TutorialKart.comWhat Are Subsidiary Books in Accounting?
Subsidiary books are special books of original entry used to record transactions of a similar nature. Instead of entering every transaction in one general journal, a business records purchases, sales, returns, cash transactions, and other recurring items in separate books.
Subsidiary books are also known as subsidiary journals or special journals. Transactions are first recorded in the relevant subsidiary book from source documents such as invoices, debit notes, credit notes, receipts, and payment vouchers. Periodic totals are then posted to the appropriate ledger accounts.
Why Businesses Use Subsidiary Books
A small business with only a few transactions may record all entries in a general journal. As the number of transactions increases, using a single journal becomes difficult and time-consuming. Subsidiary books divide the accounting work according to the nature of each transaction.
- Similar transactions are recorded together.
- Accounting work can be divided among different employees.
- Individual transactions are easier to locate and verify.
- Ledger posting becomes more systematic.
- Errors and omissions can be identified more easily.
- Periodic totals reduce the number of separate ledger postings.
Types of Subsidiary Books in Accounting
The principal subsidiary books used by a business are listed below:
- Purchase book
- Sales Book
- Purchase return book
- Sales Return Book
- Cash Book
- Petty Cash Book
- Bills Receivable Book
- Bills Payable Book
- Journal Proper
Purchase Book for Credit Purchases of Goods
The purchase book records only goods purchased on credit for resale or for use in production. Entries are made from purchase invoices received from suppliers.
Cash purchases are recorded in the cash book. Credit purchases of assets, such as furniture, machinery, or vehicles, are normally recorded in the journal proper rather than in the purchase book.
Example: A retailer purchases merchandise worth $4,000 on credit from a supplier. The transaction is entered in the purchase book. If the retailer purchases office furniture on credit, that transaction is not entered in the purchase book because furniture is an asset rather than goods purchased for resale.
Sales Book for Credit Sales of Goods
The sales book records goods sold on credit in the ordinary course of business. Entries are based on sales invoices issued to customers.
Cash sales are entered in the cash book. A credit sale of an asset, such as an old computer or vehicle, is generally recorded in the journal proper and not in the sales book.
Example: Goods worth $2,500 sold on credit to a customer are recorded in the sales book. Goods sold for immediate cash payment are recorded in the cash book.
Purchase Return Book for Goods Returned to Suppliers
The purchase return book records goods previously purchased on credit and later returned to suppliers. Goods may be returned because they are damaged, defective, of the wrong quality, or in excess of the quantity ordered.
The entry is normally supported by a debit note sent to the supplier. A debit note informs the supplier that the amount payable has been reduced.
Sales Return Book for Goods Returned by Customers
The sales return book records goods previously sold on credit and subsequently returned by customers. It is also known as the returns inward book.
The seller usually issues a credit note to the customer. The credit note confirms that the customer’s outstanding balance has been reduced by the value of the returned goods.
Cash Book for Cash and Bank Transactions
The cash book records cash receipts, cash payments, bank receipts, and bank payments. Depending on its format, it may contain separate columns for cash, bank, and discounts.
The cash book has a dual role. It is a book of original entry because transactions are first recorded in it, and it also functions as a ledger account for cash and bank balances.
- Single-column cash book: Records cash receipts and cash payments.
- Double-column cash book: Commonly contains cash and bank columns or cash and discount columns.
- Triple-column cash book: Contains cash, bank, and discount columns.
Petty Cash Book for Small Routine Payments
The petty cash book records small and frequent payments that do not justify a separate entry in the main cash book. Examples include postage, local transportation, stationery, refreshments, and minor office expenses.
Many businesses operate petty cash under the imprest system. Under this system, the petty cashier receives a fixed amount at the beginning of a period and is reimbursed by the amount spent at the end of the period.
Bills Receivable Book for Bills Accepted by Customers
The bills receivable book records bills of exchange received from customers or other debtors. These bills represent amounts that the business is entitled to collect on specified future dates.
Common particulars include the name of the debtor, date of the bill, term, due date, amount, and place of payment.
Bills Payable Book for Bills Accepted in Favor of Suppliers
The bills payable book records bills of exchange accepted by the business in favor of suppliers or other creditors. These bills represent obligations that must be paid on their respective due dates.
The book generally records the creditor’s name, date of acceptance, term, due date, amount, and payment details.
Journal Proper for Transactions Not Covered Elsewhere
The journal proper records transactions that cannot be entered in any other subsidiary book. It is sometimes called the general journal or residual journal.
