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Chapter 4: Recording of Transactions — II

Original notes — ready CBSE (NCERT, English Medium) • Class 11 • Accountancy • Book: Financial Accounting — Part I

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Chapter 4: Recording of Transactions — II — EG's own notes, in simple words

Book: Financial Accounting — Part I (CBSE, Class 11)  |  Chapter 4  |  Medium: English

Labelled diagram for Chapter 4: Recording of Transactions — II

Diagram (labels on the image): How transactions flow: source documents to the journal, cash book, subsidiary books and journal proper, then to the ledger and trial balance.

Illustration for Chapter 4: Recording of Transactions — II

A shop cash counter with an open cash drawer and bill books — the cash book records every rupee that moves.

1. The cash book — journal and ledger combined

A business with many cash transactions keeps a cash book instead of passing separate journal entries for cash. It is both a book of original entry (cash entries are recorded in it first) and a ledger account (its cash and bank columns are the Cash and Bank accounts, so they are not opened separately in the ledger).

A single-column cash book has only a cash column. A double-column cash book adds a bank column, and bank transactions are recorded alongside cash. A triple-column cash book adds a discount column on each side: discount allowed (on the debit side, when customers pay early) and discount received (on the credit side, when the business pays early). A transaction that affects both cash and bank — such as depositing cash into the bank — is a contra entry, marked with the letter 'C', and it needs no ledger posting because both sides sit in the cash book itself.

Worked example — triple-column cash book (extract). Opening balances: cash Rs 20,000, bank Rs 50,000. Cash sales Rs 15,000; wages paid in cash Rs 4,000; cash Rs 10,000 deposited into the bank (contra); a cheque of Rs 8,000 received and deposited. Closing cash = Rs 20,000 + Rs 15,000 − Rs 4,000 − Rs 10,000 = Rs 21,000. Closing bank = Rs 50,000 + Rs 10,000 + Rs 8,000 = Rs 68,000. The cash book is balanced like a ledger account, and its debit balances are carried forward.

2. The petty cash book — small expenses, imprest system

Small, frequent expenses — postage, stationery, conveyance, tea — would clog the main cash book, so a petty cashier handles them from a small float. Under the imprest system, the petty cashier starts each period with a fixed sum (the imprest). At the end of the period the amount spent is reimbursed, restoring the float to its original figure.

Worked example. Imprest Rs 2,000. Spent in the month: postage Rs 240, stationery Rs 380, conveyance Rs 160 — a total of Rs 780. The petty cashier holds Rs 2,000 − Rs 780 = Rs 1,220 in hand, and is reimbursed Rs 780 to restore the float to Rs 2,000 for the next month.

3. Subsidiary books and the journal proper

When a business buys and sells on credit every day, one journal becomes slow. So credit transactions are recorded in special subsidiary books: the Purchases Book for credit purchases of goods, the Sales Book for credit sales of goods, the Purchases Returns Book for goods returned to suppliers, the Sales Returns Book for goods returned by customers, and the Bills Receivable and Bills Payable Books. Only the totals of these books are posted to the ledger periodically, which saves time and divides work.

Everything that fits no subsidiary book goes to the journal proper: opening entries (the balances with which a new year starts), closing entries (transferring nominal accounts to Trading and Profit and Loss Accounts), transfer entries, adjustment entries, and entries for dishonour of cheques or bills. Cash purchases and cash sales never enter the Purchases or Sales Books — they go to the cash book.

At a glance — chart / table

TransactionBook used
Credit purchase of goodsPurchases Book
Credit sale of goodsSales Book
Goods returned to supplierPurchases Returns Book
Goods returned by customerSales Returns Book
Cash purchase or cash saleCash Book (never the Purchases/Sales Book)
Opening balances, closing entriesJournal Proper

4. Accounting for Goods and Services Tax (GST)

GST is a tax on the supply of goods and services. On a sale within the same state, the seller charges two equal halves: CGST (Central) and SGST (State). On a sale to another state, a single IGST (Integrated) is charged. GST collected on sales is output GST; GST paid on purchases is input GST. At the end of the period, input GST is set off against output GST, and only the net amount is paid to the government.

Worked example — set-off. A trader's output GST for the month is Rs 9,000 and input GST on purchases is Rs 6,500. The net GST payable = Rs 9,000 − Rs 6,500 = Rs 2,500, which is paid in cash. The trader is only a collector of the tax; the cost of the tax falls on the final buyer, not on the trader.

What you should learn

  • Explain why a cash book is both a journal and a ledger account, and distinguish single, double and triple column cash books.
  • Explain the petty cash book and the imprest system, and how the float is restored.
  • State what each subsidiary book records, and what it deliberately leaves out (cash transactions, trade discount).
  • List the entries that go to the journal proper instead of a subsidiary book.
  • Explain GST in accounts: input and output tax, set-off, and CGST/SGST within a state versus IGST between states.

