Books of Original Entry PDF

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PRINCIPLES OF DOUBLE ENTRY BOOK-KEEPING AND BOOKS OF ORIGINAL ENTRY SOURCE DOCUMENTS The role of source documents Business transactions are recorded on source documents. Examples include sales and purchase orders, invoices and credit notes. Types of source documents Documents used to record the business transactions in the 'books of account' of the business include the following. (a) Quotation. A document sent to a customer by a company stating the fixed price that would be charged to produce or deliver goods or services. Quotations tend to be used when businesses do not have a standard listing of prices for products. (b) Purchase order. A document of the company that details goods or services which the company wishes to purchase from another company. (c) Sales order. A document of the company that details an order placed by a customer for goods or services. The customer may have sent a purchase order to the company from which the company will then generate a sales order. (d) Goods received note. A document of the company that lists the goods that a business has received from a supplier. (e) Goods dispatched note. A document of the company that lists the goods that the company has sent out to a customer. The company will keep a record of goods dispatched notes in case of any queries by customers about the goods sent. (h) Credit note. A document sent by a supplier to a customer in respect of goods returned or overpayments made by the customer. It is a 'negative' invoice. This is discussed further below. (i) Debit note . A document sent by a customer to a supplier in respect of goods returned or an overpayment made. It is a formal request for the supplier to issue a credit note. (j) Remittance advice. A document sent to a supplier with a payment, detailing which invoices are being paid and which credit notes offset. A remittance advice allows the supplier to update the customer's records to show which invoices have been paid and which are still outstanding. It also confirms the amount being paid, so that any discrepancies can be easily identified and investigated.

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(k) Receipt. A document confirming confirmation that a payment has been received. This is usually in respect of cash sales, e.g a till receipt from a cash register. This is discussed further below. (l)Invoices An invoice relates to a sales order or a purchase order. a) When a business sells goods or services on credit to a customer, it sends out an invoice. The details on the invoice should match the details on the sales order. The invoice is a request for the customer to pay what they owe. b) When a business buys goods or services on credit it receives an invoice from the supplier. The details on the invoice should match the details on the purchase order. The invoice is primarily a demand for payment, but it is used for other purposes as well, as we shall see. BOOKS OF PRIME ENTRY The need for books of prime entry In the course of business, source documents are created. It needs to keep records of source documents – of transactions – so that it knows what is going on. Such records are made in books of prime entry. Books of prime entry are books in which we first record transactions. The main books of prime entry are as follows. (a) Sales day book (b) Purchase day book (c) Sales returns day book (d) Purchase returns day book (e) Journal (described in the next chapter) (f) Cash book (g) Petty cash book Sales and purchase day books Invoices and credit notes are recorded in day books. The sales day book The sales day book is the book of prime entry for credit sales. The sales day book is used to keep a list of all invoices sent out to customers each day. An extract from a sales day book might look like this.

The purchase day book A business also keeps a record in the purchase day book of all the invoices it receives. The purchase day book is the book of prime entry for credit purchases.

The purchase day book records other people's invoices The sales returns day book When customers return goods for some reason, a credit note is raised. All credit notes are recorded in the sales returns day book. An extract from the sales returns day book follows.

The sales returns day book is the book of prime entry for credit notes raised. The purchase returns day book Not surprisingly, the purchase returns day book records credit notes received in respect of goods which the business sends back to its suppliers.

