Class 11 Special Purpose Books and Ledger: Complete Concepts and Practice

Big picture

The journal records transactions date by date, but it doesn't tell you how much a customer owes or how much cash is left. For that we need the ledger, which collects all transactions relating to one account in one place.

In a busy business, writing every transaction in the journal is slow. So repetitive transactions are entered in special purpose (subsidiary) books: cash transactions in the cash book, credit purchases in the purchases book, credit sales in the sales book, and returns in return books. Only the remaining transactions go into the journal proper.

Learning goals

• Explain the ledger, post journal entries to it and balance accounts.

• Explain the need for and types of special purpose books.

• Prepare a simple and a double column cash book, including contra entries.

• Prepare a petty cash book under the imprest system.

• Prepare purchases, sales, purchases return and sales return books and post them.

• State which transactions go into the journal proper.

Core ideas

1. The ledger

The ledger is the principal book of accounts, containing all accounts. Each account has a debit side (left) and a credit side (right), with columns for date, particulars, journal folio (J.F.) and amount.

Posting. Each journal entry is posted to two accounts:

• In the account debited, write on the debit side "To" followed by the name of the account credited.

• In the account credited, write on the credit side "By" followed by the name of the account debited.

Balancing. At the end of the period, total both sides; write the difference on the shorter side as "Balance c/d", so both totals agree; then bring it down on the opposite side as "Balance b/d". A debit balance means more debits than credits (assets, expenses, debtors); a credit balance means more credits (liabilities, capital, incomes, creditors).

Example: Mohan's account (a creditor). On 2 April goods worth ₹30,000 were bought from Mohan on credit; on 8 April he was paid ₹12,000 by cheque.

Mohan's credit balance of ₹18,000 is the amount still owed to him.

Nominal accounts (expenses and incomes) are not balanced; they are closed by transfer to the Trading or Profit and Loss Account.

2. Special purpose books

Advantages: division of work, specialisation and efficiency, saving of time, easy reference, and fewer posting errors.

3. Cash book

The cash book is both a book of original entry and a ledger account: it replaces the Cash Account (and Bank Account) in the ledger. Receipts go on the debit side and payments on the credit side.

• Simple cash book: one amount column on each side, for cash only.

• Double column cash book: cash and bank columns on each side.

Contra entry. A transaction that affects both the cash and bank columns is a contra entry, marked "C" in the L.F. column:

• cash deposited into the bank: debit Bank column, credit Cash column;

• cash withdrawn from the bank for office use: debit Cash column, credit Bank column.

Worked example: double column cash book for April

Transactions: 1 April, cash in hand ₹15,000 and bank balance ₹40,000; 3 April, cash sales ₹8,000; 5 April, deposited ₹10,000 into the bank; 8 April, paid Mohan by cheque ₹12,000; 12 April, received a cheque from Rita for ₹9,000 and deposited it the same day; 18 April, withdrew ₹5,000 from the bank for office use; 22 April, paid rent in cash ₹4,000; 28 April, bank charges ₹200.

Closing cash ₹14,000 and bank ₹41,800. The cash column can never have a credit balance (you can't pay more cash than you have), but the bank column can show a credit balance, which is a bank overdraft.

4. Petty cash book

Small, frequent payments (postage, stationery, cartage, refreshments) are made by a petty cashier and recorded in a petty cash book, usually an analytical one with a column for each type of expense.

Imprest system. The petty cashier receives a fixed amount (the imprest) at the start of the period. At the end, the chief cashier reimburses exactly the amount spent, restoring the imprest.

Example. Imprest ₹5,000. During the week: postage ₹600, stationery ₹900, cartage ₹1,100, refreshments ₹800. Total spent = ₹3,400. Balance with the petty cashier = ₹1,600. The chief cashier reimburses ₹3,400, bringing the petty cash back to ₹5,000.

The column totals are debited to the respective expense accounts in the ledger.

5. Purchases book and purchases return book

The purchases book records credit purchases of goods only. Cash purchases go in the cash book; purchase of assets on credit goes in the journal proper.

Example. On 4 April, bought from Gupta Bros 20 chairs at ₹500 each less 10% trade discount; on 10 April, bought from Sharma & Co. 10 tables at ₹2,000 each.

Posting: each supplier's account is credited individually (Gupta Bros ₹9,000, Sharma & Co. ₹20,000), and the monthly total ₹29,000 is debited to Purchases Account.

The purchases return book (returns outward book) records goods returned to suppliers, supported by a debit note sent to the supplier. Each supplier's account is debited; the total is credited to Purchases Return Account.

6. Sales book and sales return book

The sales book records credit sales of goods only. Each customer's account is debited individually, and the total is credited to Sales Account.

The sales return book (returns inward book) records goods returned by customers, supported by a credit note issued to the customer. Each customer's account is credited; the total is debited to Sales Return Account.

Example. Credit sales: Rita ₹12,000, Arun ₹8,000. Rita returned goods worth ₹1,000. Sales book total ₹20,000 is credited to Sales A/c; Rita and Arun are debited. Sales return book total ₹1,000 is debited to Sales Return A/c, and Rita is credited ₹1,000.

7. Journal proper

Transactions that don't fit any special book are recorded in the journal proper:

• opening entries;

• closing entries and transfer entries;

• adjustment entries (outstanding expenses, depreciation, accrued income);

• rectification entries;

• credit purchase or sale of assets other than goods (furniture bought on credit);

• goods withdrawn by the owner, given as charity or free samples;

• bills receivable and bills payable transactions;

• bad debts, and endorsement or dishonour of cheques.

A reliable problem-solving routine

1. For each transaction, decide the book: cash or bank (cash book), credit purchase of goods (purchases book), credit sale of goods (sales book), returns (return books), anything else (journal proper).

2. In the cash book, treat cash and bank as separate columns; mark contra entries "C".

3. Total the subsidiary books and post the totals to Purchases, Sales and return accounts; post individual items to personal accounts.

4. Balance ledger accounts and bring down the balances.

Connections that matter

• Recording business transactions produces the journal entries posted here.

• Bank reconciliation statement compares the bank column of the cash book with the bank's passbook.

• Trial balance is prepared from the ledger balances.

Common mistakes

• Entering cash purchases in the purchases book. It records only credit purchases of goods.

• Entering credit purchase of furniture in the purchases book. It goes in the journal proper.

• Recording trade discount in the books. Record the net amount.

• Showing a credit balance in the cash column. Only the bank column can have a credit balance (overdraft).

• Forgetting that a cheque received and deposited the same day goes to the bank column.

Revision checklist

• I can post journal entries to the ledger and balance accounts.

• I can prepare simple and double column cash books with contra entries.

• I can prepare a petty cash book under the imprest system.

• I can prepare and post purchases, sales and return books.

• I can list the transactions recorded in the journal proper.