Fundamentals of Financial Accounting

C H A P T E R
2
Books of Prime Entry
Chapter 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 ledger
each time a transaction occurred, the ledger account 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 the 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.
Books of original entry are also known as either 'journals' or 'daybooks'. The term
'day book' is, perhaps, more commonly used, as it more clearly indicates the nature
of these books of original entry - entries are made to them every day.

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

Book of prime entry Transaction type

Sales day book Credit sales

Purchases day book Credit purchases

Sales returns day book Returns of goods sold on credit

Purchases returns day book Returns of goods bought on credit

Cash book All bank transactions

Petty cash book All small cash transactions

The journal All transactions not recorded elsewhere

 | Fundamentals of Financial Accounting Chapter 02

Learning Outcomes

At the end of each topic you should be able to;

Explain the main forms of business transaction and documentation

Identify, explain and understand the main forms of accounting record, including:
-Day books
-the cash book
-the journal
Chapter 02 Fundamentals of Financial Accounting

1. Business transactions and documentation

In every business a number of transactions and events will take place every day. The role of
financial reporting is to effectively measure the effect of those transactions and events records the
effects on the business and summarize those transactions and their consequences in a format that
is useful to the users of the financial statements.
The main transactions that take place include sales, purchases and payroll related transactions. All
of these transactions must be adequately captured by the financial reporting system.
With most transactions supporting document will be created to confirm the transaction has taken
place, when the transaction took place and the associated value of the transaction. This
documentation is vital to the financial accountant, who uses the information on the document as a
data source to initiate the measurement and recording of the transactions.
The table below summarizes the main types of business documentation and sources of data for an
accounting system, together with their content and purpose.
Contents Purpose
Quotation Quantity/ description/details of To establish price from various
goods required. suppliers and cross refer to
purchase requisition.
Purchase order Details of supplier. E.g. name, Sent to supplier as request for
address. Quantity/description/ supply. To check to the quotation
details of goods required and price. and delivery note.
Terms and conditions of delivery,
payments, etc.
Sales Orders Quantity/description/ details of Cross checked with the order
goods required and price placed by customer. Sent to the
stores/ warehouse department for
processing of the order.
Goods dispatched Details of supplier, e.g. name and Provided by supplier. Checked with
note (GDN) address. Quantity and description of goods received and purchase order.
goods.
Goods received note Quantity and description of goods Produced by company receiving the
goods as proof of receipt. Matched
(GRN)
with delivery note and purchase
order
Invoice Name and address of customer and Issued by supplier of goods as a
supplier; details of goods, e.g. request for payment. For the
quantity, price, value, sales, tax, supplier selling the goods/ services
terms of credit, etc. this will be treated as a sales
invoice.
For the customer this will be treated
as a purchase invoice.
Statement Details of supplier, e.g. name and Issued by the supplier. Checked
address. Has details of date, invoice with other documents to ensure that
numbers and values, payments the amount owing is correct.
made, refunds, amount owing.
| Fundamentals of Financial Accounting Chapter 02

Credit note Details of customer, e.g. name and Sent by the firm to customers who
address. Contains details of goods have returned the goods. Checked
returned. E.g. quantity, price, value, with documents regarding goods
sales tax, terms of credit, etc. returned.
Debit note Details of supplier, e.g. name and Issued by the company receiving
address. Contains details of goods the goods. Cross referred to the
returned. E.g. quantity, price, value, credit note issued by the supplier.
sales tax, terms of credit, etc.
Remittance advice Method of payment, invoice Sent to supplier with, or as
number, account number, date, etc. notification of payment.
Receipt Details of payment received. Issued by the selling company
indicating the payment received.

Once the relevant document/data source has been received by the financial accountant they have
to make a record of it in an appropriate place in the accounting system. However, transactions
cannot simply be entered into the financial statements for the shareholders; there is an accounting
process that has to take place before the results for the year can be summarized.
The flow of information from the initial transaction to the financial statements is illustrated as
follows:

Data Source

Books of Prime Entry

Ledger Accounts

Trail Balance

Financial Statements

4 Books of prime entry

Chapter 02 Fundamentals of Financial Accounting

2. Books of Prime Entry

Books of Prime entry are the books in which we first record transactions. These are not accounts;
they are simply books that records the details of a transactions, almost like a diary. The firm will
have a separate book for each kind of transaction. The type of the transaction will affect which
book it, is entered into. Sales will be entered in one book, purchases in another book, cash in
another book, and so on. The books of prime entry are used to record the following:

• The date on which each transaction took place - the transactions should be shown in date
order;
• Details relating to the transactions are entered in a 'details' column; e.g. name of
customer/supplier
• A folio column entry is made cross-referencing back to the original 'source document',
e.g. the invoice;
• The monetary amounts are entered in columns included in the books of original entry for
that purpose.

