We have now reached the practical demonstration of the accounting process. It is crucial to understand how books of accounts are prepared and maintained by businesses. While today, various accounting software is used effectively to maintain accounting records, it is important to first understand how these records were kept manually. This foundational knowledge will deepen our understanding of accounting. Later, we will compare this manual process with computerized accounting systems.
An essential book that every business, whether small or large, maintains is the Journal.
However, when the number of transactions becomes large, recording everything in a single journal can be impractical. As a result, the journal is typically divided into specialized journals and therefore before exploring the journal in detail, it’s essential to understand its classification.
Classification of Journals and Books of Accounts Maintained by Businesses
Journals are classified into the following categories:
A. Special Journals
Special journals are used for recording transactions of a repetitive nature related to a particular type of transaction. The main types of special journals are as follows:
Cash Journal/Cash Book: This journal is used to record all cash transactions, i.e., cash receipts and cash payments within the business. It helps determine the balance of cash on hand at any given time. There are two types of cash books:
Simple Cash Book: This records only cash receipts and payments, functioning like a basic cash account.
Bank Column Cash Book: This includes an additional column on each side for bank transactions, offering more detail about bank-related dealings.
Purchases Journal/Purchases Book: This journal records all credit purchases of goods meant for trading. Cash purchases are recorded in the Cash Book. This journal excludes purchases of non-trading items, such as machinery or stationery.
Sales Journal/Sales Book: This journal records all credit sales of trading goods. Cash sales are recorded in the Cash Book. Sales of non-trading items, such as old furniture or machinery, are not included in the Sales Journal.
Purchase Returns or Returns Outward Journal/Book: When goods are returned to suppliers because they do not meet required specifications, the transaction is recorded in the Purchase Returns Book, also known as the Returns Outward Journal.
Sales Returns or Returns Inward Journal/Book: When customers return goods, they are unsatisfied with, the returns are recorded in the Sales Returns Book, also known as the Returns Inward Journal.
Bills Receivable Journal/Book: When goods are sold on credit, and a payment date is agreed upon, a Bill of Exchange is created. For the seller, this document is called a Bills Receivable, while for the buyer, it is a Bills Payable. Each party records the transaction in their respective journals.
Bills Payable Journal/Book: This journal records bills that the firm has accepted and agreed to pay at a later date.
B. Journal Proper
The Journal Proper is used to record transactions that do not fit into any of the special journals. It includes transactions that are infrequent or unique, such as:
Outstanding expenses.
Prepaid expenses.
Income received in advance.
Accrued income.
Interest on capital.
Depreciation.
Credit purchases and sales of fixed assets.
Bad debts.
Goods taken by the proprietor for personal use. etc.
The Journal Proper serves as a record for all transactions that do not belong in any specific special journal.
In this blog article, we discussed the books of accounts maintained by businesses and the reasons they are prepared and maintained. In our next blog, we will explore the journal—its format and the steps involved in preparing it. Be sure to check out our upcoming post for a clearer understanding of journals and their importance in accounting.