Lesson 09


Books of Account to be Kept by Company [SECTION-230]
A company should keep proper books of account in respect of: 
a) Cash received and expended by the company;
b) Sales and purchases of goods by the company
c) All Assets and liabilities of the company; and
d) In case of a company engaged in production, processing, manufacturing, or mining 
activities, a production record as may be required by the Commission through a general or
special order; 

Books of account should be preserved for ten years;
Books of account are to be kept at the registered office of the company.  If kept at any other place, the
registrar should be informed;  
Books of account should give a true and fair view of the state of affairs of the company and should contain
explanation of transactions.
Directors can inspect the books of account during the business hours.
If company fails to comply with the above provisions a director, including chief executive and chief
(a) of listed company is liable to imprisonment for one year and a fine of not less than Rs.
 20,000 not more than Rs. 50,000, and a further fine of Rs. 5000 per day during which the
 default continues; or
(b) of other companies is liable to imprisonment for six months and with a fine, which may
 extend to Rs. 10,000 
Accounting Cycle
• Transaction
• Document
• Voucher
• Books of original entry/journal/day book
• Books of secondary entry/ledger
• Financial statement 
Transaction    Source Document
Sale     Invoice Issue
Purchase    Invoice Receive
Sales return    Credit Note Issued
Purchases return    Credit Note Received
Cash received    Receipt/Cash Memo Issue 
Cash paid    Receipt/Cash Memo Received
Lease/Hire Purchase Agreement 
• Receipt voucher
• Payment voucher
• Journal voucher
• Petty cash voucher 
Books of Original Entry
• Purchase journal
• Sale journal 
• Purchase return journal
• Sales return journal
• Cash book (two/three column)
• Petty cash book 

• General journal/ transfer journal
Books of Secondary Entry 
• Main ledger
• Subsidiary ledger 
Financial Statement
• Balance sheet
• Income statement
• Statement of changes in equity
• Cash flow statement
• Notes to the accounts 

Recording of Transactions from Source Documents
To enter into a transaction we need approval from our responsible managers. When, after having approval of
a manager, transaction takes place, such transaction should be evidenced by a document. Because, to record a
transaction into the books of account, a bookkeeper needs an evidence of proper approval of transaction
and authorization of documents, therefore, a voucher is prepared on which all of the descriptions of the
transaction are written up and with which all of the evidences of approvals and authorized document are
attached.  Such voucher is finally authorized by accounts manager which is then recorded in the books of
accounts by a bookkeeper.
To have a more clear understanding of the above paragraph, lets have a step by step example of purchasing
an air conditioning plant for workshop. 
1. Production manager will send a requisition to the general manager for air conditioning the workshop
to improve the working environment. 
2. The general manager will approve the requisition (if he gets convinced that workshop is in real need of
air conditioning plant) and will send this approval to the purchase department. 
3. The purchase department will call a tender and after having received several quotations the purchase
department will place a purchase order to the vendor quoting lowest rate. (All of the above procedure
is properly documented). 
4. The vendor company (supplier) will send an invoice (purchase invoice) to the business along with the
air conditioning plant. Such air conditioning plant will be inspected by the expert and finally the invoice
will be approved for payment. 
5. Now all of the documents along with the purchase invoice shall be send to the bookkeeping office
where a voucher will be prepared and will also be approved by the concerned manager for recording
this transaction in the books of accounts. 

Source Documents:
Following are the few examples of source documents which are required to support different types of

Sr. No. Transaction  Source Documents 
1 Sales  Sales Invoice issued
2 Purchase Purchase Invoice received
3 Sales Return Credit Note issued
4 Purchase Return Credit Note received
5 Cash received Cash Memo/receipt issued
6 Cash paid  Cash Memo/receipt received
7 Leases/Hire purchase Agreements
8 Staff Salaries  Approved Payrolls
9 Electricity, Gas, Water, Tele. Phone Metered Bills/Invoices. 
Recording in the Books
Approved voucher are recorded in the books of accounts, many businesses now a days use computers for
recording of transactions. However, an understanding of book of accounts is necessary whether
transactions are recorded manually or electronically.
Basically, there are two types of books of accounts which are used to record the business transactions  

