Chapter 10: Books of prime entry and control accounts

Chapter learning objectives

Upon completion of this chapter you will be able to:

• identify the main data sources and records in an accounting system
• describe the contents and purpose of different types of business documentation
• outline the form of accounting records in a typical manual system
• record credit sale and purchase transactions (with and without sales tax) using day books
• post day book totals to the ledger accounts
• explain the division of the ledger into sections
• explain the nature and purpose of control accounts for the accounts receivable and accounts payable ledgers
• account for contras between trade receivables and payables
• record cash transactions using the cash book
• explain the need for a record of petty cash transactions
• illustrate the typical format of the petty cash book
• explain the importance of using the imprest system to control petty cash
• list the necessary controls and security over petty cash that would normally be found in a business
• explain the uses of the journal
• illustrate the use of the journal and the posting of journal entries into ledger accounts.

1 Business documentation

The table below summarises the main types of business documentation and sources of data for an accounting system, together with their content and purpose.

2 Accounting records

Books of prime entry

• If ledgers were updated each time a transaction occurred, the ledger accounts would quickly become cluttered and errors might be made.
• To avoid this, all transactions are initially recorded in a book of prime entry.
• Several books of prime entry exist, each recording a different type of transaction:

• Entry of a transaction to a book of prime entry does not record the double entry required for that transaction.
• The book of prime entry is, however, the source for double entries to the ledger accounts.
• The double entry arising from the book of prime entry will be recorded periodically (daily, weekly, monthly) depending on the volume of transactions.

3 Ledger accounts and the division of the ledger

In a manual system, ledgers can be thought of as books containing the individual accounts:

• The general ledger contains all accounts or a summary of all accounts necessary to produce the trial balance and financial statements.
• The accounts receivable ledger contains an account for each credit customer to show how much each one owes.

  An account to summarise this information, the receivables control account, is normally contained within the general ledger.

• The accounts payable ledger contains an account for each credit supplier to show how much they are owed.

  An account to summarise this information, the payables control account, is normally contained within the general ledger.

Where there are individual accounts in a receivables or payables ledger AND a control account in the general ledger, only one can form part of the double entry system. The other exists for memorandum purposes. It is normally the case that the control accounts form part of the double entry.

Control accounts

Not all businesses maintain a receivables ledger control account and purchases ledger control account, however where they do it is usually these control accounts that form part of the double entry system.

Where control accounts are maintained, they are effective in reducing the time it takes to ascertain the total amount owed by receivables and owed to payables. The scope for making errors when realising these numbers through totalling several individual accounts is also reduced.

Even where control accounts are maintained, a business must still keep a record of how much each customer owes them and how much they owe each supplier, therefore the accounts payable ledger and accounts receivable ledger are always part of the accounting system.

4 Sales and purchases day books

Sales day book

The format of the double entry resulting from the sales day book will depend upon whether the individual accounts in the accounts receivable ledger OR the receivables control account in the general ledger is part of the double entry system:

Purchases day book, sales returns day book and purchases returns day book

The format of the remaining day books is similar to that of the sales day book. The double entries arising are:

Format of purchase day book

Format of the purchases day book

Individual purchases posted as credits to individual suppliers accounts in accounts payable ledger.

Format of the sales returns day book

Individual returns posted as credits to individual customers’ accounts in accounts receivable ledger.

Format of the purchases returns day book

Individual returns posted as debits to individual suppliers accounts in accounts payable ledger.

Illustration 1

Mr Kipper-Ling 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 for the purposes of his accounts.

Write up the following credit transactions arising in the first two weeks of August 20X6 into day books and advise Mr Kipper-Ling of the correct double entries assuming that control accounts are maintained as part of the double entry system.

