Chapter # 02

Books of Prime entry

 Date Description Debit Credit
Following transactions took place by Mr. Ahmad during March 01, 2020. 01.03.20 Bank (A) ↑ 500,000
Date Transactions Capital ↑ 500,000
03.03.20 Office Building (A) ↑ 10,000
01.03.20 Started in business with Rs. 500,000 in cheque
Acc. Payable for Building (L) ↑ 10,000
03.03.20 Purchased an office Building for Rs. 10,000 on credit 05.03.20 Purchases ↑ 3,000
05.03.20 Bought goods for cheque Rs. 3,000. Bank (A) ↓ 3,000
07.03.20 Purchases ↑ 1,500
Bought goods on credit from Ahsan amounting Rs. 1,500
07.03.20 Creditor Ahsan (L) ↑ 1,500
Bought goods on credit from Shehroze amounting Rs. 2,000 07.03.20 Purchases ↑ 2,000
11.03.20 Sold goods amounting Rs. 5,000 through cheque Creditor Shehroze (L) ↑ 2,000
11.03.20 Bank (A) ↑ 5,000
Sold goods on credit to Iqbal amounting Rs. 4,500 Sales ↑ 5,000
13.03.20
Sold goods on credit to Irfan amounting Rs. 3,500 13.03.20 Debtor Iqbal (A) ↑ 4,500
Business returned goods amounting Rs. 1,000 which was previously Sales ↑ 4,500
18.03.20 13.03.20 Debtor Irfan (A) ↑ 3,500
purchased on cheque Sales ↑ 3,500
Business returned goods amounting Rs. 500 which was previously purchased 18.03.20 Bank (A) ↑ 1,000
on credit from Ahsan Purchase Return ↑ 1,000
19.03.20 19.03.20 Creditor Ahsan (L) ↓ 500
Business returned goods amounting Rs. 700 which was previously purchased Purchase Return ↑ 500
on credit from Shehroze 19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700
20.03.20 Goods returned to business of Rs. 2,000 which were sold through cheque 20.03.20 Sales Return ↑ 2,000
Bank (A) ↓ 2,000
Goods returned to business of Rs. 1,500 which were sold on credit to Iqbal 23.03.20 Sales Return ↑ 1,500
23.03.20 Debtor Iqbal (A) ↓ 1,500
Goods returned to business of Rs. 1,000 which were sold on credit to Irfan 23.03.20 Sales Return ↑ 1,000
25.03.20 Owner withdrew Rs. 1,000 through Cheque for his personal use. Debtor Irfan (A) ↓ 1,000
25.03.20 Drawings ↑ 1,000
30.03.20 Paid Electricity expense Rs. 2,000 through cheque Bank (A) ↓ 1,000
Required: Prepare relevant books of Prime entry, Post in Ledgers and 30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
summarize a Trial Balance
 Date Description Debit Credit Purchase Day Book
01.03.20 Bank (A) ↑ 500,000 Date Description (Supplier Name) Invoice # Amount
Capital ↑ 500,000
07.03.20 Ahsan # 650 1,500
03.03.20 Office Building (A) ↑ 10,000
Acc. Payable for Building (L) ↑ 10,000 07.03.20 Shehroze # 666 2,000
05.03.20 Purchases ↑ 3,000 3,500
Bank (A) ↓ 3,000 Purchase Return Day Book
07.03.20 Purchases ↑ 1,500
Credit Note Amount
Creditor Ahsan (L) ↑ 1,500 Date Description (Supplier Name)
07.03.20 Purchases ↑ 2,000 Received #
Creditor Shehroze (L) ↑ 2,000 09.03.20 Ahsan # 630 500
11.03.20 Bank (A) ↑ 5,000
Sales ↑ 5,000
09.03.20 Shehroze # 555 700
13.03.20 Debtor Iqbal (A) ↑ 4,500 1,200
Sales ↑ 4,500 Sales Day Book
13.03.20 Debtor Irfan (A) ↑ 3,500 Date Description (Customer Name) Invoice # Amount
Sales ↑ 3,500
18.03.20 Bank (A) ↑ 1,000 13.03.20 Iqbal # 982 4,500
Purchase Return ↑ 1,000 13.03.20 Irfan # 888 3,500
19.03.20 Creditor Ahsan (L) ↓ 500 8,000
Purchase Return ↑ 500 Sales Return Day Book
19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700 Date Description (Supplier Name) Credit Note Amount
20.03.20 Sales Return ↑ 2,000 Issued#
Bank (A) ↓ 2,000
23.03.20 Iqbal # 550 1,500
23.03.20 Sales Return ↑ 1,500
Debtor Iqbal (A) ↓ 1,500 23.03.20 Irfan # 622 1,000
23.03.20 Sales Return ↑ 1,000 2,500
Debtor Irfan (A) ↓ 1,000 General Journal
25.03.20 Drawings ↑ 1,000
Date Description Debit Credit
Bank (A) ↓ 1,000
30.03.20 Electricity Expense ↑ 2,000 03.03.20 Office Building 10,000
Bank (A) ↓ 2,000 Account Payable for Building (XYZ) 10,000
 Date Description Debit Credit Cashbook (Bank a/c)
01.03.20 Bank (A) ↑ 500,000 Date Particulars Dr. Date Particulars Cr.
Capital ↑ 500,000
03.03.20 Office Building (A) ↑ 10,000
01.03.20 Capital 500,000 05.03.20 Purchases 3,000