For cash
receipts & 
Books of Original
Entries (Journal) 
To record cash transaction 

1. Books of original entries.
2. Books of secondary entries.  
These are further subdivided according to the needs of the business and/or complexity of the transaction.
Following diagram best describes the different books of accounts which are used in the business for
recording transactions.
For credit
Sales Journal

For credit
Source Documents
Figure 3.1 
To record credit transaction
For sales

Credit Note
For all other
Depends upon
the nature of
Main Ledger Subsidiary Ledger 
To extract trial balance and to 
prepare financial statements 
To keep memorandum 
Books of Secondary
Entries (Ledger) 
Just after analyzing a transaction or event for its debit and credit effects it is required to record them in a
systematic way. So the books of accounts in which Debit and Credit are initially recorded in a systematic
way are known as books of original entry (BOE). In accounting system of business concern books of
original entries possess a very important position 
It depends upon the complexity of transactions and size of the business that what books of original entries
are required to record the transactions. For a very little business, having very few cash and credit
transactions, a general purpose journal is sufficient to record each type of transactions.
Journal is the very first book of account in which all of the business transactions and events are recorded. In
this book transactions and events are recorded in a chronological (date) sequence. Both of the accounting
effects (Debit & Credit) are recorded in it in a systematic way. Information recorded in the journal for a
transaction or an event is known as journal entry.

Sketch of a Journal & Journal Entry
Particulars Post  
Jan. 10 Salaries Account (Debit)
Cash Account (Credit) 

(Staff salaries paid in cash). 
Figure 3.2
From the above illustration we can understand that on 10

 January 2003, business paid cash Rs.50,000 as staff
salaries. It is customary that the accounting head analyzed as debit is written firstly in the particulars’ column
and its amount is written in the debit column whereas the accounting head analyzed as credit is written under
the debit accounting head but after indenting a little space from the left side, its amount is written in the
credit column. The column of post reference cannot be very well understood without having knowledge of
Ledger, any how, the column post reference shows page numbers of the Ledger in which salaries and cash
accounts are posted. Words written within the parenthesis in the particulars column are known as
“Narration of a transaction or event”; it is an integral part of a journal entry. Narration explains the
accounting treatments to a layman.

Subdivision of Journal:
As discussed earlier in 1.2 that the journal is sub-divided based on complexity of the transactions or size of
business. This happens only when there are a number of cash transactions in a day and also there are so
many transactions for credit purchases and credit sales. This large numbers of transactions create a mess in
bookkeeping office; therefore, separate bookkeeping clerks are given responsibilities for separate types of
transactions along with separate journals. For example,
For cash transactions there is a separate cash office in which only cash transactions are analyzed and
recorded in a book named as cash book.
For purchases there is a purchase journal in which only and only credit transactions for purchases are
recorded. In the same way sales journal for credit transaction of sales is maintained. And if there are a large
number of returns then separate journals for sales return and purchase return are also maintained. 
Now that, after having separate journals for credit sales, credit purchases, sales & purchases return and cash
transactions, all of the remaining transactions and events like sale and purchase of assets on credit, loss by
fire etc. shall be recorded in general journal. 
To learn more about subdivision of journal, firstly have a re-look on figure 3.1.

Need for Sales Journal
In case of a small business, there is very little number of transactions of credit sales. As we can have an
example of a barber’s shop, a tailor, a retailer etc. they mostly sell their services or goods on cash terms. But
as business expands, the sales of it also grow in terms of cash as well as in terms of credit. The cash sales are
now recorded in the cash book as a receipt, and the credit sales are recorded in a separate journal named as
sales journal (sales day book). In sales journal, no other transactions are recorded except the transaction for 
sales on credit terms.

Supporting Document:
As shown in the figure 3.1 the source document supporting credit sales is sale invoice. It is made up in
duplicate or triplicate (depending upon the accounting systems developed for the recording of credit sales) 
one of these copies is sent to the debtor (credit customer) along with the goods/services sold. A standard
format of sales invoice looks like below;

Name of Vendor Co.
Address of Vendor Co. 
Sale Invoice No.       Date:
Name & Address of Customer
Purchase Order Ref. No. 

