Accounting (0452) | Books of prime entry

📘 IGCSE Accounting (0452): Study Notes

Section 2: Sources and Recording of Data - Books of Prime Entry

Hello future accountants! This chapter is where we learn about the crucial first step in recording financial information. Think of the accounting system as a complicated machine—the Books of Prime Entry are the input screens where raw data is first typed in.

Don't worry, these books aren't scary. They simply help us organise similar transactions together, making the whole process faster and much less confusing!

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1. Introduction to Books of Prime Entry (BPEs)

1.1 What are Books of Prime Entry?

The Books of Prime Entry (also known as Books of Original Entry or Journals) are the initial records where business transactions are first entered, in chronological order (date by date).

They are NOT part of the double entry system itself, but they provide the summary data needed to make the double entry in the ledgers later on.

Analogy: If the Ledger Accounts are the final, neatly filed reports, the Books of Prime Entry are your rough notes and daily diary entries.

1.2 Advantages of Using BPEs (Why bother?)

Using these special books offers huge benefits for any medium or large business:

• Efficiency (Time-Saving): Instead of posting every single credit sale directly to the ledger (a lot of work!), you record the details in the Sales Journal and then post one total figure at the end of the month.
• Specialisation of Labour: Different clerks can handle different books (e.g., one person handles Cash Book, another handles the Sales Journal), speeding up the process.
• Reduced Errors: Since each book handles only one type of transaction, it reduces the chance of making mistakes in categorization or double-entry calculation.
• Reference: It provides a clear, day-by-day record, making it easy to trace transactions back to the original source documents (like invoices).

2. The Seven Books of Prime Entry

Every single transaction a business makes must be recorded in one of these seven books. We categorize them based on the type of transaction.

2.1 Journals for Credit Transactions (Buying and Selling on Credit)

These journals handle transactions where money is not immediately exchanged (credit).

1. The Sales Journal (or Sales Day Book)
   • Purpose: To record all goods sold on credit.
   • Source Document: Copy of the Invoice issued to the customer.
   • Key Point: Cash sales are NEVER recorded here.
2. The Purchases Journal (or Purchases Day Book)
   • Purpose: To record all goods bought on credit for resale.
   • Source Document: The original Invoice received from the supplier.
   • Key Point: Cash purchases or purchases of non-current assets (like a machine) are NEVER recorded here.
3. The Sales Returns Journal (or Returns Inwards Journal)
   • Purpose: To record goods returned by our customers.
   • Source Document: Copy of the Credit Note issued to the customer.
4. The Purchases Returns Journal (or Returns Outwards Journal)
   • Purpose: To record goods returned to our suppliers.
   • Source Document: The Credit Note received from the supplier (or sometimes a Debit Note issued by us).

2.2 The Cash Book

The Cash Book is the most active and special book.

• Purpose: To record all transactions involving cash (notes/coins) and bank (cheques, transfers).
• Source Documents: Cheque counterfoils, paying-in slips, bank statements, receipts.
• Dual Function: The Cash Book is unique! It serves two roles:
  • It is a Book of Prime Entry (where entries are first recorded).
  • It is also a Ledger Account (it takes the place of separate Cash Account and Bank Account in the General Ledger).

2.3 The Petty Cash Book

This is for very small, minor cash payments.

• Purpose: To record small, frequent expenses paid in physical cash (e.g., buying stamps, cleaning supplies, or paying for short taxi rides).
• Source Document: Vouchers or receipts for small payments.

2.4 The General Journal (or Journal Proper)

This is the accounting system's "miscellaneous" book.

• Purpose: To record transactions that do not fit into any of the other six specialised books.
• Common Uses:
  • Starting the business (introducing capital).
  • Purchasing or selling non-current assets on credit.
  • Writing off irrecoverable debts.
  • Correcting errors.
  • Transferring balances at the end of the accounting period.
• Key Point: Entries in the General Journal must include a brief written explanation called a narrative to explain the entry.

3. Detailed Processing Topics

3.1 Trade Discount vs. Cash Discount

These two types of discounts are often confused, but they are handled completely differently in the books.

