BOOKS OF ORIGINAL ENTRY

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BOOKS OF ORIGINAL ENTRY

• AND
• LEDGERS

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BOOKS OF ORIGINAL ENTRY

• Books of original entry are the books in which we
  first record transactions.
• We have a separate book for each kind of
  transaction.
• Books of original entry are commonly known as
  day books or journals, however the term day
  book is the term we will use.

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BOOKS OF ORIGINAL ENTRY

• The commonly used books are
• SALES DAY BOOK in which credit sales are
  recorded.
• PURCHASES DAY BOOK in which credit purchases are
  recorded.
• RETURNS INWARDS DAY BOOK in which returns inwards
  are recorded.
• RETURNS OUTWARDS DAY BOOK in which returns
  outwards are recorded.
• CASH BOOK in which the receipt and payment of
  cash and cheques are recorded.

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BOOKS OF ORIGINAL ENTRY

• You should note that in practice a variety of
  books may be used to record transactions.
• For example, you may find some businesses which
  have a separate cash book, which only records
  cash transactions, and a separate cheques book,
  in which only cheque transactions are recorded.
• Regardless of the name of the book, their basic
  function is the same.

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BOOKS OF ORIGINAL ENTRY

• Entries are made in the books of original entry.
• These entries are summarised, and the summary
  information is then entered, using double entry,
  into accounts kept in what accountants refer to
  as a ledger.
• Again a number of different ledgers may be used
  depending upon the book of original entry in
  which the transaction is recorded.

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TYPES OF LEDGERS

• The SALES LEDGER, contains customers personal
  accounts.
• The PURCHASES LEDGER, contains suppliers
  personal accounts.
• The GENERAL LEDGER, contains the remaining double
  entry accounts, such as those relating to
  expenses, other revenues, fixed assets and
  capital.

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TYPES OF LEDGERS

• One reason why a set of ledgers is used rather
  than just one big ledger, is that it makes it
  easier to divide the work of recording all the
  businesses transactions between different people.

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TYPES OF ACCOUNTS

• In order to make matters more confusing, some
  people may describe all accounts as either
  personal or impersonal.
• Personal accounts (as we have mentioned
  previously) are the customers and suppliers
  accounts, that is the accounts we draw up to see
  if a customer owes the business money (i.e., if
  the customer is a debtor), or the business owes
  money to the supplier (i.e., the business has a
  creditor).

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TYPES OF ACCOUNTS

• Impersonal accounts, (i.e. all other accounts)
  are further divided into what are referred to as
  real accounts and nominal accounts.
• Real accounts are accounts in which possessions
  (assets) are recorded, such as Buildings,
  Machinery, Fixtures and Stock.
• Nominal accounts are accounts in which expense,
  other revenues (income) and capital are recorded.

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TYPES OF LEDGERS

• If you distinguish between accounts in this
  manner, we can further break down the general
  ledger into the nominal ledger and the private
  ledger.
• The nominal ledger is the ledger in which
  impersonal accounts are kept.
• The private ledger is the ledger in which the
  capital, drawings and other similar accounts are
  kept.

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ACCOUNTS LEDGERS

• CONFUSED, I AM NOT SURPRISED!
• At this stage the most important points to note
  are
• Similar transactions are grouped together and
  initially recorded in what are known as books of
  original entry.
• These books are summarised and entered via the
  double entry system into accounts which are
  grouped together in what accountants refer to as
  ledgers.

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THE SALES DAY BOOK

• Although at this stage your textbook, first
  considers the CASH BOOK, the benefits of using
  books of original entry are highlighted better by
  considering the other day books first.
• In all but the smallest of businesses, the
  majority of sales will be on credit.
• When a sale is made on credit, goods will be
  supplied to a customer and a sales invoice will
  be issued to them, indicating what the business
  has supplied to them and as a consequence of
  this, how much the customer owes the business for
  the goods supplied. An example of a sales
  invoice is provided on page 154 of your textbook.

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THE SALES DAY BOOK

• We will now look at page 26 of a Sales Day Book,
  for the month of September 2009.

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SALES DAY BOOK

• SALES DAY BOOK (page26)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 D. Poole 16554 560
• 8 T. Cockburn 16555 1,640
• 28 C. Carter 16556 220
• 30 D. Stevens 16557 1,100
• 3,520

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Posting credit sales to the Sales Ledger

• The credit sales are now posted (the act of using
  one book as a means of entering transactions into
  accounts, so as to complete the double entry, is
  known as posting), one by one, to the debit side
  of each customers account, indicating how much
  money they owe to the business.
• All of the customers accounts are grouped
  together in the sales ledger.

