FINANCIAL ACCOUNTING
Chapter-11 Special Purpose Books II-Other Books
Important Notes:-
1. Freight or Cartage: The seller of goods may include freight charges in the invoice for transporting the goods. In the Purchases Book, a separate column is maintained to record the freight charges. The total invoice price is divided between cost and freight. The total of cost column is debited to Purchases Account and the total of freight column is debited to Freight Inwards Account. The total of invoice price is credited to Seller's Account.
2. Packing and Forwarding Expenses: Like freight, the seller of goods may include packing and forwarding expenses i the invoice. In the Purchases Book, a separate column is maintained to record such packing and forwarding expenses. The total invoice price is divided among cost, packing and forwarding expenses. The total of cost column is debited to Purchases Accounting and the total of packing and forwarding expenses is debited to Packing and Forwarding Expenses Account. The total of invoice price is credited to Seller's Account.
3. Freight/Cartage and Packing Charges: Sometimes, freight/cartage and packing charges are charged from the customer along with the value of goods sold in the sale invoice. In the Sales Book, a separate column is maintained to record such recoveries. They are recorded in a separate column because it is nit part of sate proceeds and thus, are shown separately in the final accounts. Monthly total of the freight/cartage and packing charges column is credited to Freight/Cartage and Packing Charges Recoverable Account while the customer is debited with the sale amount plus freight/cartage and packing charges.
4. Opening Entry: Opening entry is recorded in the beginning of a financial year to open the books by debiting assets and crediting liabilities and the capital appearing in the Balance Sheet of the previous year.
5. Closing Entries: Closing entries are passed at the end of the year to close the accounts relating to expenses and revenues (or Nominal Accounts) by transferring them to the Trading Account and Profit and Loss Account. For example, the Salary Account is closed by transferring its balance to the Profit and Loss Account, the Purchases Account is closed by transferring its balance to the Trading Account and so on.
6. Rectification Entries: Entries to rectify the errors in the books of original entries or of a Ledger are recorded in the Journal Proper. (For details see Chapter on 'Rectification of Errors')
7. Transfer Entries: If an amount is to be transferred from one account to another,such a transfer is also made through a Journal entry.
8. Adjustment Entries: At the end of the year, amount of expenses or incomes may have to be adjusted for amounts paid or received in advance or for amounts not yet settled in cash. Such an adjustment also made through Journal entries. Usually the adjustment entries are for the following:
(i) Outstanding expenses, i.e., expenses incurred but not yet paid;
(ii) Prepaid expenses, i.e., expenses already paid in advance for some period in the future;
(iii) Accrued Incomes, i.e., income earned but not yet received;
(iv) Income Received in Advance, i.e., income that has not been earned but received in advance;
(v) Interest on capital, i.e., the interest which the proprietor thinks proper to allow on his investments; and
(vi) Depreciation, i.e., fall in the value of the assets used on account of wear and rear over a period.
9. Entries for Dishonor of Bills: It someone who accepted a Promissory Note (or bill) is not able to pay it on its due date, a Journal entry is necessary to record the non-payment or dishonor of bill.
10.Miscellaneous Entries: Besides the above, the following entries also require journalising:
- Credit purchase of goods other than goods dealt in or materials required for production of goods, e.g.,credit purchase of furniture or machinery will be journalised.
- Discount Allowed and Discount Received.
- An allowance to be given to customers or a charge to be made to them after the issue of the invoice.
- On an amount becoming irrecoverable, say, because of the customer becoming insolvent
- Effects of accidents such as loss of property by fire.
- Capital brought in kind by the proprietor.
Purchases Book or purchases journal
Purchases Book is a subsidiary book in which credit purchases of goods, i.e., goods in which the firm deals or uses for manufacturing goods are recorded. Thus, cash purchases of goods and purchases of non-goods like fixed assets are not recorded in Purchases Book. The entries in the Purchases Book are recorded on the basis of Invoices received from the suppliers with the amount net of trade discount,i.e., List Price or Catalogue Price less Trade Discount, if any.
List Price or Catalogue Price is the declared price of goods by the seller at which goods are sold. Trade Discount, if any, is allowed on the List Price or Catalogue Price.
Ruling of Purchases Book or Purchases Journal
The ruling of a Purchases Book or Purchases Journal is a follows:
PURCHASES BOOK OR PURCHASES JOURNAL
The Purchases Book is written as follows:
- Date: The date of transaction is written.
- Particulars: The name of the seller of goods, description of the articles, price per unit payable and quantities purchased are written.
- Invoice No.: Invoice number of the goods purchased are written.
- Ledger Folio (L.F.): When the Purchases Book is posted in ledger,the page number of the ledger is written.
- Details: The amount, i.e., List Price or Catalogue Price of each article or item of goods purchased is written. If trade discount is allowed by the seller, it is deducted from the gross amount. It is shown as follows:
List Price (Quantity Ñ… Price per Article) ...
Less: Trade Discount ...
____
...
Add: Expenses (Freight/Cartage, etc.) ...
Total Payable _____
...
====
6.Cost: Cost of goods purchased is written in this column
7.Expenses: The expenses say freight, cartage and packing material, etc., payable to the seller of goods are written.
8.Total Payable: The amount of invoice, i.e., cost and expenses payable is written.
At the end of a specified period (a week, a fortnight or a month) the Purchases Book is totaled. This total is posted to the debit of Purchases Account and credit of individual Party's Account from whom goods are purchased.
Features of Purchases Book or Purchases Journal
- Credit purchases of goods traded in or material used for manufacture are recorded in the Purchases Book. Credit purchases of items not dealt in, such as office furniture or computers for office use, are not recorded in the Purchases Book. These purchases are recorded in Journal Proper.
- Cash purchases are not recorded in the Purchases Book. They are recorded in Cash Book.
