Chap-3 (Books of Original Entries) PDF

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Chapter-3

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BOOKS OF ORIGINAL ENTRIES

CHAPTER - 3 BOOKS OF ACCOUNTS (BOOKS OF ORIGINAL ENTRIES) Preparation of voucher In order to record a transaction into the books of account, bookkeeper requires documentary evidence with proper approval of the transaction and authorization of the source documents from a concerned authority. For this purpose a voucher is prepared on which all descriptions of the transaction are written and supporting documents (along with evidences of approvals and authorizing) are attached with it. Such voucher is then submitted to the bookkeeper for its recording in the books of accounts. Recording in the books of accounts Approved voucher are recorded in the books of original entries, such recorded information is known as entry. These entries are then posted into the books of secondary entries. Many entities use computers for recording and posting transactions. However, an understanding of books of accounts is necessary whether transactions are recorded manually or electronically. Basically, there are two types of books of accounts which are used to maintain record of financial information of a business entity: 1.

Books of original entries.

2.

Books of secondary entries.

These are further subdivided according to the needs of the business and/or complexity of the transaction. Following diagram best describes the different books of accounts which are used in a business entity.

BOOKS OF ACCOUNT

Books of Secondary Entries (Ledger)

Books of Primary / Original Entries (Journal)

To record cash transaction

Main Cash Book

To record credit transaction, other events and conditions

Source Docum

Sr. No. 1 For cash receipts & 2 payments 3 4

Purchases Journal

Sales Journal

Transaction Sal For credit Pur purchases Sal Purchases Return

For credit sales

Returns Inward Journal

Petty Cash Returns Outward Journal

General Journal

Source Documents vo other transaFor For vo ctions, events purchases ) sales return return ed ed & conditions Credit Note (received)

Source Documents 6 Ca as ip Invoices Invoices Credit Credit Note Cash 7 Lea Received ch re Received Issued Note Memos 8 Sta p s Bought Sales U Main Ledger or e Ledger es – Bo Ledger Nominal Ledger or For General Ledger Debtors Creditors ep me Ledger

Depends upon the nature of information

Ledger s

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BOOKS OF ORIGINAL ENTRIES 9

Electricity, Gas, Water, Phone

MAF Series – Book-1

Metered Bills/Invoices.

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BOOKS OF ORIGINAL ENTRIES

Basic Concept of Books of Original Entries Just after analyzing a transaction or event for its debit and credit effects it is required to record them in a systematic way. So the books of accounts in which Debit and Credit are initially recorded in a systematic way are known as books of original entry (BOE). It depends upon the complexity of transactions and size of the business that which books of original entries are required to record the financial information. JOURNAL For a very little business, having very few cash and credit transactions, a general purpose journal is sufficient to record each type of financial information. Journal is the very first book of account in which all business transactions and events are recorded. In this book transactions and events are recorded in a chronological (date) sequence. Both accounting effects (Debit & Credit) are recorded in a systematic way. Information recorded in the journal for a transaction or an event is known as journal entry. Format of a Journal & Journal Entry Date 2009 Jan. 10

Particulars

Post Ref. 39 10

Salaries Account (Debit) Cash Account (Credit) (Staff salaries paid in cash).

Debit (Rs) 50,000

Credit (Rs) 50,000

From the above illustration we can understand that on 10th January 2009, business paid cash Rs.50,000 as staff salaries. It is customary that the accounting head analysed as debit is written firstly in the particulars’ column and its amount is written in the debit column whereas the accounting head analysed as credit is written under the debit accounting head but after indenting a little space from the left side, its amount is written in the credit column. The column of post reference cannot be very well understood without having knowledge of Ledger; anyhow, the column post reference shows page numbers of the Ledger in which salaries and cash accounts are posted. Words written within the parenthesis in the particulars column are known as “Narration of a transaction or event”; it is an integral part of a journal entry. Narration explains the accounting treatments to a layman. Solved problem 3.1 Pass journal entries for the following transactions 2003 Jan. 2: Goods bought for cash Rs.20,000. Jan. 5: Goods sold for cash Rs.35,000. Jan. 10: Loan taken from friends in cash Rs.50,000. Solution: Date 2009 Jan. 2

Jan. 5

Jan. 10

Particulars Purchases Account (Debit) Cash Account (Credit) (Bought goods by paying cash).