The purchase returns day book is the book of prime entry for credit notes received from suppliers. Cash book The cash book may be a manual record or a computer file. It records all transactions that go through the bank account. The cash book The cash book is also a day book, used to keep a record of money received and money paid out by the business. The cash book deals with money paid into and out of the business bank account. This could be money received on the business premises in notes, coins and cheques, subsequently paid into the bank. There are also receipts and payments made by bank transfer, standing order, direct debit and bank interest and charges, directly by the bank. Many businesses have two distinct cash books – a cash payments book and a cash receipts book. Some cash, in notes and coins, is usually kept on the business premises in order to make occasional payments for odd items of expense. This cash is usually accounted for separately in a petty cash book. The cash book is the book of prime entry for cash receipts and payments. Types of cash books 1. Single / one column Cash Book It has only one money column on both debit and credit side – to record cash transactions Example: cash book At the beginning of 1 September, Robin Plenty had $900 in the bank. During 1 September 20X7, Robin Plenty had the following receipts and payments. (a) Cash sale: receipt of $80 (b) Payment from credit customer Hay $400 less discount allowed $20 (c) Payment from credit customer Been $720 (d) Payment from credit customer Seed $150 less discount allowed $10 (e) Cheque received from Len Dinger $1,800 to provide a short-term loan (f) Second cash sale: receipt of $150 (g) Cash received for sale of machine $200 (h) Payment to supplier Kew $120 (i) Payment to supplier Hare $310 (j) Payment of telephone bill $400 (k) Payment of gas bill $280

(l) $100 in cash withdrawn from bank for petty cash (m) Payment of $1,500 to Hess for new plant and machinery Generate the cash book? If you look through these transactions, you will see that seven of them are receipts and six of them are payments. 2. Double / Two column cash book The double column cash book (also known as two column cash book) has two money columns on both debit and credit sides – one to record cash transactions and one to record bank transactions. In other words, we can say that if we add a bank column to both sides of a single column cash book, it would become a double column cash book. The cash column is used to record all cash transactions and works as a cash account whereas bank column is used to record all receipts and payments made by checks and works as a bank account. Both the columns are totaled and balanced like a traditional T-account at the end of an appropriate period which is usually one month. Since a double column cash book provides cash as well as bank balance at the end of a period, some organizations prefer to maintain a double column cash book rather than maintaining two separate ledger accounts for recording cash and bank transactions. Format

Important points to remember while making entries in a double column cash book Recording cash transactions:

1. All cash receipts are recorded in cash column on the debit side and all cash payments are recorded in cash column on credit side of the double column cash book. 2. If cash is received from a debtor or customer and is deposited into the bank account on the same date, the entry will be made in the bank column on the debit side, not in the cash column. Recording bank transactions: 1. When a check is received and the same is deposited into the bank account on the same date, the amount of the check is entered in the bank column on the debit side. 2. When a check is received and the same is not deposited into the bank on the same date, the amount of the check is entered in the cash column, not in the bank column. 3. When a check received from a receivable on a date subsequent to its receipt is deposited into the bank account, the entry is made in the bank column on the debit side and in the cash column on credit side. It is called a contra entry. 4. When a check is issued, the amount of the check is entered in the bank column on the credit side. Recording contra entries: The “contra” is a Latin word which means against or opposite. The contra entry is an entry which involves a cash account and a bank account and which is recorded on both debit and credit sides of the double column cash book at the same time. This entry is not posted to any ledger account because both debit and credit aspects of transaction are handled within the cash book and the double entry work is completed. A contra entry is made in the following circumstances: (1). When cash is deposited into the bank account: The entry for depositing cash into the bank account is: Bank [Dr] Cash [Cr] The deposited amount is written in the bank column on debit side and cash column on credit side. (2). When cash is withdrawn from bank account for business use:

