3.Recording Transaction in the Books of Prime Entry PDF

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chapter

3

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RecordingTransactionsin theBooksofPrimeEntry Chapter learning objectives  Uponcompletionofthischapteryoushouldbeableto:

•

•

prepareentriesforthebooksofprimeentry,comprising: – daybooks –

thecashbook

–

thejournal

understandthatthebooksofprimeentryarenotpartofthe doubleentryaccountingsystem.

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Recording Transactions in the Books of Prime Entry

1Overview

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2Introduction Inthischapterwedevelopanunderstandingof:

•

howindividualtransactionsarerecorded,classifiedandsummarised forinclusioninthenominalledger

•

thebooksofprimeentry.

3Accounting records Whentherelevantdocument/datasourcehasbeenreceivedbythefinancial accountanttheyhavetomakearecordofitinanappropriateplaceinthe accountingsystem.However,transactionscannotsimplybeenteredintothe financialstatementsfortheshareholders:thereisasystematicaccounting processthathastotakeplacebeforetheresultsfortheyearcanbe summarised.Manycontrolshavetobeappliedtopreventanddetectfraud anderrorbeforethefinalresultscanbeprepared. Theaccountingsystemisalsousedtomonitortheeffectivenessoftheentity andtohelpconcluderelevanttransactions(forexample,many goods/servicesaresoldoncredit,givingthecustomeranumberof days/monthstosettletheirdebt.Creditcontrolrequiresinformationfromthe accountingsystemwithregardtowhohasnotsettledtheirdebtsand,for thatreason,whoneedstobefolloweduptoensurethatpaymentis received). Theflowofinformationfromtheinitialtransactiontothefinancialstatements canbeillustratedasfollows:

94

chapter 3

Books of prime entry Theledgeraccountsofabusinessentityarethemainsourceofinformation usedtopreparethefinancialstatements.However,ifanentityupdatedits ledgerseachtimeatransactionoccurred,theledgeraccountswouldquickly becomeclutteredanderrorsmightbemade.Thiswouldalsobeaverytime consumingprocess. Toavoidthiscomplication,alltransactionsareinitiallylistedinan appropriatebookofprimeentry.Eachbookofprimeentryisalistor summaryoftransactions,themonetaryvalueofwhichisperiodicallytotalled (daily/weeklyetcasrequired)asabasisforinclusionintheledgeraccounts usingtheprinciplesofdoubleentrybookkeeping.Severalbooksofprime entryexist,eachrecordingadifferenttypeoftransactionasfollows: Book of prime entry

Transaction type

Salesdaybook

Creditsales

Purchasedaybook

Creditpurchases

Salesreturnsdaybook 

Returnsofgoodssoldoncredit

Purchasereturnsdaybook

Returnsofgoodsboughtoncredit

Cashbook

Allbanktransactions

Pettycashbook

Allsmallcashtransactions

Thejournal

Alltransactionsnotrecordedelsewhere

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Recording Transactions in the Books of Prime Entry Theprinciplesofrecordingaccountingtransactionsindaybooks,andtheir useforrecordinginformationintheledgeraccounts,isintroducedinthis chapter.

4Sales and purchase day books Sales day book Thesalesdaybooksummarisesthedailysalesmadeoncreditterms(i.e. thegoodsaresoldandpaymentwillbecollectedatalaterdate).Thisday bookdoesnotincludecashsaleswhicharerecordedinthecashbook. Date 

Invoice Customer Ledger Ref 

4.1.X6 4.1.X6 4.1.X6 4.1.X6 4.1.X6

1 2 3 4 5

Jake Bella Fizz Milo Max

RL3 RL18 RL6 RL1 RL12

Totalfor 4.1.X6

Net Sales Gross $  Tax$ $  4,500 4,500 3,000 3,000 2,200 2,200 10,000 10,000 500 500 ––––– –––– ––––– 20,200 20,200

Thetotalsalesforthedayof$20,200willbeenteredintotheaccounting ledgersusingtheprinciplesofdoubleentrybookkeeping.Notethattheday bookwillalsorecordanysalestaxchargedbytheentityonitscreditsales. Purchase day book Thepurchasedaybooksummarisesthedailypurchasesmadeoncredit terms(i.e.thegoodsarepurchasedandpaymentwillbemadeatalater date).Cashpurchasesarerecordedinthecashbook. Date 

Invoice

Supplier

Ledger Ref 

4.1.X6 4.1.X6 4.1.X6 4.1.X6 4.1.X6

34 11 5609 2 577

Harry Ron Hermione Neville  Draco

PL2 PL37 PL12 PL9 PL1

Totalfor4.1.X6

Net SalesGross $  tax$ $ 2,700 2,700 145 145 4,675 4,675 750 750 345 345 –––– –––– –––– 8,615 8,615

Thetotalpurchasesmadeoncreditforthedayof$8,615willbeenteredinto theaccountingledgersindoubleentryformat.Notethatthedaybookwill alsorecordanysalestaxchargedbysuppliersonthepurchasesmadeby theentity.

