Accounting (9215) | Prepare accounting records based on source documents and use the main books of prime entry and ledger accounts to record transactions

Hello Future Accountants! Recording Transactions Step-by-Step

Welcome to the essential starting point of accounting! This chapter is like learning your ABCs before writing a novel—it covers the fundamental processes that make all future financial analysis possible.

We are going to learn how businesses take messy, real-world documents (like receipts and invoices) and turn them into organized financial records using a process that ensures everything is tracked accurately. Don't worry if this seems technical; we will break down the journey of a transaction from a simple piece of paper right up to the final accounts!

Section 1: The Starting Point – Source Documents

What is a Source Document?

A source document is the original evidence of a transaction. It proves that a financial event actually happened. Every single entry you make in the accounting books must be backed up by one of these documents.

Analogy: Think of source documents as the receipts in your wallet after you've bought something. You need them to prove what you spent!

Key Source Documents and Their Uses

Understanding which document relates to which transaction is the very first step in recording.

• Sales Invoice: Issued by us when we sell goods on credit (the customer pays later).
  Use: Recorded in the Sales Day Book.
• Purchases Invoice: Received by us when we buy goods on credit (we pay later).
  Use: Recorded in the Purchases Day Book.
• Credit Note Issued: Sent to a customer when they return goods to us.
  Use: Recorded in the Returns Inwards Day Book.
• Credit Note Received: Received from a supplier when we return goods to them.
  Use: Recorded in the Returns Outwards Day Book.
• Receipts Issued/Received, Cheque Counterfoils, Bank Statements: These documents relate to money moving into or out of the bank or cash register.
  Use: Recorded in the Cash Book.
• Memorandum/Voucher: Used for internal or less common transactions, like adjusting an error or recording the owner starting the business.
  Use: Recorded in the General Journal (or Journal Proper).

Section 2: The First Stop – Books of Prime Entry (Journals)

What are Books of Prime Entry?

The Books of Prime Entry (also called Journals or Day Books) are where transactions are first recorded in chronological (date) order.

They are not part of the double-entry system yet. They are just lists! They organize the mass of source documents into categories before they are transferred to the main accounts (the Ledger).

Analogy: If source documents are ingredients, the Books of Prime Entry are the recipe pages listing what you used each day.

The Main Books of Prime Entry

1. The Sales Day Book (SDB)

Records all credit sales (sales where money is received later).

• Source Document: Sales Invoices issued.
• Purpose: To list the total amount owed by customers for goods sold on credit during a period.

2. The Purchases Day Book (PDB)

Records all credit purchases (purchases where money is paid later).

• Source Document: Purchases Invoices received.
• Purpose: To list the total amount owed to suppliers for goods bought on credit during a period.

3. The Returns Day Books

We have two separate books for returned items:

• Returns Inwards Day Book (RIDB): For goods returned to us by our customers. Source Document: Credit Notes Issued.
• Returns Outwards Day Book (RODB): For goods returned by us to our suppliers. Source Document: Credit Notes Received.

4. The Cash Book (CB)

This is a very special book. It records all transactions involving actual cash or bank money (money received and money paid).

• Source Documents: Receipts, Cheque Counterfoils, Bank Statements.
• Dual Role: The Cash Book acts as both a Book of Prime Entry (listing transactions chronologically) AND a main Ledger Account (the Bank Account and Cash Account).
• Structure: It has a Debit side (Money In) and a Credit side (Money Out).

5. The General Journal (or Journal Proper)

This book records all transactions that do not fit into any of the other Day Books. It is used for special or complex entries, such as:

• Correcting errors.
• Recording the purchase or sale of non-current assets (e.g., machinery) on credit.
• Recording the owner introducing capital (if not done through the bank/cash).

Section 3: The Final Destination – The Ledger Accounts

What is the Ledger? (The Master File)

The Ledger is the central place where the full double-entry accounting system operates. It contains all the individual accounts (T-accounts) used by the business.

This is where we apply the rules of Debit and Credit. Every entry that was first recorded in a Book of Prime Entry must eventually be posted here, ensuring every transaction affects at least two accounts.

The Double Entry Rule (A Quick Recap)

DEBIT (DR) increases Assets and Expenses, and decreases Liabilities, Capital, and Revenue.
CREDIT (CR) increases Liabilities, Capital, and Revenue, and decreases Assets and Expenses.

The Three Main Ledgers

To keep things organized, the main Ledger is usually divided into three parts:

1. The Sales Ledger (SL) or Debtors Ledger

Contains an individual account for every customer who buys goods on credit.

• Why? This shows us exactly how much money each specific customer (debtor) owes us.

2. The Purchases Ledger (PL) or Creditors Ledger

Contains an individual account for every supplier from whom we buy goods on credit.

• Why? This shows us exactly how much money we owe to each specific supplier (creditor).

3. The General Ledger (GL)

This is the main Ledger. It holds all the remaining accounts, including:

• All Asset Accounts (e.g., Non-current assets, Inventory).
• All Liability Accounts (e.g., Loans, Payables Control).
• The Capital Account.
• All Revenue and Expense Accounts (e.g., Sales, Purchases, Rent, Wages).
• The Control Accounts (if used, which summarize the SL and PL).

The Flow: From Source Document to Ledger

This is the crucial process you must understand:

Step 1: The Transaction Happens. (We sell goods on credit).

Step 2: Source Document Created. (A Sales Invoice is issued).

Step 3: Recording in Book of Prime Entry. (The transaction is listed in the Sales Day Book, usually daily).

Step 4: Posting to the Ledger Accounts (Double Entry).

How Day Book Information is Posted:

Information from the Day Books is posted to the Ledger in two ways:

1. Daily to Individual Accounts: Each individual credit sale is immediately posted (debited) to the specific customer's account in the Sales Ledger. Each credit purchase is immediately posted (credited) to the specific supplier's account in the Purchases Ledger.
2. Monthly/Periodically to the General Ledger: The TOTAL of the Sales Day Book is posted (credited) to the Sales Account in the General Ledger. The TOTAL of the Purchases Day Book is posted (debited) to the Purchases Account in the General Ledger.

This process ensures the double entry is complete: one side is the individual customer/supplier, and the other side is the main Sales or Purchases account.

Summary and Review

You have successfully mapped the complete journey of a transaction! Every financial event starts as a piece of paper and ends up as two entries in the Ledger, balancing the books.

• Source Documents provide the evidence.
• Books of Prime Entry categorize and summarise transactions chronologically.
• Ledger Accounts (Sales, Purchases, General) receive the entries using the double-entry rule, forming the basis for the Trial Balance and Final Accounts.

Mastering this flow is crucial because it ensures that transactions are recorded accurately, making the entire accounting system reliable! Keep practicing posting from the Day Books to the Ledgers, and you'll be well on your way to success!