Books of prime entry

Introduction

The ledger accounts of a business are the main source of information used to prepare the financial statements. However, if a business were to update their 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 recorded in a book of prime entry. This is a simple note of the transaction, the relevant customer/supplier and the amount of the transaction. It is, in essence, a long list of daily transactions.

Different types of book

Several books of prime entry exist, each recording a different type of transaction:

The sum total of the day's transactions is recorded in the accounting ledgers of the company. This is done in a 'double entry' format. 

The sales day book

The sales book summarises the daily sales made on credit terms (i.e. the goods are sold and payment is collected at a later date).

The total sales for the day of $20,200 will be entered into the accounting ledgers in double entry format.

Purchases day book

The purchase day book summarises the daily purchases made on credit terms (i.e. the goods are purchased and payment is made at a later date).

The total purchases for the day of $8,615 will be entered into the accounting ledgers in double entry format.

The sales returns day book

The purchases returns day book

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.

Illustrative cash payments book

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

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 the movement in the 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:

Dr Non-current asset $xxx

Cr Payables $xxx

A brief narrative should be given to explain the entry.

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