Contents: 7 sections
Syllabus points
- Identify the books of prime entry and the transactions each one records.
- Explain the source document that feeds each book.
- Post from the books of prime entry to the general, sales and purchases ledgers.
- Explain the purpose of dividing the ledger into three.
The order things happen in
A transaction moves through the system in a fixed order, and questions test whether you know which stage a name belongs to.
- A source document is created: an invoice, a credit note, a cheque counterfoil, a receipt.
- The document is listed in a book of prime entry, which is a list, not a ledger account.
- Totals and individual amounts are posted to ledger accounts using double entry.
- The ledger balances are collected into a trial balance.
The books of prime entry are also called books of original entry or day books. They exist so that hundreds of similar transactions can be summarised before they reach the ledger, which keeps the ledger short and gives one place to look when something needs checking.
The seven books, their documents and their postings
| Book of prime entry | Records | Source document | Posting |
|---|---|---|---|
| Sales journal | Credit sales | Copy sales invoice | Dr each customer, Cr sales with the total |
| Purchases journal | Credit purchases | Purchase invoice | Cr each supplier, Dr purchases with the total |
| Sales returns journal | Returns in | Credit note issued | Cr each customer, Dr sales returns |
| Purchases returns journal | Returns out | Credit note received | Dr each supplier, Cr purchases returns |
| Cash book | All bank and cash | Paying-in slip, cheque counterfoil, receipt | Both a book of prime entry and a ledger account |
| Petty cash book | Small cash payments | Petty cash voucher | Cr petty cash, Dr the expenses |
| The journal | Everything else | Various | As stated in the entry |
Two entries in that table need care.
The cash book is unusual: it is a book of prime entry and a ledger account at the same time. Its balance is the bank or cash figure, so it appears in the trial balance directly. No other book of prime entry does.
The journal is the catch-all for anything the other six do not cover: opening entries, the purchase and sale of non-current assets on credit, correction of errors, year-end adjustments, transfers between accounts, and writing off irrecoverable debts. If a transaction is not a credit sale, a credit purchase, a return or a cash movement, it goes here.
Cash sales do not touch the sales journal
Only credit transactions go in the sales and purchases journals. A cash sale goes straight into the cash book. This trips up more candidates than any other point in the topic, because "sales journal" sounds as though it should hold all sales.
The three ledgers
| Ledger | Also called | Contains |
|---|---|---|
| Sales ledger | Receivables ledger, debtors ledger | A personal account for every credit customer |
| Purchases ledger | Payables ledger, creditors ledger | A personal account for every credit supplier |
| General ledger | Nominal ledger | Every other account: sales, purchases, expenses, assets, capital, and the control accounts |
Dividing the ledger this way does four useful things: it lets several people work at once, it keeps customer and supplier detail out of the main ledger, it makes fraud harder because the control account is kept by someone other than the clerk, and it means the balance owed by any one customer can be found immediately.
Trade discount and cash discount
Both appear on invoices, and they behave completely differently.
- Trade discount is deducted before the invoice total is recorded. It never appears anywhere in the books. A list price of $1 000 with 20% trade discount is entered as $800, full stop.
- Cash discount, also called settlement discount, is for paying promptly. It is recorded, as discount allowed (an expense) or discount received (an income), and it appears in the discount columns of the cash book.
So trade discount reduces the sales figure; cash discount does not.
Common mistakes
- Putting cash sales in the sales journal.
- Calling a book of prime entry a ledger, or saying the sales journal is part of double entry. The journals are lists; the double entry happens when they are posted.
- Recording trade discount as an expense.
- Forgetting that the cash book is both a book of prime entry and a ledger account.
- Posting the total of the sales journal to each customer as well as to sales, so the entry is doubled.
- Saying credit notes go in the sales or purchases journal. They go in the returns journals.