Books of prime entry
Books of prime entry (also called original books) are the first place where business transactions are recorded. They act as a filter, organizing raw data before it is posted to the ledger accounts. This two-step process ensures accuracy and efficiency.
There are seven main books:
- Cash Book: Records all cash and bank transactions.
- Petty Cash Book: Records small, routine cash payments.
- Sales Journal: Records credit sales of goods.
- Purchases Journal: Records credit purchases of goods.
- Sales Returns Journal: Records goods returned by customers.
- Purchases Returns Journal: Records goods returned to suppliers.
- General Journal: Records non-routine transactions (e.g., opening entries, corrections, depreciation).
Why use them?
- Efficiency: Instead of posting every single transaction individually to the ledger, we post totals from these journals. This saves time.
- Specialization: Different books handle different types of transactions, reducing errors.
The cash book is unique because it serves two roles:
- Book of Prime Entry: It records the original details of cash/bank transactions.
- Ledger Account: It acts as the Bank and Cash accounts in the ledger itself.
Because it is a ledger account, the cash book must always balance (Debits = Credits). The 'Bank' column and 'Cash' column are effectively two separate ledger accounts within one book.
Trade Discount
- Definition: A reduction in the list price of goods, usually given for bulk purchases or as a trade allowance.
- Treatment: It is ignored in the books of prime entry and ledger. Transactions are recorded at the net amount (List Price minus Trade Discount).
Cash Discount
- Definition: A reduction in price offered to encourage early payment of an account (e.g., '2/10 net 30' means 2% discount if paid within 10 days).
- Treatment: It is recorded separately.
- Discount Allowed: Given to customers (Expense). Recorded in the General Journal or a specific Discount Allowed column in the Cash Book.
- Discount Received: Received from suppliers (Income). Recorded in the General Journal or a specific Discount Received column in the Cash Book.
1. Sales Journal (Credit Sales)
- Records: Credit sales of goods only.
- Format: Date, Customer Name, Invoice Number, Amount.
- Posting to Ledger:
- Individual customer amounts are posted to the Debit side of their respective Trade Receivable accounts in the Sales Ledger.
- The Total of the journal is posted to the Credit side of the Sales Account in the General Ledger.
2. Purchases Journal (Credit Purchases)
- Records: Credit purchases of goods only.
- Format: Date, Supplier Name, Invoice Number, Amount.
- Posting to Ledger:
- Individual supplier amounts are posted to the Credit side of their respective Trade Payable accounts in the Purchases Ledger.
- The Total of the journal is posted to the Debit side of the Purchases Account in the General Ledger.
3. Sales Returns Journal (Returns Inwards)
- Records: Goods returned by customers.
- Posting to Ledger:
- Individual amounts are posted to the Credit side of the respective customer's account.
- The Total is posted to the Debit side of the Sales Returns Account in the General Ledger.
4. Purchases Returns Journal (Returns Outwards)
- Records: Goods returned to suppliers.
- Posting to Ledger:
- Individual amounts are posted to the Debit side of the respective supplier's account.
- The Total is posted to the Credit side of the Purchases Returns Account in the General Ledger.
5. Cash Book (Cash and Bank)
- Records: All receipts and payments via cash, cheque, debit/credit card, and online transfers.
- Format: Two columns for Debits (Receipts) and two for Credits (Payments). Each side has 'Details' and 'Amount'. Often includes a 'Discount' column.
- Posting to Ledger:
- Individual items in the 'Details' column are posted to specific ledger accounts (e.g., Rent, Salaries).
- The Total of the Discount Allowed column is posted to the Debit side of the Discount Allowed Account.
- The Total of the Discount Received column is posted to the Credit side of the Discount Received Account.
- The final balance is carried down (c/d) and brought down (b/d).
6. General Journal
- Records: Non-routine transactions not covered by other books.
- Common Entries:
- Opening entries for a new business.
- Correction of errors (e.g., wrong account used).
- Depreciation adjustments.
- Recording cash discounts received from suppliers (if not in Cash Book).
Purpose of the Imprest System
The imprest system controls petty cash by limiting the amount available. It ensures that only a fixed sum is held on hand, reducing theft risk and simplifying reconciliation.
Key Definitions:
- Imprest Amount: The fixed total amount of money allocated to the petty cash fund.
