Purchases Journal: Definition

A purchases journal is a special journal used to record any merchandise purchased

on account. The entries in this journal are made based on the invoice received from
the supplier on the purchase date.

Other names used for the purchases journal are the purchases book, purchases day
book, and the credit purchases journal.

Purchases Journal: Explanation

The purchases journal is mainly used to record merchandise and inventory purchases
on credit. If these are the only transactions recorded in the purchases journal, then
the journal is similar to the one shown in the example below.

Purchase invoices are used to enter data into the journal. We are assuming that
a periodic inventory system is in use and that all purchases are recorded at their
gross amounts.

Therefore, the amount column represents a credit to accounts payable and a debit
to purchases at the full invoice price.
Purchases Journal Format
The purchase journal has five columns, as shown in the format below.

The purposes of these columns are as follows:

 Date: Records the purchase date

 Account Credited: Records the name of the business from which
merchandise was purchased on account
 Invoice Number: Records the invoice number for reference purposes
 Posting Reference: Records the account number after posting to
the ledger
 Amount: Records the invoice amount

Posting the Purchases Journal

Entries from the purchases journal are posted to the accounts payable subsidiary
ledger and general ledger. The procedure for doing this is outlined below:

1. The amounts from the purchases journal are posted as credits to

individual suppliers’ accounts in the accounts payable subsidiary
ledger. This posting occurs immediately after an entry has been made
in the purchases journal.
2. At the end of each month (or as appropriate), the amount column of
the purchases journal is totaled and posted as a debit to the
purchases account and a credit to the accounts payable account in
the general ledger.
3. The sum of all postings to accounts in the accounts payable
subsidiary ledger is always equal to the amount posted to the
accounts payable account in the general ledger.
Postings from the purchases journal follow the same pattern as postings from the
sales journal. Each day, individual purchases should be posted to the vendor’s
account in the accounts payable subsidiary ledger.

At the end of the month, the amount column in the journal is totaled, and this
amount is posted as a debit in the general ledger purchases account. It is also posted
as a credit in the general ledger accounts payable account.

Finally, at the end of the month, a list of the individual subsidiary accounts is created.
This list is often called the accounts payable trial balance (or a schedule of accounts
payable).

The balance in this list is compared with the balance in the general ledger accounts
payable account. This procedure helps to verify that all the postings have been made
correctly.

Example
Transactions from XYZ trading company for the month of January 2016 are listed
below:

 Jan. 02: Purchased merchandise on account from S & Co. for $900,
invoice No. 105
 Jan. 06: Purchased merchandise on account from A & Co. for $3,200 ,
invoice No. 240
 Jan. 08: Purchased merchandise on account from Z Brothers for $360,
invoice No. 115
 Jan. 15: Purchased merchandise on account from S & Co for $800,
invoice No. 305
 Jan. 25: Purchased merchandise on account from S & Co for $700,
invoice No. 395
 Jan. 31: Purchased merchandise on account from Z Brothers for $300,
invoice No. 345

Required:

1. Record the above transactions in the purchases journal

2. Post entries from the purchases journal to the accounts payable
subsidiary ledger
3. Post the purchases journal to the general ledger
 4. Prepare the schedule of accounts payable

Solution

1. Purchases journal

2. Accounts payable subsidiary ledger

3. General ledger
4. Schedule of accounts payable
Sales Journal:Definition and explanation
The sales journal (also known as sales book and sales day book) is a special
journal that is used to record all credit sales. Every transaction that is entered in
sales journal essentially results in a debit to accounts receivable account and a
credit to sales account. All cash sales are recorded in another special
journal known as cash receipts journal.

Here, the term sales refers to the sale of only those goods or merchandise in
which the business normally deals. The sale of used or outdated assets (such as
old plant, machinery, equipment and newspapers etc.) are not recorded in sales
journal. These transactions are entered in general journal (also known as journal
proper).

Sales invoice
When seller (also termed as supplier) sells merchandise on credit, he prepares
an invoice known as sales invoice or outward invoice. This invoice is sent to the
customer, usually along with the merchandise. Seller also prepares a duplicate
copy of sales invoice. This duplicate copy is kept by the seller with him because
the entry in the sales journal is made on the basis of it.

Format of sales invoice

The specimen/format of a simple sales invoice or outward invoice with some

basic information is given below:

If you have already read “purchases journal” article, you may have noticed that
the sales invoice and purchase invoice are two different names of the same
document. It is always prepared by the seller and is called sales invoice in the
record of the seller and purchase invoice in the record of the buyer. The seller
uses it to record a sales transaction in the sales journal and the buyer uses it to
record a purchase transaction in the purchase journal.

