RECORDING IN THE PRIMARY BOOKS Prof. Seema Chakrabarti

Primary Books Books of accounts consist of two broad sets of books: Primary Books and Secondary Books. A primary Book (also called Journal) is a book of prime (first) entry of transactions. Any transaction which is not recorded in primary book does not get reflected in books of accounts. Recording in the Primary Books 2-2

Ground Rules for Recording in Primary Books Recollect the accounting equation:  A(Asset)= L(Liabilities)+ E(Equity) Ground Rules:  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 2-3 Recording in the Primary Books

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, Recording in the Primary Books

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, Recording in the Primary Books

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 Debit Rs. 100,000  Sales Credit Rs. 100, Recording in the Primary Books

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 Debit Rs. 150,000  Cash Credit Rs. 150, Recording in the Primary Books

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, Recording in the Primary Books

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, Recording in the Primary Books

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 Recording in the Primary Books

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 Recording in the Primary Books

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

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 2-13 Recording in the Primary Books

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