Cash and subsidiary books, along with the general ledger, are essential components of record keeping in accounting. They help organize and track financial transactions systematically. Here are detailed notes on cash and subsidiary books, as well as their relationship with the general ledger:
Cash Book:
- Definition: The cash book is a subsidiary book that records all cash and bank transactions of a business.
- Types of Cash Books:
- Single Column Cash Book: Records cash transactions only.
- Double Column Cash Book: Records cash and bank transactions separately, typically with two columns for cash and bank.
- Triple Column Cash Book: Includes columns for cash, bank, and discount allowed or received.
- Recording Transactions in the Cash Book:
- Cash inflows are recorded on the debit (left) side.
- Cash outflows are recorded on the credit (right) side.
- Bank transactions are recorded similarly, with separate columns in double or triple column cash books.
- Purpose and Benefits:
- Provides an up-to-date record of cash and bank balances.
- Facilitates cash flow management and reconciliation.
- Serves as a basis for preparing bank reconciliation statements.
Subsidiary Books:
- Definition: Subsidiary books are specialized journals used to record specific types of transactions. They provide a detailed breakdown of transactions before they are posted to the general ledger.
- Types of Subsidiary Books:
- Sales Journal (Sales Day Book): Records credit sales of goods or services.
- Purchases Journal (Purchases Day Book): Records credit purchases of goods or services.
- Sales Returns Journal (Returns Outwards Day Book): Records returns from customers.
- Purchases Returns Journal (Returns Inwards Day Book): Records returns to suppliers.
- Journal Proper (General Journal): Records non-routine transactions.
- Recording Transactions in Subsidiary Books:
- Each subsidiary book has specific columns for relevant details such as date, particulars, invoice numbers, amounts, and accounts affected.
- Totals from subsidiary books are periodically posted to the general ledger.
- Purpose and Benefits:
- Streamlines recording of specific transactions, making the ledger posting process more efficient.
- Provides a chronological record of transactions for specific accounts.
General Ledger:
- Definition: The general ledger is the principal book of accounts that contains summarized information from all subsidiary books and journals.
- Posting to the Ledger:
- Transactions recorded in subsidiary books are periodically posted to the respective accounts in the general ledger.
- Debits and credits from subsidiary books are transferred to appropriate ledger accounts, maintaining the accounting equation (Assets = Liabilities + Equity).
- Trial Balance:
- The trial balance is prepared from the ledger accounts to ensure that debits equal credits, helping detect errors in recording.
- Financial Statements:
- The general ledger is used to prepare financial statements, including the income statement and balance sheet.
Importance of Record Keeping Basics:
- Accurate and organized record keeping is essential for financial management, reporting, and decision-making.
- It provides transparency, accountability, and compliance with accounting standards.
Automation and Software:
- Modern accounting software automates and streamlines the recording, posting, and reporting processes, reducing manual effort and errors.
In summary, cash and subsidiary books serve as detailed records of specific transactions before being summarized in the general ledger. The general ledger forms the foundation for preparing financial statements. Effective record keeping is vital for maintaining accurate financial records and ensuring a clear audit trail.