- Opening entries at the beginning of an accounting period
- Closing and transfer entries
- Adjustment entries
- Rectification of accounting errors
- Credit purchases or sales of fixed assets
- Depreciation and provisions
- Goods withdrawn by the owner for personal use
- Exceptional or infrequent transactions
Subsidiary Books and Their Source Documents
| Subsidiary book | Transactions recorded | Common source document |
|---|---|---|
| Purchase book | Credit purchases of goods | Purchase invoice |
| Sales book | Credit sales of goods | Sales invoice |
| Purchase return book | Credit-purchased goods returned to suppliers | Debit note |
| Sales return book | Credit-sold goods returned by customers | Credit note |
| Cash book | Cash and bank receipts and payments | Receipt, payment voucher, bank record |
| Petty cash book | Small routine cash payments | Petty cash voucher |
| Bills receivable book | Bills received from debtors | Bill of exchange |
| Bills payable book | Bills accepted for creditors | Accepted bill of exchange |
| Journal proper | Transactions not covered by other books | Relevant supporting document |
Difference Between Subsidiary Books and the Ledger
| Basis | Subsidiary books | Ledger |
|---|---|---|
| Purpose | Record transactions in chronological order according to their nature | Classify transactions account by account |
| Stage of recording | Usually the first stage of accounting entry | Entries are posted after initial recording |
| Arrangement | Organized by transaction type | Organized by individual accounts |
| Examples | Purchase book, sales book, cash book | Purchases account, sales account, supplier account, customer account |
Example of Recording Transactions in Subsidiary Books
Assume a trading business completes the following transactions:
- Purchases goods worth $6,000 on credit from Alpha Suppliers.
- Sells goods worth $3,500 on credit to Green Stores.
- Receives $1,000 in cash from a customer.
- Returns defective goods worth $400 to Alpha Suppliers.
- Pays $25 for postage from petty cash.
- Purchases office furniture worth $1,200 on credit.
These transactions are classified as follows:
| Transaction | Book used |
|---|---|
| Credit purchase of goods | Purchase book |
| Credit sale of goods | Sales book |
| Cash received from a customer | Cash book |
| Goods returned to a supplier | Purchase return book |
| Postage paid from petty cash | Petty cash book |
| Furniture purchased on credit | Journal proper |
Posting Subsidiary Book Totals to the Ledger
Transactions are first entered individually in the appropriate subsidiary book. At the end of a chosen period, such as a day, week, or month, the total of that book is posted to the relevant general ledger account. Individual customer and supplier amounts are also posted to their personal accounts.
For example, the monthly total of the sales book is credited to the Sales Account. Each customer’s individual purchase is debited to that customer’s account. This approach maintains complete account details while reducing repetitive entries in the general ledger.
Advantages and Limitations of Subsidiary Books
Advantages of Maintaining Subsidiary Books
- Division of work: Different books can be maintained by different employees.
- Faster recording: Repetitive transactions are entered in a standard format.
- Better control: Management can review purchases, sales, returns, and cash transactions separately.
- Easier reference: Transactions of a particular type can be found without searching through one large journal.
- Efficient posting: Periodic totals can be posted to general ledger accounts.
- Improved checking: Responsibility for each book can be assigned and reviewed independently.
Limitations of Maintaining Subsidiary Books
- A suitable classification system must be established before transactions are recorded.
- Incorrect classification may place a transaction in the wrong book.
- Several books may increase administrative work for a very small business.
- Totals and ledger postings must still be checked and reconciled regularly.
- Subsidiary books do not replace the ledger or the preparation of final accounts.
Common Errors When Classifying Subsidiary Book Entries
- Recording cash purchases in the purchase book instead of the cash book.
- Entering the credit purchase of an asset in the purchase book.
- Recording cash sales in the sales book.
- Confusing a debit note with a credit note.
- Entering a purchase return in the sales return book.
- Using the journal proper for a transaction that belongs in a specific subsidiary book.
Frequently Asked Questions About Subsidiary Books
Why are subsidiary books called books of original entry?
They are called books of original entry because transactions are first recorded in them from source documents before being posted to ledger accounts.
Are cash purchases recorded in the purchase book?
No. The purchase book records only credit purchases of goods. Cash purchases are recorded in the cash book.
Is the purchase of machinery entered in the purchase book?
A credit purchase of machinery is generally entered in the journal proper because the purchase book is reserved for goods purchased on credit for resale or production. A cash purchase of machinery is recorded in the cash book.
What is the difference between purchase returns and sales returns?
A purchase return occurs when a business returns goods to a supplier. A sales return occurs when a customer returns goods to the business.
Does a cash book replace the cash ledger account?
In traditional bookkeeping, the cash book generally serves as both a book of original entry and the ledger account for cash and bank transactions. A separate cash account is therefore usually unnecessary.
Subsidiary Books Accounting Review Checklist
- Confirm that only credit purchases of goods are entered in the purchase book.
- Confirm that only credit sales of goods are entered in the sales book.
- Match purchase returns with debit notes and sales returns with credit notes.
- Record all cash and bank movements in the cash book.
- Use the petty cash book only for small routine payments.
- Enter asset purchases, adjustment entries, and unusual transactions in the correct book.
- Check subsidiary book totals before posting them to the ledger.
- Reconcile customer, supplier, cash, and bank balances regularly.