Business Accounting for Engineering
(ETHSM 401)
UNIT II:
Accounting Transactions
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Introduction to Journals & Ledger
• A journal is generally referred to as a subsidiary accounting book. According to
the general standards of accounting, it records all financial transactions. This is
the first and an important step of the accounting process. The transactions are
listed all in a particular chronological order. It provides the intricacies of the
accounts that are supposed to be affected after each transaction has been
completed.
• Ledger is a principal accounts book. Its primary aim is to transfer transactions
from a journal. After the transaction, it is responsible for classifying it into
separate accounts. It is also referred to as the final entry book. It helps
businesses prepare statements for accounting, for example, the Trial Balance.
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Journals
Definition: A journal is the book of original entry where all financial
transactions are recorded in chronological order as they occur.
Purpose: It serves as the primary record of transactions before they are
posted to the ledger.
Format: Transactions are recorded in a structured format, typically
including:
• Date of the transaction
• Accounts affected (debit and credit)
• Amounts debited and credited
• A brief description of the transaction (narration)
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Journals
Types:
There are different types of journals for specific transactions, such as:
1. General Journal:
For non-repetitive transactions.
2. Specialized Journals:
For repetitive transactions (e.g., sales journal, purchase journal).
3. Usage:
Helps to ensure that every transaction is captured systematically at
the time of occurrence.
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Properties of journals
• Order – The entries in the journal are recorded in a date-wise chronology. It aids in
analyzing the transactions much more swiftly.
• Double-entry system- entries follow a particular system wherein each transaction is
entered on both sides, i.e., on the debit and credit sides. When there is a debit in one
account, the other account gets credited having the exact amount or value. This is an
example of a dual entry system.
• Daybook: on a day-to-day basis, for consistency and ease, a journal lists the
transactions.
• Compound Entry: on the same day, there can be more than one or even two accounts
in a single entry. Also, journals can have a transaction that is related to one another.
• Description: every transaction has a little description added to it called narration. It
explains the purpose, type, and nature of the transaction.
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Ledgers
Definition:
A ledger is the book of secondary entry where all journal entries are
classified and summarized by account.
Purpose:
It consolidates information from the journal, showing the individual account
balances.
Format: A ledger is organized by accounts, with each account having a
separate page or section. It shows:
• Account name or number
• Debit and credit entries
• Running balance
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Ledgers
Types:
[Link] Ledger: Contains all accounts of the business, such as assets,
liabilities, equity, revenues, and expenses.
2. Sub-ledgers: For detailed tracking, e.g., accounts receivable or
accounts payable ledgers.
Usage:
Helps in preparing the trial balance and financial statements by
providing a summarized view of account balances.
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Difference between Ledgers and Journals
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Properties of Ledgers
• Dual Sides: A Ledger has dual sides – credit and debit; the credit entries are on
the right-hand side, while The debit entries fall on the left-hand side of a ledger.
• Transaction: Each transaction can affect more than two ledger accounts. It is
because the transaction may be related. It can be to a person, income or
expense.
• Balancing: The two sides of a ledger must always have the same value. That
always does not happen because the credit side could have more value than the
debit side and vice versa. To balance between the two, recording the difference,
that too on the deficient side is done. When the credit side is less than the debit
side, the balance is listed on the credit side. This is known as the debit balance.
Likewise, when the credit side is more than the debit side, the balance is listed
on the credit side. Now, this is called a credit balance.
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Cash Book
• A Cash Book is an Original Entry (or Prime Entry) book in which all cash and
bank transactions are documented chronologically. When the business is small,
it is easy to record every transaction in a single book called a ‘Journal’. Journal
is also known as the book of original entry. But gradually when the business
expands, it becomes inconvenient to record such a large number of transactions
in a single book. As a result, a separate book is required for recording cash
transactions. It is known as a ‘Cash Journal’ or a ‘Cash Book’.