96

chapter 3 Accountingforsalestaxwillbeconsideredlaterinthispublication.  Ratherthanincludingindividualaccountsforeachsalesorpurchase transactionmadeoncreditinthedoubleentryaccountingsystem,theday booktotalsarepostedintotheappropriate'total'or'control'account.They arenormallyreferredtoasthe'salesledgercontrolaccount'and'purchase ledgercontrolaccount'respectively.Inaddition,separatememorandum records(whicharenotpartofthedoubleentryaccountingsystem)of individualaccountbalancesaremaintainedwhichidentifyamountsowedto theentityfromcreditcustomersina'salesledger'andamountsowedbythe entitytosuppliersina'purchaseledger'.Note–theseledgersmayalsobe referredtoasthe'receivablesledger'or'payablesledger'respectively. Maintenanceofthesalesandpurchaseledgers,alongwiththeir reconciliationandagreementwiththeappropriatecontrolaccounttotal,is dealtwithinasubsequentchapterofthispublication.

5Sales and purchase returns day books Itisnormalforcustomerstoreturnunwantedgoodstothesupplier,perhaps becausetheyhavebeendamagedintransit,orthewronggoodswere delivered.Equallyabusinessentitymayoccasionallyhavereasontoreturn unwantedordamagedgoodstoitssuppliers. Notethatsales returns may also be referred to as 'returns inwards' , whichreflectsthesituationthatgoodshavebeenreturnedintotheentity. Similarly,purchase returns may be referred to as 'returns outwards'to reflectthesituationthatfoodshavebeenreturnedfromtheentity.  Anyreturnsmadetocreditsuppliers(orreturnsreceivedfromcredit customers)arerecordedinseparatedaybooksasillustratedbelow.  Format of the sales returns day book  Date 4.1.X6 4.1.X6 4.1.X6 4.1.X6 4.1.X6 Totalfor4.1.X6

Invoice 1 2 3 4 5

Customer Max Ernie Pat Sam Milo

Ledger Ref RL12 RL2 RL20 RL27 RL1

$  50 450 390 670 2,300 ––––– 3,860

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Recording Transactions in the Books of Prime Entry Format of the purchase returns day book  Date  4.1.X6 4.1.X6 4.1.X6 4.1.X6 4.1.X6

Invoice 112 56 7 890 12

Supplier Harry Cho Fleur Neville Draco

Ledger Ref PL3 PL16 PL2 PL1 PL12

Totalfor4.1.X6

$  600 75 800 50 100 ––––– 1,625

Thetotalsofthepurchasereturnsandsalesreturnsdaybooksfortheday willbeenteredintotheaccountingledgersusingtheprinciplesofdouble  entrybookkeeping. Rememberthatreturnsinwardsfromcustomersandreturnsoutwardsto suppliersareeachnormallyrecordedinitsownbookofprimeentry. However,forentitieswhichhaveveryfewsalesreturnsand/orpurchase returns,theymayberecordedas'negativeamounts'inthesalesdaybook andpurchasedaybookrespectively.

6Worked Example 3.A ABChadthefollowingtransactionsduringthefirstweekofJuly20X2:  1Jul

BoughtgoodsoncreditfromJBcost$1000 SoldgoodsoncredittoJSAfor$800

2Jul

SoldgoodsoncredittoPBfor$80 ReturnedgoodstoJBbecausetheywerefaulty$80

3Jul

BoughtgoodsoncreditfromALcost$600

4Jul 5Jul

JSAreturnedunwantedgoods$200 ReturnedgoodstoAL$120

6Jul 7Jul

SoldgoodsoncredittoCALfor$400 CALreturnedgoodsasunsuitable$120 SoldgoodsoncredittoBCfor$240

Required: Preparethedaybookstorecordthesetransactions.

