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Unit 1 Double Entry System and Prime Entry Books - Cash Book Tutorial

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Unit 1 Double Entry System and Prime Entry Books - Cash Book Tutorial

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1

Double Entry System and Prime Entry Books

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Introduction
The day-to-day transactions are recorded in the books of a business using the double entry
system of book-keeping. The term double entry is used because the two effects of a
transaction (a giving and a receiving) are both recorded in the ledger.
A business maintains a separate ledger account for each type of asset, expense, liability
and income and also for each individual debtor and creditor. Every transaction is recorded
in the ledger account relating to that particular item or person.

Subsidiary Books
Subsidiary Books are the books that record the transactions which are similar in nature in
an orderly manner. They are also known as special journals or Daybooks. In big business
institutions, it is not easy to record all the transactions in one journal and post them into
various accounts. So, for the easy and accurate recording of all the transactions, the journal
is subdivided into many subsidiary books. For every type of transaction, there is a separate
book.

Types of Subsidiary Books

o Sales journal
o Purchases journal
o Sales returns journal
o Purchases returns journal
o Cash book
o Petty cash book
o General journal (Journal)

Subsidiary Books of Accounts

The Subsidiary Books are the books of Original Entry. These
books are also called Day Books or special journals. We
record the transactions in this book which are of similar
nature, the recordings are done in correct order in Subsidiary
Books. Subsidiary books actually are helpful in overcoming
the limitations of journal books or journal entries.
2

Advantages of Subsidiary Books

The advantages of the subsidiary book are as follows:
1. Proper with Systematic Record of the Business Transactions
The business transactions are classified and grouped properly in cash and non-cash
transactions, these are further classified as credit purchases, credit sales, and returns,
etc. The books facilitate individual transactions, as they can be properly and
systematically recorded in the subsidiary books.

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
2. Convenience While Posting
The transactions of a nature are recorded at a single place, in one of the subsidiary
books. Example, all the credit purchases of the goods are recorded in the purchases
book while all the credit sales of goods are recorded in the sales book.

3. Efficiency
The work is being divided here which gives the advantage of specialization. When the
same work is done by a person repeatedly and continuously the person becomes
efficient in handling it.

4. Helpful in Decision Making

Subsidiary books provide accurate and complete details about each type of transaction
separately. Thus, the management can use the information as the basis for deciding the
future actions.

5. Errors and Frauds Are Prevented

The Internal check becomes more effective as now the work can be divided in such a
manner, where the work of one person is automatically checked by another person.
With this internal check, the possibility of occurrence of the errors or fraud may be
avoided and to the least minimized.

6. Availability of Requisite Information at a Glance

The transactions are entered in only one journal thus; it becomes difficult to locate the
information about a particular item. When the subsidiary books are maintained, the
details about a particular type of transaction can be easily obtained from the subsidiary
books. The maintenance of these subsidiary books helps in obtaining the necessary
information at a single

The Ledger
The ledger can be described as a collection of accounts of a business.
A Ledger is a bound book containing all the different accounts such as cash account, sales
& purchase account, etc. It is also called the book of secondary entry because all the
business transactions are recorded in Ledger after they have been recorded in Journal
primarily. It is also called the Principal book of accounts. It is also called the book of final
entry.

What is a ledger account?

The layout of a ledger account is as follows

What is the layout of a ledger account?

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Each account will be split into two sides
o The debit entries appear on the left
 This side is sometimes labelled as Dr
o The credit entries appear on the right
 This side is sometimes labelled as Cr

When you make an entry you need to include

o The date of the transaction
o The details of the transaction
 This is normally the name of the other account involved
o The value of the transaction

Double Entry System

What is Double Entry System of Accounting?

Under the Double Entry System of Accounting, all the business transactions are recorded
as Debit and Credit. These are the two terms used in the Double entry system of
accounting where both the aspects of business transactions are recorded as Debit and
Credit. It means the business transactions are divided into two aspects as Debit and Credit.
For every Debit, there is corresponding Credit. The sum of the Debit amount is equal to the
Credit amount. The debit is receiving aspect and credit is the giving aspect and vice versa.

Classification of Accounts

Golden Rules of Double Entry System of Accounting are

 Personal Account
Debit - The Receiver
Credit - The Giver

 Real Account
Debit - If an Asset comes into the business entity
Credit - If Asset goes out of the business entity

 Nominal Account
Debit - All expenses, Losses
Credit - All Incomes, Gains
4

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Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
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Asset Account
Debit if there is an increase in assets and credit if there is a decrease in assets

Liability Account
Credit if there is an increase in liability and debit if there is a decrease in liability

Expense Account
Debit if there is an increase in expense and credit if there is a decrease in expense

Revenue Account
Credit if there is an increase in revenue and debit if there is a decrease in revenue

Capital Account
Credit if there is an increase in Capital and debit if there is a decrease in Capital

Types of accounts
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5

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Double entry records in types of accounts
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Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
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7

Balancing Accounts
At the end of every accounting year all the accounts which are operated in the ledger book
are closed, totaled and balanced. Balancing of ledgers means finding the difference
between the debit and credit amounts of a particular account

To balance an account there are a number of steps that we have to take.