Post Ref. ? ?

Debit (Rs) 20,000

20,000

Cash Account (Debit) Sales Account (Credit) (Sold goods for cash).

? ?

35,000

Cash Account (Debit) Loan from friend (Credit) (Loan taken in cash from friend).

? ?

50,000

MAF Series – Book-1

Credit (Rs)

35,000

50,000

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BOOKS OF ORIGINAL ENTRIES

Compound Entry It often happens in practice that a business makes more than one transactions in a day in which one accounting head is common in each journal entry. For example; January 5: cash Rs.7,000 paid for wages and cash Rs. 1,000 paid for purchase of stationery. In this transaction, cash account is to be credited for both, wages and stationery. If we record this transaction separately, it would be: Date 2009 Jan. 5

Particulars

Post Ref. ? ?

Wages Cash (wages paid in cash)

Jan. 5

Stationery Cash (Stationery purchased for cash.)

? ?

Debit (Rs) 7,000

Credit (Rs) 7,000

1,000 1,000

To avoid double working, we can combine these entries in one as under: Date 2009 Jan. 5

Particulars Wages Stationery Cash (Wages paid & Stationery purchased for cash).

Post Ref. ? ?

Debit (Rs) 7,000 1,000

Credit (Rs) 8,000

Solved problem 3.2 Prepare a journal for the following transactions. Jan 1: Capital introduced in the business Rs.10,000 in cash and Rs.20,000 as machinery. Jan 2: Purchase land for cash Rs.4,000. Jan 3: Purchase goods for cash Rs. 2,000 and on credit from khan Rs.7,000 Jan 4: Sold goods for cash Rs.3,000. Jan 5: Rent paid in cash Rs.2,000. Jan 6: Owner withdrew cash for personal use Rs.500. Jan 7: Jan 8 Jan 9 Jan10: Date 2003 Jan. 1

Jan. 2

Salaries paid in cash Rs.200. Bought goods from Butt on credit Rs.6,000. Sold goods on credit to Khawaja for Rs.8,000 and for cash Rs.4,000. Received cash from Mughal 2,500 on his account. Particulars Cash Account Machinery Account Capital Account (Cash & machinery introduced as capital).

Post Ref. ? ?

? ?

Land Account Cash Account (Purchased land for cash).

MAF Series – Book-1

Debit (Rs) 10,000 20,000

Credit (Rs) 30,000

4,000 4,000

Chapter-3 Jan. 3

Jan. 4

Jan. 5

Jan. 6

Jan. 7

Jan. 8

Jan. 9

Jan. 10

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BOOKS OF ORIGINAL ENTRIES Purchases Account Cash Account Creditor (Khan) (Goods purchased for cash & on credit from Khan).

? ?

9,000

Cash Account Sales Account (Sold goods for cash).

? ?

3,000

Rent Account Cash Account (Rent paid in cash).

? ?

2,000

Drawings Account Cash Account (Cash withdrew by the owner for personal use).

? ?

500

Salaries Account Cash Account (Salaries paid in cash).

? ?

200

Purchased Account Creditors (Butt) Account (Purchase goods on credit from Butt).

? ?

6,000

Debtors (Khawaja) Account Cash Account Sales Account (Sold goods on credit to Khawaja and goods sold for cash). Cash Account Debtors (Mughal)Account (Received cash from Mughal).

? ?

8,000 4,000

? ?

2,500

2,000 7,000

3,000

2,000

500

200

6,000

12,000

2,500

Types of discounts A trader often allows its customers two types of discounts I. II.

Trade discount Settlement discount

Trade Discount It is the discount offered by a seller to its customers before entering into the transaction, based on some policy. Examples include; 1.

A bulk purchase discount.

2.

Regular customer discount.

3.

Season end discount.

Settlement Discount MAF Series – Book-1

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BOOKS OF ORIGINAL ENTRIES

It is the discount offered by a seller to its customers, based on some settlement terms, for early payment of the invoice. Example: Goods sold for Rs.2,000 on settlement terms 5/10, n/30 (2,000 x 5%) = Rs.100 shall be the amount of settlement discount. This discount is also known as cash discount. ITTR: 

Trade discount is not recorded in the books of accounts of either party.