98

chapter 3 Solution

Date Doc.no 1Jul 3Jul

001 002

Purchases day book Personaldetails Net $ JB 1,000 AL 600 ——— 1,600 ———

Salestax $

—— ——

Gross $ 1,000 600 ——— 1,600 ———

 Date Doc.no 1Jul 2Jul 6Jul 7Jul

101 102 103 104

Sales day book Personaldetails Net $ JSA 800 PB 80 CAL 400 BC 240 ——— 1,520 ———

Salestax $

—— ——

Gross $ 800 80 400 240 ——— 1,520 ———

 Date Doc.no 4Jul 7Jul

901 902

Returns inwards day book Personaldetails Net $ JSA 200 CAL 120 —— 320 ——

Salestax $

—— ——

Gross $ 200 120 —— 320 ——

 Date Doc.no 2Jul 5Jul

9001 9002

Returns outwards day book  Personaldetails Net $ JB 80 AL 120 —— 200 ——

Salestax $

—— ——

Gross $ 80 120 —— 200 ——

Rememberthatwemuststillrecordtheindividualtransactionsinseparate purchaseandsalesledgerstoenableidentificationofamountsowedtothe entityfromindividualcustomersorowedbytheentitytoindividualsuppliers. 

99

Recording Transactions in the Books of Prime Entry

Illustration 1

MrKNPrunsabusinessprovidingequipmentforbakeries.Healways makesanoteofsalesandpurchasesoncreditandassociatedreturns, butheisnotsurehowtheyshouldberecordedintheaccounting records. 1August BKWboughtcaketinspricedat$500fromMrKNP. 1August MrKNPpurchasedequipmentatacostof$2,000from wholesalersTPL. 2August MrKNPreturnedgoodscosting$150toanothersupplier, ICO. 3August JAFbought$1,200worthofequipment. 3August BKWreturned$100worthofthegoodssupplied. 4August VSWboughtanewovenfor$4,000. 5August MrKNPpurchasedbakingtraysatacostof$600from regularsupplierTTI. 8August MrKNPpurchasedovenscosting$10,000fromHSL. 8August MrKNPreturnedequipmentcosting$300toTPL. 9August POApurchasedgoodsatacostof$2,200fromMrKNP. 11August BKWboughtsomeoven proofdishesatacostof$600. Required: Writeupthecredittransactionsenteredintoduringthefirsttwoweeksof August20X6intotherelevantdaybooks. 

Solution to Illustration 1

Sales day book

100

Sales returns day book

Aug

Customer

$  Aug

Customer

1

BKW

3

JAF

1,200 3

4

VSW

4,000



9

POV

2,200



11

BKW

600



––––

––––

8,500

100

500

$  

BKW

100

chapter 3 Purchases day book Aug

Supplier

1

TPL

5

TTI

8

HSL

Purchases returns day book $

 Aug

Supplier

$ 

2,000 2

ICO

150

600 8

TPL

300

10,000



–––––

––––

12,600

450

Extending the use of day books

Theexamplesaboveassumedthatonlysalesoftheentity ’sproducts, andpurchasesofitsgoodsforsaleorrawmaterials,wereenteredinthe daybooks.Thisusedtobethecasewhenmostofanentity's transactionswereingoodsforsale.Nowadays,entitieshaveawide rangeofexpensesandservicestoo,andthedaybookscanbe extendedtocaterforthesealso.Asanexample,considerapurchase daybookthatisusedtorecordalltheentity'spurchasesoncreditas follows. DateDoc. noDetails Purchases Stationery Heat and Motor Sales Total ($) ($) light($) expenses($) tax($) ($) 1Jan 001

ABC

2Jan 002

XYZ

3Jan 003

PQ

4Jan 004

GLM

005

ABC

5Jan 006

XYZ

007

GEL

6Jan 008

RSM

7Jan 009

GGA Totals

1,000

175 1,175 400

70

2,000

470

350 2,350 120

4,000

21

141

700 4,700 200 600 240 400

———

——

——

7,000

600

1000

———

——

——

——

35

235

105

705

42

282

70

470

—— ———

360 1,568 10,528 ——

—— ———

7The cash book Theterm‘cashbook’datesbacktothedayswhenentitiesdealtonlyincash transactions(i.e.notesandcoins).Nowadaysbusinessentitiesrarelydeal incashunlesstheyareretailbusinesses,sotheterm‘cashbook’refersto anybookthatrecordsmoniesreceivedandpaid.

