CHAPTER 3: RECORDING, SUMMARISING AND POSTING TRANSACTIONS

Business transactions are initially recorded on source documents. Records of the details on
these documents are made in the books of prime entry.

Books of Prime entry Documents recorded

Cash book Cash paid and received
Petty Cash book Notes and coins paid and received
Sales Day book Credit sales invoices, Credit notes sent
Sales returns day book Credit notes
Purchase day book Credit purchase invoices, Credit notes received
Purchase returns day book Credit notes received
Journal Adjustments

Summarising source documents

It is vital that information on the source documents is summarized due to their volume, these
may be summarized in the following ways:

1. Summaries of all transactions undertaken with an individual supplier or customer so that a

net amount due or owed can be calculated. Ledger used: Receivables ledger and Payables
ledger

2. Summaries of all transactions undertaken with all suppliers and customers, so that a total for
receivables & a total for Payables could be calculated. Ledger used: General Ledger…
(a)Receivables ledger Control Account (b) Payables ledger Control Account

NB: Control Accounts rather than Individual Suppliers & Customers Accounts make up the
double entry

DAY BOOKS

The sales day book

The sales day book is a list of all invoices sent out to credit customers each day.

The sales returns day book

When customers return goods for some reason, the returns are recorded in the sales returns
day book.

The purchase day book

The purchase day book is the record of all the invoices received from suppliers.

The purchase returns day book

The purchase returns day book is kept to record credit notes received in respect of goods
which the business sends back to its suppliers.

The cash book

The cash book is a book of prime entry, used to keep a cumulative record of money received
and money paid out by the business via its bank account.

Petty cash book

Most businesses keep a small amount of cash on the premises to make occasional small
payments in cash – eg to pay the milkman, to buy a few postage stamps, or to pay for some bus
or taxi fares. This is often called the cash float. It can also be the resting place for occasional
small receipts, eg cash paid by a visitor to make a phone call.

The petty cash book is the book of prime entry which keeps a cumulative record of the small
amounts of cash received into and paid out of the cash float

Double entry

Every transaction gives rise to two effects (or two entries). One entry is known as a Credit
entry and the other a debit entry.

Double entries often displayed in ‘T’ accounts

Debit (DR) side

Increase in an assets

Increase in an expense

Decrease in a liability (amount owed)

Credit (CR) side

Decrease in an asset

Decrease in an expense

Increase in a liability

Increase in income

The General (Nominal ) Ledger

Most accounts are contained in the general ledger (sometimes referred to as the nominal
ledger

The general ledger is the accounting record which summarises the financial affairs of a
business. It contains details of assets, liabilities and capital, income and expenditure and so
profit and loss. It consists of a large number of different ledger accounts, each account having
its own purpose or 'name' and an identity or code. Another name for the general ledger is the
nominal ledger.

Transactions are posted to accounts in the general ledger from the books of prime entry.

Posting means to enter transactions in ledger accounts in the general ledger from books of
prime entry.

Often this is done in total (ie all sales invoices in the sales day book for a day are added up and
the total is posted to the total receivables account) but individual transactions are also posted
(eg non-current assets).

Accounting for Sales tax

Sales tax and sales

A business does not keep the output sales tax it charges – it pays it back to the tax authority. It
therefore follows that its records of sales should not include sales tax.

Example: accounting for output sales tax

If a business sells goods for $600 + $120 sales tax, i. e for $720 gross price, the sales account should

only record the $600 excluding sales tax. The accounting entries for the sale would be as follows.

DEBIT Cash or trade accounts receivable $720

CREDIT Sales $600

CREDIT Sales tax account (output sales tax) $120

Similarly, the business does not want to show input tax paid on purchases as a cost of the business – it
must reclaim it from the government. However, the cost of purchases in the statement of profit or loss
may or may not include the 'input' tax paid, depending on whether or not the input tax is recoverable.