Sr. No. Particulars/Description Quantity Rate Amount

Trade discount
Settlement terms. 2/10, n/30 

Figure 3.3
Purchase Order Reference No:
When a customer asks a vendor for supply of some goods, such order is evidenced through a purchase
order form. Purchase order form discloses the quantity and quality of goods ordered along with its rates and
discounts both trade and settlement. Each purchase order has its unique number which is put on the sales
invoice for reference.

Trade Discount:
Amount of trade discount is not required to be recorded in the books of accounts. Actually it is the
discount which is agreed before entering into the transaction of sales or purchase, therefore, it is just
formally show on the face of the invoice, otherwise it has no other financial effects.

Settlement Terms:
It is also known as prompt payment terms. These terms are in fact offered to lure the customer for having
more discounts by making payment for the invoice earlier. In this term, for example 2/10, n/30, the first
part 2/10 contemplates that if customer pays cash within 10 days of the invoice, he will be offered a
discount of 2%, the second part of it n/30 contemplates that after 10 days there will be no discount offer
but the customer has to pay the amount of invoice net of trade discount within the thirty days of the date of
This term sounds as two ten net thirty (2/10, n/30).

Brain Storming 

How this will sound 5/20, n/60 and what do you understand by this term? 

Entering the Transaction of Credit Sales in Sale Journal:
In case of credit sales the business is very much interested in the name and addresses of the credit customer
(Debtor), therefore, sales journal is so designed to cover following information;

Date--------------------- Date of invoice
Name of Debtor -------Mentioned in the invoice 
Invoice number ------- It helps to trace the other details of invoice.
Post reference ---------Page number of subsidiary ledger (will be discussed later on)
Amount of invoice ---- Net of Trade Discount

Sketch of Sales Journal

Date Name of Debtor Invoice


You would have noticed in the sales journal, there is only one column for amount. It might have created
confusion in your mind that why we are not having two columns for amount, one for debit and other for
credit, like in journal. Remember, here in sales journal all of the transactions are of same nature (credit sales)
and the purpose of sales journal is just to avoid over working for recording the debits and credits of each
transaction again & again. So, the role of sales journal in an accounting system is to precise all of the credit
transactions of sales for a month or so and give effect of debit to debtors and credit to sales with total
amount of such period.

Purchase Journal:
Need for a Purchase Journal
After knowing the need of sales journal (as discussed in previous section) it will be very easy to understand
that for a large business having frequent transactions of credit purchases it is necessary to maintain a
separate book for recording the transactions of purchases on credit terms. This book is named as purchase
day book. Obviously like a sales journal no cash transactions relating to purchase shall be recorded in this

Supporting Document:
As shown in the diagram the supporting document for transactions of credit purchases is purchase invoice.
It is exactly the same document as we looked into the diagram of previous section. Purchase invoice is in
fact the copy of sales invoice in the hands of customer. It is issued to the purchaser by the
seller/vendor/supplier. So from the stand point of a purchasing business, the business after having received
the invoice will put an internal number on it and will file it as evidence of the transaction and also for the
purpose to remember that amount of this invoice is still outstanding for payment according to the
settlement terms as discussed in section.

Entering the Transaction of Credit Purchases in Purchase Journal:
The basic contents of a purchase journal are exactly the same as discussed in the case of a sales journal with
the exception of one thing that now in the second column there is the name of Creditors instead of
Debtors. Obviously, we remember the person from whom goods are purchased on credit is creditor of the
Sketch of Purchase Journal

Date Name of creditor Inv.


A purchase journal is a list of all credit purchases in a stipulated time period. All of the credit purchases
recorded in a purchased journal during a period is totaled and then for such total amount debit effect is
given to the purchases account and credit effect is given to the creditors account. You noticed here that the
rules of debit and credit remain same all the time.