Trade Discount

• Definition: A reduction given to trade customers, often for buying in bulk or being a frequent buyer.
• Recording: It is never entered into the books of account. The invoice is simply made out for the reduced amount.
• Example: A supplier lists an item at \$100 but gives you a 10% trade discount. You record the purchase at \$90.

Cash Discount (or Settlement Discount)

• Definition: A reduction offered to debtors (customers) or claimed from creditors (suppliers) for paying promptly (e.g., within 10 or 30 days).
• Recording: This must be recorded because it affects the amount of cash received or paid.
• Types of Cash Discount:
  1. Discount Allowed: We allow this to our customers (it is an expense for us). Recorded on the debit side of the Cash Book.
  2. Discount Received: We receive this from our suppliers (it is an income for us). Recorded on the credit side of the Cash Book.

3.2 Recording Bank Transfers and Electronic Payments

In modern accounting, fewer transactions involve physical cheques or cash. Many are done electronically.

These electronic transactions are recorded in the Bank column of the Cash Book, just like cheques.

• Bank Transfers: Direct movement of funds between bank accounts (used for receipts and payments).
• Direct Debits: Authorised automatic payments (e.g., monthly utilities).
• Standing Orders: Instructions to the bank to pay a fixed amount regularly (e.g., monthly rent).
• Credit Transfers: Funds paid directly into our bank account by a customer (receipts).

The Bank Statement serves as the essential source document for verifying all these electronic receipts and payments.

4. The Petty Cash Book and the Imprest System

4.1 What is Petty Cash?

The Petty Cash Book is used to keep track of small payments. While it could be just a simple record, most businesses use a more formal method called the Imprest System.

4.2 How the Imprest System Works (Step-by-Step)

The Imprest System aims to keep the amount of cash in the petty cash box constant (fixed). This helps maintain control and reduce fraud.

1. Start the Fund: The cashier sets up the fund by drawing a cheque for a fixed amount (the Imprest Amount or Float), e.g., \$100. (Dr Petty Cash, Cr Bank).
2. Making Payments: Throughout the period (e.g., a month), the petty cashier makes small payments, records them in the Petty Cash Book, and keeps a voucher for each transaction.
3. Reimbursement (Restoring the Float): At the end of the period, the petty cashier calculates how much was spent (e.g., \$85). The cashier then draws a cheque for exactly \$85 to restore the fund back to its original \$100 float.

The rule of the Imprest System is:
Cash in hand + Vouchers (expenses) = Fixed Float

Example: If the float is \$100 and \$40 has been spent, the cashier asks for \$40 to bring the fund back to \$100.

5. Posting from Books of Prime Entry to the Ledger

Once data is compiled in the Books of Prime Entry, the next step is to transfer (post) these figures into the Ledger Accounts to complete the double entry.

5.1 Posting the Journals (Sales, Purchases, Returns)

The credit journals (Sales, Purchases, Returns) are posted in two ways:

1. Individual Postings (Daily): Each individual transaction must be posted to the personal account of the customer or supplier in the Sales Ledger or Purchases Ledger. This is necessary so we know exactly how much each person owes or is owed.
2. Total Posting (Monthly): The grand total column of the journal is posted once at the end of the month to the Nominal (General) Ledger.
   • Sales Journal Total: Credit Revenue Account. (The corresponding Debit is to the Sales Ledger Control Account).
   • Purchases Journal Total: Debit Purchases Account. (The corresponding Credit is to the Purchases Ledger Control Account).

5.2 Posting the Cash Book

Since the Cash Book already acts as the Cash and Bank Ledger accounts, most of its entries involve three columns: Bank, Cash, and Discount.

• Discount Columns: The totals of the Discount Allowed and Discount Received columns are posted monthly to the respective Discount Accounts in the Nominal Ledger.
• Other Accounts Column: Any entry not affecting the Sales/Purchases Ledger is posted individually to the appropriate account in the Nominal Ledger (e.g., Rent Paid, Commission Received).

5.3 Posting the Petty Cash Book

The Petty Cash Book typically has analysis columns for different expenses (e.g., travel, stationery). The totals of these analysis columns are posted monthly to the respective expense accounts in the Nominal Ledger.