Advantages of keeping books of original entry

• Accounts can be found more easily by the use of the cross referencing nature of the books
of original entry being kept.
• If records are lost then the ledgers and the books of original entry acts as a backup for
each other.
• Acts as a 'listing device' for posting totals to various accounts, thereby saving labour.
• The commonly used books of original entry together with source document it used to
record transactions are:

Books of Prime Entry Transaction Type Source Document

Sales daybook (or Sales for credit sales Sales invoice
journal)
Purchases daybook (or for credit purchases Purchase invoice
Purchases journal)
Sales returns day book/ for returns inwards Credit notes
Returns inwards daybook (or
Returns inwards journal)
Purchases returns day for returns outwards Debit notes
book/Returns outwards
daybook (or Returns outwards
journal)
Cashbook for receipts and payments of Cheque counterfoils(From the
cash and cheques chequebook to show
cheques paid out), paying in
slips(Evidence of money
paid into bank accounts), till
rolls (Evidence of cash
being received)
Petty cashbook All small cash transactions Petty cash vouchers
General journal All transactions not recorded Everything else not covered by
else where above
| Fundamentals of Financial Accounting Chapter 02

2.1 Sales Day Book

A book in which non-cash sales are recorded with details of customer, invoice, amount and date;
these details are later posted to each customer's account in the sales ledger.
A sales book is also known as sales day book is a book of prime entry in which are recorded the
details of credit sales made by a businessman. Total of sales book shows the total credit sales of
goods during the period concerned. Usually the sales book is totaled every month. The sales day
book is written up daily from the copies of invoices sent out.
In many businesses most of the sales will be made on credit rather than for immediate settlement
of the amount. For some businesses all sales will consist entirely of credit sales, while for some
other firms, all will be for cash settlement. It is realistic to expect most firms to have some cash
and some credit sales. All credit sales should be entered into the sales daybook.
The source document for the sales daybook is the sales invoice. A sales invoice is simply a
business document containing all the details of the sale made. The business will keep a copy and
will send another copy of the invoice to the customer. Details contained on the invoice would
include:

• Name of customer
• Address of customer
• Date of sale
• Value of sales
• Any trade discount
• Any cash discount - and details of the conditions
• Invoice number

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

Example

Date Invoice Customer Rs.

30.4.14 1 Ruwan 4,900
30.4.14 2 Nuwan 3,800
30.4.14 3 Kamal 2,700
30.4.14 4 Sunil 10,500
30.4.14 5 Amal 2500
––––––
Total for 30.4.14 24,400
The total sales for the day of Rs.24, 400 will be entered into the accounting ledgers in
double entry format.
Chapter 02 Fundamentals of Financial Accounting

2.2 Purchases day book

Purchases book or purchases day book is a book of original entry maintained to record credit
purchases. You must note that cash purchases will not be entered in purchases day book because
entries in respect of cash purchases must have been entered in the cash book. At the end of each
month, the purchases book is totaled. The total shows the total amount of goods purchased on
credit. Purchases book is written up daily from the invoices received. The invoices are
consecutively numbered. The invoice of each number is noted in the purchases book.
The purchase day book summarizes the daily purchases made on credit terms (i.e. the goods are
purchased and payment is made at a later date)

Example
Date Invoice Customer Rs.
30.4.14 34 Henry 2,750
30.4.14 11 Roshni 1,450
30.4.14 5609 Herath 4,875
30.4.14 2 Nuwan 7,550
30.4.14 577 Diluka 3,445
–––––
Total for 30.4.14 20,070
The total purchases for the day of Rs.20,070 will be entered into the accounting
ledgers in double entry format.