Sales Return Journal:
(Returns Inward Journal)
Need for Sales Return Journal
As the business expands the number of complaints and returns inwards also increases. Such return inwards
can be recorded in the sales journal as a negative entry if these are very little in number. But because of its
reverse nature it is recommended to maintain a separate journal to record sales return. Here one very 
important concept should be remembered that in sales return journal only the returns against credit sales
(from Debtors) are recorded. Normally, it doesn’t happen that return of goods sold against cash are
accepted by a business because certainly against such return the business would have to make refund of
money already received. That’s why in coming practice you will not find any such transaction. But obviously if
you have any example of such transaction in your business, it will be recorded in cash book as a payment.

Supporting document:
When a business receives back its sold goods it issues a “credit note” to the debtor returning goods, which 
evidences that we have received the returned goods and accept that money for such sales will not be
received in future. A “credit note” issued is an evidence of reduction in sales income and also in the amount
of debtors. It is also said that a “credit note” is a reversal document of an “invoice” which cancels the effect
of it. Like an “invoice”, a credit note is also given a number and also possesses a reference of sales invoice against
which such return were made. Rest of the contents of credit note are commonly understood, such as:  

 Name & Address of the business (Seller)
 Name & Address of the customer
Sketch of Credit Note

Name of Vendor Co.
Address of Vendor Co.
Credit Note No:       Date:

Customer’s Name
Customer’s Address

Ref. Invoice No       Account No:  
Item No. Description Quantity Rate Trade
Figure 3.6 

Net Amount 
Purchase return journal:
(Returns outward journal)
Need for a Purchase Return Journal?
Purchase return journal has the same story as we just have discussed in previous unit. The only thing to
remember is that it is also known as return outward journal/daybook. Obviously these transactions (for
purchase returns) could also be recorded in the purchase journal as negative entry but same as for sales
return journal it is required to have a separate journal for purchase returns because of its reverse nature to
the purchases. The total of purchase return journal will cause a reduction in the purchases expenses and also
a reduction in the amount of creditors.

Supporting document: 
Although purchase returns are evidenced by a copy of credit note received from the seller, which is treated as
a reversal document against purchase invoice. But here we shall also discuss the need of a “Debit Note”. A
“debit note” is in fact a request, put to the seller by the purchaser business, for issuance of a credit note. A copy
of debit note is sent to the seller along with the rejected goods, in which all of the particulars of goods
rejected and returned along with the reference of relevant invoice number are entered. Remember, a
business cannot  record purchases returns considering a debit note as a supporting document because the 
effects of purchase invoice are not considered cancelled unless acceptance of rejected goods is received
from the seller in shape of a copy of credit note.

Entering Transactions in Purchases Return Journal:
you will find nothing new in this section except the treatment of total of purchase return journal which is
debited to the creditors account and credited to the purchases return account.

Sketch of a Purchase Return Journal

Date Creditor Name Credit 
Note No.  
Figure 3.7

Cash Book:
Cash book is a book of original entries in which all of the cash transactions are recorded very firstly. If we
refer to the figure 3.1, we can notice that the (books of original entry) journal is subdivided for two types of
transactions i.e. credit transactions and cash transactions. As discussed in previous units, all credit
transactions are recorded in different journals. The cash transaction of a concern needs a separate book
named as cash book.
A cash book is divided into two sections, one for cash receipts and the other for cash payments. Each of
the section is formatted for date, particulars, post reference and amount. See below for its proper sketch;

Cash book
Date Particulars Post 
Amount Date Particulars Post 
Figure 3.8
Left hand side of a cash book is known as receipt side and right hand side is known as payment side. In a
way, we can say that within a cash book, we prepare two cash journals, one, cash receipt journal and second,
cash payment journal.

Supporting Documents: 
For Cash Receipts
All cash receipts are evidenced by a copy of cash memo/receipts retained by the business. These cash
memos/receipt are already serially pre-numbered and for each receipt of cash, the cash office issues an
original copy of the cash memo/receipt to the person making payment and retains a carbon copy or
counterfoil of it within the office which are used to record receipts of cash in the cash book.
For Cash Payments
All cash payments are evidenced by an original copy of cash memo/receipts issued by the recipient
business. These are attached with a cash voucher as evidence that cash was paid to recipient who issued this
cash memo/receipt. 

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