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THE SALES LEDGER

• D. Poole (page 12)
• 2009 Folio
• Sept 1 Sales SB 26 560 T.
  Cockburn (page 39) 2009 Folio
  Sept 8 Sales SB 26
  1,640

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Posting sales to the Sales Ledger

• SALES DAY BOOK (page26)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 D. Poole 16554 SL 12 560
• 8 T. Cockburn 16555 SL 39 1,640
• 28 C. Carter 16556 220
• 30 D. Stevens 16557 1,100
• 3,520

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THE SALES LEDGER

• C. Carter (page 125)
• 2009 Folio
• Sept 28 Sales SB 26 220 D
  . Stevens (page 249) 2009 Folio
  Sept 30 Sales SB 26
  1,100

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Posting sales to the Sales Ledger

• SALES DAY BOOK (page26)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 D. Poole 16554 SL 12 560
• 8 T. Cockburn 16555 SL 39 1,640
• 28 C. Carter 16556 SL 125 220
• 30 D. Stevens 16557 SL 249 1,100
• 3,520

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Posting credit sales to the General Ledger

• At the end of the period (normally monthly) the
  total of the credit sales is posted to the credit
  of the sales account, which is held in another
  ledger (the general ledger).

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Posting credit sales to the GENERAL LEDGER

• Sales A/c (page 44)
• 2009 Folio
• Sept 30 Credit sales
• for the month SB 26 3,520

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Posting sales to the Sales Ledger

• SALES DAY BOOK (page26)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 D. Poole 16554 SL 12 560
• 8 T. Cockburn 16555 SL 39 1,640
• 28 C. Carter 16556 SL 125 220
• 30 D. Stevens 16557 SL 249 1,100
• GL 44 3,520

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REVIEW QUESTION

• Can you now see, why books of original entry are
  used?

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TRADE DISCOUNTS

• Those customers who buy large quantities of goods
  from the business, will not want to pay as much
  per unit purchased, as those who buy in small
  quantities.
• In other words, such customers may request a
  TRADE DISCOUNT.

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TRADE DISCOUNTS

• A trade discount is simply a way of calculating
  the selling price of goods sold.
• NO ENTRY FOR TRADE DISCOUNT SHOULD BE MADE IN THE
  DOUBLE ENTRY RECORDS, NOR IN THE SALES DAY BOOK.

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PURCHASES DAY BOOK

• When a business purchases goods on credit from a
  supplier, the process of recording these
  transactions is, in many respects similar to the
  sale of goods on credit, only the double entry is
  reversed.
• Let us look at page 49 of the Purchases Day Book.

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PURCHASES DAY BOOK

• PURCHASES DAY BOOK (page49)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 J. Blake 10085 560
• 8 T. Cockburn 12346 1,380
• 19 C. Brown 30556 230
• 30 K. Gabriel 25557 510
• 2,680

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REVIEW QUESTION

• Can you now see, any differences between the
  invoice numbers in the Sales Day Book and the
  purchases invoice numbers in the Purchases Day
  Book?
• Why do you think this is the case?

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Posting purchases to the PURCHASES LEDGER

• The credit purchases are posted one by one, to
  the credit of each suppliers account, indicating
  that the business owes money (creditors) to these
  suppliers.
• All the suppliers accounts are grouped together
  in the PURCHASES LEDGER.

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THE PURCHASES LEDGER

• J. Blake (page 16)
• 2009 Folio
• Sept 1 Purchases PB 49
  560 B. Hamilton (page 29)
  2009 Folio Sept 8
  Purchases PB 49 1,380

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PURCHASES DAY BOOK

• PURCHASES DAY BOOK (page49)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 J. Blake 10085 PL 16 560
• 8 T. Cockburn 12346 PL 29 1,380
• 19 C. Brown 30556 230
• 30 K. Gabriel 25557 510
• 2,680

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THE PURCHASES LEDGER

• C. Brown (page 55)
• 2009 Folio
• Sept 19 Purchases PB 49
  230 K. Gabriel (page 89)
  2009 Folio Sept 30
  Purchases PB 49 510

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PURCHASES DAY BOOK

• PURCHASES DAY BOOK (page49)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 J. Blake 10085 PL 16 560
• 8 T. Cockburn 12346 PL 29 1,380
• 19 C. Brown 30556 PL 55 230
• 30 K. Gabriel 25557 PL 89 510
• 2,680

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Posting credit purchases to the General Ledger

• At the end of the period (normally monthly) the
  total of the credit purchases is posted to the
  debit of the purchases account, which is held in
  another ledger (the general ledger).