The entry for withdrawal of cash from bank account for business purpose is: Cash [Dr] Bank [Cr] The withdrawn amount is written in the cash column on debit side and bank column on credit side. Important: The contra entry is made only when the cash is withdrawn for business use. If cash is withdrawn for personal use, it will be recorded only in the bank column on credit side of the cash book. (3). When a check received from a receivable or customer on a date subsequent to its receipt is deposited into the bank account: When a check is received and is not deposited into the bank account on the same date, it is recorded in the cash book just like a normal cash receipt. On a subsequent date, when the check is deposited into the bank account, the following entry is made: Bank [Dr] Cash [Cr] The amount of the check is recorded in the bank column on debit side and cash column on credit side. Balancing and posting a double column cash book Both cash column and bank column of double column cash book are totaled and balanced at the end of an appropriate period. The process of balancing and posting a cash book has been explained in detail in single column cash book article. The same process is also applicable to a double column cash book. The following example summarizes the whole explanation given above. Example The Edward Company uses a double column cash book to record its cash and bank related transactions. It engaged in the following transactions during the month of March 2018: March 01: Cash balance $1,450 (Dr.), bank balance $1,500 (Dr.). March 02: Paid Mark & Co. by check $120. • March 04: Received from John & Co. a check amounting to $400. • March 05: Deposited into bank the check received from John & Co. on March 04. • •

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March 08: Purchased stationary for cash, $25. March 12: Purchased merchandise for cash, $525. March 13: Sold merchandise for cash, $1,800. March 15: Cash deposited into bank, $850. March 17: Withdrew from bank for personal expenses, $40. March 19: Issued a check for merchandise purchased, $630. March 20: Drew from bank for office use, $150. March 22: Received a check from Peter & Co. and deposited the same into bank immediately, $880. March 25: Paid a check to Daniel Inc. for $270. March 26: Bought furniture for cash for office use, $175. March 28: Paid office rent by check, $120. March 29: Cash sales, $650. March 30: Withdrew from bank for office use, $145. March 31: Paid salary to employees by check, $300.

Required: Record the above transactions in a double column cash book and post entries therefrom into relevant ledger accounts. Solution

3. Triple / Three Column Cash Book The Cash Book that has three columns for discount received and paid, cash transactions and bank transactions is called Three Column Cash Book. Explanation The three column cash book (also known as triple column cash book) has three money columns on both debit and credit side – one on each side for recording discount, cash and bank amounts. If a business keeps a bank account and receipts and payments are frequently made through bank account than it is useful to maintain a three column cash book rather than a single column cash book or a double column cash book.

It is the custom of the business houses that discount is allowed and received for early payments of dues. If cash is paid early, creditors may allow a discount. On the other hand, if debtors pay early, a discount may be allowed to them. It may be noted that cash and discount are related to each other that’s why discount columns are also provided in Cash Book. Thus in three column cash book, three columns for amount are provided on each side. One column is used to record cash receipts and payments, the second column is provided to record banking transactions and in third column discount received and discount allowed are recorded. Where, the single and double column cash books are alternatives to a cash account, the three column cash book serves the purpose of cash as well as bank account. Some key points regarding discount columns Following are some key point regarding discount columns of triple column cash book: 1. Discount allowed column is provided on debit side and discount received column is drawn on credit side. 2. Discount Allowed and Discount received columns represent two different accounts. They have no relationship with each other. 3. Discount columns are memorandum columns in nature. Therefore, two sperate account, Discount Allowed” and “Discount Received” are opened is ledger. 4. Since there is no relationship between discount allowed and discount received, that’s why they are not balanced. Both columns are separately totaled and aggregate is transferred to ledger accounts. Format of Tripple /Three Column Cash Book The common format of three column cash book is given below:

