www.gradeup.

co
www.gradeup.co

Subsidiary Books
Business transactions are firstly recorded in a Journal and then posted into Ledger but in practice, the
number of transactions is very large, and it becomes difficult to record all of them in one book of prime
entry. Therefore, it is convenient to maintain a separate register for each class of transactions i.e. one for
purchase of goods, one for sale of goods, one for receipts and payments of cash etc.
A register of this type is called a book of original or prime entry. These books are also called a Special
Journal or Subsidiary Books.
Classification of Subsidiary books:
• Cash Book: Records all cash as well as bank transactions. Cash book is a subsidiary book but it is
also a part of the ledger and therefore, it is also treated as a Principal book of accounts. It is
mainly of three types: Simple cash book (for recording only cash transactions), Two-column cash
book (for recording both cash and bank transactions) and Three-column cash book (for
recording cash and bank transactions involving profit or gain on account of discount). On the
debit side, all cash receipts are recorded and on the credit side, all cash payments are recorded.

• Sales Book: Records the credit sales of goods dealt in by the firm. Cash sales are not recorded in
the sales book; they are entered in the cash book. Entries under sales book are recorded on the
basis of invoices. Total amount of sales book is posted to the sales account periodically. Credit
sales of items other than goods dealt in by the firm are not entered in the sales, they are
journalized.

• Purchases Returns Book: Records the return of goods and materials previously purchased on
credit. It is also called Returns Outward Book. Goods may be returned because of reasons such as
goods are defective, not as per sample, delivered late and the customer has refused to accept etc.
In all these mentioned cases, the purchaser prepares a note called ‘Debit Note’ and sends it to the
supplier.

• Sales Returns Book: Records the returns of credit sales made by customers. Sales returns book
is also known as Return Inwards Book. A ‘Credit Note’ is prepared on receipt of goods in
duplicate. The original copy is sent to the customer and the second copy is retained for record
and entry is recorded in the book on its basis.

• Bills Receivable Book: Records the receipts of promissory notes from various parties. A
promissory note is a document that contains a written promise to pay a specified sum of money
to a specified person at a specified date. The written commitment can be in the form of bill of
exchange or promissory note. A bill of exchange is prepared by the seller of goods and accepted
by the purchaser whereas a Promissory Note is prepared by the purchaser of goods.

• Bills Payable Book: Records the issue of promissory notes to other parties. Bills Payables are
recorded in a book which is called ‘Bills Payable Book’. The payment of a bill payable on the due
date is recorded in the cash book. Dishonor or renewal of bills is recorded in the Journal. The
amount column of the bills payable book is totaled and the total is posted to the credit of bills
payable account by writing ‘By Sundries as per bills payable book’.

• Journal Proper: The journal proper records the transactions that cannot be mentioned in any of
the above books. Entries recorded in the journal proper are: Opening entry, Closing entry,
Transfer entries, Adjusting entries, Rectifying entries, Credit sale of obsolete assets etc.

• Purchase Book: It is a subsidiary book that records only the credit purchases of goods dealt in
by the firm. Cash purchases are recorded in the cash book. It is also known as Purchase Register
containing the record of all credit-purchase. Total amount of Purchases book is posted to the
Purchases account. It involves six columns viz., Date, Particulars, Invoice No., L.F.(Ledger Folio),
Details and Amount.
www.gradeup.co

Advantages of Subsidiary Books

• It helps dividing the accounting work among a number of persons as in place of one journal there
are many subsidiary books
• It helps in undertaking various accounting simultaneously because of the use of number of books
• A separate book is maintained for each and every class of transactions. Therefore, information
relating to each class is available a one place
• It is easy to locate errors

Disadvantages of Subsidiary Books

• Subsidiary books system is expensive as separate books have to be maintained by the company
for each transaction
• It requires sufficient manpower in order to handle different books for different accounts.
Therefore, this system is not advisable to a small company

Accounting Equation Approach: The rules can be summarized as follows:

1. Increase in assets are debits; Decrease in assets are credits
2. Increase in capitals are credit; Decrease in capitals are debit
3. Increase in liabilities are credit; Decrease in liabilities are debit
4. Increase in incomes and gain are credit; Decrease in incomes and gain are debits
5. Increase in expenses and losses are debited; Decrease in expenses and losses are credit
Prepaid Expenses:
Internet Charges
Insurance Policy
Discount: A Reduction in Amount
Trade Discount: This discount is given by seller to buyer if the buyer purchases in bulk. It is not shown in
the books. Only discount amount will be reduced.
www.gradeup.co

Example: M/s KT Enterprises sold 500 pens to its customer, Mr. A. The retail price is Rs.10/pen. M/s KT
Enterprise gave 20% discount to its customer. Thus the total retail price of Rs. 5,000 (500*10) will be
reduced to Rs. 4,000 (500*8). Here, the trade discount is Rs. 1,000.
Discount: A Reduction in Amount
Cash Discount: A cash discount is a deduction allowed by some sellers of goods or by some providers of
services to encourage customers to pay within a specified time. Cash discount is also referred to as an
early payment discount.
This Discount will be shown in the books as it is loss to the seller.
Treatment of Cash Discount allowed: Always Debit Cash Discount
Treatment of Cash Discount received: Always Credit Cash Discount
Let’s understand it through an example and Journal Entry:
On 15-6-18 M/s MP Enterprises sold 50 pens to its customer, Mr. X on credit. The retail price is
Rs.10/pen. M/s MP Enterprise gave 20% discount to Mr. X on early payment as he paid the money on 18-
6-18. Here, the cash discount is Rs. 100.

Outstanding Expenses:
Outstanding Salary
Outstanding Rent
Outstanding Wages
Bank Loan
Creditor/ Debtor
Bills Receivable
Bills Payable
Bad Debts-: When the goods are sold to customer on Credit and if the amount becomes irrecoverable due
to his insolvency or for some other reason, the amount not recovered is called bad debts. For recording it,
the bad debt account is debited because the unrealized amount is a loss to the business and the
customer’s account is credited.
Bad debts recovered-: Sometimes, the bad debts previously written off are subsequently recovered. In
such a case, cash account is debited and bad debts recovered account is credited because the amount so
received is gain to the business.

***