2.3 Sales returns book

Sales returns book is also called returns inwards book. It is used for recording goods returned to
us by our customers. The ruling of this book is exactly as for sales day book.
Credit Note:
Customers who return goods should be sent a credit note. It is a statement sent by a business to
another person showing the amount credited to the account of the later. Credit notes are serially
numbered and are similar in form to the invoices. These are usually printed in red ink. Credit
notes issued to customers are vouchers for the entries appearing in the sales returns book.
The sales returns book summarizes the daily return of goods sold on credit terms

Example
Date Invoice Customer Rs.
30.4.14 1 Amal 500
30.4.14 2 Roshan 4,500
30.4.14 3 Damith 3,900
30.4.14 4 Sam 6,700
30.4.14 5 Sunil 2,300
–––––
Total for 30.4.14 17,900
| Fundamentals of Financial Accounting Chapter 02

The total sales returns for the day of Rs.17,900 will be entered into the accounting
ledgers in double entry format.

2.4 Purchases returns book

Purchases returns book is a book in which the goods returned to suppliers are recorded. It is also
called returns outward book or purchases returns day book. Goods may be returned because they
are of the wrong kind or not up to sample or because they are damaged etc. The ruling of this
book is absolutely the same as of purchases day book. The book and entries are made therein just
the same as those made in the purchases day book.
Debit Note:
When the goods are returned to the suppliers, intimation is sent to them through what is known as
a debit note. These debit notes serve as vouchers for these entries. A debit note is a statement sent
by a businessman to another person, showing the amount debited to the account of the later. Debit
notes are usually serially numbered and are prepared in the same
The purchases returns book summarizes the daily return of goods bought on credit terms

Example

Date Invoice Customer Rs.

30.4.14 112 Henry 1,600
30.4.14 56 Saman 750
30.4.14 7 Kamal 800
30.4.14 890 Nuwan 500
30.4.14 12 Diluka 1000
–––––
Total for 30.4.14 4,650
The total purchases returns for the day of Rs.4,650 will be entered into the
accounting ledgers in double entry format.

2.5 Cash Book

Deals with both credit and debit transactions using cash. These transactions are totaled on a
regular basis to be posted to the ledger, either directly or through the journal.
Single column cash book
Single column cash book records only cash receipts and payments. It has only one money column
on each of the debit and credit sides of the cash book. All the cash receipts are entered on the
debit side and the cash payments on the credit side.

A double column cash book

A double column cash book or two column cash book is one which consists of two separate
columns on the debit side as well as credit side for recording cash and discount. In many concerns
it is customary for the trader to allow or to receive small allowance off or against the dues.
Chapter 02 Fundamentals of Financial Accounting

These allowances are made for prompt settlement of accounts. In certain business almost all
receipts or payments are accompanied by such discounts and in order to avoid unnecessary
postings separate columns in the cash book are introduced to record the discounts received or
allowed. These discount columns are memorandum columns only. They do not form the discount
account. The discount column on the debit side of the cash book will record discounts allowed
and that on the credit side discounts received.
A three column cash book
A three column cash book or treble column cash book is one in which there are three columns on
each side - debit and credit side. One is used to record cash transactions, the second is used to
record bank transactions and third is used to record discount received and paid.
When a trader keeps a bank account it becomes necessary to record the amounts deposited into
bank and withdrawals from it. For this purpose one additional column is added on each side of the
cash book. One of the main advantages of a three column cash book is that it is very helpful to
businessmen, since it reveals the cash and bank deposits at a glance

Writing a Three column Cash Book:

Opening Balance:
Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the cash
book and bank columns. If the opening balance is credit balance (overdraft) then it will be put in
the credit side of the cash book in the bank column.
Cheque/Check or Cash Received:
If a cheque is received from any person and is paid into the bank on the same date it will appear
on the debit side of the cash book as “To a Person”. The amount will be shown in the bank
column. If the cheque received is not deposited into the bank on the same date then the amount
will appear in the cash column. Cash received will be recorded in the usual manner in the cash
column.
Payment ByCheque/Check or Cash:
When we make payment by cheque, this will appear on the credit side “By a person” and the
amount in the bank column. If the payment is made in cash it will be recorded in usual manner in
the cash column.