Acc. Payable for Building (L) ↑ 10,000 11.03.20 Sales 5,000 20.03.20 Sales Return 2,000
05.03.20 Purchases ↑ 3,000 18.03.20 Purchase Return 1,000 25.03.20 Drawings 1,000
Bank (A) ↓ 3,000
07.03.20 Purchases ↑ 1,500
30.03.20 Electricity Exp. 2,000
Creditor Ahsan (L) ↑ 1,500 31.03.20 Bal. c/d 498,000
07.03.20 Purchases ↑ 2,000 506,000 Dr. Nature Balance 506,000
Creditor Shehroze (L) ↑ 2,000
11.03.20 Bank (A) ↑ 5,000
Sales ↑ 5,000
Capital a/c
13.03.20 Debtor Iqbal (A) ↑ 4,500 Date Particulars Dr. Date Particulars Cr.
Sales ↑ 4,500 01.03.20 Bank 500,000
13.03.20 Debtor Irfan (A) ↑ 3,500
Sales ↑ 3,500
31.03.20 Bal. c/d 500,000
18.03.20 Bank (A) ↑ 1,000 Cr. Nature Balance 500,000 500,000
Purchase Return ↑ 1,000
19.03.20 Creditor Ahsan (L) ↓ 500 Office Building a/c
Purchase Return ↑ 500
Date Particulars Dr. Date Particulars Cr.
19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700 03.03.20 Acc. payable 10,000
20.03.20 Sales Return ↑ 2,000 31.03.20 Bal. c/d 10,000
Bank (A) ↓ 2,000
10,000 Dr. Nature Balance 10,000
23.03.20 Sales Return ↑ 1,500
Debtor Iqbal (A) ↓ 1,500
Account payable For Building a/c
23.03.20 Sales Return ↑ 1,000
Debtor Irfan (A) ↓ 1,000 Date Particulars Dr. Date Particulars Cr.
25.03.20 Drawings ↑ 1,000 03.03.20 Office Building 10,000
Bank (A) ↓ 1,000
31.03.20 Bal. c/d 10,000
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000 Cr. Nature Balance 10,000 10,000
 Date Description Debit Credit Purchase a/c
01.03.20 Bank (A) ↑ 500,000
Date Particulars Dr. Date Particulars Cr.
Capital ↑ 500,000
03.03.20 Office Building (A) ↑ 10,000 05.03.20 Bank 3,000
Acc. Payable for Building (L) ↑ 10,000 07.03.20 Total Creditor 3,500 31.03.20 Bal. c/d 6,500
05.03.20 Purchases ↑ 3,000
6,500 Dr. Nature Balance 6,500
Bank (A) ↓ 3,000
07.03.20 Purchases ↑ 1,500
Creditor Ahsan (L) ↑ 1,500 Purchase Return a/c
07.03.20 Purchases ↑ 2,000 Date Particulars Dr. Date Particulars Cr.
Creditor Shehroze (L) ↑ 2,000
11.03.20 Bank (A) ↑ 5,000
18.03.20 Bank 500
Sales ↑ 5,000 31.03.20 Bal. c/d 2,200 19.03.20 Total Creditor 1,700
13.03.20 Debtor Iqbal (A) ↑ 4,500 Cr. Nature Balance 2,200 2,200
Sales ↑ 4,500
13.03.20 Debtor Irfan (A) ↑ 3,500
Sales ↑ 3,500
Sales a/c
18.03.20 Bank (A) ↑ 1,000 Date Particulars Dr. Date Particulars Cr.
Purchase Return ↑ 1,000 11.03.20 Bank 4,500
19.03.20 Creditor Ahsan (L) ↓ 500
Purchase Return ↑ 500
31.03.20 Bal. c/d 13,000 13.03.20 Total Debtor 8,500
19.03.20 Creditor Shehroze (L) ↓ 700 Cr. Nature Balance 13,000 13,000
Purchase Return ↑ 700
20.03.20 Sales Return ↑ 2,000 Sales Return a/c
Bank (A) ↓ 2,000
23.03.20 Sales Return ↑ 1,500
Date Particulars Dr. Date Particulars Cr.
Debtor Iqbal (A) ↓ 1,500 20.03.20 Bank 2,000
23.03.20 Sales Return ↑ 1,000 23.03.20 Total Debtor 2,500
Debtor Irfan (A) ↓ 1,000
25.03.20 Drawings ↑ 1,000
31.03.20 Bal. c/d 4,500
Bank (A) ↓ 1,000 4,500 Dr. Nature Balance 4,500
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
 Date Description Debit Credit
01.03.20 Bank (A) ↑ 500,000 Drawings a/c
Capital ↑ 500,000
Date Particulars Dr. Date Particulars Cr.
03.03.20 Office Building (A) ↑ 10,000
Acc. Payable for Building (L) ↑ 10,000 25.03.20 Bank 1,000
05.03.20 Purchases ↑ 3,000 31.03.20 Bal. c/d 1,000
Bank (A) ↓ 3,000
1,000 Dr. Nature Balance 1,000
07.03.20 Purchases ↑ 1,500
Creditor Ahsan (L) ↑ 1,500
07.03.20 Purchases ↑ 2,000
Creditor Shehroze (L) ↑ 2,000 Electricity Expense a/c
11.03.20 Bank (A) ↑ 5,000 Date Particulars Dr. Date Particulars Cr.
Sales ↑ 5,000
30.03.20 Bank 2,000
13.03.20 Debtor Iqbal (A) ↑ 4,500
Sales ↑ 4,500 31.03.20 Bal. c/d 2,000
13.03.20 Debtor Irfan (A) ↑ 3,500 2,000 Dr. Nature Balance 2,000
Sales ↑ 3,500
18.03.20 Bank (A) ↑ 1,000
Purchase Return ↑ 1,000
19.03.20 Creditor Ahsan (L) ↓ 500
Purchase Return ↑ 500
19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700
20.03.20 Sales Return ↑ 2,000
Bank (A) ↓ 2,000
23.03.20 Sales Return ↑ 1,500
Debtor Iqbal (A) ↓ 1,500
23.03.20 Sales Return ↑ 1,000
Debtor Irfan (A) ↓ 1,000