 

Settlement discount is recorded in the books of both parties. Such discount for seller is knows as discount allowed; and for purchaser is known as discount received.

Accounting Entries: (A) Cash received from debtor Rs. 11,400 in full settlement of his account of Rs. 12,000. By analyzing this transaction we found that there is a decrease in debtors because of discount allowed to them based on settlement terms for Rs.600 and because of cash received from them Rs.11,400, therefore, the double entry would be: Rs. Rs. I II

Cash Account Debtor Account

11,400 11,400

Discount Allowed Account Debtor Account

600 600

By combining these two journal entries, we can have a compound entry as Cash account Discount Allowed Account Debtors Account

11,400 600 12,000

(B) Cash paid to creditors Rs.9, 500 after deducting a discount of Rs. 500. By analyzing this transaction we will find that there is a decrease in creditors because of discount received from them based on settlement terms Rs.500 and because of cash paid to them for Rs. 9,500. Therefore, the double entries would be: Rs. Rs. I

II

Creditor Account Cash Account

9,500 9,500

Creditor Account Discount Account

500 500

By combining these two journal entries we can have a compound entry as; Creditors Account Cash Account Discount Received Account

10,000 9500 500

(C) Cash paid to Creditor in full settlement of his account Rs. 9,500, after subtracting discount Rs. 500. Creditor’s Account Cash Account Discount Received Account Understanding the concept of settlement terms through invoice MAF Series – Book-1

Rs. 9,500

Rs. 9,000 500

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BOOKS OF ORIGINAL ENTRIES

Invoice is a document that is issued by a seller to its customer at the time of sales. An invoice states trade discount as a deduction from the list price and also states settlement terms for calculation of settlement discount in future. Following is a sketch of an invoice that will explain the concept of settlement terms: Standard format of Invoice Business Name and Address Ali Traders Invoice # Date: December 19, 2009

Customer’s Name and Address Hasan Traders

Amount Rs. 10,000

1

Fans

5

Rate Rs. 2,000

2

Air conditioner

2

25,000

50,000

3

Room Coolers

3

10,000

30,000

Serial No

Description

Quantity

Sub Total

90,000

Trade discount 10%

(9,000)

Net amount of invoice

81,000

Settlement term: 2/10 , n/30

Describing the above invoice As per the above invoice Rs. 9,000 is the amount of trade discount that would not be accounted for this amount is just subtracted from the list price of the items invoiced. Rs. 81,000 is the amount of invoice that is due to the supplier as on December 19, 2009. If the invoice will be paid within 10 days i.e. by December 29, 2009, the supplier will offer further 2% discount that is known as settlement discount (as explained above). Amount of settlement discount would then be Rs. 1,620 (81,000 x 2%). Accounting Entries In the Books of Seller (Ali Traders) Dec. 19 Before Dec. 29

Rs. 81,000

Debtors A/c. Sales A/c.

Rs. 81,000

Cash A/c. Discount allowed A/c. Debtors A/c.

79,380 1,620 81,000

In the Books of Buyer/Customer (Hasan Traders) Dec. 19

Purchases A/c. Creditors A/c.

Before Dec. 29

Creditors A/c. Cash A/c. Discount received A/c. Solved problem 3.4 MAF Series – Book-1

81,000 81,000

81,000 79,380 1,620

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BOOKS OF ORIGINAL ENTRIES

Pass journal entries in a journal for the following transactions. Dec 1: Business started with cash Rs 100,000 and furniture worth Rs. 35,000 as capital. Dec 2: Machinery purchased from Sheikh on credit Rs.2,000. Dec 4: Loan taken from the bank Rs.200 in cash. Dec 6: Machinery returned to Sheikh Rs.2,000. Dec 8: Bought goods on credit from Kashmiri Rs.600. Dec 10: Bought goods on credit from Khan for Rs.10,000 subject to a 5% trade discount. Dec 11: Goods sold for Rs.2,000 to Bhutta on settlement terms 5/10, n/30. Dec 12: Sold goods on credit to Malik Rs.800. Dec 16: Goods returned to Kashmiri Rs.100. Dec 17: Bhutta settled his account in full. Dec 18: Cash paid to Kashmiri Rs.580 in full settlement of his account. Dec 20: Goods returned by Malik Rs.200. Dec 22: Charity paid in cash Rs.200. Dec 23: Goods worth Rs.350, Cash Rs.1,000 were taken away by the proprietor for personal use. Dec 26: Goods distributed as free sample Rs.100 and given away as charity worth Rs.50. Dec 28: Bank loan paid Rs.200. Date 2009 Dec 1

