Principles

of Accounts
BOOKS OF
ORIGINAL ENTRY
Recording Returns and Cash Transactions
Learning Outcomes:

In this lesson, you will learn how to:

● Use source documents to make entries into the purchases
and sales returns books
● Record and document debit notes
● Use source documents to make entries in a cash book
● Prepare three-column cash books

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Introduction to Returnd Outwards and
Return Inwards Books

Goods are returned to their supplier for a number of

reasons, for example:
● Goods were found to be damaged on receipt.
● The wrong goods were sent out by supplier.
● Goods were received too late so that the “sell by”
date had been exceeded.

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Credit Notes

Credit notes are documents used to

record the amount to be deducted
when goods are returned. The most
commonly used source document for
returns is a credit note.

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Credit Notes

0091

Refunded due to damages you observed upon receipt

Credit Notes

Credit notes are used in the following ways:

● In the Return Outwards book:
○ Where goods are returned to a supplier that were previously
purchase on credit.
○ In this case, a business returns goods to the supplier and then
receives a credit note from the supplier.
○ This credit note will state how much can be deducted from the
amount due as shown on the purchase invoice.
○ The credit notes received are used to prepare the returns outwards
book

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Credit Notes

Credit notes are used in the following ways:

● In the Return Inwards book:
○ Where goods are returned by a customer that were previously sold
to that customer on credit.
○ In this case, the business selling the goods would send a credit
note to the customer.
○ This credit note will state how much can be deducted from the
amount due as shown on the sales invoice.
○ Copies of the credit notes sent are used to prepare the returns
inwards book

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Credit Notes

The Return Outwards book:

● A book of original entry listing all goods
returned to a company’s credit suppliers.

The Return Inwards book:

● A book of original entry listing all goods
returned by a company’s credit customers.

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Debit Notes

Debit notes are documents used to

record details of goods being
returned to a supplier and the
amount to be subtracted form the
total due. Just occasionally a debit
note could be used as evidence of
returns
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Debit Notes

00578
1240091

$
Debit Notes
Debit notes are issued under the following
situation:
● When a business has received faulty goods and issues a debit
note to the supplier to request a reduction in the amount due
● In this situation, no entries are to be made in the books of
accounts of the business until a credit note is received from the
supplier.
● In other words, the credit note is the key source document
● A business might receive a debit note from a customer who is
returning goods .
● The business would use the debit note to make entries in its
returns inwards book

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Summary: Source Document and
Returns

Transaction to be recorded in the Most commonly used Book of orignal

accounts of a business source document entry
Return outwards This business returns goods Credit note received from Returns outwards
to a supplier the supplier book

Return inwards A customer returns goods to Copy of credit note issued Returns inwards
the business to the customer book
Preparing Returns Books
Returns books are the first record in the accounting system of details shown
on credit notes. The precess is similar to that for the purchases and sales
books.
● Returns books list details in date order.
● The amount of the return is shown net of any trade discount.
● The entries are totaled at regular intervals.
● Only returns on goods previously purchased or sold on credit are
recorded. In other words, no cash transactions are recorded in these
books.

● The details are used to make double-entry records in the ledger accounts
of the business.

● The foilio columns are completed (with reference to the ledger and the
account number) when the details are posted to the ledger accounts

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Preparing Returns Outwards Books
Sophia owns a wholesale business. During March 2019 the following transactions occurred:
● March 8: Returned damaged goods to a supplier, BTL Manufacturing and received a
credit note (number 473) for total value of $780
● March 13: Returned faulty goods to PCP Ltd, invoice which had a list price of $600
but on which a trade discount of 25% had been deducted, and received a
credit note (number T1007) for $450
Here is the return outwards book recording these transactions

RETURNS OUTWARDS BOOK Page 3

Credit note Amount

Date Supplier number Folio due
$

March 8 BTL Manufacturing 473 780

13 PCP Ltd T1007 450

Total returns outwards 1 230

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Preparing Returns Inwards Books
Sophia owns a wholesale business. During March 2019 the following additional transactions
occurred:
● March 20: Issue a credit note (number B83) to Rockfort Retail Ltd for goods returned
by its customer with a total value of $370
● March 27: Issue a credit note (number B84) to Trent Stores Ltd, for goods that had
been sold at a list price of $960 less a trade discount of 20%
Here is the return inwards book recording these transactions

RETURNS INWARDS BOOK Page 4

Credit note Amount

Date Customer number Folio due
$

March 20 Rock Retail Ltd B83 370

27 Trent Stores Ltd B84 768

Total returns inwards 1 138

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The Three-Column Cash Book
● The book of original entry used for recording cash
transactions is called the cash book.
● It records information information taken from source
documents.
● Its sets transactions out in date order for posting to
the ledger accounts.
● A three-column cash book includes column to record
receipts and payments affecting both cash and bank
accounts of the business
● It also has additional columns to record cash
discounts.
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The Three-Column Cash Book
● The discount columns are not part of the double-entry
records of cash and discounts.
● They are simply a convenient place for the first records
of any discount involved in a transaction by the cashier.
● The cashier is the one member of the account team who
knows whether a discount was claimed or given.
● Discounts columns are an example of what is often
refered to as ‘memorandum’ means note of something
to remembered
● A cash book is both a book of original entry and also a
ledger for the two accounts, Cash and Bank.