• A cash book is a financial journal that contains all cash receipts and
disbursements, including bank deposits and withdrawals. This is the
main area where businesses record any and all cash-related
information. Entries are normally divided into cash payments and
receipts. All of these are posted in the company's general ledger.
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KEY FEATURES
• A cash book is a subsidiary of the general ledger in which all cash
transactions during a period are recorded.
• The cash book is recorded in chronological order, and the balance is
updated and verified on a continuous basis.
• Larger organizations usually divide the cash book into two parts: the
cash disbursement journal and the cash receipts journal.
• A cash book differs from a cash account in that it is a separate ledger in
which cash transactions are recorded, whereas a cash account is an
account within a general ledger.
• There are three common types of cash books: single column, double
column, and triple column.
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KEY FEATURES
• All cash receipts are transferred to the debit side of the Cash Book, while payments are
recorded on the credit side.
Debit Side (Receipts):
All cash inflows (money received) are recorded on the debit side of the cash book.
Example: Sales income, money received from debtors, capital introduced, etc.
Credit Side (Payments):
All cash outflows (money paid) are recorded on the credit side of the cash book.
Example: Payments to creditors, expenses incurred, purchase of assets, etc.
• The balance of cash in hand and at the bank is calculated by subtracting total payments from
total receipts.
• As a result, Cash Book allows the business to know the balance of cash in hand and at the
bank at any time of the year.
• In cash book, only cash and bank transactions are documented and no credit transactions are
recorded.
• It functions as both a journal and a ledger at the same time.
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Types of Cash Book:
• 1. Simple Cash Book or Single Column Cash Book
• The format of a Simple Cash Book is similar to an ledger account, with one
amount column on each side. The left-hand side of the cash book is called Debit
Side and it records cash receipts and the right-hand side of the cash book is
called Credit side and it records cash payments.
• Format for the simple cash book is as follows:
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• Columns of a Simple Cash Book :
• 1. Date: This column contains the date, month, and year of the transaction.
• 2. Particulars: This column contains the name of the account for which cash
has been received or paid.
• 3. Journal Folio (J.F.): This column keeps track of the journal page number
where the posting of this amount has been made.
• 4. Amount: This column records the actual amount of cash receipts on the Dr.
side, while cash payments are recorded on the Cr. side.
• Here, Debit side represents the receipts side and Credit side represents the
payments side.
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2. Double Column or Two column Cash Book:
• For a Double Column or Two Column Cash Book, there are two columns to
record amount on both sides. One column is to record transactions related to
cash, and another column records transactions related to banks. So, one is the
cash column and the other is the bank column. A two-column cash book is
prepared when both cash and bank transactions happen in the business.
• Format for the double-column cash book is as follows:
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Columns of a Double Column Cash Book represent:
1. Date: This column contains the date, month, and year of the transaction.
2. Particulars: This column contains the name of the account for which cash has been
received or paid.
3. Journal Folio (J.F.): This column keeps track of the journal page number where the
posting of this amount has been made.
4. Cash: This column records the actual amount of cash receipts on the Dr. side, while
cash payments are recorded on the Cr. side.
5. Bank: This column records the amount received through the bank on the Dr. side,
while payments made through the bank are recorded on the Cr. side
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Balancing of Double-column Cash Book
• Cash Columns always indicate a Debit Balance: Cash columns are balanced exactly in
the same way that single-column cash books are balanced. Cash Column always has a
debit balance for the reason that cash payments can never go beyond cash in hand. As
a result, the amount will be shown on the credit side as ‘By Balance c/d’.
• The Bank Column may indicate either a Debit Balance or a Credit Balance: The bank
column is also balanced like a cash column. But The bank column may indicate either
a debit or a credit balance, unlike the cash column. An overdraft occurs when the total
of the bank column on the credit side exceeds the total of the bank column on the debit
side. Or it can be said that cash withdrawn from the bank exceeds cash deposited into
the bank. In this case, the difference will be written as “To Balance c/d” on the debit
side. If the total of the debit side exceeds the total of the credit side, the difference is
written as “By Balance c/d” on the credit side.
