What you'll learn
This guide covers the foundation of the accounting recording system: how business transactions are first captured and then entered into the accounting records. You'll learn to identify different source documents, understand their purpose, and correctly record transactions in the appropriate books of prime entry — essential skills tested extensively in Paper 1.
Key terms and definitions
Source document — An original record that provides written evidence that a business transaction has taken place (e.g. invoice, credit note, receipt).
Books of prime entry — Accounting books where transactions are first recorded from source documents before being transferred to the ledger; also called books of original entry or day books.
Invoice — A source document sent by a seller to a buyer showing details of goods sold or services provided on credit, including price, quantity, trade discount, and VAT.
Credit note — A document issued by a seller to a buyer to cancel or reduce the amount owed, usually due to returned goods or overcharges.
Trade discount — A percentage reduction from the list price given by suppliers to regular customers or trade buyers; deducted before calculating VAT.
Cash discount — A percentage reduction offered to customers who pay within a specified period; also called settlement or prompt payment discount.
Sales day book — A book of prime entry recording all credit sales made by the business from sales invoices.
Purchases day book — A book of prime entry recording all credit purchases made by the business from purchase invoices received.
Core concepts
Purpose and types of source documents
Source documents provide the audit trail for business transactions. They serve as evidence for accountants and can be verified by internal and external auditors or tax authorities. Without proper source documentation, transactions cannot be reliably recorded in the accounting system.
Key source documents tested at IGCSE level:
- Sales invoice — Sent by the seller when goods are sold on credit
- Purchase invoice — Received by the buyer when goods are purchased on credit
- Credit note (issued) — Sent by the seller to reduce amounts owed by customers
- Credit note (received) — Received by the buyer from suppliers reducing amounts owed
- Debit note — Sent to a supplier requesting a credit note for goods returned or overcharges
- Receipt — Evidence of cash/cheque received
- Cheque stub/counterfoil — Evidence of payment made by cheque
- Petty cash voucher — Evidence of small cash payments
- Bank statement — Record of transactions in the business bank account
- Payslip — Evidence of wages/salaries paid to employees
Structure and content of invoices
An invoice must contain specific information to be a valid business document. Understanding invoice layout is crucial for IGCSE examinations.
Essential elements of an invoice:
- Seller's name, address, and VAT registration number
- Buyer's name and address
- Invoice number (sequential for reference)
- Date of issue
- Description of goods/services supplied
- Quantity and unit price
- Trade discount (if applicable)
- Subtotal after trade discount
- VAT amount and rate
- Total amount due
- Terms of payment (e.g. "Net 30 days")
Calculation sequence on invoices:
- List price × Quantity = Gross amount
- Gross amount − Trade discount = Net amount (before VAT)
- Net amount + VAT = Total amount due
VAT (Value Added Tax) in the UK is currently charged at 20% on most goods and services. Some items are zero-rated or exempt.
Credit notes and their purpose
Credit notes reverse or reduce the value recorded on invoices. They are issued for several reasons:
- Goods returned by customers (faulty or unwanted)
- Overcharges on the original invoice
- Goods damaged in transit
- Allowances given for customer complaints
Credit note format:
A credit note mirrors the invoice format but is clearly marked "CREDIT NOTE" and often printed in red. It reduces the amount the customer owes.
Accounting treatment:
- Credit notes issued reduce sales and accounts receivable
- Credit notes received reduce purchases and accounts payable
Both must be recorded in separate columns in the relevant day books.
The six main books of prime entry
Transactions are classified by type and recorded in specific books of prime entry before posting to ledger accounts.
1. Sales day book (Sales journal)
Records all credit sales made by the business. Each sales invoice is entered showing:
- Date
- Customer name
- Invoice number
- Total amount (including VAT)
At period-end, the sales day book is totalled and posted to the sales and VAT accounts.
2. Purchases day book (Purchases journal)
Records all credit purchases of inventory and other items. Each purchase invoice received is entered showing:
- Date
- Supplier name
- Invoice number
- Total amount (including VAT)
3. Sales returns day book (Returns inwards journal)
Records all credit notes issued to customers for goods returned to the business.
4. Purchases returns day book (Returns outwards journal)
Records all credit notes received from suppliers for goods returned by the business.
5. Cash book
A dual-purpose book serving as both a book of prime entry and a ledger account. It records:
- All money received (debit side/receipts)
- All money paid out (credit side/payments)
- Bank transactions and cash transactions (often in separate columns)
- Discounts allowed and discounts received
6. Petty cash book
Records small cash payments using the imprest system. Analysis columns categorize expenditure (postage, stationery, travel, etc.).
Understanding discounts
IGCSE examinations frequently test the distinction between trade discount and cash discount.
Trade discount:
- Deducted from list price before VAT calculation
- Given to regular customers or trade buyers
- Not recorded separately in the accounts
- Simply reduces the net amount invoiced
- Example: 20% trade discount on £500 = £100 discount; invoice shows £400 + VAT
Cash discount (settlement/prompt payment discount):
- Offered for payment within specified period (e.g. 2% if paid within 7 days)
- Calculated after trade discount and VAT
- Recorded separately in the cash book when taken
- Example: "2/7, net 30" means 2% discount if paid within 7 days, otherwise full amount due in 30 days
- Discount allowed — given to customers (expense)
- Discount received — obtained from suppliers (income)
Recording in books of prime entry
Step-by-step recording process:
- Business transaction occurs
- Source document prepared/received
- Transaction recorded in appropriate book of prime entry
- At period-end, books of prime entry totalled
- Totals transferred (posted) to ledger accounts
- Ledger balances used to prepare trial balance and financial statements
Format example — Sales day book:
Date | Customer Name | Invoice No. | Amount £
------------------------------------------------------
2024 Jan 5 | A. Brown Ltd | 001 | 600.00
2024 Jan 8 | C. Davis & Co | 002 | 840.00
2024 Jan 12| E. Foster | 003 | 360.00
------------------------------------------------------
Total for January 1,800.00
The total of £1,800 would be posted to the credit of the sales account and debit of the sales ledger control account.