1 August Mrs Bakewell buys $500 worth of cake tins.

1 August Mr Kipper-Ling purchases $2,000 worth of equipment from wholesalers TinPot Ltd.

2 August Mr Kipper-Ling returns goods costing $150 to another supplier, I Cook.

3 August Jack Flap buys $1,200 worth of equipment.

3 August Mrs Bakewell returns $100 worth of the goods supplied to her.

4 August Victoria Sand-Witch buys a new oven for $4,000.

5 August Mr Kipper-Ling purchases $600 worth of baking trays from regular supplier TinTin Ltd.

8 August Mr Kipper-Ling purchases ovens costing $10,000 from Hot Stuff Ltd.

8 August Mr Kipper-Ling returns equipment costing $300 to TinPot Ltd.

9 August Pavel Ova purchases goods costing $2,200.

11 August Mrs Bakewell buys some oven-proof dishes costing $600.

Solution

Solution

5 Sales tax in day books

If a business is registered for sales tax, the sales and purchases day books must include entries to record the tax.

Illustration 2 – Sales tax in day books

Sales day book

Purchases day book

What double entry arises from the day book?

Solution

The double entry for the above transaction will be:

The double entry for the above transaction will be:

Test your understanding 1

The following sales invoices have been issued by Quincy in July:

Quincy is registered for sales tax, applied at a rate of 17.5%

What double entry arises from the day book?

Control accounts

Control accounts are ledger accounts that summarise a large number of transactions.

Control accounts do form part of the double entry system.

The receivables ledger control account may include any of the following entries:

The payables ledger control account may include any of the following entries:

SDB Sales day book

PDB Purchases day book

SRDB Sales returns day book

PRDB Purchases returns day book

CB Cash book

Note that any entries to the control accounts must also be reflected in the individual accounts within the accounts receivable and payable ledgers.

Recording contra entries

Contra entries

The situation may arise where a customer is also a supplier. Instead of both owing each other money, it may be agreed that the balances are contra’d, i.e. cancelled.

The double entry for this type of contra is:

The individual receivable and payable accounts must also be updated to reflect this.

Recording credit balances

Credit balances on the receivables ledger control account

Sometimes the receivables ledger control account may show a credit balance, i.e. we owe the customer money. These amounts are usually small and arise when:

• The customer has overpaid.
• Credit notes have been issued for fully-paid-for goods.
• Payment is received in advance of raising invoices.

The payables ledger control account may show a debit balance for similar reasons.

Test your understanding 2

Jones prepares monthly Receivables and Payables ledger control accounts. At 1 November 2005 the following balances existed in the company’s records.

The following information is extracted in November 2005 from the company’s records:

At 30 November 2005 the balances in the Receivables and Payables ledgers, as extracted, totalled:

Prepare the receivables ledger control account and the payables ledger control account for the month of November 2005 to determine the closing debit and closing credit balances on the receivables ledger control account and payables ledger control account respectively.

6 The cash book

• All transactions involving cash at bank are recorded in the cash book.
• Many businesses have two distinct cash books – a cash payments book and a cash receipts book.
• A note of cash discounts given and received is also recorded in the cash book. This is to facilitate the recording of discounts in both the general and accounts payable/receivable ledgers.
• It is common for businesses to use a columnar format cash book in order to analyse types of cash payment and receipt.

Illustration 3 – The cash book

The cash payments book

The following is the cash payments book of a small print business.

What are the accounting entries arising from the totals in the cash book at the end of the day, assuming control accounts are kept?

Solution to cash payments book

Solution

The cash transactions are recorded in total as follows:

Dr Payables ledger control account $3,210

Dr Rent expense $3,400

Cr Bank $6,610

The discount is recorded as follows:

Dr Payables ledger control account $180

Cr Discounts received $180

Entries must also be made to Mr A, Mr B and Mr C’s individual accounts in the accounts payable ledger in order to reflect the payments made and discounts received.

Test your understanding 3

The following is the cash receipts book of the SM Art Gallery.

What are the accounting entries arising from the totals in the cash book at the end of the day, assuming control accounts are kept?

7 The petty cash book

• All transactions involving small amounts of cash are recorded in the petty cash book.
• The petty cash system is usually designed to deal with sundry small payments in cash made by a business, e.g. paying the milkman, purchasing biscuits, buying stationery or reimbursing travel expenses.
• The cash receipts will be recorded together with the payments which will be analysed in the same way as a cash book.

The imprest system

The best way of dealing with petty cash is by means of an imprest system, which works as follows.

Step 1

The business decides on the amount of cash to be held as a float.

This round sum amount will be referred to as the ‘petty cash float’.

