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RECORDING IN THE PRIMARY BOOKS

Prof. A.S.Suresh

Accounting Trail
Identify a transaction Recording Record in Primary Books Record in Secondary Books Prepare Trial Balance

Reporting

Prepare Financial Statements

Financial Accounting: An introduction

Recording of Transactions: The Double Entry Principle


Each transaction has two aspects (or side): Debit and Credit. Every debit has an equal and opposite credit. Each transaction should be recorded in such a way that it affects two sides- debit and credit- equally. Thus, the first and foremost step in recording a transaction is to identify the debit and credit elements.

Financial Accounting: An introduction

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Ground Rules for Recording in Primary Books

Recollect the accounting equation:

A(Asset)= L(Liabilities)+ E(Equity) Increase in assets and decrease in liabilities and equity: Debit. Decrease in assets and increase in liabilities and equity: Credit. Expenses and losses: Debit Income and gains: Credit

Ground Rules:

Recording in the Primary Books

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Application of Ground Rules

Example 1:

ABC Ltd bought an equipment for Rs. 500,000 in cash.


Is it a transaction? There are two elements: Equipment (Asset) and Cash (Asset). One asset (Equipment) increases and the other asset (Cash) decreases. Applying ground rules: Equipment Debit Rs.500,000 Cash Credit Rs. 500,000

Recording in the Primary Books

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Application of Ground Rules

Example 2:
ABC Ltd. purchased raw materials for immediate consumption worth Rs. 200,000 paying 50% in cash and balance payable after one month.

Three elements: Purchase of raw materials (Expenses), Cash (Asset), Payables to suppliers (Liability) Expenses are incurred, cash (Asset) depletes, and Suppliers Credit (Liabilities) increases. Applying ground rules: Purchases Debit Rs. 200,000 Cash Credit Rs. 100,000 Creditors Credit Rs. 100,000

Recording in the Primary Books

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Application of Ground Rules

Example 3: Cash sales of Rs. 100,000


Two elements- Cash (Asset) and Sales (Income) Cash (Asset) increases and Sales (Income) increases. Applying ground rules:

Cash Sales

Debit Credit

Rs. 100,000 Rs. 100,000

Recording in the Primary Books

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Application of Ground Rules

Example 4: Repayment of Loan of Rs. 150,000


The two elements are: Loan (Liability) and Cash (Asset) Loan (Liability) has decreased and Cash (Asset) has also decreased. Applying ground rules:

Loan Cash

Debit Credit

Rs. 150,000 Rs. 150,000

Recording in the Primary Books

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Application of Ground Rules

Example 5: Sold goods worth Rs. 10,00,000 on credit.

The two elements are sales (income) and receivables from customer (Asset). Income (sales) increases and Asset (Debtors) also increases. Applying ground rules: Debtors Debit Rs. 10,00,000 Sales Credit Rs. 10,00,000

Recording in the Primary Books

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Application of Ground Rules

Example 6: Continuing with Example 5,the customer has paid Rs. 9,90,000 in full and final settlement of her dues.

The elements are receivables from customer (Asset), cash (Asset), discount allowed (expense) One asset (receivables from customer) decreases, another asset (cash) increases and an expense (discount allowed) has been incurred. Applying ground rules: Cash Debit Rs. 9,90,000 Discount Allowed Debit Rs. 10,000 Debtors Credit Rs. 10,00,000

Recording in the Primary Books

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Types of Journal

There are many primary books (i.e., Journal Books). The transactions are categorized as per their nature and, for each type of transaction, a separate journal is used for recording the transaction.

Since transactions are recorded in journal chronologically as these occur, journal books are generally called day books.

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Types of Journal

There are eight types of journal books:

Purchases Day Book It records credit purchase of raw materials, and traded goods Sales Day Book It records credit sale of goods. Return Outward (also called Purchases Return) Book It records goods returned to the supplier (s) of raw materials and traded goods. Return Inward (also called Sales Return) Book It records goods returned by customers.

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Types of Journal

Bills Receivable Book


It records bills (of exchange) accepted by customers.

Bills Payable Book


It records bills (of exchange) raised by suppliers.

Cash Book
It records all cash (and bank) transactions: receipts and payments.

Journal Proper
It records all residual transactions i.e., transactions which do not find place in any of the other journal books.

Recording in the Primary Books

Examples of Journal Proper


II. Journal Proper This journal is meant for recording all such transactions for which no special journal has been maintained in the business. Therefore, in this journal, all such transactions are recorded which do not occur frequently and for these transactions no special journal is required. For example, if Machinery is purchased on credit, it will be recorded in the journal proper, because in the Cash Book, we will record only cash purchases of machinery. Similarly, many other transactions, which do not find their place in the special journals will be recorded in the General Journal such as (i) Outstanding expenses Salaries outstanding, Rent outstanding, etc. (ii) Prepaid expenses Prepaid Rent, Salaries paid in advance Income received in advance Rent received in advance, interest received in advance, etc. (iv) Accrued Incomes Commission yet to be received, interest yet to be received. (v) Interest on Capital (vi) Depreciation (vii) Credit Purchase and Credit Sale of fixed Assets Machinery, Furniture. (viii) Bad debts. (ix) Goods taken by the proprietor for personal use.

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Journal Book Identification


Identify the appropriate journal for the following transactions: 1. Credit purchase of machinery.
2. Cash sales 3. Loan raised 4. Credit sale of goods. 5. Cash purchase 6. Credit purchase of goods 7. Cash deposited to Bank 8. Goods returned by customers. 9. Goods returned to suppliers. 10. Depreciation on assets

Recording in the Primary Books

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Cash Book

It is the most important day book. Prepare a cash book with the following transactions:

Opening cash balance Rs. 50,000 Opening bank balance Rs. 100,000 Cash purchases Rs. 125,000 Cash Sales Rs. 175,000 Salary paid Rs. 20,000 Cash deposited to bank Rs. 20,000 Cash withdrawn from bank Rs. 10,000

Find the closing cash and bank balances.

Recording in the Primary Books

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