Worked examples
Example 1: Preparing an invoice (6 marks)
Question: On 15 March 2024, Martin Trading Ltd sold the following goods on credit to J. Wilson:
- 40 units of Product X at £25 per unit
- 30 units of Product Y at £18 per unit
Martin Trading Ltd offers J. Wilson a 10% trade discount. VAT is charged at 20%.
Prepare the invoice showing all relevant calculations.
Model answer:
INVOICE
Martin Trading Ltd Invoice No: 245
Unit 5, Park Estate Date: 15 March 2024
Bristol BS2 4TH
VAT Reg. No: 123 4567 89
To: J. Wilson
12 High Street
Bath BA1 2PQ
Quantity | Description | Unit Price £ | Amount £
-------------------------------------------------
40 | Product X | 25.00 | 1,000.00
30 | Product Y | 18.00 | 540.00
-----------
List Price | 1,540.00
Less: Trade discount 10% | 154.00
-----------
Net Amount | 1,386.00
VAT @ 20% | 277.20
-----------
TOTAL DUE | 1,663.20
Mark scheme:
- Correct calculations for line items (1 mark)
- Trade discount correctly calculated and deducted (1 mark)
- Net amount correct: £1,386.00 (1 mark)
- VAT correctly calculated: £277.20 (1 mark)
- Total amount correct: £1,663.20 (1 mark)
- Professional layout with all essential details (1 mark)
Example 2: Recording in the sales day book (4 marks)
Question: Enter the following transactions in the sales day book for March 2024:
- 3 March: Sold goods on credit to K. Ahmed, invoice 156, £480 including VAT
- 10 March: Sold goods on credit to L. Burton, invoice 157, £720 including VAT
- 18 March: Sold goods on credit to K. Ahmed, invoice 158, £360 including VAT
Total the sales day book and show the ledger entries.
Model answer:
SALES DAY BOOK
Date | Customer | Invoice No. | Amount £
-----------------------------------------------
2024 Mar 3 | K. Ahmed | 156 | 480
2024 Mar 10| L. Burton | 157 | 720
2024 Mar 18| K. Ahmed | 158 | 360
-----------------------------------------------
Total for March | 1,560
Ledger entries:
- Debit: Sales Ledger Control Account £1,560
- Credit: Sales Account £1,560
Mark scheme:
- All three transactions correctly entered with proper dates, names, and amounts (2 marks)
- Correct total: £1,560 (1 mark)
- Correct double entry shown (1 mark)
Example 3: Calculating cash discount (4 marks)
Question: On 5 April, Thompson Ltd sold goods to Garcia & Sons for £1,200 plus VAT at 20%, offering terms of 5% cash discount for payment within 10 days.
Garcia & Sons paid on 12 April.
(a) Calculate the amount Garcia & Sons will pay (3 marks) (b) Name the book of prime entry where Thompson Ltd will record the receipt (1 mark)
Model answer:
(a) Calculation:
Goods £1,200.00
VAT @ 20% 240.00
Total invoice amount £1,440.00
Less: Cash discount 5% × £1,440.00 72.00
Amount paid £1,368.00
(b) Cash book (receipts side/debit side)
Mark scheme:
- Invoice total correctly calculated: £1,440 (1 mark)
- Cash discount correctly calculated: £72 (1 mark)
- Amount paid correct: £1,368 (1 mark)
- Cash book identified (1 mark)
Common mistakes and how to avoid them
Confusing trade discount with cash discount — Remember: trade discount is deducted before VAT and is not separately recorded; cash discount is taken when payment is made and recorded in the cash book as discount allowed/received.
Calculating VAT on the wrong amount — Always calculate VAT on the net amount after deducting trade discount, not on the gross list price.
Recording in the wrong book of prime entry — Credit sales go in the sales day book, cash sales in the cash book. Returns inwards are customer returns (sales returns); returns outwards are returns to suppliers (purchases returns).
Forgetting to include VAT in invoice totals — The total amount due on an invoice must include VAT unless the goods are zero-rated or the business is not VAT-registered.
Mixing up credit notes issued and received — Credit notes issued reduce sales (your business is giving back money); credit notes received reduce purchases (you're getting money back from suppliers).
Incorrect date formats in day books — Use the format shown in the question; typically day/month/year in UK contexts (e.g. 15 March 2024 or 15/03/2024).
Exam technique for "Source Documents and Books of Prime Entry"
Command word "Prepare" — When asked to prepare an invoice or day book, use clear columnar format with proper headings, dates in chronological order, and accurate totals. Show all workings for calculation questions (typically 1 mark for method, 1 mark for answer).
Command word "Identify" or "Name" — Give precise terminology. "Cash book" earns the mark; "book for cash" does not. Learn the exact names of all six books of prime entry.
Layout marks are available — Even if your calculations are wrong, you can earn marks for correct format, appropriate headings, and logical structure in document preparation questions.
Show the double entry — When asked to show ledger entries from books of prime entry totals, clearly state both the debit and credit entries with account names and amounts (typically 2 marks: 1 for each entry).
Quick revision summary
Source documents provide evidence of transactions. The main documents are invoices, credit notes, receipts, and cheques. Trade discount is deducted before VAT; cash discount when payment is made. The six books of prime entry are: sales day book, purchases day book, sales returns day book, purchases returns day book, cash book, and petty cash book. Transactions are recorded in books of prime entry before posting totals to ledger accounts. Learn document formats and the correct book for each transaction type.