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Subsidiary Books
• Subsidiary Books are the books that record the transactions which are similar in
nature in an orderly manner. They are also known as special journals or
Daybooks. In big business institutions, it is not easy to record all the
transactions in one journal and post them into various accounts. So, for the easy
and accurate recording of all the transactions, the journal is subdivided into
many subsidiary books.
• In the normal course of business, a majority of transactions are either relate to
sales, purchases or cash. So we record transactions of the same or similar nature
in one place, i.e. the subsidiary book. every type of transaction, there is a
separate book.
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Types of Subsidiary Books
There are basically 8 types of subsidiary books that are used for recording different
types of transactions. So, let us know the types.
The 8 Subsidiary books are as follows:
1. Cash Book
2. Purchase Book
3. Sales Book
4. Purchase Return Book
5. Sales Return Book
6. Bills Receivable Book
7. Bills Payable Books
8. Journal Proper
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2. Purchase Book
• Purchase Book is a subsidiary book that is used to record all the transactions related
to credit purchases. The purchases of the asset are never recorded in the purchase
book.
• Format of Purchase Book:
Particulars
Date Particulars Inward L.F. Amount
Invoice No
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3. Sales Book
• The Sales Book records all the transactions related to credit sales. The sales
book cannot record the sale of assets. The sales book format is given below.
Particulars
Date Particulars Outward L.F. Amount
Invoice No
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4. Purchase Return Book
• The purchase return book, also known as the return outward book, is used to record transactions of all the
returns made to the supplier. A debit note is issued against every return and is recorded in the Purchase
Return Book.
• Format of Purchase Return Book:
Particulars
Date Particulars Debit Note L.F. Details Amount
ABC Traders purchased 100 units of product X from XYZ Ltd. for ₹10,000 on 1st Feb 2025. However, 10 units
were found to be defective and were returned on 5th Feb 2025.
Purchase Return Book Entry:
•A debit note (DN-2025/01) is issued for ₹1,000.
•The supplier's account is debited by ₹1,000.
Goods
Date Supplier Name Invoice No. Amount (₹) Debit Note No.
Returned
05/02/2025 XYZ Ltd. 101 10 units 1,000 DN-2025/01
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5. Sales Return Book
• The sales return book records all the transactions related to inward returns. It is also known as a return inward
book. When the customer returns goods, a credit note is issued to the customer for every return, and it is
recorded in the Sales Return Book.
• Sales Return Book Format:
Particulars
Date Particulars Credit Note No. L.F. Details Amount
ABC Traders sold 50 units of product Y to PQR Ltd. for ₹5,000 on 10th Feb 2025. However, 5
units were defective, and PQR Ltd. returned them on 15th Feb 2025.
Sales Return Book Entry:
•A credit note (CN-2025/02) is issued for ₹500.
•The customer's account is credited by ₹500.
Customer Goods
Date Invoice No. Amount (₹) Credit Note No.
Name Returned
15/02/2025 PQR Ltd. 202 5 units 500 CN-2025/02
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6. Bills Receivable Book
• The Bills Receivable Book records all the transactions of bills drawn in favour of
the business. The total of the bills receivable book is posted on the debit side of the
Bills Receivable account. The Format of Bills Receivable Book is as follows.
Particulars
Date of Bill No. Acceptor From Terms Due Date Amount
Bill
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7. Bills Payable Book
• The Bills Payable Book records all the transactions related to bills that are drawn
on the business and are payable by the business. The Bills Payable Books Format is
as follows.
Particulars
Date of Bill No. Drawee Payee Terms Date of Amount
Bill Maturity
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8. Journal Proper
• There are certain transactions that cannot be recorded in any of the above-mentioned
books; these transactions are termed miscellaneous transactions. So, the Journal
Proper is used to record all the miscellaneous transactions. It includes transactions
such as credit purchase and sale of assets, depreciation, etc.
