0452 · 2.3Books of prime entry

Books of prime entry basics

0:00At Rowan Cycles, a sale, a supplier invoice and a bank payment can arrive within minutes of each other. Recording everything straight into separate ledger accounts would make omissions difficult to spot. Books of prime entry organise these transactions before posting. This video covers the seven books of prime entry, the source document behind each one and how each entry is posted to the ledger. Books of prime entry are records in which transactions are first entered before transfer to ledger accounts.

0:27A source document provides evidence and information used to make an accounting entry. Invoices, credit notes and receipts are common examples. A ledger is a collection of accounts, and each account records changes relating to one particular item. Think of the books of prime entry as sorting trays and the ledger as the organised account history. Double entry records each transaction as a debit in one account and an equal credit in another.

0:53Revenue is the income a business earns from its main activity, such as selling goods or providing services. A credit increases revenue, other income, a liability or capital, while a debit reduces them. Expenses are the costs used up in running the business and earning revenue during a period. A debit increases an expense or an asset, while a credit reduces it. When posting, the details column names the other account, so each entry shows where its matching entry belongs.

1:20Trade receivables are amounts owed by credit customers who have not yet paid for goods or services. Trade payables are amounts owed to suppliers for goods or services bought on credit. Customer accounts belong in the sales ledger, and supplier accounts belong in the purchases ledger. Accounts for sales, purchases and expenses belong in the nominal ledger, also called the general ledger. The first sorting decision is whether money moves now or payment happens later.

1:47Immediate receipts and payments normally belong in the cash book. Buying or selling goods on credit belongs in a specialised journal. Here, goods means items bought for resale, such as the bicycles sold by Rowan Cycles.

Sales and purchases journals

1:59The sales journal records credit sales of goods from copies of invoices sent. A cash sale goes into the cash book because payment happens immediately. For each credit sale, debit the customer account because the amount owed increases. The sales account is credited because sales revenue increases, although the business has not yet received payment. The purchases journal records credit purchases of goods from invoices received. Debit purchases because the goods bought for resale increase, and credit the supplier account because the liability to that supplier increases.

2:31A bicycle repair stand bought for business use is equipment, not goods for resale. It therefore never enters the purchases journal. Trade discount is a reduction from the list price of goods that a seller gives to trade customers. It establishes the actual selling price before the transaction enters the accounts. The invoice shows the amount after this reduction, and only that amount is recorded. Trade discount therefore never appears in any ledger account, because the unreduced list price never becomes an amount owed.

2:59Rowan Cycles sells bicycles to Meadow Rentals with a list price of two thousand five hundred dollars. The trade discount is twenty per cent. Twenty per cent of two thousand five hundred dollars is five hundred dollars. Subtracting this reduction gives an invoice amount of two thousand dollars, which enters the sales journal. On the third of May, record Meadow Rentals and two thousand dollars in the sales journal. A second credit sale, of nine hundred dollars to Hillside Tours, follows on the sixth of May.

3:26Debit Meadow Rentals with two thousand dollars and Hillside Tours with nine hundred dollars, because each customer's debt increases. The journal total is two thousand nine hundred dollars. At the end of May, credit the sales account with that total because revenue increases. Each customer is posted individually, while the sales account receives one period total. This avoids recording every separate credit sale in the sales account. The purchases journal works in the opposite direction, with each supplier credited individually and the period total debited to purchases.

3:56On the fifth of May, Rowan Cycles buys eight hundred dollars of goods on credit from Harbour Supplies. The purchases journal records it, and the posting is a debit to purchases and a credit to Harbour Supplies.

Returns journals and cash book

4:08The sales returns journal records goods returned by credit customers from credit notes sent. On the eighth of May, Hillside Tours returns a damaged bicycle, and Rowan Cycles sends a credit note for three hundred dollars. Debit sales returns because the amount returned increases, and credit Hillside Tours because its debt decreases. Nine hundred dollars less three hundred dollars leaves Hillside Tours owing six hundred dollars. The period total of the journal is debited to the sales returns account in the nominal ledger.