If input tax is recoverable, the cost of purchases should exclude the tax. For example, if a
business purchases goods on credit for $400 + recoverable tax $80, the transaction would be
recorded as follows.

DEBIT Purchases $400

DEBIT Sales tax account (input tax) $80

CREDIT Trade accounts payable $480

If the input tax is not recoverable, the cost of purchases must include the tax, because it is the
business itself which must bear the cost of the tax.

DEBIT Purchases $480

CREDIT Trade accounts payable $480

Sales tax is accounted for when it first arises – when recording credit purchases/sales in credit

transactions, and when recording cash received or paid in cash transactions.

RECEIVABLES(SALES)LEDGER AND THE PAYABLES(PURCHASES)LEDGER

Personal accounts are the accounts detailing the transactions which have already been summarised in
the general ledger, hence why they do not form part of double entry system. This involves transactions
relating to customers and suppliers.
Receivables ledger consists of number of individual personal receivables accounts. It is maintained for
the following reasons;

 To assess the credit position of any individual customer any any point in time
 To easily match payment against correspondence debt owed
 To send statement to each credit customer at the end of each month
Edwin's account
10.07.x7 balance b/d 500.00 18.07.x7 Sales returns 300.00
15.07.x7 Sales 1,500.00
31/07.x7 balance c/d 1,700.00
2,000.00 2,000.00
01.08.x7 balance b/d 1,700.00

The debit side of the receivables account show the amount that Edwin owes to the business, when he
pays ,he reduces the debt, so cash received will be debited in the cash book and the receivables
account(Edwin)will be credited to reduce the balance. Any sales returns will also be recorded on the
credit side to show reduction of the invoice previously sent.

Payables ledger consists of number of individual personal payables accounts.

Sophia's account
10.07.x7 cash 500.00 18.07.x7 Purchases 900.00
15.07.x7 Purchases returns 200.00
31/07.x7 balance c/d 200.00
700.00 900.00
01.08.x7 balance b/d 200.00

CONTROL ACCOUNTS;

This are the accounts in the general ledger which are used to record a total value of similar individual
transactions.

The receivables ledger control account(total receivables account);This is a control account which keeps
a record of all transactions relating to receivables in total.It is posted with the totals from the sales day
book, sales returns day book and the cash book.

The payables ledger control account(total payables accounts);This is a control account which keeps a
record of all transaction relating to payables in total.It is posted with the totals from the purchases day
book, purchases returns day book and the cash book.
METHODS OF CODING DATA

Coding data means giving each account in the accounting system, a unique code in order to recognise
the unique nature of each transaction and to identify the correct account for posting. It saves time,
storage space in computer systems.

Account Account
code Name
1000/000 Non- current assets
1000/001 motor vehicles
1000/002 Furniture & Fittings
2000/000 Inventory
3000/000 Cash

MANUAL AND COMPUTERISED SYSTEMS

Input; Entering data from original documents

Processing; posting books and ledgers and sorting information accordingly

Output ;Producing reports(financial statements)

Advantages of computerised system;

 Large amount of data can be processed very quickly

 It saves time
 They can perform some tasks automatically
 More accurate

Batch processing and control totals

Batch processing means sorting transactions according to their similarity in batches,and then
processing them with a computer .

Control totals is used to ensure that the total value of input transactions is the same as the
value of totals previously calculated.

ACCOUNTING SYSTEMS

Accounting software or programmes are the instructions that tells the electronics how to
process data.

Accounting package is an accounting system which consists of accounting modules(e.g general

ledger,payables ledger,cash book)

A module is programme which deal with certain part of accounting system,

An accounting package may consists of one module(stand alone module) or several

modules(suite)

Disadvantages of computerised accounting systems’

 Time and costs incurred to install the system and training of its users
 Lack of audit trail
 Security checks to protect data

INTERGRADED SOFTWARE

This is a programme containing modules which interrelate with other relevant modules, so
that data entered in one module can automatically update relevant data in other modules.