25.03.20 Drawings ↑ 1,000
Bank (A) ↓ 1,000
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
 Date Description Debit Credit
01.03.20 Bank (A) ↑ 500,000
Individual Ledgers
Capital ↑ 500,000
03.03.20 Office Building (A) ↑ 10,000 Payables Ledgers
Acc. Payable for Building (L) ↑ 10,000
05.03.20 Purchases ↑ 3,000
Bank (A) ↓ 3,000 Creditor Ahsan a/c
07.03.20 Purchases ↑ 1,500 Date Particulars Dr. Date Particulars Cr.
Creditor Ahsan (L) ↑ 1,500 19.03.20 Purchase Return 500 07.03.20 Purchase 1,500
07.03.20 Purchases ↑ 2,000
Creditor Shehroze (L) ↑ 2,000 31.03.20 Bal. c/d 1,000
11.03.20 Bank (A) ↑ 5,000 Cr. Nature Balance 1,500 1,500
Sales ↑ 5,000
13.03.20 Debtor Iqbal (A) ↑ 4,500
Sales ↑ 4,500 Creditor Shehroze a/c
13.03.20 Debtor Irfan (A) ↑ 3,500 Date Particulars Dr. Date Particulars Cr.
Sales ↑ 3,500
18.03.20 Bank (A) ↑ 1,000 19.03.20 Purchase Return 7,00 07.03.20 Purchase 2,000
Purchase Return ↑ 1,000 31.03.20 Bal. c/d 1,300
19.03.20 Creditor Ahsan (L) ↓ 500 Cr. Nature Balance 2,000 2,000
Purchase Return ↑ 500
19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700
20.03.20 Sales Return ↑ 2,000 List of Balance
Bank (A) ↓ 2,000
23.03.20 Sales Return ↑ 1,500 Rs.
Debtor Iqbal (A) ↓ 1,500 Creditor Ahsan 1,000
23.03.20 Sales Return ↑ 1,000
Debtor Irfan (A) ↓ 1,000 Creditor Shehroze 1,300
25.03.20 Drawings ↑ 1,000 Total Creditors 2,300
Bank (A) ↓ 1,000
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
 Date Description Debit Credit
01.03.20 Bank (A) ↑ 500,000
Individual Ledgers
Capital ↑ 500,000
03.03.20 Office Building (A) ↑ 10,000 Receivables Ledgers
Acc. Payable for Building (L) ↑ 10,000
05.03.20 Purchases ↑ 3,000
Debtor Iqbal a/c
Bank (A) ↓ 3,000
07.03.20 Purchases ↑ 1,500 Date Particulars Dr. Date Particulars Cr.
Creditor Ahsan (L) ↑ 1,500 13.03.20 Sales 4,500 23.03.20 Sales Return 1,500
07.03.20 Purchases ↑ 2,000
31.03.20 Bal. c/d 3,000
Creditor Shehroze (L) ↑ 2,000
11.03.20 Bank (A) ↑ 5,000 4,500 Dr. Nature Balance 4,500
Sales ↑ 5,000
13.03.20 Debtor Iqbal (A) ↑ 4,500
Sales ↑ 4,500
Debtor Irfan a/c
13.03.20 Debtor Irfan (A) ↑ 3,500
Sales ↑ 3,500 Date Particulars Dr. Date Particulars Cr.
18.03.20 Bank (A) ↑ 1,000 13.03.20 Sales 3,500 23.03.20 Sales Return 1,000
Purchase Return ↑ 1,000
31.03.20 Bal. c/d 2,500
19.03.20 Creditor Ahsan (L) ↓ 500
Purchase Return ↑ 500 3,500 Dr. Nature Balance 3,500
19.03.20 Creditor Shehroze (L) ↓ 700
Purchase Return ↑ 700
20.03.20 Sales Return ↑ 2,000 List of Balance
Bank (A) ↓ 2,000
23.03.20 Sales Return ↑ 1,500 Rs.
Debtor Iqbal (A) ↓ 1,500
23.03.20 Sales Return ↑ 1,000
Debtor Iqbal 3,000
Debtor Irfan (A) ↓ 1,000 Debtor Irfan 2,500
25.03.20 Drawings ↑ 1,000 Total Debtors 5,500
Bank (A) ↓ 1,000
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
 Date Description Debit Credit Mr. Ahmad
01.03.20 Bank (A) ↑ 500,000
Capital ↑ 500,000 Trial Balance
03.03.20 Office Building (A) ↑ 10,000
Acc. Payable for Building (L) ↑ 10,000
As at 31.03.20
05.03.20 Purchases ↑ 3,000
Bank (A) ↓ 3,000 Particulars Debit (Rs.) Credit (Rs.)
07.03.20 Purchases ↑ 1,500
Creditor Ahsan (L) ↑ 1,500 Bank 498,000
07.03.20 Purchases ↑ 2,000
Creditor Shehroze (L) ↑ 2,000
Purchases 6,500
11.03.20 Bank (A) ↑ 5,000
Purchase Return 2,200
Sales ↑ 5,000
13.03.20 Debtor Iqbal (A) ↑ 4,500 Capital 500,000
Sales ↑ 4,500
13.03.20 Debtor Irfan (A) ↑ 3,500 Office Building 10,000
Sales ↑ 3,500
18.03.20 Bank (A) ↑ 1,000 Sales 13,000
Purchase Return ↑ 1,000
19.03.20 Creditor Ahsan (L) ↓ 500 Sales Return 4,500
Purchase Return ↑ 500
19.03.20 Creditor Shehroze (L) ↓ 700 Drawings 1,000
Purchase Return ↑ 700
20.03.20 Sales Return ↑ 2,000
Account Payable for Building 10,000
Bank (A) ↓ 2,000
23.03.20 Sales Return ↑ 1,500
Electricity Expense 2,000
Debtor Iqbal (A) ↓ 1,500 Total Creditors 2,300
23.03.20 Sales Return ↑ 1,000
Debtor Irfan (A) ↓ 1,000 Total Debtors 5,500
25.03.20 Drawings ↑ 1,000
Bank (A) ↓ 1,000 527,500 527,500
30.03.20 Electricity Expense ↑ 2,000
Bank (A) ↓ 2,000
 Note

