Accounting | Books of original entry

Welcome to Books of Original Entry! (Introduction to Organization)

Welcome to one of the most practical chapters in accounting! Don't worry if this sounds intimidating—it's actually about organization. Think of this chapter as learning how to be an excellent filing clerk for a business.

In previous chapters, we learned about the Double Entry System. But imagine a large shop having thousands of transactions every month. If they tried to post every single transaction directly into the Ledger (T-accounts), it would be messy, time-consuming, and full of errors!

The Books of Original Entry (or Journals/Day Books) act as essential pit stops. They help us group similar transactions together before moving the totals to the Ledger. This makes bookkeeping much faster, organized, and easier to check for mistakes.

Why Books of Original Entry are Essential

The accounting process usually follows this flow:
1. Source Document: The proof (e.g., Invoice).
2. Book of Original Entry (Day Book): Recording the detail chronologically.
3. Ledger Account: Summarising the totals using Double Entry.

Key Takeaway: Day Books are where transactions are recorded first, in the order they happen (chronologically).

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Section 1: Source Documents – The Starting Point

Every entry in the Books of Original Entry must be supported by a piece of paper, called a Source Document. If there's no source document, the transaction hasn't officially happened (or can't be proven).

Common Source Documents and What They Record

• Sales Invoice: Issued when the business sells goods on credit. This records a credit sale.
• Purchases Invoice: Received when the business buys goods on credit. This records a credit purchase.
• Credit Note (Issued): Sent to a customer when they return goods to us. This records Sales Returns (Returns Inwards).
• Credit Note (Received): Given to us by a supplier when we return goods to them. This records Purchases Returns (Returns Outwards).
• Cheque Counterfoil/Receipts/Bank Paying-in Slips: These document money paid or received. They go into the Cash Book.

Analogy: Think of source documents as the receipts in your wallet. The Day Books are like an app where you type up all those receipts, organizing them by category (food, clothes, bills) before doing your final budget (the Ledger).

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Section 2: The Day Books for Credit Transactions

These books are specifically designed to record transactions where cash is not exchanged immediately (credit transactions).

1. The Sales Day Book (SDB)

This book records ALL credit sales of goods.

• Source Document: Copy of the Sales Invoice issued to the customer.
• What NOT to include: Cash sales, or selling old equipment (non-current assets) on credit.
• Process: Each invoice is listed individually in the SDB throughout the month. At the end of the month, the total is calculated.

The Double Entry Connection (SDB)

The total of the Sales Day Book is posted only once at the end of the period:
Debit: The Sales Ledger Control Account (or individually to Customer Accounts)
Credit: The Sales Account in the General Ledger

Did you know? Posting the total saves dozens, maybe hundreds, of entries directly into the Sales Account!

2. The Purchases Day Book (PDB)

This book records ALL credit purchases of goods for resale (inventory).

• Source Document: Original Purchases Invoice received from the supplier.
• What NOT to include: Cash purchases, or buying a new machine on credit.

The Double Entry Connection (PDB)

The total of the Purchases Day Book is posted once at the end of the period:
Debit: The Purchases Account
Credit: The Purchases Ledger Control Account (or individually to Supplier Accounts)

3. The Returns Day Books

Sometimes goods are returned. We need special books to handle these transactions.

i) The Sales Returns Day Book (Returns Inwards)

Records goods returned to us by our customers.

• Source Document: Copy of the Credit Note issued.

The Double Entry Connection (SRDB)

Debit: Sales Returns Account
Credit: Sales Ledger Control Account (The customer now owes us less money).

ii) The Purchases Returns Day Book (Returns Outwards)

Records goods returned by us to our suppliers.

• Source Document: Original Credit Note received from the supplier.

The Double Entry Connection (PRDB)

Debit: Purchases Ledger Control Account (We now owe the supplier less money).
Credit: Purchases Returns Account

Memory Aid: Returns Inwards means the goods came in to our business (they were returned to us). Returns Outwards means the goods went out of our business (we returned them to the supplier).

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Section 3: The Cash Book and Petty Cash

When money changes hands immediately, we use the Cash Book. This book is unique because it serves two roles!

1. The Cash Book (CB)

The Cash Book records all transactions involving cash (physical money) and bank deposits/withdrawals (money held in the bank).

• Dual Role: It acts as both a Book of Original Entry (listing daily receipts and payments) AND the actual Cash and Bank Ledger Accounts (using T-account layout).

Format of the Two-Column Cash Book

For IGCSE, you usually work with the Two-Column Cash Book, which has separate columns for Cash and Bank on both the Debit (Receipts) and Credit (Payments) sides.

Debit Side (Receipts): Money coming In.
Example: Cash sales, money received from debtors, new capital introduced.

Credit Side (Payments): Money going Out.
Example: Cash purchases, wages paid, money paid to creditors.

Bounced Cheques and Contra Entries

Bounced Cheque: If we received a cheque and deposited it (Debit Bank), but the customer’s bank rejects it later, we must reverse the entry (Credit Bank) to show the money never arrived.

Contra Entry: This is an entry that affects both the Cash column and the Bank column in the Cash Book simultaneously. It occurs when:
1. Cash is deposited from the business safe into the bank.
2. Cash is withdrawn from the bank for use in the business safe (for cash payments).
Hint: A contra entry requires a 'C' or 'X' reference in the folio column on both sides.

2. The Petty Cash Book (PCB)

Imagine paying for stamps, bus fares, or small snacks. You wouldn't want to write a cheque for every 2 dollar expense!

The Petty Cash Book is used to record small, minor, or irregular cash expenses.

• Purpose: To reduce the number of small entries cluttering the main Cash Book.
• The Imprest System: This is a very important concept. The cashier is given a fixed float (e.g., $100). When expenses are paid out, the float decreases. At the end of the period, the exact amount spent is reimbursed, returning the float to the original fixed amount ($100).

Example Imprest: Starting float is $100. You spend $40. You are reimbursed $40. You start the next period again with $100.

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Section 4: The General Journal (or Journal Proper)

The General Journal is the "catch-all" book. If a transaction doesn't fit neatly into the SDB, PDB, SRDB, PRDB, or Cash Book, it goes here.

Don't worry if this seems tricky at first. The Journal is used for less frequent, complex, or internal entries.

Typical Uses of the General Journal

• Purchasing Non-Current Assets on Credit: Buying a machine on credit (since the PDB is only for goods for resale).
• Opening Entries: Recording the starting assets and liabilities when a business first starts or at the beginning of a new financial year.
• Correction of Errors: Fixing mistakes found in the Ledger accounts.
• Transfer of Amounts: Moving balances between different ledger accounts.
• Bad Debts: Writing off money owed by a debtor that will never be collected.

Structure of a Journal Entry

A Journal entry always contains four key parts:

1. The Account to be Debited (written first).
2. The Account to be Credited (indented slightly).
3. The Amount (for both debit and credit).
4. The Narration (a brief, clear explanation of why the entry was made). The narration is crucial!

Example Journal Entry: Purchased office computer for $500 on credit from Tech Suppliers.

Office Equipment Account (Dr) 500
    Tech Suppliers Account (Cr) 500
(Being purchase of equipment on credit as per invoice 123)