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Posting credit purchases to the GENERAL LEDGER

• Purchases A/c (page 63)
• 2009 Folio
• Sept 30 Credit purchases
• for the month PB 49 2,680

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PURCHASES DAY BOOK

• PURCHASES DAY BOOK (page49)
• Date Customers Name Invoice No Folio Amount
• 2009
• Sept 1 J. Blake 10085 PL 16 560
• 8 T. Cockburn 12346 PL 29 1,380
• 19 C. Brown 30556 PL 55 230
• 30 K. Gabriel 25557 PL 89 510
• GL 63 2,680

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RETURNS DAY BOOKS

• Postings from the returns day books are mirror
  images (i.e. reversed, or laterally inverted) of
  the ones you have learnt to make for sales and
  purchases.
• For this reason, this chapter (chapter 16), is
  left for independent study.
• However, a few points can be difficult to
  understand and are therefore briefly discussed.

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RETURNS DAY BOOKS

• When a business agrees to take back goods and/or
  refund the money which it may have received for
  them, a document known as a credit note
  (sometimes referred to as a sales credit note)
  will be sent to the customer, showing the amount
  which the business has agreed to refund to the
  customer.
• It is called a credit note because the customers
  account will be credited (remember when the
  company invoiced the customer, this created an
  asset, the agreed refund effectively reduces this
  asset, as supplied goods have been returned, thus
  the amount owed has been reduced).

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RETURNS DAY BOOKS

• Credit notes will be recorded (sequentially,
  remember why) in a Returns Inwards Day Book.
• This is then used for posting the items as
  follows.

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RETURNS INWARDS DAY BOOK

• Credit the amount of credit notes, one by one, to
  the personal accounts of the customers, in the
  SALES LEDGER.
• At the end of the accounting period (normally one
  month), the total of the Returns Inwards Day Book
  is posted to the debit of the Returns Inwards
  Account, in the GENERAL LEDGER.
• An example of entries to the various ledgers is
  provided on page 170 of your text book.

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RETURNS OUTWARDS AND DEBIT NOTES

• If the supplier agrees, goods bought by the
  business may be returned.
• When this happens, a debit note is sent by the
  business to the supplier, giving details of the
  goods returned and the reason for their return.

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RETURNS DAY BOOKS

• Debit notes will be recorded (sequentially,
  remember why) in a Returns Outwards Day Book.
• This is then used for posting the items as
  follows.

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RETURNS OUTWARDS DAY BOOK

• Debit the amount of debit notes, one by one, to
  the personal accounts of the customers, in the
  PURCHASES LEDGER.
• At the end of the accounting period (normally one
  month), the total of the Returns Outwards Day
  Book is posted to the credit of the Returns
  Outwards Account, in the GENERAL LEDGER.
• An example of entries to the various ledgers is
  provided on page 172 of your text book.

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RETURNS OUTWARDS DAY BOOK

• PLEASE NOTE THAT MANY FIRMS NOW DO NOT ISSUE
  DEBIT NOTES.
• RATHER, THEY INFORM THE SUPPLIER THAT THAY ARE
  RETURNING GOODS AND THE REASONS THAT THE GOODS
  ARE BEING RETURNED.
• THEY THEN RETURN THE GOODS AND WAIT TO RECEIVE A
  CREDIT NOTE FROM THE SUPPLIER.

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RETURNS OUTWARDS DAY BOOK

• THESE SUPPLIER CREDIT NOTES (sometimes referred
  to as purchases credit notes) ARE RECORDED IN THE
  RETURNS OUTWARDS DAY BOOK, AND TREATED EXACTLY
  THE SAME AS DEBIT NOTES WOULD HAVE BEEN TREATED
  IN THE PURCHASES AND GENERAL LEDGER.
• WILL THE CREDIT NOTE NUMBERS IN THE RETURNS
  OUTWARDS DAY BOOK BE SEQUENTIAL IF THIS METHOD IS
  EMPLOYED?

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RETURNS OUTWARDS DAY BOOK

• THIS IS CONFUSING, BUT REFLECTS THE VARIETY OF
  WAYS IN WHICH BUSINESSES RECORD TRANSACTIONS.
• THE NET RESULT SHOULD BE THE SAME, BUT THE ACTUAL
  METHOD OF RECORDING TRANSACTIONS IS DIFFERENT.

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THE CASH BOOK

• Usually the cash book consists of the cash
  account and the bank account put together in one
  book.
• In appendix A, exhibits 13.1 and 13.2, illustrate
  how a cash book combines both the cash and bank
  account (these can be found on page 137 of the
  textbook).
• Note, appendix A is an excel spreadsheet, and
  demonstrates how spreadsheets can be used by
  accountants to reduce the amount of simple
  calculations that they must perform.
• It also demonstrates how the advent of the
  computer and accounting packages, such as Sage,
  which you will study if you are pursuing an
  accounting degree, has revolutionised the day to
  day tasks of recording transactions and preparing
  financial statements.