Credit Note Debit Note

Issued Received Issued Received

Sales Return Purchase Return Purchase Return Sales Return

Sales Return Dr. Creditor Dr. Creditor Dr. Sales Return Dr.
Debtor Cr. Purchase Return Cr. Purchase Return Cr. Debtor Cr.
5. Which of the following Statements is/are true about Credit note?
(I) Credit note is received on every Returns inwards
(II) Credit note issued implies that the specific amount is no longer
recoverable from Customer

(a) Both are true (b) Only (1) is True

(c) Only (2) is True (d) Both are not true

Answer:
Credit note is issued not received so Statement (1) is not correct. In
Statement (2), when Credit notes are issued it means Sales return
are done which are on credit and now We have Dr. Sales Return &
Cr. Debtor so no amount is owed. So, Only (2) is correct.
Assume: List price of goods is Rs.
90,000. Trade discount is Rs. Business is Seller-Think like a seller
6,000.
Further Cash discount is applied Rs. %
@ 10% of Agreed Price.
List Price 90,000 x
Cash Sales Less Trade/Bargain discount (6,000) x
10 𝑛 Agreed amount 84,000 100%
,
15 40
Less;
Credit Sales Cash discount

‫غم‬ Settlement discount

Early Payment discount
Seller ky liye Prompt Payment discount (8,400) (10%)
Discount allow
krna aik gham hyy Net Amount received 75,600 90%
10
In it, 15 means if customer pays within 15 days, then he is
10 𝑛 𝑛
Credit Terms , allowed 10% Cash Discount & means if Customer doesn’t
15 40 40
want to get cash discount and will not pay within 15 days he
must have to pay in 40 days in all circumstances
List Price:
It is tagged price, No fixed price shop & Bargain option is available
Think like a Seller
Credit Sales Cash Sales
Date Description Dr. Cr. Date Description Dr. Cr.
Credit Sales made Cash Sales made
01.01.19 Debtor (A) ↑ 84,000 01.01.19 Cash/Bank (A) ↑ 84,000
Sales ↑ 84,000 Sales ↑ 84,000
Cash received from Debtors Cash received from Customers immediately
11.01.19 Cash/Bank (A) ↑ 75,600
Debtor (A) ↓ 75600
Discount allowed @ 10% Discount allowed
11.01.19 Discount allowed exp. ↑ 8,400
Debtor (A) ↓ 8,400
If No Discount Hence;
allowed then; Cash (A) ↓ / Bank (A) ↓ • Discount allowed is a Non-Cash expense
As, Cash/Bank is not credited • Trade discount will never be recorded in books
Bank Dr. 84,000 • Trade discount can be on cash sales as well as on
so Discount allowed is
Debtor Cr. 84,000 Credit sales
Non-Cash expense
• Cash discount can only be on Credit Sales.
Other Names of Discount allowed:
Cash discount, Early Payment discount, Settlement discount, Prompt Payment discount
Assume: List price of goods is Rs.
90,000. Trade discount received is Business is Buyer-Think like a Buyer
Rs. 6,000.
Further Cash discount is applied Rs. %
@ 10% of Agreed Price.
List Price 90,000 x
Cash Purchase Less Trade/Bargain discount (6,000) x
10 𝑛 Agreed amount 84,000 100%
,
15 40
Less;
Credit Purchase Cash discount