Format of sales journal

The information recorded in the sales journal depends on the nature and needs
of each individual business. However, a commonly used format of sales journal is
given below:

Explanation of columns

A brief explanation of columns used in above format of sales journal is as follows:

1. Date: This column is used to record the date on which the sale is made.
Normally, it is the same date as written on the invoice.
2. Account debited: This column is used to enter the name of customers
whose individual accounts are maintained in accounts receivable
subsidiary ledger.
3. Invoice number: The sales invoice number is written in this column.
4. Post reference (PR): The entries in sales journal are posted on daily
basis to relevant accounts in accounts receivable subsidiary ledger. The
post reference is used to enter account numbers of individual accounts in
the accounts receivable subsidiary ledger in which the entries are posted.
5. Accounts receivable & Sales: In this column, the net amount receivable
from customers is written. In the general ledger, the accounts receivable
account is debited and sales account is credited by the total of this
column.
6. Cost of goods sold & inventory: In this column, the cost price of the
merchandise sold is entered. In general ledger, the cost of goods sold
account is debited and inventory account is credited by the total of this
column.
Posting entries from sales journal to subsidiary
and general ledger
The entries in sales journal must be posted from sales journal to individual
accounts in accounts receivable subsidiary ledger and general ledger. The
posting procedure is briefly explained below:

(1). Posting to accounts receivable subsidiary ledger:

At the end of each day (or immediately after the transaction has been performed),
the individual entries are debited to appropriate accounts in accounts receivable
subsidiary ledger.

(2). Posting to general ledger:

At the end of each month or another appropriate period, the column totals of
sales journal are posted to relevant general ledger accounts as follows:

1. The total of accounts receivable & sales column is debited to accounts

receivable account and credited to sales account in the general ledger.
2. The total of cost of goods sold & inventory column is debited to cost of
goods sold account and credited to inventory account in the general
ledger.

To indicate that the posting has been made to general ledger accounts, the
account numbers of general ledger accounts are written in parentheses below the
totals of the relevant columns of sales journal. Consider the following example for
a better explanation of the whole procedure.

Example
The following example illustrates how transactions are recorded in sales journal
and how entries from sales journal are posted to individual accounts in accounts
receivable subsidiary ledger and general ledger.
Sales journal with a “sales tax payable” column
The sellers are usually instructed by governmental agencies to collect sales
tax from customers on the sale of certain goods and services and send these
taxes to the appropriate governmental agency. If a business is collecting sales
tax, it is convenient to add a sales tax payable column to its sales journal to
record the amount of sales tax collected from customers on each sale. An
example of sales journal with a sales tax payable column is given below:

The sales journal given above shows that the seller is collecting a sales tax @
2% on all goods sold to customers. The posting of this sales journal will be similar
to the posting explained in the above example. A sales tax payable account
would be opened in the general ledger and the total of sales taxes payable
column of sales journal would be credited to that account at the end of each
month or another appropriate period.
Cash Book: Definition, Types, Example, Format
What is the Cash Book?
Cash Book contains cash transactions passing into and out of business. 2
types of Cash Book are (1) general cash book and (2) petty cash book. The
general cash book is subdivided into the single column, double column,
and treble column cash book.

The primary book where transactions regarding cash receipts and payments
are recorded in chronological order of dates with explanations and balance
is drawn at the end of the day or a particular period is called cash book.

Among the financial transactions of concern, cash transactions carry much

more importance.

That’s why these are recorded in a separate book of account.

Since all cash transactions are recorded in this book in the ledger account
format, a separate cash account in the ledger is not needed.

Cash Book Example

The owner can know the accurate cash position of his business from the
cash book. ‘T’ form cash book contains two sides: the left-hand side means
the debit side, and the right-hand side means the credit side.
The debit side stands for cash receipts, and the credit sides stand for cash
disbursements.

All the receipts are recorded on the receipt sides, and all cash
disbursements are recorded on the payment side of the cash book.

At the end of the day or a particular period, the totals of receipts and
payments are made, and the difference between these two totals is shown
as balance.

This balance indicates the amount of cash in the hand of an organization.

Cash Book is a book in which an account is kept of the receipts and

disbursements of money.

Importance of Cash Book

The features of the cash book are as follows;

1. Since only cash transactions are recorded in the cash book, it is a

special journal.
 2. The cash book serves the purpose of the journal and ledger.
3. The cash book always shows a debit balance.
4. The balance of the cash book always means cash in hand. The
balance of the cash book and cash of a cash box must be equal.
5. Non-cash transactions of cash books are transferred to a relevant
account in the ledger.