 Add the money columns on the debit and credit sides and find the difference (the
balance)

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
 Enter the balance on the side where the total is less than the other. This is the
balance carried down (c/d)
 The two sides are now equal, and the totals are written on the same line on each
side and ruled off with a single line above and a double line below the total
 The balance is brought down (b/d) to the side with the higher total. Write this balance
immediately below the total. This completes the double entry which is inherent in the
balancing process
 The balance b/d is the opening balance for the next period.
8

The Main books (Books of original entry)

The prime entry books and original documents

Cash Book
A cash book is that unique book of accounts which fulfils the objective of both, a journal and
a ledger. Like a journal, it is the first book which records all the cash transactions of the
business. It also acts as a subsidiary book to post all the cash transactions, similar to a
cash account in the ledger.

What is a Cash Book?

 Cash Book serves dual role of a ledger as well as journal.
 Cash book is the account which keeps track of all the cash transactions of the
business. It is a part of Ledger.
 Because of the enormously large amount of cash transactions in a typical business,
this Cash Account is maintained as a separate book known as cash book. Cash
12

book is also a book of original entry. Cash book consists of Cash Account and Bank
Account.

Because of the enormously large amount of cash transactions in a typical business, this
Cash Account is maintained as a separate book known as cash book. Cash book is also a
book of original entry. Cash book consists of Cash Account and Bank Account.
 Cash Account is an Asset account or Real Account and thus,
 Any increase in Cash or Bank Account is debited to the account and;

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
 Any decrease in Cash or Bank account is credited to the account.
 Cash Book always shows a debit balance.

Advantages of Cash Book

Cash book offers the following advantages

1.It offers easy verification of cash by matching the balance in the cash book with actual
cash in hand and is therefore helpful in identifying mistakes in the entry.

2.It helps in creating a regular record of transactions date wise for the convenience of
accounting personnel.

3. As it is maintained date wise, any cash payments or the transaction can be correctly
traced back in the cash book.

4. It is helpful in detecting any cash frauds in the organization.

5.It helps in saving time and labour by reducing the workload

Types of Cash Book

There are four types of cash books used for accounting purposes. Let us have a look at the
types of cash books.
1.Single column cash book
2.Double column cash book
3.Triple column cash book
4. Petty cash book
13

Cash Book format

Discounts

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
1.Trade discount
2.Cash Discounts (Discount allowed and discount received)

Trade discount
What is trade discount?
A trade discount is a reduction in the list price of a product or service. It is typically offered
to customers that offer large amounts of repeat business, that purchase product in
significantly large quantities, or that are otherwise considered to be important to the seller.

Accounting for a Trade Discount

When we buy goods, we are sometimes given a trade discount, which is a reduction in the
list price because we are buying large quantities or reselling to an end user. This discount is
not shown in the books as it is deducted before the purchase is entered. It must not be
confused with a cash discount, which is when the supplier offers an incentive for a prompt
payment.

Calculation for a Trade Discount

The trade discount is simply used to calculate the net price for the customer. As the trade-
discount is deducted before any exchange takes place, it does not form part of the
accounting transaction, and is not entered into the accounting records of the business.
 A trade discount is based on the list price of the goods.
 Trade discount = List price x Trade discount rate

The customer invoice price is calculated by deducting the trade discount from the list price.
Invoice price = List price – Trade discount
14

Cash Discount

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Cash Discount
The term 'cash discount' refers to an allowance or reduction of the price, offered as an
inducement for prompt payment. The rate of cash discount is often quoted as a percentage.
Cash discounts are in two categories - discounts allowed and discounts received.
Calculation for a Cash Discount

Discount Allowed
This is the discount granted to Trade receivables (debtors) by the business in collecting
money within the discount period granted to them. Discount allowed is an expense to the
business.
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Discounts Received
This is the discount granted by the supplier (Trade payables/Creditors) when paying
money, within the discount period by the business. Discount received is an income to the
business.
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15

Difference between Trade discount and Cash discount

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Accounting for Discount Allowed
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16

Accounting for Discounts Received

Other important transactions in cash book

Contra entry
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Deposit cheque
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Money withdrawal from bank

Money withdrawal for personal things (Cash)

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Money withdrawal for personal things (Cheque)
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Direct deposits
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Dishonoured deposited cheque

Received money from trade receivables

Paid money to trade payables

Paid money to trade payables by telephone transfer

On 1 September 2017 the balance of the bank column in Keung’s cash book was $1900
debit. The transactions for the month of September 2017 were:
 September 5 Received and banked a cheque, $830, from Cello, a credit customer.
He had deducted $20 cash discount.
 8 Paid general expenses by cheque, $725.
 14 Francis, a credit customer, paid his debt of $2000 by cheque after deducting a
cash discount of 3%.
 23 Received and banked a cheque from Alice, a credit customer, $300.

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
 26 Paid a cheque to Tansley, a supplier, in full settlement of his account of $3500
less 2% cash discount.
 29 The bank returned the cheque received from Alice on 23 September as
dishonoured.

