchased on credit.

c. Sales book: It records all transactions relating to goods sold on credit.

d. Purchase return book: It records return of goods to suppliers.

e. Sales return book: It records return of goods by the customers.

f. Bills receivable book: It records entries regarding bills receivables. The details of bills are given in this book.

g. Bills payable book: All bills which are accepted and payable by a business house are recorded in this book.

h. Journal proper: Those transactions which are not recorded in any of the above mentioned books are recorded in the journal proper.

 

BANK RECONCILIATION STATEMENT

Q1. What is Bank Reconciliation Statement? What are its features?

Ans. Bank Reconciliation Statement indicates the various items causing a difference between the bank balance as per cash book and the bank balance as per pass book on a particular date. The statement may be prepared weekly, monthly or quarterly depending upon the number of transactions and the size of the business enterprise.

Following are the features of Bank Reconciliation Statement:

a. It is merely a statement and not an account.

b. It does not form a part of double entry system of book keeping.

c. It is to be prepared whenever a bank balance as per pass book and bank balance as per cash book does not tally.

d. It is prepared to attest the accuracy and completeness of cash book records.

e. It gives the detail of the transactions, causing the difference in bank balance as per cash book and pass book.

Q2. What are the need and objectives for Bank Reconciliation Statement?

Ans. Following are the need and objectives for Bank Reconciliation Statement:

a. It is prepared in order to attest the accuracy and completeness of cash book records.

b. It helps in detecting errors and omissions in the cash book and pass book.

c. It prevents frauds in recording the bank transactions.

d. The delay in the collection of cheques deposited and the payment of the cheques issued is stated in the Bank Reconciliation Statement.

e. It contains the details of the causes responsible for difference in bank balances as per cash book and pass book.

Q3. What are the reasons for the difference in the balances of cash book and pass book?

Ans. Following are the reasons for the difference in the balances of cash book and pass book:

a. Cheques deposited but not yet collected by bank.

b. Cheques issued but not yet presented for payment.

c. Bank charges debited by bank only.

d. Interest credited by bank but not recorded in cash book.

e. Directly deposited by a customer into bank.

f. Direct collection by a bank on behalf of customers.

g. Direct payment by the bank on behalf of customers.

h. Dishonor of cheques or discounted bills.

 

Q4. Discuss the steps for preparing a Bank Reconciliation Statement.

Ans. Followings steps are taken into consideration for preparing a bank reconciliation statement:

1. The data for preparing a bank reconciliation statement is selected which is usually the last day of the month because monthly account statements are generally received from the bank.

2. The cash book and completed pass book are comparing to identify the causes of difference in the balance of cash book and pass book. The common items in cash book and pass book are ticked. The unticked items from the basis of preparing a bank reconciliation statement.

3. The unticked items are to be classified into common groups on the basis of their characteristics .e.g., cheques deposited but not collected by bank, cheques issued but not presented, etc.

4. The balance or overdraft shown by cash book or pass book should be taken as starting point in the reconciliation statement. If both the balances are given, any of the two may be selected as the starting point, and then the other one will be the answer of the reconciliation statement.

5. When we start preparing reconciliation statement with the balance, whether as per cash book or pass book, it is taken on the plus side. When we start with overdraft, whether as per cash book or pass book, it is taken on the minus side.

6. The unticked items would be either taken in the ‘plus’ column or ‘minus’ column depending upon the effected of transaction on the books and the starting points of the reconciliation statement.

7. After making all adjustments, if the total of ‘plus ‘column is more than the total of ’minus’ column the difference in reconciliation statement is treated as favorable balance and vice versa.

 

**************