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.
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