Financial Accounting

3. SUBSIDIARY BOOKS

This chapter covers the following:

 Cash Book
 Simple cash book or single column cash book
 Double column cash book (with discount column)
 Three column cash book (with discount & Bank column)
 Petty Cash Book
 Purchase Book
 Sale Book
 Purchase Return Book
 Sale Return Book
 Bills receivable book
 Bills payable book
 Bank reconciliation
 Trial balance
 Financial statements
 Depreciation and its roles

Let us go through each one of them in detail.

Cash Book
Cash book is a record of all the transactions related to cash. Examples include:
expenses paid in cash, revenue collected in cash, payments made to creditors,
payments received from debtors, cash deposited in bank, withdrawn of cash for
office use, etc.

In double column cash book, a discount column is included on both debit and
credit sides to record the discount allowed to customers and the discount received
from creditors respectively.

In triple column cash book, one more column of bank is included to record all the
transactions relating to bank.

Note: In modern accounting, simple cash book is the most popular way to record
cash transactions. The double column cash book or three column cash book is
practically for academic purpose. A separate bank book is used to record all the
banking transactions as they are more than cash transactions. These days, cash

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is used just to meet petty and routine expenditures of an organization. In most of

the organizations, the salaries of employees are paid by bank transfer.

Note: Cash book always shows debit balance, cash in hand, and a part of current
assets.

Single Column Cash Book

Cash book is just like a ledger account. There is no need to open a separate cash
account in the ledger. The balance of cash book is directly posted to the trial
balance. Since cash account is a real account, ruling is followed, i.e. what comes
in – debit, and what goes out – credit. All the received cash is posted in the debit
side and all payments and expenses are posted in the credit side of the cash book.

Format:

CASH BOOK(Single Column)

Dr. Cr.

Date Particulars L.F. Amount Date Particulars Amount

L.F.
Double Column Cash Book
Here, we have an additional Discount column on each side of the cash book. The
debit side column of discount represents the discount to debtors of the company
and the credit side of discount column means the discount received from our
suppliers or creditors while making payments.

The total of discount column of debit side of cash book is posted in the ledger
account of ‘Discount Allowed to Customers’ account as ‘To Total As Per Cash
Book’. Similarly, credit column of cash book is posted in ledger account of
‘Discount Received’ as ‘By total of cash book’.

Format:

CASH BOOK(Single Column)

Dr. Cr.

Date Particula L.F. Discount Amt. Date Particula L.F. Discount Amt.
rs rs

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Triple Column Cash Book

When one more column of Bank is added in both sides of the double column cash
book to post all banking transactions, it is called triple column cash book. All
banking transactions are routed through this cash book and there is no need to
open a separate bank account in ledger.

Petty Cash Book

In any organization, there may be many petty transactions incurring for which
payments have to be done. Therefore, cash is kept with an employee, who deals
with it and makes regular payments out of it. To make it simple and secure, mostly
a constant balance is kept with that employee.

Suppose cashier pays Rs 5,000 to Mr A, who will pay day-to-day organization

expenses out of it. Suppose Mr A spend Rs 4,200 out of it in a day, the main
cashier pays Rs 4,200, so his balance of petty cash book will be again Rs 5,000.
It is very useful system of accounting, as it saves the time of the main cashier and
provides better control.

We will soon discuss about ‘Analytical or Columnar Petty Cash Book’ which is
most commonly used in most of the organizations.

Format:

PETTY CASH BOOK

Amt C.B.F Date Particul Amt Stationery Cartage Loading Postage

Recd ars Paid &
L.F

Printing

Purchase Book
Purchase book is prepared to record all the credit purchases of an organization.
Purchase book is not a purchase ledger.

Format:

PURCHASE BOOK

Date Particulars Inward Invoice No. L.F. Amount

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 Financial Accounting

Sale Book
The features of a sale book are same as a purchase book, except for the fact that
it records all the credit sales.

Format:

SALE BOOK

Outward
Date Particulars L.F. Amount
Invoice No.

Purchase Return Book

Sometimes goods are to be retuned back to the supplier, for various reasons. The
most common reason being defective goods or poor quality goods. In this case, a
debit note is issued.

Format:

PURCHASE RETURN BOOK

Date Particulars Credit Note No. L.F. Amount

Sale Return Book

The reason of Sale return is same as for purchase return. Sometimes customers
return the goods if they don’t meet the quality standards promised. In such cases,
a credit note is issued to the customer.

Format:

SALE RETURN BOOK

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 Financial Accounting

Date Particulars Debit Note No. L.F. Amount

Bills Receivables Book

Bills are raised by creditors to debtors. The debtors accept them and subsequently
return them to the creditors. Bills accepted by debtors are called as ‘Bills
Receivables’ in the books of creditors, and ‘Bills Payable’ in the books of
debtors. We keep them in our record called ‘Bills Receivable Books’ and ‘Bills
Payable Book’.