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The Three-Column Cash Book:
Contra Entry
Contra entry: this is where records
are made in the cash book of cash
transferred to bank, or cash
withdrawn from the bank for company
use. Contra entries are indicated by a
letter ‘C’ in the folio column.

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The Three-Column Cash Book:
A Worked Example
● Anita owns a retail business.
● Her suppliers offer a cash discount for prompt payment,
and she offers her credit customers a cash discount if
they settle their accounts promptly.
● Her accounting system includes a three-column cash
book.
● On 1 September 2019, page 11 of her cash book
showed opening balances of $635 in hand and $4838
cash at bank.
● During the first week of September the following
transactions occurred (see next slide)
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The Three-Column Cash Book:
A Worked Example
Date Source Document Transactions

Sept 1 Cheque counterfoil Payment of supplier, MNH Supplies, $1 140 in full settlement
of the amount due, $1 200

2 Paying-in slip counterfoil Cheque received from credit customer, K Anson, for $780, in
full settlement of the amount due, $800

3 Cash receipt in respect Payment for general expenses, $82

of sundry purchases

4 Bank statement Bank charges for month totaling $73

5 Cash register roll Cash sales of $1 884

6 Paying-in slip counterfoil Cheque received from credit customer, Leo Adams. Leo
Adams owed $1 200 at this date. The Cheque was in full
settlement of this amount less a 2.5% cash discount.

7 Cheque counterfoil Payment of supplier, Island Traders Ltd. This company was
owed $2 600 on this date. The amount was settled in full less
a 5% cash discount

8 Paying-in slip counterfoil Cash banked, $1 500

 The Three-Column Cash Book:
A Worked Example
Dr CASH BOOK Cr

Date Details Folio Discount Cash Bank Date Details Folio Discount Cash Bank
allowed received

$ $ $ $ $ $

Sept 1 Balances b/d 635 4 838 Sept 1 MNH 60 1 140

Supplies

2 K Anson 20 780 3 General 82

expenses
5 Sales 1 884 4 Bank 73
Charges
6 Leo 30 1 170 7 Island 130 2 470
Adams Traders Ltd

7 Cash C 1 500 7 Bank C 1 500

50 190
Additional Notes
● The discount allowed columns appears on the left-hand
side of the cash book as it needs to be alongside the
columns where money received from credit customers
is recorded.
● The discount received columns appears on the right-
hand side of the cash book as it needs to be alongside
the columns where payments to credit suppliers are
recorded .
● Discounts columns are totaled at regular intervals.
These totals are used to update the discount accounts
in the general ledger.

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Additional Notes
● The transactions involving discounts are presented in
two different ways: on the 1st and 2nd of September the
amount of payment/receipt and the amount of the
discount are given.
● There are no calculations involved; however, on the 6th
and 7th of September, the amount of the discount and
the amount actually paid/received have to be
calculated

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Additional Notes
● When cash is transferred to the bank (as on 7th of
September) or cash withdrawn from the bank (for
company use), the complete double entry for the
transaction is recorded within the cash book.
● To indicate that this has happened, a C (for contra
entry) is entered in the folio column.
● As usual, the folio column entries are made when
information is posted to the ledger accounts.
● The only exception is the contra entry on the 7th of
September.

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Summary Points

● Debit notes are not often encountered.

● As well as being issued to prompt the receipt of a credit

note, they (debit notes) are sometimes issued by a
business to correct underchsrge on an invoice issued to a
customer.
● Be sure to fully explain the circumstances under which a
credit and debit note is issued to a customer/supplier.
● You should also be able to demonstrate and explain the
process that leads to the receipt of a credit note from a
supplier.

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Summary Points
● Be sure to demonstrate and explain the purpose of
drafting and completing the three-column cash book and
understand the purpose of all columns included therein.
● Note and explain the concept of a ‘memorandum record’
in a three column cash book and explain the type of
entries that may requires such notation.
● Explain and demonstrate the correct way and purpose of
entering a letter ‘C’ in the folio column of a cash book for
certain transactions.

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