Chapter 04

Double entry book-keeping – Part B

Myo Hein

2021-22
 Table of Contents
01 INTRODUCTION

02 DIVISION OF THE LEDGER INTO SPECIALIST AREAS

Sales Ledger
Purchase Ledger
Nominal Ledger
Cash Books

03 TWO COLUMN CASH BOOK

04 CONTRA ENTERIES

05 BANK OVERDRAFT

06 THREE COLUMN CASH BOOK

Date 07 DISHONORED CHEQUE 2

Introduction

As the Small Business, need a few number of ledger As the Business Grows, so does the number of ledger
accounts accounts, so it becomes necessary to divide the ledger
into different sections.

- More Convenient to use

- Enables checking procedures
- Reduce the Possibility of Fraud

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Division of the ledger into specialist area

Sales Ledger Purchase Ledger Nominal Ledger Cash Books

▪ Referred to as Debtors ledger / ▪ Referred to as Creditors ledger / ▪ General Ledger ▪ Mainly control the main cash book
Trade Receivables Ledger Trade Payables Ledger ▪ The ledger where all the other and Petty Cash Book
▪ The ledger in which the accounts ▪ The ledger in which the accounts accounts are maintained except
of credit customers are maintained. of credit suppliers are maintained cash, bank, credit customers and
▪ Only the personal accounts of ▪ Only the personal accounts of credit suppliers.
credit customers are recorded in credit suppliers are recorded in the
the sales ledger. The sales account purchase ledger. The purchases
is recorded in the nominal ledger. account is recorded in the nominal
Ledger.

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Interactive Exercise 4.1

1. State one advantage of dividing the ledger into specialist areas.

2. State in which ledger each of the following accounts would appear.
A. Rent account
B. AB Finance Co loan account
C. XY Stores account (a supplier)
D. Capital account
E. Sales returns account
I n t e r a c t ive
F. Gee Tee Traders account (a customer)
Exercise

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Two Column Cash Book (Cash + Bank)
Central Vertical Line

Left Hand Account Name Right Hand

Side Side
Debit (Dr) Credit (Cr)
Cash Bank Cash Bank
Date Details Folio Date Details Folio
$ $ $ $
xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx c xxx xx-xx xxxxxxx c xxx

Contra Entries

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Contra Entries for Cash ‹› Bank

Cash Deposit to Bank Cash withdrawn from the bank

▪ Dr – Bank Account ▪ Dr – Bank Account

▪ Cr – Cash Account ▪ Cr – Cash Account

▪ Folio “C” ▪ Folio “C”

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Method of Payments

By cheque By By means of By standing By direct By Debit

• bank Cheque electronic a credit order debit Cards /
• much quicker transfer • instructs the • to collect an Credit Cards
and safer • instructing bank to pay a amount
their bank fixed sum at directly from
fixed intervals their bank
to another account
person

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Walkthrough 4.1
December
1 Mamata started business with a capital of $20 000 which she transferred into a business bank account
2 Paid rent of premises, $650, by standing order
5 Purchased goods, $9 500, on credit from Lodi Road Traders
9 Withdrew $150 from the bank account for office use
14 Paid advertising expenses, $90, in cash
18 Sold goods, $4 120, on credit to Central Dealers
23 Paid Lodi Road Traders’ account by cheque
26 Bought motor vehicle, $5 760, and paid by credit transfer
28 Mamata took $3 000 from the business bank account for personal use

Enter these transactions in the books of Mamata. The cash account and the bank account should be shown in a two-column
cash book. The ledger should be divided into sales ledger, purchases ledger and nominal ledger. Balance the cash book on 31
December.

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Interactive Exercise 4.2

1. Explain what is meant by a contra entry in a cash book.

2. Give two examples of contra entries in a cash book.

I n t e r a c t ive
Exercise

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Bank Overdraft

Cash A/C Bank Overdraft

It is not possible to have a credit balance It is possible to have a credit balance on a

on a cash account. bank account.
Paid out of the bank > Put into the Bank
Bank allows the business to pay out more
from the bank than is put into the bank.
interest will be charged by the bank on
the amount overdrawn.

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Walkthrough 4.2
Walkthrough 4.1, except that her drawings on 28 December amounted to $5 000 rather than $3 000.