Hints for recording in three/triple column cash book

Remember the following points while recording entries in a three column cash book: (1). Opening balance: The opening balance of cash in hand and cash at bank are recorded on the debit side in cash and bank column respectively. If the bank balance is a credit balance (overdraft) then it is entered on the credit side in the bank column. (2). Receipt of check or cash: If a check is received and is deposited into bank account on the same date, it will appear on the debit side on the cash book in bank column. If the check is not deposited into bank on the same date, the check is treated as cash and therefore the amount will appear in cash column. The receipt of cash is recorded in the cash column in usual manner. (3). Payment by check or cash: If payment is made by check, it will be recorded in the credit side in the bank column because the cash at bank is decreased. If the payment is made in cash, it will be recorded in cash column in usual manner. (4). Bank charges: Bank charges are recorded on the credit side of cash book in bank column because cash at bank is decreased as a result of such charges. What are Contra entries? If an entry is made on the debit side and the same entry is recorded on the credit side of the cash book, it is called a “contra entry“. In order to distinguish the contra entries from other entries, letter “C” is put in posting reference column against these entries on both debit and credit sides of the cash book. Letter “C” shows that the contra effect of this transaction is recorded on the opposite side. Contra entries may be of the following types: 1. When cash is deposited into bank by the office two entries are required, one on the credit (payment) side in the cash column to record the reduction in cash in hand and the other on the debit (receipt) side in the bank column to record the increase in cash at bank. 2. When cash is withdrawn from bank for office use, two entries are needed, one on the credit side in the bank column to record the reduction of cash at bank and the other on the debit side in the cash column to record the increase in cash in hand. 3. It has already been explained that when a check is received and not deposited into bank on the same date, the amount will be recorded on the debit side in the cash column. When the same check is deposited into bank account on another date, two entries are required, one on the debit side in the bank column to record the increase in amount at bank and the other on the credit side in the cash column to record the cash (check) paid into bank.

Balancing the three column cash book Whenever it is desired to ascertain the bank balance, the bank columns are totaled on both sides. If debit column is bigger than the credit column, the difference represents cash at bank. If, on the other hand, credit column is bigger than the debit column, the difference represents “overdrawn balance”. Bank account may have an overdrawn balance because by arranging an overdraft with the bank, it is possible that more money may be withdrawn from the bank than what has been deposited. The cash columns are balanced as usual. The discount columns are just totaled and not balanced. Posting three column cash book to ledger accounts The method of posting a three column cash book into ledger is as follows: 1. The opening balances of cash book are not posted. 2. Contra entries are not posted because the double entry accounting for these transactions is completed within the cash book. 3. All items on the debit side of the cash book are posted to the credit of respective accounts in the ledger. 4. All items on the credit side of the cash book are posted to the debit of respective accounts in the ledger. 5. The total of discount column on the debit side is posted to the debit of discount allowed account and the total of discount column on credit side is posted to the credit of discount received account in the ledger. Example The John trading company has undertaken the following transactions during the month of May 2016. Year: 2016 May 01: Cash balance $2,200, bank overdraft $365. May 03: Paid J & Co. by check $1,200, discount received from him $15. May 05: Received from A & Co. a check for $980, discount allowed to them $20. May 07: Deposited into bank the check received from A & Co. on May 05. May 10: Purchased stationary for cash, $150. May 15: Purchased merchandise for cash, $1,300. May 15: Cash sales for the first half of the month, 2,350. May 16: Deposited into bank $1,600. May 18: Cash withdrawn from bank for personal expenses $150. May 19: Issued a check for merchandise purchased, $1,650. May 21: Drew from bank for office use, $650. May 24: Received a check from S & Sons and deposited the same into bank, $1,560. May 25: Paid a check to Ali Inc. for $400 and received a discount of $15.

May 27: Bought furniture for cash for office use, $390. May 29: Paid office rent by check, $450. May 30: Cash sales for the second half of the month $4,300. May 31: Paid salaries by check $1,760. May 31: Withdrew from bank for office use $1,470. Required: Record the above transactions in a three/triple column cash book. Solution

Petty cash Most businesses keep petty cash on the premises, which is topped up from the main bank account. Under the imprest system, the petty cash is kept at an agreed sum, so that each topping up is equal to the amount paid out in the period. What is petty cash?

Most businesses keep a small amount of cash on the premises to make occasional small payments in cash, eg staff refreshments, postage stamps, to pay the office cleaner, taxi fares, etc. This is often called the cash float or petty cash account. The cash float can also be the resting place for occasional small receipts, eg cash paid by a visitor to ma...