Going further — full coverage of the source chapter

§4.1 Cash book. Single column has only a cash column; double column adds a bank column; triple column adds discount columns — discount allowed on the debit side, discount received on the credit side. A contra entry (cash deposited into the bank, or cash withdrawn from the bank for office use) affects both cash and bank columns, is marked 'C', and needs no ledger posting because both sides already sit in the cash book. The cash book is balanced like a ledger account, and its balances are carried forward. The petty cash book handles small, frequent expenses (postage, stationery, conveyance) from a small float: under the imprest system the petty cashier starts each period with a fixed sum, spends from it, and is reimbursed exactly what was spent, restoring the float. An analytical petty cash book adds columns for each head of expense.

§4.2 Purchases (Journal) Book. Records credit purchases of goods only. Cash purchases are not entered here (they go in the cash book), and purchases of assets are not entered here (they go to the journal proper). The source document is the supplier's invoice. Trade discount is deducted from the list price and the net amount is recorded; the discount itself is never shown as a separate item.

§4.3 Purchases Return (Journal) Book. Records goods returned to suppliers. The source document is the debit note sent by the business. Trade discount allowed on the original purchase is adjusted here too.

§4.4 Sales (Journal) Book. Records credit sales of goods only. Cash sales go in the cash book; sale of an asset goes to the journal proper. The source document is the outward invoice.

§4.5 Sales Return (Journal) Book. Records goods returned by customers. The source document is the credit note issued by the business. A cash discount (for early payment) is different from a trade discount: cash discount is recorded, in the cash book's discount columns; trade discount is never recorded.

§4.6 Journal Proper. The journal proper takes everything the subsidiary books cannot: the opening entry, closing and transfer entries, adjustment entries, rectification entries, credit purchase and sale of assets, goods withdrawn by the proprietor for personal use, goods given away as free samples, and other unusual entries such as loss by fire.

§4.7 Balancing the accounts. Every account in the ledger and cash book is balanced at period end: debit balances (assets, expenses, drawings) are carried forward on the debit side, credit balances (liabilities, capital, incomes) on the credit side, and these balances feed the trial balance.

GST in this chapter (source section on Goods and Services Tax). GST paid on purchases is input tax; GST collected on sales is output tax. Output tax is set off against input tax and only the net amount is paid to the government. Within a state the tax splits into CGST and SGST (for example 9% + 9% on an 18% rate); between states it is charged as a single IGST (18%). GST is therefore not an expense of the business, except where set-off is not allowed.

Key Terms / Important Terms

  • Cash book — A book that records cash and bank transactions; it is both a journal and a ledger account.
  • Contra entry — An entry affecting both cash and bank columns of the cash book, marked 'C'.
  • Imprest system — A petty cash system in which a fixed float is restored by reimbursing the amount spent.
  • Subsidiary books — Special journals for one kind of credit transaction, such as the Purchases Book.
  • Journal proper — The journal used for entries that fit no subsidiary book, such as opening and closing entries.
  • Input GST — GST paid on purchases, which can be set off against output GST.
  • Output GST — GST collected on sales, which is payable to the government after set-off.
  • Trade discount — A reduction from the list price allowed by a seller to a buyer, deducted before recording; it is never shown as a separate entry.
  • Cash discount — A reduction allowed for prompt payment, recorded in the cash book's discount columns (allowed on the debit side, received on the credit side).
  • Credit note — The document issued by a seller when goods are returned by a customer; it is the source document for the sales return book.

Remember

  • The cash book is both a book of original entry and a ledger account for cash and bank.
  • Contra entries (cash to bank or bank to cash) are marked 'C' and need no ledger posting.
  • Imprest: float − spent = balance in hand; reimbursement restores the float.
  • Purchases and Sales Books record credit transactions in goods only — never cash deals.
  • GST set-off: net payable = output GST − input GST; IGST applies between states, CGST + SGST within a state.
  • Trade discount is never recorded; cash discount is always recorded. If a transaction is a cash transaction it never enters the purchases or sales book.

Exam Tip / Common Mistake

Common mistake: entering a cash purchase in the Purchases Book, or a credit sale of an old machine in the Sales Book. Both books are for goods only, and only on credit. Cash deals go to the cash book, and sale of an asset goes to the journal proper. In exams, underline 'cash' or 'credit' and 'goods' or 'asset' before choosing the book.