Dec 2

Dec 4

Dec 6

Dec 8

Dec 10

Dec 11

Particulars Cash Account Furniture Account Capital Account (Cash and Furniture introduced as capital)

Post Ref. ? ? ?

Debit (Rs) 100,000 35,000

135,000

Machinery Account Creditors (Sheikh)Account (Machinery purchased on credit from Sheikh).

? ?

2,000

Cash Account Bank Loan Account (Loan taken in cash from Bank).

? ?

200

Creditors (Sheikh) Account Machinery Account (Machinery returned to Sheikh).

? ?

2,000

Purchase Account Creditors (Kashmiri)Account (Bought goods on credit from Kashmiri).

? ?

600

Purchases Account Cash Account (Goods purchased on trade discount of 5% 10,000 X 5/100 = 9,500)

? ?

9,500

Debtor (Bhutta) Account Sales Account (Goods sold on credit on settlement term 5/10, n/30)

? ?

2,000

MAF Series – Book-1

Credit (Rs)

2,000

200

2,000

600

9,500

2,000

Chapter-3 Dec 12

Dec 16

Dec 17

Dec 20

Dec 22

Dec 23

Dec 26

Dec 28

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BOOKS OF ORIGINAL ENTRIES Debtors (Malik)Account Sales Account (Sold goods on credit to Malik).

? ?

800

Creditors (Kashmiri) Account Purchases Return Account (Goods returned to Kashmiri).

? ?

100

Cash Account Discount Account Debtor (Bhutta) Account (Cash received & discount allowed) 2,000 X 5/100 = 100* Sales return Account Debtors (Malik) Account (Goods returned by Malik).

? ? ?

1,900 100*

? ?

200

Charity Account Cash Account (Charity paid in cash).

? ?

200

Drawings Account Cash Account Purchases Account (Owner withdrew cash & goods for personal use).

? ? ?

1,350

Free Sampling Account Charity Account Purchases Account (Goods distributed as free sampling & given away as charity). Bank Loan Account Cash Account (Bank Loan paid in cash).

? ? ?

100 50

? ?

200

800

100

2,000

200

200

1,000 350

150

200

SUBDIVISION OF JOURNAL Journal is sub-divided because of complexity of the transactions or large size of business. Subdivision of journal is required when there are a number of cash transactions in a day and also there are so many transactions for credit purchases and credit sales. This, large number of transactions, creates a mess in bookkeeping office; therefore, separate bookkeeping assistants are assigned responsibilities for separate types of transactions along with separate journals. For example: For cash transactions there is a separate cash office in which only cash transactions are analyzed and recorded in a book named as cash book. For purchases there is a purchase journal in which only and only credit transactions for purchases are recorded. In the same way sales journal for credit transaction of sales is maintained. And if there are a large number of returns then separate journals for sales return and purchases return are also maintained. All remaining transactions and events like sale and purchase of fixed assets on credit, loss by fire etc. are recorded in general journal. General journal is also used to record rectifying entries, adjusting entries and closing entries.

MAF Series – Book-1

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BOOKS OF ORIGINAL ENTRIES

SALES JOURNAL Need for Sales Journal In small business entities there are very little number of transactions for credit sales. As we can have an example of a barber’s shop, a tailor, a retailer etc. they mostly sell their services or goods on cash terms. But as business expands, the sales of it also grow in terms of cash as well as in terms of credit. The cash sales are then recorded in the cash book as a receipt, and the credit sales are recorded in a separate journal named as sales journal (sales day book). In sales journal, no other transactions are recorded except the transactions for sales on credit terms. Recording transactions in Sales Journal In case of credit sales the business is very much interested in the names and addresses of the credit customer (Debtor), therefore, sales journal is designed accordingly in order to cover following information; Date----------------------Name of Debtor -------

Date of...