Cash Book is both a Journal and a Ledger

Some accountants term cash book as a journal and some others term it as a
ledger. Modem accountants term cash book both as journal and ledger.

Cashbook is a journal; because:-

 After the transactions, these are recorded in the cash book in

chronological order of dates with explanations like a journal.
 How transactions are posted into the ledger from the journal is
followed in the case Of posting transactions to the ledger from the
cash book.
 As separate special journals are maintained for various transactions,
cash book is similarly maintained for cash transactions.
 Cash transactions are recorded in the cash book according to debit
and credit.
 Other than cash book, no subsidiary journal is maintained for cash
transactions.

For all these features of the cash book, it is called a journal.

Cashbook is a ledger; because:-

 The format of the cash book is similar to that of a ledger account.

 Like a ledger account, the cash book consists of two sides – the debit
side and the credit side if prepared in ‘T’ format.
 Like ledger accounts, the balance of the cash book is determined and
transferred to the trial balance.
 The cash book serves the purpose of the cash account. In such a case,
the cash account is not prepared in the ledger.
The cash book is called a ledger because of its above-mentioned
characteristics. It is very much evident from the above discussion. Cash
book is both journal and ledger as it contains all journal and ledger features
and serves purposes of both.

Advantages of Cash Book

1. Cash receipts and cash payments for a particular period can easily be
ascertained from the cash book.
2. Since cash transactions are recorded in the cash book, it becomes
convenient to find any cash transactions for future reference.
3. It avoids the journalization of huge cash transactions.
4. The amount of cash in hand can be ascertained at any time, and it
can be compared with the cash in a cash box. This ensures the
accuracy of the cash book and detects »misuse or misappropriation
of cash.
5. Cashbook minimizes time and labor in preparing the ledger as it
performs both the journal and ledger functions.
6. Proper maintenance of the cash book influences the cashier’s
morality, which refrains him from stealing cash.

For proper maintaining of cash books, preventive measures are taken to

avoid fraud and forgery.

For example;

The officials entrusted with preparing cash books are seated in a separate
room, and the entrance of unauthorized employees is restricted there.

Types of Cash Book

Generally, a cash book is of two types –

 1. General cash book.
2. Petty cash book.

3 types of general cash books are detailed.

1. Single column cash book,

2. Double column cash book,
3. Treble column cash book.

1. Double Column Cash Book

The cash book containing two money columns – cash column and bank
column on both sides for recording cash and bank transactions is called a
double column cash book.

All cash receipts and all bank deposits are recorded on the debit side, and
all cash payments and all payments through cheques are recorded on the
credit side of this cash book.

Cash receipts are recorded in the cash column of the debit side, and cash
payments are recorded in the cash column of the credit side. Cash and
cheques deposited in the bank are recorded in the bank column of the
debit side, and payment by cheques are recorded in the bank column of
the credit side.
The debit balance of the double column cash book indicates cash in hand
and cash at the bank of a particular date of concern.

There might be a credit balance of the bank column, indicating bank

overdraft or excess withdrawn over deposits.

Method of Preparing Double Column Cash Book

Preparing a double column cash book is almost similar to that of the single
column cash book. The double-column cash book system has been
introduced to avoid complexity in posting bank transactions in the single
column cash book.

Here all bank transactions are directly recorded in bank columns.

When preparing a double column cash book, it is to be kept in mind that all
types of cash receipts are to be recorded in the cash column of the debit
side, and all bank deposits are to be recorded in the bank column of the
debit side

On the other hand, cash payments are recorded in the cash column of the credit side, and
payments through cheques are recorded on the debit side.

2. Treble Column Cash Book

The cash book containing three money columns on both sides is called a treble column cash
book. The columns are ‘Cash,’ ‘Bank,’ and ‘Discount.

In a treble column cash book, there are three money columns on both sides for recording
transactions relating to cash, bank, and discount.

Like the double column, cash book cash receipts and bank deposits are recorded in the debit
cash column and bank column respectively of the treble column cash book, and cash
payments and payment by cheque are recorded in the credit cash column and bank column,
respectively.
The discount allowed to the customer for realizing debits is recorded in the debit discount
column of the treble column cash book, and discount received from suppliers or creditors in
making a payment is recorded in the credit discount column of the treble column cash book.

In preparing a treble column cash book, it must be carefully noted that discount columns need
not be balanced.

The total debt discount column and the total credit discount column are treated as separate
balances.

The total debt discount column means expense, and the total credit discount column means
income.