Enter Mamata’s transactions for December 20–6 in her two-column cash book. Balance the book on 31 December and bring
down the balances on 1 January 20–7.

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Three Column Cash Book (Cash Discount + Cash + Bank)
Central Vertical Line

Left Hand Account Name Right Hand

Side Side
Debit (Dr) Credit (Cr)
Discount Cash Bank Discount Cash Bank
Date Details Folio Date Details Folio
Allowed $ $ Received $ $

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

xx-xx xxxxxxx xx xxx

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Cash Discount
Two Types of Cash Discount
Cash Discount
01. Discount Allowed
• Cash discount is an allowance given
Discount allowed is the discount a business to a customer when an account is
allows its credit customers (debtors) when
they pay their accounts within a set time. This settled within a time limit set by the
is an expense of the business as it is the cost supplier.
of having debts settled promptly. • The time of payment is the deciding
factor rather than how the account is
paid
02. Discount Received
Discount received is the discount a business
receives from its credit suppliers (creditors) when
it pays their accounts within a set time. This is
an income of the business as it is the benefit
received from settling debts promptly.

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Double Entry for Cash Discount

Cash Discount is Allowed Cash Discount is Received

Discount to the Customers Discount from the Suppliers

Dr – Discount Allowed Column in CB Dr – Creditor’s account

Cr – Debtor’s account Cr – Discount Received Column in CB

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Double Entry System for Cash Discount in Cash Book
The discount columns in the cash book are not a part of the double entry system. They are used for
convenience to make a note of discount at the time an account is paid or received. At the end of the trading
period the totals must be transferred to the double entry system. The steps for this are as follows:
1 Total each discount column.
2 Debit the discount allowed account in the nominal ledger with the total of the discount allowed column.
This now represents the double entry for all the individual credits in the accounts of debtors.
3 Credit the discount received account in the nominal ledger with the total of the discount received column.
This now represents the double entry for all the individual debits in the accounts of creditors.

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Dishonored Cheque
A dishonoured cheque is a cheque received which the debtor’s bank refuses to pay. This may occur because
the debtor does not have enough money in his/her bank account, or it may be because of an error on the
cheque, e.g. no signature, no date, the amount in words and the amount in figures do not agree.
If a cheque is dishonoured, it is returned to the business that paid the cheque into the bank. The business
must record the return of this cheque by crediting the bank account and debiting the debtor’s account (the
reverse of the entries made when the cheque was received). The business will also inform the debtor that this
amount is unpaid.

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Interactive Exercise 4.3

1. Explain why it is not possible to have a credit balance brought down in the
cash column of a cash book.
2. Explain the meaning of the term bank overdraft .
3. Explain why a business may allow its credit customers cash discount.
4. Explain the meaning of the term ‘dishonoured cheque’.

I n t e r a c t ive
Exercise

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Walkthrough 4.3
January
1 Mamata had a cash balance of $60 and a bank overdraft of $1 060
4 Bought goods, $5 200, on credit from Lodi Road Traders
8 Returned goods, $200, to Lodi Road Traders
12 Sold goods, $770, on credit to A & J Singh
14 Cash sales $680
17 Paid $650 cash into the business bank account
21 Received a cheque from A & J Singh in settlement of their account
24 Sold goods, $1 200, on credit to North East Stores
26 A & H Singh’s cheque was dishonoured and returned by the bank
28 Paid Lodi Road Traders the amount due, by credit transfer, after deducting a discount of 2 1/2 %
31 North East Stores paid the amount due by credit transfer, less a cash discount of 3%

Enter the following transactions in the books of Mamata. She maintains a three column cash book and divides the ledger into
three sections – sales ledger, purchases ledger and nominal ledger.

Balance the cash book on 31 January 20–7 and transfer the totals of the discount columns to the relevant accounts in the
nominal ledger. Balance the accounts in the sales and purchases ledgers where necessary.

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Revision Checklist
Chapter 2

❑ Division of Ledger
❑ Two Column Cash Book
❑ Contra for Cash to Bank and Bank to Cash
❑ Methods of Payment
❑ Bank Overdraft
❑ Cash Discount
❑ Cash Discount column in Three column CB.

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 Thank you

Myo Hein
+09-253-262626
[email protected]
www.mesc.pro

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