‫خوشی‬ Settlement discount

Early Payment discount
Business ky liye Prompt Payment discount (8,400) (10%)
Discount receive
krna aik Khushi hy Net Amount Paid 75,600 90%
10
In it, 15 means if Business pays within 15 days, then it is allowed
10 𝑛 𝑛
Credit Terms , 10% Cash Discount & means if Business doesn’t want to get
15 40 40
cash discount and will not pay within 15 days he must have to
pay in 40 days in all circumstances
 Think like a Buyer
Credit Purchases Cash Purchases
Date Description Dr. Cr. Date Description Dr. Cr.
Credit Purchase made Cash Purchases made
01.01.19 Purchases ↑ 84,000 01.01.19 Purchases↑ 84,000
Creditor (L) ↑ 84,000 Cash/Bank (A) 84,000
Cash Paid to creditor ↓
11.01.19 Creditor (L) ↓ 75,600 Cash paid to Suppliers immediately
Cash/Bank (A) 75600
↓
Discount received @ 10% Discount received
11.01.19 Creditor (L) ↓ 8,400
If No Discount Discount Received (O.I) 8,400 Hence;
↑
received Cash (A) ↑ / Bank (A) ↑ • Discount received is a Non-Cash Income
then; As, Cash/Bank is not debited • Trade discount will never be recorded in books
Creditor Dr. 84,000 • Trade discount can be on cash Purchases as well as
so Discount received is
Cash Cr. 84,000 on Credit Purchases
Non-Cash Income
• Cash discount can only be on Credit Purchases.
Other Names of Discount Received:
Cash discount, Early Payment discount, Settlement discount, Prompt Payment discount
Assume business made credit sales; Rs.
List Price 20,000
List Price of goods is Rs. 20,000 with
Expectation of Discount allowed Trade discount (50%) (10,000)
50% Trade discount. Credit terms are Agreed Value 10,000
4 𝑛 Cash discount (4%) (400)
, . Net Value 9,600
25 30

Business expects that discount will not be allowed Business expects that discount will be allowed

Recording of Sales Dr. Cr. Recording of Sales Dr. Cr.

01.01.24 Debtor Dr. 10,000 01.01.24 Debtor Dr. 9,600
Sales Cr. 10,000 Sales Cr. 9,600

In Future when Customer will pay & business will receive In Future when Customer will pay & business will receive

No Discount allowed Discount allowed against Discount allowed as No Discount allowed against
as per expectation expectation of business per expectation expectation of business

28.01.24 Dr. Cr. 20.01.24 Dr. Cr. 28.01.24 Dr. Cr. 20.01.24 Dr. Cr.
Bank Dr. 10,000 Bank Dr. 9,600 Bank Dr. 9,600 Bank Dr. 10,000
Debtor Cr. 10,000 Discount allowed/Sales Dr. 400 Debtor Cr. 9,600 Debtor Cr. 9,600
Debtor Cr. 10,000 Sales Cr. 400
DISCOUNT ALLOWED
This is the discount given by a business to its customers.

Trade discount
This is a definite price reduction given to a customer at the time of sales transaction. The
invoice is issued at the reduced amount so there are no double entry problems caused
by this type of discount. The sales revenue is simply recorded at net (of trade discount)
amount.
For example, an entity sells an item with list price of Rs. 100 to a credit customer who
negotiates 5% discount at the time of transaction, the sales invoice of Rs. 95 shall be
issued and sales revenue of Rs. 95 will be recorded.
Cash discount / Settlement discount / Prompt payment discount
A settlement discount might be offered in order to persuade credit customers to pay earlier. For example, a
cash discount of 4% may be offered to a customer if pays within 10 days, otherwise he will pay full amount
within 30 days that is normal credit term of the business.
It is for the customer to decide whether to take advantage of paying discounted (reduced) amount by
paying early or to take advantage of longer credit period, however, paying the full amount.
Although offering this discount encourages earlier receipt of cash from credit customers, there is still loss of
revenue to the entity (seller’s business).
When a business makes a sale, it does not know whether the customer will take advantage of the
settlement discount or not, therefore, this is dealt in following ways:
(a) Record the revenue for the full amount if the customer is not expected to pay early:
(i) If customer does not pay early as expected, the full amount is due as recorded already.
(ii) If customer pays early and is entitled to discount, recognise the reduction in revenue by
the amount of discount. Reduction in revenue may be recorded by debiting the ‘revenue’
account directly or by debiting ‘discount allowed’ account which is eventually deducted
from sales revenue (similar to sales returns).
(b) Record the revenue for reduced (net of discount) amount if the customer is expected to pay early:
(i) If customer pays early as expected, the net amount is due as recorded already.
(ii) If customer does not pay early as expected, treat the additional amount received as
revenue from original sales transaction.
06. Ali Enterprises (AE) sold goods of Rs. 33,000 to A & Co. on 17th October 2015 to
be paid till the end of October. A & Co. will be entitled to 3% discount if she pays
within 7 days. AE expected that A & Co. will not pay within 7 days but he
actually pays on 22nd October. Then how transactions will be recorded in Books
of AE on 22nd October?
(a) Bank Dr. 32,010 (b) Bank Dr. 32,010
Discount Allowed Cr. 990 A & Co. Cr. 32,010
A & Co. Cr. 32,010
(c) Bank Dr. 32,010 (d) Bank Dr. 33,000
Sales Dr. 990 A & Co. Cr. 33,000
A & Co. Cr. 33,000

Answer:
When we expect that customer will not avail Discount, we recorded this
transaction on Gross Value but if expectation become wrong in Future and
Customer avail the Discount then we record it as Discount Allowed Dr. or as
Less in Sales (Sales Dr.) which is showed in Option C.
 Assume business made credit purchase Rs.
List Price 20,000
List Price of goods is Rs. 20,000 with
Expectation of Discount received Trade discount (50%) (10,000)
50% Trade discount. Credit terms are Agreed Value 10,000
4 𝑛 Cash discount (4%) (400)
, . Net Value 9,600
25 30

Business expects that discount will not be received Business expects that discount will be received

Recording of Purchases Dr. Cr. Recording of Purchases Dr. Cr.