Practice set — try it yourself

  1. A trader deposits Rs 12,000 cash into the bank. Is this a contra entry? Give the reason. Hint: Ask which two columns of the cash book are affected.
  2. Petty cash imprest is Rs 3,000; Rs 1,850 was spent in the month. How much is reimbursed, and what is the balance in hand before reimbursement? Hint: Balance in hand = imprest minus spent; reimbursement equals spent.
  3. Where is a credit sale of goods of Rs 22,000 recorded, and where is a cash sale of Rs 22,000 recorded? Hint: Goods on credit go to a subsidiary book; cash deals go to the cash book.
  4. Output CGST Rs 4,000 and output SGST Rs 4,000; input CGST Rs 2,500 and input SGST Rs 2,500. Find the net GST payable. Hint: Set off each half separately, then add the two net amounts.
  5. Give two entries that always go to the journal proper. Hint: Think of entries no subsidiary book can hold: opening, closing, adjustment, transfer.

Questions with Answers

  1. From the notes, verify the closing cash and bank balances of the triple-column cash book extract. Answer: Cash: Rs 20,000 + Rs 15,000 − Rs 4,000 − Rs 10,000 = Rs 21,000. Bank: Rs 50,000 + Rs 10,000 + Rs 8,000 = Rs 68,000.
  2. A cheque of Rs 7,500 received from a debtor is deposited into the bank. Which columns of the cash book are affected, and is it a contra entry? Answer: Only the bank column on the debit side is affected (with the debtor's account credited in the ledger). It is not a contra entry, because cash is not involved.
  3. Distinguish discount allowed from discount received. Answer: Discount allowed is given to customers who pay early; it is an expense, shown on the debit side of the cash book. Discount received is received from suppliers for early payment; it is an income, shown on the credit side.
  4. A trader's output GST is Rs 15,000 and input GST is Rs 11,200. How much is payable, and why is the trader not out of pocket for the full Rs 15,000? Answer: Payable = Rs 15,000 − Rs 11,200 = Rs 3,800. The Rs 11,200 input GST is set off because the trader already bore that tax on purchases; only the tax on the value added by him is paid.
  5. Why is the cash book not posted to a separate Cash Account in the ledger? Answer: Because the cash book itself serves as the Cash Account (and the Bank Account): its columns are the ledger accounts, so posting them again would duplicate the entries.

Extension Questions with Answers

  1. Pass the contra entry: Rs 10,000 cash is deposited into the bank. Why is no ledger posting needed? Answer: Cash Book: Bank column Dr Rs 10,000, Cash column Cr Rs 10,000, marked 'C'. No posting is needed because both affected accounts (Cash and Bank) already sit in the cash book itself.
  2. A firm buys goods of Rs 7,000 for cash. Should this appear in the purchases book? Answer: No. The purchases book records credit purchases of goods only; a cash purchase is recorded in the cash book.
  3. Output GST for a month is Rs 18,000 and input GST is Rs 12,000. How much GST is payable, and why? Answer: Rs 6,000. Output tax is set off against input tax; only the net Rs 18,000 − Rs 12,000 = Rs 6,000 is paid to the government.
  4. A petty cashier works on an imprest of Rs 3,000 and spends Rs 2,350 in the month. How much is reimbursed, and what is the float for next month? Answer: Reimbursed Rs 2,350. The float is restored to Rs 3,000 for next month.
  5. Pass the journal proper entry: the proprietor withdraws goods costing Rs 4,000 for personal use. Answer: Drawings A/c … Dr Rs 4,000; To Purchases A/c Rs 4,000. (Goods leave the business, so purchases fall and the owner's capital falls.)

Board-pattern Questions with Answers

  1. Distinguish a double column cash book from a triple column cash book. Answer: Double column has cash and bank columns. Triple column adds a discount column on each side: discount allowed on the debit side, discount received on the credit side.
  2. Why is the cash book called both a book of original entry and a ledger account? Answer: Cash entries are recorded in it first (journal), and its cash and bank columns are themselves the Cash and Bank accounts, so they are not opened again in the ledger.
  3. What is the source document for the sales return book? Answer: The credit note issued by the business to the customer returning the goods.
  4. Goods with a list price of Rs 20,000 are bought on credit with a trade discount of 10%. At what amount is the purchase recorded in the purchases book? Answer: Rs 18,000. Trade discount (Rs 2,000) is deducted and never recorded separately.
  5. Goods worth Rs 1,00,000 are sold within a state at 18% GST, and the same value is sold to another state. How is the tax charged in each case? Answer: Within the state: CGST Rs 9,000 + SGST Rs 9,000. To another state: IGST Rs 18,000 as a single tax.

Recap

The cash book is journal and ledger in one; contra entries are marked 'C' and need no posting. The petty cash book runs on the imprest system. Subsidiary books record only credit transactions in goods, with trade discount deducted and never recorded; everything else goes to the journal proper. GST paid is input tax, GST collected is output tax, set off gives the net payable — CGST plus SGST within a state, IGST between states.