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THE CASH BOOK

• TRY CHANGING THE AMOUNT RECEIVED IN THE CASH
  ACCOUNT AND IN THE CASH BOOK FROM T. Moore TO
  133, IN THE SPREADSHEET.
• DO YOU AGREE WITH THE CHANGE IN THE BALANCES
  CARRIED DOWN AND BROUGHT DOWN?
• TRY CHANGING THE FIGURE FOR CAPITAL INTRODUCED IN
  THE BANK ACCOUNT AND THE CASH BOOK TO 12,000 IN
  THE SPREADSHEET.
• DO YOU AGREE WITH THE CHANGE IN THE BALANCES
  CARRIED DOWN AND BROUGHT DOWN?

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THE CASH BOOK

• Experiment with changing the entries in the
  spreadsheet.
• Can you see the benefits of computerised systems
  of accounting?

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CASH PAID INTO THE BANK

• A cash receipt of 100 from M. Davis on 1 August
  2008 is followed by the banking of 80 cash on 3
  August.
• This would be shown in the Cash Book as follows

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CASH PAID INTO THE BANK

• CASH BOOK
• Cash Bank Cash Bank
• 2008 2008
  
• Aug 1 M. Davies 100 Aug 3 Bank 80
• 3 Cash 80

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CASH WITHDRAWN FROM THE BANK

• A withdrawal of 75 cash from the bank on 31
  August 2008.
• This would be shown in the Cash Book as follows

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CASH WITHDRAWN FROM THE BANK

• CASH BOOK
• Cash Bank Cash Bank
• 2008 2008
  
• Aug 1 M. Davies 100 Aug 3 Bank 80
• 3 Cash 80
• 
  31 Cash
  75

31 Bank 75
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CONTRA ENTRIES

• Note that in the previous two examples, the debit
  and credit entries are made in the same book of
  original entry.
• When this happens it is known as a contra item.
• In the folio column an entry of C should be made
  as no further posting is required.
• Can you see why the Cash Book is different from
  the other books of original entry?

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THE CASH BOOK

• All of the other books of original entry are
  associated with two entries, i.e. one to a
  personal account (which is held in either the
  Sales or Purchases ledgers) and one to the
  general ledger.
• In the Cash Book, there is only one posting to
  either the Sales, Purchases or General ledger.
• Why is this?

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THE CASH BOOK

• The reason is that the Cash Book is actually the
  combination of two accounts, i.e. the Cash
  Account and the Bank Account, hence one entry is
  made when cash and bank transactions are recorded
  in the book.
• To complicate things a little further, there is
  one exception to this, that is the treatment of
  cash discounts.

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CASH DISCOUNTS

• CASH DISCOUNTS ARE DISCOUNTS EITHER RECEIVED
  FROM SUPPLIERS OR GIVEN (ALLOWED) TO CUSTOMERS,
  FOR EITHER THE BUSINESS PAYING THE AMOUNT IT OWES
  (CREDITORS) EARLIER THAN IT HAS TO, OR FOR
  CUSTOMERS (DEBTORS) PAYING THE BUSINESS EARLIER
  THAN THEY HAVE BEEN ASKED TO BY THE BUSINESS.

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CASH DISCOUNTS

• DISCOUNTS ALLOWED, are cash discounts given
  (allowed) by a business to its customers when
  they pay the amount they owe to the business
  quickly.
• DISCOUNTS RECEIVED, are cash discounts received
  by a business from its suppliers, when the
  business pays the amount it owes to suppliers
  quickly.

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CASH DISCOUNTS

• ALL cash discounts appear in the profit and loss
  part of the Trading, Profit and Loss Account.
• Discount allowed is an expense of the business,
  incurred to receive quick payment from customers,
  (NOT for the customer buying large quantities of
  goods from the business).
• Discount received is income (revenue) received by
  the business for paying its suppliers quickly,
  (NOT for buying a large quantity of goods from
  the supplier).

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DISCOUNTS

• What is the name given to the discount, either
  given or received, for buying from suppliers, or
  selling to customers, large quantities of goods?
• Is this type of discount recorded using the
  double entry system?

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DISCOUNT COLUMNS IN THE CASH BOOK

• The discounts allowed account and the discounts
  received account are in the General Ledger along
  with all the other expense and revenue accounts.
• Discounts allowed and received are recorded for
  the first time, in the Cash Book, by inserting an
  extra column on the debit side (discounts
  allowed) and an extra column on the credit side
  (discounts received).
• A worked example should illustrate this.
• The worked example is included in Appendix B (an
  excel spreadsheet). It can be found on page 143
  of your textbook.