101

Recording Transactions in the Books of Prime Entry Beforeweprogressontodealingwithhowtransactionsarerecordedinthe cashbook,itmaybehelpfultoconsiderthebankingsystemandthe differenttypesoftransactionthatmaypassthroughabankaccount.The importantpointtonoteisthat,irrespectiveofthenatureofsuchtransactions, theyshouldberecordedinthecashbook(abookofprimeentry)priorto postingintothenominalledger(consideredinchapter4).Aknowledgeof banktransactionsmayalsoberelevantwhendealingwithaccounting reconciliations(consideredinchapter9).  The banking system Today’sbankingsystemishighlyautomated,withlargenumbersof transactionsconductedelectronically.However,manyentitiesstilluse chequestomakepayments,andpayinginslipstomakedepositsintotheir bankaccounts.Somecommonmethodsoftransactingbusinessthrougha bankaccountareasfollows:

•

By cheque –Thedrawermakesoutachequetothepersonbeing paid(thepayee).Thechequeisenteredinthedrawer’sledger accountsatonce,andsenttothepayee.Thepayeepaysitintohisown bankaccountsomedayslater,usingapayinginsliptorecordits detailsandthatofotherchequespaidinatthesametime.Thebank clearingsystempassesittothedrawer’sbankforapprovaland payment,withtheresultthatitistakenoutofthedrawer’sbankaccount. Thisisknownas presenting a chequeforpayment.Untilthechequeis acceptedbythedrawer’sbank,itisconsideredtobeuncleared and thebankhastherighttoreturnitasdishonouredifthereissomething amisswithit,orthereareinsufficientfundsinthedrawer ’saccount.The timedelaybetweenmakingoutachequeanditbeingcleareddepends onvariousfactors,suchaspostaldelays,administrativedelays,holiday periodsandsoon.Eachchequehasareferenceorserialnumberby whichitcanbeidentified.

•

By bankers automated clearing system (BACS)–Thisavoidsuse ofthepostalsystemandthewritingofnumerouschequesbycreatinga transferbetweenthebankaccountsofdifferententities.Itisafaster meansofpaymentanditisalsomorecosteffectivewhenthereare regularpaymentstothesamepeople.Theaccountholderproducesa listofthepaymentstobemadeatanyparticulartime.Therearealso specialisedtypesofautomatedpaymentssuitablefortheimmediate transferoffundsbothwithinacountryandonaninternationalbasis.

•

By direct debit or standing order –Theseworkinasimilarmanner toeachother,andaresuitableforregularpaymentstoaparticular person.Thebankmakesthetransferautomatically.

•

By bankinitiated transactions–Thiswillincludetransactionssuch aschargingfeesformaintainingoroperatingabankaccount(bank charges),interestpaidonoverdrawnbalances,interestreceived, chargesfordealingwithdishonouredchequesandsoon.

Anentitymaybothmakeandreceivepaymentsbyanyofthesemethods. 102

chapter 3

The cash book Atitssimplest,thecashbookisnomorethananordinaryledgeraccount, usedtorecordthemovementsinthebankaccount.Someentitiesuseitto recordcashmovementsaswellasbankmovements,byusingtwo‘money ’ columnsoneachsidetodistinguishbetweentransactionsthathavepassed throughthebankaccountandpettycashtransactionsrespectivelyas follows: Receipts Date Details 1Jan

Balanceb/d

4Jan

XYZ

8Jan

Cashsales



 Ref.

Bank ( $)



400

101

200

Payments Cash Date ($) 

Details

50 3Jan ABC

 Ref. 00123

 Bank ($)

Cash ($) 

100

5Jan Wages

20

120 5Jan Office 00124 equipment

300 125

10Jan PQR

102

150

8Jan Advertising 00125

RST

102

170

12Jan Wages

30

103

50

14Jan Cash banked

50

14Jan Cash banked

14Jan Balance c/d

15Jan Balanceb/d

445

70

——

——

——

——

970

170

970

170

——

——

——

——

445

70

Notethattheexampleabove(andinotherpartsofthischapter)thereis referencetobalancec/d(carrieddown)andbalanceb/d(broughtdown).In simpleterms,itreferstothenetbalanceremainingafteranumberof transactionshavebeenrecorded.Youwillcomeacrossthisterminology regularlyinyouraccountingstudiesanditwillbeexplainedinmoredetailin chapter4.

103

Recording Transactions in the Books of Prime Entry Discount columns in the cash book Adiscountisareductionintheamountthatisduetobepaidorreceived betweentwoparties.ConsidertheexampleofXhassoldgoodstoYata valueof$1,000andagreedthatYcouldhaveacreditperiodofthirtydays beforepaymentisdue.XmayofferanincentivetoYtoencouragethemto payearlier,say,adiscountof$100ifYmakespaymentwithintenda...