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Types of Discounts
• Discounts are reductions to the regular price of a product or service. Businesses offer
discounts as a promotional tactic to increase sales, clear out inventory, reward
customers, or target a specific audience segment. Here are some common types of
discounts:
1. Cash Discounts:
• Aimed at accelerating payments and improving cash flow.
• Example: “2/10, net 30” means a 2% discount is given if payment is made within 10 days, but
the full (net) amount is due within 30 days.
• “Urban Trends” offers a special deal: “Pay within five days of your purchase and get a 5%
discount on your total bill.”
2. Quantity Discounts:
• Discounts based on the quantity purchased.
• Example: “Buy 10 get 1 free” or “10% off when you purchase 3 or more.”
• On a display of socks: “Buy 3 pairs, get the 4th pair free.”
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[Link] or Functional Discounts:
• Offered to channel members for performing their roles, like wholesalers or
retailers.
• Example: A manufacturer might give a retailer a 15% trade discount to
stock and sell their product.
• “Urban Trends” provides a 15% discount to local boutique shops that buy
their products for resale.
4. Seasonal Discounts:
• To stimulate sales during off-peak seasons.
• Example: Offering winter clothing at a discount in spring to clear out
inventory.
• Summer is ending, so they offer: “End-of-Summer Sale! 30% off all
summer dresses.”
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5. Promotional or Cash-Off Discounts:
• Temporary reductions in price, often used to quickly move stock.
• Example: “Rs.500 off your next purchase.”
• Over the weekend: “Flash Sale! Get Rs. 250 off any purchase over Rs.
1000.”
6. Rebate:
• A customer pays the full price upfront but can claim a part of it back after
purchase.
• Example: On a high-end leather jacket: “Pay Rs. 2500 now and claim a Rs.
400 rebate online within 30 days.”
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7. Loyalty or Membership Discounts:
• Given to members of a loyalty program or repeat customers.
• Example: A coffee shop offering every 10th coffee for free as a loyalty reward.
• For members: “Loyalty Members Special! Extra 10% off your purchase this
month.”
8. Employee Discounts:
• Offered to employees of a company, often as a perk.
• Example: A retail store offering its employees 20% off on all products.
• To its staff: “Employee Appreciation Week! Enjoy 25% off all items.”
9. Early Bird Discounts:
• Offered to those who buy or register early.
• Example: Register for a workshop two months early and get 15% off the regular
price.
• For the upcoming winter collection preview: “First 50 customers get an exclusive
20% early bird discount.”
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[Link] Discounts:
• Reduction in price when products are bought together.
• Example: Buying a computer, monitor, and keyboard together for a combined lower
price.
• “Buy a shirt + jeans combo and get 15% off.”
[Link] or Student Discounts:
• Special discounts for specific groups like seniors or students.
• Example: A movie theater offering reduced ticket prices for senior citizens.
• Every Tuesday: “Student Day! Show your student ID and get 20% off.”
12. Flash Sales:
• Deep discounts offered for a very short period, often used to create urgency.
• Example: An online store offering 50% off everything for the next two hours.
• “Online Exclusive: 50% off select items from 1 PM to 3 PM today!”
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13. Volume Discounts:
• Price reductions based on the amount purchased.
• Example: The price per unit drops when ordering more than 100 units of a product.
• For wholesale buyers: “Order 100 t-shirts or more and get them at a reduced price of Rs.
100 each, down from Rs. 140.”
14. Trade-In Discounts:
• Discounts given when a customer trades in an old item while purchasing a new one.
• Example: Getting Rs. 100000 off a new car when trading in an old vehicle.
• “Bring in your old jeans, no matter the brand, and get rs. 500 off a new pair.”
15. Referral Discounts:
• Offered to customers who refer new customers.
• Example: Refer a friend, and both of you get Rs. 200 off your next purchase.
• To existing customers: “Refer a friend to shop online, and both of you get a rs. 100
discount on your next purchase.”
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Thank You