Format:

BILLS RECEIVABLE BOOK

Due
Date Received From Term L.F. Amount
Date

Bills Payable Book

Bills payable issues to the supplier of goods or services for payment, and the
record is maintained in this book.

Format:

BILLS PAYABLE BOOK

Date To Whom Given Term Due L.F. Amount

Date

Key Features of Subsidiary Books

There is a difference between a purchase book and a purchase ledger. A purchase
book records only credit purchases and a purchase ledger records all the cash
purchases in chronical order. The daily balance of purchase book is transferred to

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purchase ledger. Therefore, purchase ledger is a comprehensive account of all

purchases.

The same rule applies to sale book and sale ledgers.

1. It is quite clear that maintaining a subsidiary book is facilitation to journal

entries, practically it is not possible to post each and every transaction
through journal entries, especially in big organizations because it makes
the records bulky and unpractical.

2. Maintenance of subsidiary books gives us more scientific, practical,

specialized, controlled, and easy approach to work.

3. It provides us facility to divide the work among different departments like

sale department, purchase department, cash department, bank
department, etc. It makes each department more accountable and provides
an easy way to audit and detect errors.

4. In modern days, the latest computer technology has set its base all over
the world. More and more competent accounts professionals are offering
their services. Accuracy, quick results, and compliance of law are the key
factors of any organization. No one can ignore these factors in a competitive
market.

Bank Reconciliation
On a particular date, reconciliation of our bank balance with the balance of bank
passbook is called bank reconciliation. The bank reconciliation is a statement that
consists of:

 Balance as per our cash book/bank book

 Balance as per pass book
 Reason for difference in both of above

This statement may be prepared at any time as per suitability and requirement of
the firm, which depends upon the volume and number of transaction of the bank.
ri

In these days, where most of the banking transactions are done electronically, the
customer gets alerts for every transaction. Time to reconcile the bank is reduced
more.

Format:

BANK RECONCILIATION STATEMENT

(1) (2)
PARTICULARS Debit Bank Credit Bank
Balance as
per Bank

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Balance as Book
per Bank (Overdraft)
Book
Balance as per Bank Book 50,000 -50,000
1. Add: Cheque issued to parties but not 3,25,000 3,25,000
presented in bank
2. Less: Cheque deposited in bank but -50,000 -50,000
not cleared yet
3. Less: Bank Charges debited by bank -1,200 -1,200
but not entered in our books of
accounts
4. Less: Bank interest charged by bank -10,000 -10,000
but not entered in our books of
accounts
5. Add: Payment direct deposited by 1,75,000 1,75,000
party without intimation to us
Balance as per Bank Pass Book/ 4,88,800 3,88,800
Statement

Trial Balance
Trial balance is a summary of all the debit and credit balances of ledger accounts.
The total of debit side and credit side of trial balance should be matched. Trial
balance is prepared on the last day of the accounting cycle.

Trial balance provides us a comprehensive list of balances. With the help of that,
we can draw financial reports of an organization. For example, the trading account
can be analyzed to ascertain the gross profit, the profit and loss account is
analyzed to ascertain the profit or Loss of that particular accounting year, and
finally, the balance sheet of the concern is prepared to conclude the financial
position of the firm.

Format:

TRIAL BALANCE

S.NO. Ledger Accounts L.F. DEBIT Credit

(Rs) (Rs.)
1 ADVANCE FROM CUSTOMERS XX
2 ADVANCE TO STFF XX
3 AUDIT FEES XX
4 BALANCE AT BANK XX
5 BANK BORROWINGS XX
6 BANK INTEREST PAID XX
7 CAPITAL XX
8 CASH IN HAND XX
9 COMMISSION ON SALE XX
10 ELECTRICITY EXPENSES XX
11 FIXED ASSETS XX
12 FREIGHT OUTWARD XX

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13 INTEREST RECEIVED XX
14 INWARD FREIGHT CHARGES XX
15 OFFICE EXPENSES XX
16 OUTSTANDING RENT XX
17 PREPAID INSURANCE XX
18 PURCHASES XX
19 RENT XX
20 REPAIR AND RENUWALS XX
21 SALARY XX
22 SALARY PAYABLE XX
23 SALE XX
24 STAFF WELFARE EXPENSES XX
25 STOCK XX
26 SUNDRY CREDITORS XX
27 SUNDRY DEBTORS XX
TOTAL XXXXX XXXXX

Financial Statements
Financial statements are prepared to ascertain the profit or loss of the business,
and to know the financial position of the company.

Trading, profit & Loss accounts ascertain the net profit for an accounting period
and balance sheet reflects the position of the business.

All the above has almost a fixed format, just put all the balances of ledger accounts
into the format given below with the help of the trial balance. With that, we may
derive desired results in the shape of financial equations.