Contra Entries:
If an amount is entered on the debit side of the cash book, and the exact amount is again entered
on the credit side of the same account, it is called “contra entry”. Similarly an amount entered on
the credit side of an account also may have a contra entry on the debit side of the same account.
Contra entries are passed when:
Cash is deposited into bank by office: It is payment from cash and receipt in bank. Therefore,
enter on credit side, cash column “By Bank” and on debit side bank column “To Cash”. The
reason for making two entries is to comply with the principle of double entry which in such
transactions is completed and therefore, no posting of these items is necessary. Such entries are
marked in the cash book with the letter “C” in the folio column.
Cheque/Check is drawn for office use: It is payment by bank and receipt in cash. Therefore, enter
on the debit side, cash column “To Bank” and on credit side, bank column “By Cash”.

Books of Prime Entry 9

| Fundamentals of Financial Accounting Chapter 02

Bank Charges and Bank Interest Allowed:

Bank charges appear on the credit side, bank column “Bank Charges.” Bank interest allowed
appears on the debit side, bank column “To Interest”.
The main advantages of cash book are as follows:
• To have systematic and permanent record of all cash and banking transactions in a
separate book.
• To obtain reliable and detailed information of all cash receipts and payments easily and
immediately.
• To keep effective control over misappropriation of cash and banking transaction.
• To know the main sources and heads of payment of cash.
• To know cash and bank balances.
• To help to prepare cash budget and to avoid the possibility of having excess or shortage
of cash.
• To make the cashier and other concerned officers accountable for all cash and banking
transactions.

2.6 Petty cash book

In almost all businesses, it is found necessary to keep small sums of ready money with the cashier
or petty cashier for the purpose of meeting small expenses such as postage, telegrams, stationary
and office sundries etc. The sum of money so kept in hand generally termed as petty cash and
book in which the petty cash expenditures are recorded is termed as petty cash book.
In large business houses , the cashier has to handle every day a large number of receipts and
payments and if in addition to this he is further saddled with petty cash payments, his position
becomes embarrassing. Besides, it is most common to find with large commercial establishments
that all receipts and payments are made through bank. Since expenses like postage, telegrams,
traveling etc, cannot be made by means of cheques, the maintenance of a small cash balance to
meet these petty payments becomes all the more necessary.
A petty cash book is generally maintained on a columnar basis – a separate column being allotted
for each type of expenditure. This is only one money column on the debit side and all sum
received from time to time by the petty cashier from the chief cashier are entered in it. The credit
side consists of several analysis columns. Every payment made by the petty cashier is entered on
this side twice – Firstly it is recorded in the total column and then to the appropriate column to
which the expense is concerned. The total of the “total column” will naturally agree with the total
of all subsidiary columns. The difference between the total of the debit items and that of the “total
column” on the credit side at any time will represent the balance of the petty cash in hand and this
should tally with the petty cashier’s actual holding of cash.
The posting from the petty cash book to the respective accounts in the ledger are made directly in
total at the end of every month or any other fixed period.
The Imprest System of petty cash:
The more scientific method of maintaining petty cash so for introduced into practice is the
imprest system. Under this system a fixed sum of money is given to the petty cashier to cover the
petty expenses for the month (Or even on weekly basis). At the end of a month the petty cashier
submits his statement of petty expenses to the chief cashier. The chief cashier on the receipt of

10 Books of prime entry

Chapter 02 Fundamentals of Financial Accounting

such statement refunds to the petty cashier the exact amount spent by him during the month, thus
making the imprest for the next month the same as it was at the beginning of the current month.
It is to be noted that the amount of cash in the hands of the petty cashier is a part of the cash
balance; therefore it should be included in the cash balance when the latter is shown in the trial
balance and the statement of financial position. It should also be kept in mind that petty cash book
is not like the cash book. It is a branch of cash book.
The main advantages of imprest system of petty cash are as follows:
• As the petty cashier has to produce to the chief cashier the petty cash book for inspection, it
acts as a healthy check on the petty cashier.
• As the petty cashier has to account for his expenses, before he can draw further sums, the
petty cash book remains up to date.
• As the petty cashier cannot draw as and when he likes, it prevents unnecessary
accumulation of cash in his hand thus the chances of defalcation of cash are minimized.
• Petty cash book maintains records of all petty payments systematically.
• Petty cash book supplies information regarding petty payments made on different heads
more easily and quickly.
• Petty cash reduces the burden of head cashier as he is not required to handle petty
transactions. Hence, the head cashier will have enough time to manage and control major
cash transactions more effectively.
• Petty cash book saves time because each payment under particular head is not posted into
the ledger separately. The posting is made with the periodical total at a time.