Step 2

As the petty cashier makes payments he records these in the petty cash book, which is not part of the double entry system. All expenditure must be evidenced by an expense receipt and the petty cashier will attach an expense voucher to each expense.

Step 3

When the petty cash runs low, a cheque is drawn to return the petty cash to the exact amount of the original float. At this stage the expense vouchers should be produced by the petty cashier to the cheque signatory which will exactly equal the cheque required.

This aspect of control is the essential feature of the petty cash system. At any stage:

Float = Cash in petty cash box + sum total of expense vouchers since last reimbursement

Petty cash

Controls over petty cash

The following controls and security over petty cash should be found in a business:

• Petty cash must be kept in a petty cash box.
• Petty cash box must be secured in a safe.
• Person responsible for petty cash must be reliable and know what he/she is doing.
• All petty cash must be supported by invoices.
• Petty cash vouchers must be signed by the claimant and the person responsible for running the petty cash.
• Regular spot checks must be carried out to ensure that the petty cash is accurate.

Petty Cash Book

In this book the business will record small cash transactions.

• The cash receipts will be recorded together with the payments which will be analysed in the same way as a cash book. An imprest system will be adopted for the petty cash book.
• An amount is withdrawn from the bank account which is referred as a ‘petty cash float’.
  This ‘float’ will be used to pay for the various sundry expenses. The petty cash book cashier will record any payments.
• Any expenditure must be evidenced by an expense receipt and the petty cashier will attach a petty cash voucher to each expense.
• At any point in time the cash together with the expense vouchers should agree to the total float.
• At the end of the period the petty cash float is ‘topped up’ by withdrawing an amount from the bank totalling the petty cash payment made during the period.

Illustration 4 – The petty cash book

On 1 March 20X9 a petty cash float of $100 is introduced by Dialex. During March the following payments are made out of petty cash:

On 31 March the cash is reimbursed. Write up the petty cash book for the month and show the resulting entries to the general ledger.

Solution

Solution

No double entry bookkeeping entries are made from the receipts side of the petty cash book – in a good system the only receipt should be the reimbursement of the float, the double entry of which is dealt with in the posting of the cash book.

As regards the payments, the double entry in the general ledger is performed as follows:

8 The journal

The journal is a book of prime entry which records transactions which are not routine (and not recorded in any other book of prime entry), for example:

• year-end adjustments
  • depreciation charge for the year
  • irrecoverable debt write-off
  • record movement in allowance for receivables
  • accruals and prepayments
  • closing inventory

• acquisitions and disposals of non-current assets
• opening balances for statement of financial position items
• correction of errors.

The journal is a clear and comprehensible way of setting out a bookkeeping double entry that is to be made.

Presentation of a journal

A journal should be laid out in the following way:

to record the purchase of a new non-current asset.

A brief narrative should be given to explain the entry.

Test your understanding 4

Igor Romanov runs a Russian restaurant. He is a very good chef but not quite so good at accounting and needs help to record the following transactions:

(1) Closing inventory of 250 bottles of vodka at a cost of $2,750 has not been recorded.

(2) Igor needs to charge depreciation on his restaurant. He holds a 25-year lease which cost him $150,000 ten years ago.

(3) A regular customer, V Shady, keeps a tab behind the bar. He currently owes $350 but was last seen buying a one-way ticket to Moscow. Igor has given up hope of payment and intends to write the debt off.

(4) On the last day of the year Igor bought two new sofas for cash for the bar area of the restaurant. They cost $600 each but the purchase has not been reflected in the accounts.

What journals should Igor post?

Chapter summary

Test your understanding answers

Test your understanding 1

The correct answer is D

Sales day book

The double entry for the above transaction will be:

Test your understanding 2

Test your understanding 3

The cash transactions are recorded in total as follows:

The discount is recorded as follows:

Entries must also be made to Monet, Gogh and Picasso’s individual accounts in the accounts receivable ledger in order to reflect the payments received and discounts allowed.

Test your understanding 4

(1) Dr Closing inventory (statement of financial position) $2,750

(2) Dr Depreciation expense $6,000 ($150,000/25 yrs)

(3) Dr Irrecoverable debt expense $350

(4) Dr Fixtures and Fittings cost $1,200

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