Cash/Subsidiary Books:
Cash and subsidiary books are an essential part of the double-entry bookkeeping system. They are used to record specific types of transactions in a summarized and organized manner before posting them to the general ledger.
- Cash Book:
- The cash book is used to record all cash transactions, including cash receipts and cash payments.
- It is divided into two sides: the debit side (for cash payments) and the credit side (for cash receipts).
- Cash receipts are recorded on the credit side as credits, and cash payments are recorded on the debit side as debits.
- The cash book provides an overview of the company’s cash inflows and outflows.
- Subsidiary Books:
- Subsidiary books are specialized books used to record specific types of transactions in a detailed and organized manner.
- Examples of subsidiary books include the sales book, purchases book, sales returns book, and purchases returns book.
- These books are used to record transactions related to sales, purchases, and returns before they are posted to the general ledger.
Ledger:
The ledger is the principal book of accounts in the double-entry bookkeeping system. It contains individual accounts for each type of asset, liability, equity, revenue, and expense. Transactions from the cash book and subsidiary books are posted to the ledger accounts following the principles of debits and credits.
Debits and Credits:
The fundamental concept of debits and credits is at the core of double-entry bookkeeping. Here’s how it works:
- Debits (Dr.):
- Debits are recorded on the left side of an account in the ledger.
- They represent increases in assets and expenses or decreases in liabilities and equity.
- Examples of debit transactions include cash payments, asset purchases, and expense incurrences.
- Credits (Cr.):
- Credits are recorded on the right side of an account in the ledger.
- They represent increases in liabilities, equity, and revenue, or decreases in assets and expenses.
- Examples of credit transactions include cash receipts, liability incurrences, and revenue generation.
The fundamental accounting equation (Assets = Liabilities + Equity) is the foundation of the debits and credits system. Every transaction must maintain the equation’s balance.
For example, when recording a cash sale:
- Cash increases (an asset), so it’s debited.
- Sales revenue increases (equity), so it’s credited.
Remember, the rules of debits and credits can vary for different types of accounts. The key is to ensure that each transaction is balanced and accurately recorded in the appropriate accounts.
In summary, cash/subsidiary books help organize and summarize transactions before they are posted to the general ledger, where debits and credits are used to maintain accurate records of a company’s financial activities.