Trading & Profit & Loss Account of M/s ABC Limited

(For the period ending 31-03-2014)
Particulars Amount Particulars Amount
To Opening Stock XX By Sales XX
To Purchases XX By Closing Stock XX
To Freight charges XX By Gross Loss c/d XXX
To Direct Expenses XX
To Gross Profit c/d XXX
Total XXXX Total XXXX

To Salaries XX By Gross Profit b/d XXX

To Rent XX
To Office Expenses XX By Bank Interest received XX
To Bank charges XX By Discount XX
To Bank Interest XX By Commission Income XX
To Electricity XX By Net Loss transfer to XX
Expenses Balance sheet
To Staff Welfare XX
Expenses

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 Financial Accounting

To Audit Fees XX
To Repair & Renewal XX
To Commission XX
To Sundry Expenses XX
To Depreciation XX
To Net Profit transfer XX
to Balance sheet
Total XXXX Total XXXX

Balance sheet of M/s ABC Limited

as on 31-03-2014

Liabilities Amount Assets Amount

Capital XX Fixed Assets XXXX

Add: Net Profit XX XX Less: Depreciation XX XX

Bank Borrowings XX Current Assets XX

Long Term Borrowing XX Stock XX
Current Liabilities: XX Debtors XX
Advance From XX Cash In hand XX
Customers
Sundry Creditors XXX Cash at Bank XX
Bills payable Bills receivables XX
Expenses Payable
Total XXXX Total XXXX

Owner’s Equity
The equation of equity is as follows:

Owner Equity = Assets – liability

The owner or the sole proprietor of a business makes investments, earns some
profit on it, and withdraws some money out of it for his personal use called
drawings. We may write this transaction as follows:

Investment (capital) +- Profit or Loss – drawings = Owner’s Equity

Current Assets
Assets that are convertible into cash within the next accounting year are called
current assets.

Cash in hand, cash in bank, fixed deposit receipts (FDRs), inventory, debtors,
receivable bills, short-term investments, staff loan and advances; all these come

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under current assets. In addition, prepaid expenses are also a part of current
assets.

Note: Prepaid expenses are not convertible into cash, but they save cash for the
next financial or accounting year.

Current Liabilities
Like current assets, current liabilities are immediate liabilities of the firm that are
to be paid within one year from the date of balance sheet.

Current liabilities primarily include sundry creditors, expenses payable, bills

payable, short-term loans, advance from customers, etc.

Depreciation
Depreciation reduces the value of assets on a residual basis. It also reduces the
profits of the current year.

Depreciation indicates reduction in value of any fixed assets. Reduction in value

of assets depends on the life of assets. Life of assets depends upon the usage of
assets.

There are many deciding factors that ascertain the life of assets. For example, in
case of a building, the deciding factor is time. In case of leased assets, the deciding
factor is the lease period. For plant and machinery, the deciding factor should be
production as well as time. There can be many factors, but the life of assets should
be ascertained on some reasonable basis.

Why Do We Need to Account for Depreciation?

Here is why we need to provide depreciation:

 To ascertain the true profit during a year, it is desirable to charge

depreciation.

 To ascertain the true value of assets, depreciation should be charged.

Without calculating the correct value of assets, we cannot ascertain the true
financial position of a company.

 Instead of withdrawal of overstated profit, it is desirable to make provisions

to buy new assets to replace old asset. The accumulated value of
depreciation provides additional working capital.

 Depreciation helps in ascertaining uniform profit in each accounting year.

 Depreciation allows to take the advantage of tax benefit.

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Accounting Entries Related to Assets and Depreciation

Let us see the accounting entries related to assets and depreciation:

S. No. Journal Entries

1 Purchase of Fixed Assets

Asset A/c Dr.

To Bank A/c

2 Expenses on purchase of Fixed Assets

Related Asset A/c Dr.

To Cash/Bank A/c

3 For Providing depreciation

Depreciation A/c Dr.

To Assets A/c

4 Transfer of Depreciation to Profit and Loss A/c

Profit & Loss A/c Dr.

To Depreciation A/c

5 Sale of Assets

Bank A/c Dr.

To Assets A/c

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Cost of Assets − Scrap Value of Assetts

Depreciation =
Estimated Life of Assets

Method of Depreciation
Depreciation can be calculated using any of the following methods, however the
most popular methods remain (a) Straight Line Method and (b) Written Down
Value Method.

 Straight Line Method

 Written Down Value Method
 Annuity Method
 Insurance Policy Method
 Machine Hour Rate Method
 Depletion Method
 Revaluation Method
 Depreciation Fund Method

Format:

DEPRECIATION CHART
Desc. Opening Addition Sale Balance Rate of Value of Closing
Value during Depreci Depreci value
the year ation ation

1 2 3 4 5 6 7 8
(2+3-4) ( 5-7)

Format of ledger accounts:

ASSET ACCOUNT

Date Particulars L.F. Amt Date Particulars L.F. Amt

25- To Bank xxx 31-03- By Depreciation xx

06-13
By Balance c/d xx
Total xxx Total xxx
01- To Balance b/d xx By Depreciation Xx
04-14

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