01.01.24 Purchases Dr. 10,000 01.01.24 Purchases Dr. 10,000
Creditor Cr. 10,000 Creditor Cr. 10,000

In Future when business will pay & creditor will receive In Future when business will pay & creditor will receive

No Discount received Discount received against Discount received as per No Discount received as
as per expectation expectation of business expectation per expectation

28.01.24 Dr. Cr. 20.01.24 Dr. Cr.

Creditor Dr. 10,000 Creditor Dr. 10,000
Bank Cr. 10,000 Bank Cr. 9,600
Discount received/
400
Purchases Cr.
DISCOUNT RECEIVED
This is the discount given by a supplier to the business.

Trade discount
This is definite price reduction given by a supplier. The invoice is issued at the reduced
amount so there are no double entry problems caused by this type of discount. The
purchase is simply recorded at net (of trade discount) amount.
Cash discount / Settlement discount / Prompt payment discount
A settlement discount might be offered by a supplier to persuade earlier payment. For example, a cash
discount of 4% may be offered by a supplier if the business pays within 10 days, otherwise full amount will
be paid within 30 days as per normal credit terms.
The purchase and related liability (trade payables) are usually recorded at full cost of the goods. This is in
line with prudence concept, which requires that expenses and liabilities must not be understated.
Then, the purchaser will decide whether or not to take advantage of settlement discount considering his
cash flow position. The subsequent treatment is as follows:
(a) If advantage of settlement discount is not taken, the gross amount is payable to supplier as
already recorded.
(b) If advantage of settlement discount is taken, the differential is recognised as reduction of cost of
purchases. Alternatively, ‘discount received’ may be credited. The ‘discount received’ is netted
off against the cost of purchase of inventory (in accordance with IAS 2).
13. Chatni & Co. has purchased some goods from Bubbloo & Co. at a list price of Rs.
2,000 receiving trade discount of 5%. Supplier has offered a prompt payment
discount of 10% if he receives amount within next twenty days. Chatni & Co. has
expectations of not availing the discount. Bubbloo & Co. received the amount in
five days from the sales’ date through cheque. How should Chatni & Co. record
the payment in books of account.
(a) Bank Dr. 1,710 (b) Bank Dr. 1,900
Discount Allowed Dr. 190 Debtor Cr. 1,900
Debtor Cr. 1,900
(c) Creditor Dr. 1,900 (d) Creditor Dr. 2,000
Bank Cr. 1,710 Bank Cr. 1,900
Purchases Cr. 190 Purchases Cr. 100
Answer: List Price(2,000) – 5% Trade Discount (100) = 1,900 (Gross Value)
Chatni & Co. has not expected so entry would be at Gross amount as:
Purchases Dr. 1,900
Creditor Cr. 1,900
And at Payment date, As we received the discount so now,
Creditor 1,900
Bank Cr. 1,710
05. Which of the following statements are correct?
(I) If the cash discount is expected to be availed, then the purchases are
recognised at discounted amount.
(II) If the payment is expected to be made within the discounted period, then
sales are recognised at discounted amount

a) Only Statement I is correct

b) Only Statement II correct
c) Both are correct
d) None is correct
Source Document are very important for ICAP Paper
Book of prime entry Transactions type Source document
1. Sales day book Records sales of inventory items on credit to Sales invoices
(Sales journal) customers. issued to customers
2. Sales return day book Credit notes
Records items returned by credit customers. issued to customers
(Return inwards journal)
3. Purchases day book Records purchases of inventory items on Purchase invoices
(Purchase journal) credit from suppliers. from suppliers
4. Purchases return day book Credit notes received
Records items returned to credit suppliers. (or debit notes issued)
(Return outwards journal)
5. All cash transactions including cash sales and Cheques, counterfoils,
cash purchases and payment of expenses and bank statements, receipts,
Cash book + Petty cash book etc.
cash transactions with credit customers and
suppliers.
6. Records transactions that are not recorded in Invoice, bill or another
General Journal any of the other books of original entry, authorised document
e.g. non-current asset bought on credit.
ACCOUNTING FOR SALES
Impact on
Document Purpose
double entry?
Before ordering, customers often require a sales quotation for review
1. Sales Quotation in their company. It is created as a proposal of your goods and No
services to a customer.
2. Sales order From the customer placing an order. No
Goods dispatched A notice to the customer to inform them that the goods have been
3. No
note dispatched.
A note that accompanies the goods. (A customer will check this to
4. Delivery note make sure that it agrees with his order and that it is consistent with No
what has actually been delivered.
A request for payment from the customer for goods delivered.
5. Sales invoice Invoices normally show a date, details of transaction and payment Yes
terms.
A document to show the customer the amount still owed at a point in
6. Statement time. It will be the net amount of all invoices issued less cash No
received by the business up to a point in time.
Issued when a customer returns goods and the business agrees to
7. Credit note issued this. The business issues a credit note to acknowledge that the Yes
amount specified is no longer owed to them by the customer.
ACCOUNTING FOR PURCHASES
Impact on
Document Purpose
double entry?
Purchase An item should be requisitioned first if not lying in the stock.
1. No
requisition
Where value of goods exceeds certain limit, quotations are usually
Quotation and
2. obtained from at least three suppliers. Purchase order is then No
approval
initiated after evaluating quotations.
3. Purchase order A document sent by the business to place an order. No
A document produced when goods are received. It is produced after
the goods have been checked against the delivery note and what has
Goods
4. actually been received. The GRN is sent to accounts staff who will No
received note
check that what has been received is what was ordered and that the
invoice agrees with what was received.
A request for payment from the supplier for goods delivered.
5. Purchase Invoice Yes
A document from the supplier to show the amount still owed at a
6. Statement No
point in time.
Credit note Issued by supplier when we return goods or get credit because of
7. damaged goods. Yes
received
ACCOUNTING FOR CASH
The cash book is a book of prime entry and is used to record the receipts of and payments from the
business bank account. The cash book has two sides, a side for receipts of money (debit) and a side for
payments (credit). Both sides have a number of columns so that cash receipts and payments can be
analysed to make it easier to construct journals for double entry.
A business can analyse the amounts received and paid in any way it chooses.