2.7 Journals
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
o depreciation charge for the year
o irrecoverable debt write-off
o record the movement in the allowance for receivables
o accruals and prepayments
o 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. Show if transactions are to be posted to the debtor or creditor side of the relevant ledger
account.
Presentation of a journal

A journal should be laid out in the following way:

Dr Non-current asset Rs.xxx
Cr Payables Rs.xxx
A brief narrative should be given to explain the entry.

Books of Prime Entry 11

| Fundamentals of Financial Accounting Chapter 02

Summary

Cash & Bank Transactions- Cash book

Small Cash Transactions- Petty cash

book Dual

Effect
Credit Sales- Sales day book
Transactions Records
occur
In
Credit Purchases- Purchases day book
Ledger

Credit sales returns- Sales returns day Account

book s

Credit purchase returns- Purchases

returns day book
 Chapter 02 Fundamentals of Financial Accounting

Exercises

1. Mr. Mathew runs a business providing equipment for bakeries.write up the

following transactions arising in the two weeks of April 2014 into the
relevant day books.
• 1st April Mrs. Sandra buys Rs. 5000 worth of cake tins.
• 1st April Mr. Mathew purchases Rs. 20,000 worth of equipment from Ceylon
PLC.
• 3rd April Mr. Mathew returns goods costing Rs.3500 to another supplier,
Cook PLC.
• 4th April Mr. Fernando buys Rs.12,000 worth of equipment.
• 5th April Mrs. Sandra returns Rs.1000 worth of goods supplied to her.
• 5th April Mr. Jeson buys a new oven for Rs.5000.
• 5th April Mr. Mathew purchases Rs.2500 worth of baking trays from Sand-
witch PLC.
• 9th April Mr. Mathew purchases ovens costing Rs. 10,000 from Hot PLC.
• 9th April Mr. Mathew returns equipment costing Rs.3000 to Ceylon PLC.
• 11th April Mrs. Sandra buys oven costing Rs.6000.

2. On April 1, 2014 Amali Stores cash book showed debit balance of cash
Rs.1,55,000 and bank Rs.135,750. During the month of January following
business was transacted.
2014
Apr.1 Purchased office computer for cash Rs.55000; cash sales Rs.31500
” Deposited cash Rs.5000
” 4 Received from Ruwan a cheque for Rs.25.500 in part payment of his account
” 6 Paid by cheque for merchandise purchased worth Rs.10,050
” 8 Deposited into bank the cheque received from Ruwan.
” 10 Received from Khan a cheque for Rs.7750 in full settlement of his account
and allowed him discount Rs.1500.
” 12 Sold merchandise to Kamal Bros. for Rs.1,5000 who paid by cheque which
was deposited in the bank.
” 16 Paid SamanRs.9150 by cheque, discount received Rs.500
” 27 Paid to Ahmad by chequeRs.6500
” 30 Paid salaries by chequeRs.17500
” 30 Deposited into bank the cheque of Khan.
” 30 Drew from bank for office use Rs.2500.
| Fundamentals of Financial Accounting Chapter 02

Required: Record the transactions in three column cash book

3. Tom Smart started a small printing business on 1 June. The following is a list
of transactions which occurred during his first week of trading.following
relate to the petty cash expenditure incurred during the first week.
2014
Jun.1 established the petty cash fund in the amount of 10,000
Jun.2 Issued Voucher No. 1 for Sundry accessories for shop display Rs.1850.
Jun.2 Issued Voucher No. 2 for Cleaning cloths, soap and disinfectant Rs.975
Jun.3 Issued Voucher No. 3 for One dozen marker pens& one box of printer
labelsRs.1750
Jun.4 Issued Voucher No. 4 for Postage stamps Rs.250
Jun.6 Issued Voucher No. 5 for Petrol for delivery vanRs.2500
Jun.7 Replenished the fund
Required: Record the transactions in petty cash book

Solutions
14 Books of prime entry