Prepare the bank and discount columns of the cash book for September 2017. Balance the
bank column and bring down the balance on 1 October 2017.
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The books of Keung show a total discount received of $275 for the eleven months from
1 October 2016 to 31 August 2017.

Prepare the discount received account for the year ended 30 September 2017. Show the
year end transfer to the appropriate financial statement.
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23

1 Mohan is a trader. On 24 April 2011 he had a bank overdraft of $150.

 The following transactions took place during the week ended 30 April 2011.
 April 25 Withdrew $200, by cheque, for personal use.
 April 26 Paid by cheque the balances on the accounts owed to:
 Kerai, $400, less 3% cash discount
 Susan, $750, less 4% cash discount.
 April 27 Cash sales, $630, paid into the bank.
 April 28 Received a cheque from Loula for the balance of her account, $2000, less

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
4% cash discount.
 April 30 Cashed cheque to pay wages, $430.

Peter is a trader. The following transactions took place in April 2022. Apr 1 Balance b/d in
cash 135 and bank is 920.
 April 2 Cash sales, $410, were paid directly into the bank account
 3 Paid $798 to Rahat, by cheque, in full settlement of a debt of $840
 8 Paid $42 cash for a motor vehicle repair
 15 Purchased goods, list price $320, on credit subject to a trade discount of 10%,
from Rahat
 18 Cash sales, $460
 20 Paid $392 to Samir by telephone transfer, having deducted 2% cash discount
from the amount due
 25 A cheque for commission receivable, $115, was paid into the bank account
 29 Paid $285 to Rafael by cash, in full settlement of a debt of $300

Prepare Peter’s cash book on the page opposite. Balance the cash book and bring down
the balances on 1 May 2022.
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24

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
Bilal is a trader. He buys goods on credit and for cash. He sells goods on a cash basis only.
The following transactions took place in April 2020. Apr 1 Balance b/d in cash 160 and bank
is 1960.
 April 4 Bought goods on credit from Milly, list price $320, subject to a trade discount
of 20%
 5 Bought goods on credit from EHL Limited, $500
 6 Bought stationery, $145, paying by cheque
 8 Cash sales, $280, were paid immediately into Bilal’s bank account
 10 Paid $128 cash to Milly
 12 Cash sales, $110
 13 Bought goods on credit, $250, from Todd who offers 4% cash discount for
payments made within 14 days
 17 Bought office equipment, $500, paying by bank transfer
 21 Paid by cheque for the goods purchased from Todd on 13 April after deducting
the cash discount
 24 Paid $485 to EHL Limited by telephone transfer, having deducted 3% cash
discount
 28 Sold old office equipment for $50 cash

Lee maintains a three-column cash book. On 1 August 2020 the balances were: bank
overdraft $248, cash $45. The following transactions took place in August 2020.

August Transaction
3 Paid by direct debit to Mobilecom, $115
8 Cash sales, $1 420
9 Paid cash into the bank, $800
16 Paid Sophia by cheque, $475, in full settlement of an invoice after taking 5% cash

Jihan Gunathilaka Reading MBA in Colombo, BSc. Business Admin, Executive Dip in Business Administration.
discount.
23 Received a cheque from Folan, a credit customer, $225
28 Paid wages by cash, $540
29 Received notice from the bank that the cheque from Folan, $225, had been
dishonoured.
30 Received a cheque from Chan in full settlement of an invoice for $880. Chan had taken
a 5% cash discount.

Enter the above transactions in the three-column cash book. Balance the cash book at 31
August 2020 and bring the balances down on 1 September 2020.

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Unit 1 Double Entry System and Prime Entry Books - Cash Book Tutorial

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Unit 1 Double Entry System and Prime Entry Books - Cash Book Tutorial

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1

Double Entry System and Prime Entry Books

Types of Subsidiary Books

Subsidiary Books of Accounts

Advantages of Subsidiary Books

4. Helpful in Decision Making

5. Errors and Frauds Are Prevented

6. Availability of Requisite Information at a Glance

What is a ledger account?

The layout of a ledger account is as follows

What is the layout of a ledger account?

When you make an entry you need to include

Double Entry System

What is Double Entry System of Accounting?

Golden Rules of Double Entry System of Accounting are

To balance an account there are a number of steps that we have to take.

The Main books (Books of original entry)

The prime entry books and original documents

What is a Cash Book?

Advantages of Cash Book

4. It is helpful in detecting any cash frauds in the organization.

5.It helps in saving time and labour by reducing the workload

Types of Cash Book

Cash Book format

Accounting for a Trade Discount

Calculation for a Trade Discount

Difference between Trade discount and Cash discount

Accounting for Discounts Received

Other important transactions in cash book

Money withdrawal from bank

Money withdrawal for personal things (Cash)

Dishonoured deposited cheque

Received money from trade receivables

Paid money to trade payables

Paid money to trade payables by telephone transfer

1 Mohan is a trader. On 24 April 2011 he had a bank overdraft of $150.

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