TYPES OF CASH BOOK

There are four basic types of a cash book.
• Single column cash book
• Two column cash book
• Three column cash book
• Petty cash book
Single column cash book
A simple cash book or a single column cash book is just like an ordinary account that carries one amount column on
each side. The left hand side is for recording receipts of Bank and the right hand side is for recording payments of
Bank. It is balanced just like any other ledger account.
Question # 01:
Following are the transactions during 1st month
of 2023 given by Mr. Ahmad Single Column Cashbook (Bank a/c)
Date Transactions Date Particulars Dr. Date Particulars Cr.
Started in business with Rs. 400,000 in 01.01.23 Capital 400,000 03.01.23 Van 100,000
January 01
cheque.
08.01.23 Sales 15,000 07.01.23 Purchases 12,000
Purchased a Van for Rs. 100,000
January 03 09.01.23 Drawings 20,000
through cheque
10.01.23 Rent Expense 15,000
January 07 Bought goods for cheque Rs. 12,000.
31.01.23 Bal. c/d 268,000
Sold goods amounting Rs. 15,000 415,000 Dr. Nature Balance 415,000
January 08
through cheque
Owner withdrew Rs. 20,000 in cheque
January 09
for his personal use. Required:
Paid Rent amounting Rs. 15,000
January 10 Prepare Single Column Cashbook
through cheque
Two column cash book: The double column cash book has two columns i.e. the cash column and the bank column on
both the sides of the cash book. All the cash receipts and cash payments are recorded in the cash columns and all the
deposits in and withdrawals from the bank are entered in the bank columns accordingly.
Question # 02:
Additional transactions only
Two Column Cashbook
Date Transactions Cash Bank Cash Bank
Date Particulars Date Particulars
Owner Invested Rs. Dr. Dr. Cr. Cr.
12.01.23 01.01.23 Capital 400,000 03.01.23 Van 100,000
200,000 in Cash
Bought goods from 07.01.23 Purchases 12,000
Usman amounting 08.01.23 Sales 15,000
15.01.23
Rs. 15,000 and Cash 09.01.23 Drawings 20,000
paid immediately 10.01.23 Rent Expense 15,000
Sold goods on Cash 12.01.23 Capital 200,000 15.01.23 Purchases 15,000
17.01.23 amounting Rs.
17.01.23 Sales 40,000
40,000
19.01.23 Equipment 60,000
Purchased an Office
21.01.23 Drawings 40,000
Equipment
19.01.23 31.01.23 Bal. c/d 125,000 268,000
amounting Rs.
60,000 through Cash 240,000 415,000 Dr. Nature Balance 240,000 415,000
Owner withdrew Rs.
21.01.23 40,000 in cash for his
personal use.
Question # 03: Three Column Cashbook
Additional Discount Bank Discount
transactions only Cash Cash Bank
Date Particulars allowed Date Particulars received
Date Transactions Dr. Dr. Dr. Cr. Cr. Cr.
Purchased goods on 01.01.23 Capital 400,000
credit from Ali 03.01.23 Van 100,000
23.01.23 amounting Rs 60,000 07.01.23 Purchases 12,000
subject to 10% cash 08.01.23 Sales 15,000
discount 09.01.23 Drawings 20,000
Cash paid to Ali 10.01.23 Rent Expense 15,000
25.01.23 amounting Rs 54,000 12.01.23 Capital 20,000
and availed discount 15.01.23 Purchases 15,000
Sold goods on Credit
17.01.23 Sales 40,000
to Iqbal amounting Rs
26.01.23 19.01.23 Equipment 60,000
100,000 subject to 5%
Cash discount 21.01.23 Drawings 40,000
Cash received from 25.01.23 Creditor 6,000 54,000
Iqbal amounting Rs 29.01.23 Debtor 5,000 95,000
27.01.23
95,000 and allowed 30.01.23 Cash 500
discount 31.01.23 Bank 500
Deposit Rs 500 of the 31.01.23 Cash 300
30.01.23 opening cash into the 31.01.23 Bank 300
Bank 31.01.23 Bal. c/d 165,800 268,200
Withdraw Rs 300 out 5,000 335,300 415,500 Dr. Nature Balance 6,000 335,300 415,500
31.01.23 of the Bank and put it
in Cash till
Petty cash Book
Petty cash is cash (notes and coins) held by a business to pay for small items of expense, in
situations where it is more convenient to pay in notes and coin than to pay through the bank
account. Petty cash might be used, for example, to pay for bus fares, taxi fares, tea and coffee
for the office, and so on.
When petty cash transactions take place, for example petty cash is spent on tea and coffee for
the office, the entity needs to record both an expense, and a reduction in the asset “petty cash”.
Imprest system: A very common petty cash system is called the imprest system. Under this
system a set amount is established (say Rs.10,000). This set amount is called the imprest. At any
moment in time, the petty cash balance plus the amounts on invoices and notes should sum to
the imprest. Periodically the invoices are removed and replaced by cash to re-establish the
imprest in cash.
01. Which of the following is/are correct?
(I) Petty cashbook must follow imprest system.
(II) Petty expenses may exceed imprest amount.
a) Only Statement (I) is true b) Only Statement (II) is true
c) Both are true d) Both are not true

