What you'll learn
Books of original entry are the day books in which a transaction is first recorded from its source document, before it is posted to the ledger. There are seven of them — the sales day book, the purchases day book, the sales returns day book, the purchases returns day book, the cash book, the petty cash book and the journal — and between them they capture every transaction a business enters into. The ledger is where those entries are then classified by account, so that at any moment you can read off what a single customer owes, what has been spent on wages, or what the bank balance is.
The reason this stage exists at all is volume. A supermarket in Chaguanas might make two thousand credit sales in a month. Posting each one individually to the sales account would produce two thousand entries in a single account and no useful information. Instead each sale is listed in the sales day book, the book is totalled at month end, and one figure is posted to the sales account. The detail stays available in the individual receivable accounts; the summary goes to the nominal ledger.
By the end of this topic you should be able to enter transactions in the correct day book, post from each day book to the correct side of the correct ledger account, explain the three-way division of the ledger, operate a two-column and a three-column cash book, run a petty cash book on the imprest system, and use the journal for the entries that no other day book covers.
Key terms and definitions
Source document — the paper or electronic record that evidences a transaction: an invoice, a credit note, a receipt, a cheque counterfoil, a bank statement.
Book of original entry — the first accounting record a transaction enters, also called a day book, a book of prime entry or a subsidiary book.
Posting — transferring an entry from a book of original entry to a ledger account.
Sales ledger (receivables ledger) — the ledger holding one personal account for each credit customer.
Purchases ledger (payables ledger) — the ledger holding one personal account for each credit supplier.
General ledger (nominal ledger) — the ledger holding the impersonal accounts: income, expenses, assets, liabilities and capital.
Trade discount — a reduction in list price given to a trade customer. It is deducted before the invoice total is recorded and never appears in the ledger.
Cash discount — a reduction for prompt settlement. It is recorded, in the discount allowed or discount received accounts.
Imprest system — a method of running petty cash in which the float is restored to a fixed amount each period by reimbursing exactly what was spent.
Contra entry — an entry appearing on both sides of the cash book, such as cash banked, where money moves between the firm's own cash and bank balances.
Core concepts
The seven books and what goes in each
The sales day book lists credit sales only. Cash sales go straight to the cash book, and this catches candidates out every year. The purchases day book lists credit purchases of goods for resale — not the purchase of a computer for the office, which is a non-current asset and goes through the journal.
The sales returns day book (returns inwards) lists goods customers send back; the purchases returns day book (returns outwards) lists goods returned to suppliers. Both are driven by credit notes, not invoices.
The cash book records all receipts and payments of cash and through the bank. It is unusual in being both a book of original entry and a ledger account, which is why the cash and bank accounts do not appear again in the general ledger. The petty cash book handles small cash payments — stamps, taxi fares, cleaning materials — so that the main cash book is not clogged with trivial items.
The journal — sometimes called the journal proper — takes everything the other six do not: opening entries when a business starts keeping proper books, the purchase and sale of non-current assets on credit, the correction of errors, year-end adjustments, bad debts written off, and transfers between accounts.
The three-way division of the ledger
The ledger is split three ways for control and for division of labour. The sales ledger and purchases ledger hold personal accounts — one per customer, one per supplier. The general ledger holds everything else.
The point of the split is that different clerks can maintain different ledgers, and each subsidiary ledger is checked against a control account in the general ledger. The sales ledger control account is built from the day book totals and should agree with the sum of the individual customer balances; if it does not, the error is inside the sales ledger and the rest of the accounts are unaffected. Without the split, a single error would have to be hunted through the whole system.
Posting rules, day book by day book
Each day book is posted twice: individually to the personal accounts, and in total to the general ledger.
From the sales day book, debit each customer's account with their invoice, and credit the sales account with the monthly total. From the purchases day book, credit each supplier's account, and debit the purchases account with the total. Sales returns reverse the sales pattern: credit the customer, debit the returns inwards account. Purchases returns reverse the purchases pattern: debit the supplier, credit the returns outwards account.
The direction follows from what the account represents. A customer who has been invoiced owes the business money, and a receivable is an asset, so the customer's account is debited. Sales are income, and income increases on the credit side.
The three-column cash book
A two-column cash book has a cash column and a bank column on each side. A three-column cash book adds a discount column: discount allowed on the debit (receipts) side, discount received on the credit (payments) side.
The discount columns are memorandum columns — they are not part of the double entry within the cash book. They are totalled and posted, as totals, to the debit of discount allowed and the credit of discount received in the general ledger. The other side of each discount entry has already been made in the personal account, where the customer or supplier was credited or debited with the full amount settled.
Trade discount versus cash discount
Trade discount never enters the books. If goods with a list price of $10,000 carry a 20% trade discount, the invoice is for $8,000 and $8,000 is what appears in the day book and the ledger.
Cash discount does enter the books, because it is only known when payment is made. If that $8,000 customer settles within the discount period and takes 2.5%, they pay $7,800 and the business records $200 as discount allowed. The customer's account is credited with $7,800 from the cash book and $200 from the discount column, clearing the $8,000.
The imprest system for petty cash
A float is fixed — say $500. The petty cashier pays small expenses against vouchers. At the end of the month the vouchers are totalled, the analysis columns are posted to the relevant expense accounts, and the cashier is reimbursed with exactly the amount spent, restoring the float to $500.
The strength of the system is that the cash in the tin plus the vouchers held should always equal the imprest amount. That is a check any manager can perform in two minutes without opening a ledger.