- The entries in the Purchases Book are recorded on the basis of invoices received from the seller of goods with the net amount after trade discount.
Utilities of Purchases Book
- It reduces the volume of work required to pass Journal entry for each credit purchase.
- Ledger posting becomes easier since all the credit purchases are recorded in a single book.
- It is possible to have a periodic total of credit purchases of goods.
- It becomes easier to check the price charged and other calculations.
Sales Book or Sales Journal
Sales Book or Sales Journal is a Subsidiary Book or Special Journal in which credit sales of goods dealt in by the firm are recorded. Cash sales are recorded in the Cash Book and not in the Sales Book. Also, credit sales of items other than goods dealt in by the firm (e.g.,sale of assets) are not recorded in the Sales Book, they are recorded in Journal Proper. Entries in the Sales Book are on the basis of invoices issued to the customers with the net amount after allowing trade discount.
Features of Sales Book
1. Credit sales of goods dealt in are recorded in the Sales Book.
2. Credit sales of items other than goods traded in or sale of finished goods by the firm (e.g., sale of assets) are not recorded in the Sales Book, they are recorded in Journal Proper.
3. Cash sales are not recorded in the Sales Book since these are recorded in Cash Book.
4. Entries are recorded on the basis of invoices.
Ruling of Sales Book or Sales Journal
The ruling of Sales Book is shown below:
SALES BOOK OR SALES JOURNAL
Entries in the Sales Book are recorded in the same manner as in the Purchases Book. For example, the particulars column will record the name of the customers to whom goods have been sold on credit.
Entries in the Sales Book are written as follows:
- Date: The date of transaction is written.
- Particulars: The name of the Purchaser of goods, description of goods, price charged per unit and quantities sold are written.
- Invoice No.: Invoice number of the goods sold are written.
- Ledger Folio: (L.F.): At the time of entries being posted in Ledger Accounts, the page number of the ledger is written.
- Details: The amount, i.e., List Price or Catalogue Price of each article or item of goods sold is written. If trade discount is allowed to the purchaser of goods, it is deducted from the gross amount. It is shown as follows:
List Price (Quantity Ñ… Price per Article) ...
Less: Trade Discount ...
____
...
Add: Expenses (Freight/Cartage, etc.) ...
Invoice price _____
...
====
7.Total: The amount of invoice and expenses is written.
Utilities of Sales Book
- It reduces the volume of work required to pass Journal entry for each credit sale.
- Ledger posting becomes easier since all credit sales are recorded in a single book.
- It becomes easier to check whether the prices charged are according to the catalogue or not.
- It is possible to have a periodic total of credit sale of goods.
Purchases Return Book or Return Outward Book
Purchases Return Book or Returns Outward Book is a subsidiary book maintained to record the goods or materials returned to the sellers of goods that were purchased on credit. Neither the return of goods purchased on cash nor the returns of any asset other than merchandise are recorded in this book. This book is maintained if the return of goods is frequent otherwise it can be recorded in the Journal. Goods may be returned because of any of the following reasons:
1. Goods are not as per sample.
2. Goods are defective.
3. Goods are not as per order.
4. Goods have been delivered late and the customer has refused to accept them.
In all these cases, the purchaser prepares a 'Debit Note' and sends it to the supplier.
Debit Note: It is a document notifying the person that a debit has been made to his account.
The reason for the debit is also stated in the Debit Note.
Sales Return Book or Return Inward Book
Sales Return Book or Return Inward Book is a subsidiary book maintained to record the goods or materials returned by the purchaser that had been sold on credit. This book is maintained if the return of goods is frequent otherwise it can be recorded in the Journal.
A Credit Notes is prepared when goods are returned by the purchaser and on its basis entry is recorded in the Sates Return Book.
Credit Note: It is a document evidencing that a credit entry has been recorded to the account of the debtor.
Mechanics of Posting of Purchases Book in Ledger Accounts
In the 'Particulars' Column of the Purchases Book, names of the parties from whom goods have been purchased on credit are written. The accounts of the parties are credited by writing 'By Purchases A/c' with the value of goods purchased and if any amount is payable (say towards freight charges) 'By Freight Inwards A/c'.
Mechanics of Posting of Sales Book in Ledger Accounts
Names written in the Sales Book are of the parties to whom goods have been sold on credit. The accounts of the parties are debited by writing in the Particulars column 'To Sales A/c' for the sale value of goods; and 'To Expenses Recoverable A/c' for the amount of expenses (say towards freight/cartage and packing) incurred on behalf of the customers and being recoverable.
Mechanics of Posting from Purchases Return Book in Ledger Accounts
The amount of goods returned is transferred to the credit of 'Purchases Return Account'.
The account of the party from whom goods were purchased is debited with the value of goods returned by writing 'To Purchases Return A/c'. The total of Purchases Return Book is posted to the Purchases Return Account by writing 'By Sundries as per Purchases Return Book'.
Mechanics of Posting from Sales Return Book in Ledger Accounts
The amount of goods returned back by the purchaser of goods is credited to the debtor (customer or purchaser of goods) and debited to Sales Return Account.
Mechanics of Posting of General Journal in Ledger Accounts
The process of posting of General Journal has already been discussed at the time of discussing Journal Book. Hence, it has not been discussed again.
Journal Proper or General Journal
We have discussed above that transactions of a particular nature are recorded in a Special Journal maintained for the purpose.
1. Cash transactions are recorded in the Cash Book.
2. Credit purchases of goods or materials dealt in are recorded in the Purchases Book.
3. Credit sales of goods are recorded in the Sales Book.
4. Returns of goods purchased on credit are entered in the Purchases Return Book.
5. Returns of goods sold on credit to customers are recorded in the Sales Return Book.
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