Answer: Petty cashbook must follow imprest system. Yes, always a fixed float should be
maintained. Petty expenses can exceed imprest amount.
02. A businessman maintains petty cash book. The imprest amount is Rs. 1,000. During a
month, payments totaling Rs. 400 were made. How much amount will be reimbursed at
the end of the month to restore the petty cash, if business increase the float by 300?
(a) Rs. 400 (b) Rs. 1,300
(c) Rs. 700 (d) Rs. 1,000

Answer:
Payment is Rs. 400 + Increase is Rs. 300 so amount reimbursed will be Rs. 700.
 Additional Mcqz

01. Which of the following is correct?

(I) Purchase order is issued by seller to buyer.
(II) When an invoice is received from a supplier, it should be checked with
goods received note.
Select the most appropriate answer:

a) Only Statement I is correct

b) Only Statement II correct
c) Both are correct
d) None is correct
02. Which of the following statement is correct?
(I) Credit notes issued to customers is the source document for sales day book.
(II) Cheques and counterfoils are the source documents for cashbook.

a) Only Statement I is correct

b) Only Statement II correct
c) Both are correct
d) None is correct
03. Which of the following is correct?
(I) Sales day book total balance is recorded in general Ledger
(II) Sales day book individual balance is recorded in sales ledger

a) Only Statement I is correct

b) Only Statement II correct
c) Both are correct
d) None is correct
04. Which of the following is correct?
(I) General journal is a book of prime entry for all transactions.
(II) Sales day book is a book of prime entry for credit notes issued to customers.

a) Only Statement I is correct

b) Only Statement II correct
c) Both are correct
d) None is correct
05. Hussain runs a business of purchase and sales of furniture. During a particular
period, Hussain made following transactions:
• Sales to A Rs. 12,000 list price and cash discount 5%
• Sales to B Rs. 10,000 list price and trade discount 2%
• Sales returns from A Rs. 3,000
What is the total of sales day book for the period?

(a) Rs. 22,000 (b) Rs. 21,800

(c) Rs. 21,200 (d) Rs. 18,800
Answer:
Sales are always recorded net of Trade discount but not of cash discount.
Total sales = Rs. 12,000 + (Rs. 10,000x0.98) = Rs. 21,800
GENERAL JOURNAL
The general journal (journal for short) is a book of prime entry that is used to record
transactions that are not recorded in any other book of original entry.
The journal might be used to provide a record and explanation of:
• year-end adjustments;
• settlement discounts;
• contra settlement;
• correction of errors; or
• any other adjustment.
In practice, not all entries are recorded in a journal or journalised but of course it is
possible to write a journal for any transaction.
VOUCHERS AS AN ALTERNATIVE TO DAY BOOKS
Voucher is an internal document prepared as proof that a monetary transaction has
occurred between two parties and it is often supported by bill, invoice, copy of cheque,
etc. In business, a voucher can be used for a variety of purposes, sometimes for payment
of cash in a transaction, acting as a receipt, or indicating that an invoice has been
approved for payment.
In practice, especially in computerised accounting systems, voucher system replaces (or
supports) the books of prime entry. Every transaction is recorded on relevant vouchers as
input to accounting system, which produces ledgers, trial balances and other reports
through using automated processes. The voucher systems do vary across different
entities. A practical system might operate as follows to replace the books of prime entry:
A practical system might operate as follows to replace the books of prime entry:

Book of prime entry Transactions type Voucher type

Records sales of inventory items on credit Sales voucher
1. Sales day book
to customers. (or simply a sales invoice).
Records items returned by credit Sales Return Voucher
2. Sales return day book
customers. (or credit notes issued).
Records purchases of inventory items on Purchase voucher
3. Purchases day book
credit from suppliers. (or purchase invoices).
Records items returned to credit suppliers. Purchase return voucher
4. Purchases return day book
(or credit notes received).
All cash transactions including cash sales
and cash purchases and payment of Payment vouchers and
5. Cash book
expenses and cash transactions with credit Receipt vouchers
customers and suppliers.
Records transactions that are not recorded
6. General Journal in any of the other books of original entry, Journal Voucher
e.g. non-current asset bought on credit.
Payment voucher:
Payment can be made after approval of payment voucher supported with bills or other
relevant supporting documents.
Receipt voucher:
Receipt vouchers are prepared to record the cash and cheque receipts and collections in
bank accounts.
Journal voucher (JV):
JV is prepared to evidence the authorization to record non-cash transactions.