Advantages of Treble Column Cash Book

The advantages of treble column cash book are stated below,

 Time and labor-saving A good deal of time and labor are saved because for
maintaining a treble column cash book cash account, bank account, and discount
accounts are not needed to be prepared in the ledger.
 Knowing cash and bank balance Cash and bank balances can easily be ascertained
whenever needed from a treble column cash book.
 Knowing discount income and discount expense, the discount income, and discount
expenses can easily be known from the total credit discount column and debit
discount column of the treble column cash book.

3. Petty Cash Book

Companies maintain two types of Petty Cash Book for all cash transactions of a business.

1. Columnar petty cash book

2. Imprest petty cash book.

The Book Containing the record of all cash passing into and out of business is called the Cash
Book.
General journal

A Journal entry is the first step of the accounting or book-keeping process. In this
step, all the accounting transactions are recorded in general journal in a
chronological order. The general journal is maintained essentially on the concept
of double entry system of accounting, where each transaction affects at least two
accounts.

Other names used for general journal are “journal book” and “book of original
entry”.

The process of making a journal entry

The first step in the process of preparing a journal entry is to analyze the
accounts involved in a business transaction and then apply the rules of debit and
credit based on the type of each account. After identifying the accounts involved
in the transaction and deciding upon the applicable rules, the journal entry is
recorded in the general journal in a specified format which includes the following
details:

1. Date of transaction
2. Ledger accounts involved
3. Amount of transaction
4. A brief narration to describe the transaction

Format of general journal

Let’s understand the format of general journal and the process of making a
journal entry through an illustration.

Transaction:

January 05: Purchase of machinery by making cash payment of $15,000.

Analysis of transaction:

Recording journal entry:

According to rules of debit and credit, when an asset increases, its account is
debited and when an asset decreases, its account is credited. In this
transaction, machinery (an asset) is increasing, and cash (an asset) is
decreasing. So the journal entry would be made as follows:

All business transactions are recorded in the general journal in a manner

illustrated above. After making journal entries in the journal, they are periodically
posted to the ledger accounts.

Example:
The Moon Service Inc. engaged in the following transactions during the month of
November 2015:

 Nov. 01: Issued 20,000 shares of common stock at $20 per share
 Nov. 03: Paid office rent for the moth of November $500.
 Nov. 06: Purchased office supplies $250.
 Nov. 12: Purchased office equipment on account $4,500
 Nov. 16: Purchased business car for $25,000. Paid $10,000 cash and
issued a note for the balance.
 Nov. 21: Billed clients $24,000 on account.
 Nov. 25: Declared dividends $3,000. The amount of dividends will be
distributed in December.
 Nov. 28: Paid utility bills for the month of November $180.
 Nov. 29: Received $20,000 cash from clients billed on November 21.
 Nov. 30: Paid salary for the month of November $7,500

Required: Record the above transactions in a general journal.

Solution:
Return Inwards

Return inwards are goods returned to a business by its customer(s).

They are goods which were once sold to external third parties,
however, because of being unsatisfactory, they were returned by
the customer. They are also called “Sales Returns”.

Inward returns reduce the total accounts receivable for the

business. It is a sales return and on the other, it is a purchase
return. The transaction in both cases is reversed and the related
sale or purchase is nullified.

This reversal reduces the total sales of a company and the

deduction is shown in the trading account.
A subsidiary book called Sales returns book is prepared to
record all such entries.

Journal Entry for Return Inwards

Return Inwards A/C Debit Debit the decrease in revenue

To Customer’s A/C Credit Credit the decrease in assets

Return Inwards – This is a reduction in revenue for the business.

Customer – This is a reduction in receivables for the business.

Shown in Trading Account (Deducted from Sales)

Return Outwards

Return outwards are goods returned by a customer to the seller.

They are goods which were once purchased from external parties,
however, because of being unsatisfactory they were returned
back to them, they are also called Purchase returns.

Outward returns reduce the total accounts payable for a business.

It is a sales return and on the other, it is a purchase return. The
transaction in both cases is reversed and the related
sale or purchase is nullified.

Purchase returns reduce the total purchases/accounts payable of a

company and the deduction is shown in the trading account. A
subsidiary book called Purchase returns book is prepared to
record all such entries.

Journal Entry for Return Outwards

Supplier’s A/C Debit Debit the decrease in liability

To Return Outwards A/C Credit Credit the decrease in expense

Supplier – This is a reduction in payables for the business.

Return Outwards – This is a reduction in expenses for the business.

Shown in Trading Account (Deducted from Purchases)