Worked examples
Example 1 — Posting the sales day book (5 marks)
During May, Ramdass Trading made these credit sales: Persad $3,400; Mohammed $2,150; Joseph $1,980; Persad again $2,470.
The sales day book is totalled: $3,400 + $2,150 + $1,980 + $2,470 = $10,000.
Posting:
- Debit Persad $3,400 and $2,470 — his account carries a $5,870 debit balance.
- Debit Mohammed $2,150.
- Debit Joseph $1,980.
- Credit Sales account with the total, $10,000.
Check: the individual debits total $5,870 + $2,150 + $1,980 = $10,000, equal to the single credit. One mark for the total, three for the personal postings, one for the sales credit.
Example 2 — Three-column cash book with discount (6 marks)
Joseph owed $1,980 and settles on 12 May taking a 2% cash discount by cheque.
Discount = 2% × $1,980 = $39.60. Cheque received = $1,980 − $39.60 = $1,940.40.
In the cash book, on the debit side: bank column $1,940.40, discount allowed column $39.60.
Posting: credit Joseph's account with $1,980 in total — $1,940.40 from the bank column and $39.60 from the discount column — which clears his balance to nil. At month end the discount allowed column total is debited to the discount allowed account in the general ledger.
Note that the $39.60 is an expense of the business. It is the price paid for getting the cash early.
Example 3 — Petty cash on the imprest system (5 marks)
The imprest is $600. During June the petty cashier paid: stationery $145, travel $208, cleaning $92, postage $75.
Total spent = $145 + $208 + $92 + $75 = $520. Cash remaining in the tin = $600 − $520 = $80.
The reimbursement at 30 June is $520, restoring the float to $600.
Posting from the analysis columns: debit stationery $145, debit travel $208, debit cleaning $92, debit postage $75 — total $520 — and credit the petty cash book with the same $520. The reimbursement is credited in the main cash book and debited in the petty cash book.
Example 4 — Journal entry for a credit purchase of an asset (4 marks)
Ramdass Trading buys a delivery van on credit from Southern Motors for $128,000.
This is not a purchase of goods for resale, so it does not belong in the purchases day book. The journal entry is: debit Motor vehicles $128,000, credit Southern Motors $128,000, with the narrative "Being purchase of delivery van on credit from Southern Motors."
Putting it in the purchases day book would overstate cost of sales by $128,000 and understate non-current assets by the same amount — an error of principle, which the trial balance would not reveal.
Common mistakes and how to avoid them
Recording cash sales in the sales day book. The sales day book is for credit sales only. Cash sales are debited in the cash book and credited to sales directly.
Putting asset purchases in the purchases day book. Purchases means goods bought for resale. Everything else goes through the journal.
Recording trade discount in the ledger. Only the net invoice figure is ever entered. If a question gives a list price and a trade discount, do the subtraction before you write anything down.
Posting the discount columns as part of the cash book double entry. They are memorandum columns. The double entry is completed by posting the totals to the general ledger.
Getting the returns the wrong way round. Returns inwards means goods coming back in from a customer, which reduces sales. Returns outwards means goods going back out to a supplier, which reduces purchases. Read the direction from the point of view of the business whose books you are keeping.
Forgetting the narrative on a journal entry. Most mark schemes award a mark for it, and it is the cheapest mark on the paper.
How this links to your Internal Assessment
The Internal Assessment requires you to set up and operate an accounting system for a real or simulated small business, and the books of original entry are where that system starts. Choose a business with enough credit transactions to justify subsidiary books — a hardware supplier or a small wholesaler works better than a snack van that takes only cash.
Show the source documents alongside the day books. A photocopied or reconstructed invoice placed next to the day book entry it produced, and then next to the ledger account it was posted to, demonstrates the audit trail far more convincingly than a written description of it. Moderators reward evidence that the system was operated, not merely described.
If you are recommending improvements, the imprest system and the division of the ledger are strong, defensible recommendations for a small business that currently keeps one cash box and one notebook. Say what the weakness is, what you propose, and what control it introduces.
Exam technique for books of original entry and ledgers
Questions come in three shapes. The first gives you a list of transactions and asks you to write up one or more day books and post them; here, accuracy and layout carry the marks, so rule your columns and total them. The second gives you a partly completed cash book and asks you to complete and balance it. The third asks you to explain why a particular transaction belongs in a particular book, which is a knowledge question with an application mark attached.
Watch the command word. State which book means name it and stop. Explain which book means name it and give the reason — that it is a credit sale, or that no other day book covers it. Prepare means produce the ruled book with totals.
Always balance and carry down when asked to write up a cash book, and label the balance b/d on the correct side. A debit balance brought down on the bank column means money in the bank; a credit balance brought down means an overdraft.
Quick revision summary
- Seven books of original entry: sales, purchases, sales returns, purchases returns, cash book, petty cash book, journal.
- The cash book is both a day book and a ledger account; cash and bank do not reappear in the general ledger.
- The ledger divides three ways: sales ledger, purchases ledger, general ledger.
- Day books are posted individually to personal accounts and in total to the general ledger.
- Sales day book: debit each customer, credit sales with the total. Purchases day book: credit each supplier, debit purchases with the total.
- Returns reverse the original pattern.
- Trade discount never enters the books; cash discount does, as discount allowed (expense) or discount received (income).
- Discount columns in the three-column cash book are memorandum columns posted in total to the general ledger.
- Imprest: cash in tin plus vouchers equals the fixed float; reimbursement equals the amount spent.
- The journal handles opening entries, credit purchases and sales of non-current assets, corrections, year-end adjustments and bad debts — with a narrative.