- Restoring the Imprest: The process of reimbursing the petty cash fund at the end of a period so that it returns to the original imprest amount.
How to Apply the Imprest System:
- Start with the Imprest Amount as the opening balance.
- Record all small payments in the Petty Cash Book, often using an Analysis Column (e.g., Postage, Stationery, Travel) to categorize expenses.
- Calculate the total of payments made during the period.
- The amount needed to restore the imprest is exactly equal to the total payments made.
- The closing balance (Balance c/d) should be zero if fully restored, or reflect the remaining cash if not yet restored.
A business uses an imprest system with a monthly imprest of 500.<br>On 1 March, the petty cash balance is500 (Balance b/d).
During March, the following payments are made:
- Postage: 20</li> <li>Stationery:30
- Travel: 45</li> <li>Refreshments:15
Question: Calculate the amount needed to restore the imprest on 31 March and the closing balance.
Solution:
- Total Payments: 20 +30 + 45 +15 = 110.</li> <li><strong>Restoration Amount</strong>: To restore the imprest, we need to replace exactly what was spent. Therefore, the bank transfers <strong>110 into the petty cash fund.
- Closing Balance (Balance c/d):
- Opening: 500</li> <li>Plus Restoration:110
- Less Payments: (110)</li> <li>Closing Balance:500.
Note: In many exam questions, the 'Restoration' is shown as a credit entry in the Petty Cash Book (if treating it as a payment from bank) or simply as the amount to be claimed. The key is that Balance b/d on 1 April must equal the Imprest Amount ($500).
Mistake 1: Confusing Trade and Cash Discounts
- Error: Recording trade discounts in the books or deducting cash discounts before posting to the ledger.
- Correction: Always record transactions at the net amount (after trade discount). Only record cash discounts when payment is actually made/received. Do not include trade discounts in the totals posted to the Sales/Purchases accounts.
Mistake 2: Incorrect Posting of Journal Totals
- Error: Posting individual items from the Sales Journal to the General Ledger instead of just the total.
- Correction: Remember the dual role. Individual items go to the Subsidiary Ledger (Receivables/Payables). Only the Total goes to the General Ledger (Sales/Purchases Accounts).
Mistake 3: Discount Received Account Location
- Error: Keeping the Discount Received account in the Purchases Ledger.
- Correction: Discount Received is an income item and must be in the General Ledger, not the Purchases Ledger.
Mistake 1: Incorrect Restoration Calculation
- Error: Subtracting the restoration amount from the imprest to find the closing balance, or adding payments to the opening balance without accounting for the restoration.
- Correction: The restoration amount equals the total payments. The closing balance before restoration is (Imprest - Payments). After restoration, it returns to the Imprest amount.
Mistake 2: Omitting the Opening Balance
- Error: Starting the Petty Cash Book with zero or ignoring the 'Balance b/d'.
- Correction: Always start with the correct opening balance. If the question states an imprest of X, the first line is usually 'Balance b/dX'.
Why examiners accept this: Examiners look for the distinction between subsidiary ledger postings (individual items) and general ledger postings (totals). This demonstrates understanding of internal controls.
Correct Phrasing Example:
'For the Sales Journal, the total amount is credited to the Sales Account in the General Ledger. Individual customer amounts are debited to their respective Trade Receivable accounts in the Sales Ledger.'
Key Markscheme Phrase: 'Total posted to Sales/Purchases account; individual items posted to receivables/payables ledger.'
Why examiners accept this: Clarity on net vs. gross amounts is fundamental to accurate financial reporting.
Correct Phrasing Example:
'Trade discounts are not recorded in the books; transactions are entered at the net price. Cash discounts are recorded only when payment is made, with Discount Allowed debited and Discount Received credited.'
Key Markscheme Phrase: 'Trade discount ignored/net amount used; cash discount recorded upon settlement.'
Why examiners accept this: The imprest system relies on the principle that the fund is always replenished to its original fixed amount. Confusing the 'balance' with the 'restoration amount' is a common error.
Correct Phrasing Example:
'The amount required to restore the imprest is equal to the total of the payments made during the period. This ensures the closing balance returns to the original imprest figure.'
Key Markscheme Phrase: 'Restoration amount equals total payments; closing balance equals imprest amount.'
- Speed/Efficiency: Data entry is faster and can be automated. 2. Accuracy/Security: Reduces manual calculation errors and allows for backup/recovery of data.