4:37The purchases returns journal records goods returned to credit suppliers from credit notes received. On the ninth of May, Rowan Cycles returns faulty bicycle parts costing one hundred and fifty dollars to Kestrel Parts and receives a credit note. Debit Kestrel Parts because the amount owed decreases, and credit purchases returns because returns to suppliers increase. Each supplier is posted individually, and the period total is credited to purchases returns.

5:02Cash discount is an allowance for paying early within the credit period. Unlike trade discount, it arises when an existing amount owed is settled. Discount allowed is an expense because the business accepts less from its customer. For the supplier side, discount received is income because the business settles its liability for less than the amount owed. The cash book records receipts and payments of cash and of money through the bank.

5:27Receipts go on the debit side because cash or bank increases, while payments go on the credit side because cash or bank decreases. Rowan Cycles uses it for every immediate receipt or payment, whatever the payment method. The cash book has a dual function as a book of prime entry and as a ledger account for bank and cash. It records transactions first and already contains their cash or bank double entry.

5:51Therefore, there is no separate posting to another cash or bank account. Only the matching entries need to reach the other ledger accounts. A two-column cash book has cash and bank columns on each side. Adding discount columns produces a three-column cash book with discount, cash and bank columns. Discount allowed accompanies customer receipts on the debit side, while discount received accompanies supplier payments on the credit side. These columns collect discounts rather than hold spendable money.

Cash book entries and balances

6:17Meadow Rentals owes Rowan Cycles two thousand dollars and qualifies for a five per cent cash discount. Five per cent of two thousand dollars is one hundred dollars. Subtracting that allowance leaves a bank transfer of nineteen hundred dollars. The full customer debt is cleared even though the bank receives less than the original invoice amount. Debit bank by nineteen hundred dollars because the bank asset increases. Discount allowed increases, so debit that expense account by one hundred dollars.

6:45Credit Meadow Rentals by two thousand dollars because its debt is cleared. Nineteen hundred dollars plus one hundred dollars equals two thousand dollars, so the debits equal the credit. Harbour Supplies allows Rowan Cycles a five per cent discount on its eight hundred dollar liability. The reduction is forty dollars, so the business pays seven hundred and sixty dollars. Debit Harbour Supplies by eight hundred dollars because the liability disappears.

7:09Credit bank by seven hundred and sixty dollars because money decreases, and credit discount received by forty dollars because income increases. Seven hundred and sixty dollars plus forty dollars equals the eight hundred dollar debit. The May cash book begins with cash of one hundred and fifty dollars and bank money of three thousand dollars. On the tenth of May, Meadow Rentals appears with discount allowed of one hundred dollars and bank receipts of nineteen hundred dollars.

7:33Its details name the customer because that is the other account. The remaining receipts are transfers between cash and bank. A contra entry records a transfer between the cash and bank accounts within the cash book. On the fifteenth of May, Rowan Cycles pays one hundred dollars of cash into the bank. Debit bank because the bank asset increases, and credit cash because cash decreases. Both entries stay inside the cash book, with each details column naming the other account.

8:00On the eighteenth of May, the business takes two hundred dollars from the bank for office cash. Debit cash because money held at the premises increases, and credit bank because bank money decreases. This is another contra entry, not an expense. The debit side totals are one hundred dollars for discounts, three hundred and fifty dollars for cash, and five thousand dollars for bank. On the twelfth of May, the supplier payment records discount received of forty dollars and bank payment of seven hundred and sixty dollars.

8:27The contra entries show cash paid into bank of one hundred dollars and bank money transferred to cash of two hundred dollars. On the twentieth of May, rent of three hundred and forty dollars is paid by debit card. Debit rent because the expense increases, and credit bank because bank money decreases. The only cash payment is the one hundred dollar contra. Three hundred and fifty dollars less one hundred dollars leaves a cash balance of two hundred and fifty dollars.

8:53In the bank column, seven hundred and sixty plus two hundred plus three hundred and forty makes thirteen hundred dollars of payments. Five thousand dollars less thirteen hundred dollars leaves a bank balance of thirty-seven hundred dollars. Enter both balances carried down on the credit side to make the columns agree. Both cash columns total three hundred and fifty dollars, and both bank columns total five thousand dollars. On the first of June, both balances are brought down on the debit side.

9:19Cash starts June at two hundred and fifty dollars, and bank starts at thirty-seven hundred dollars. Total discount allowed is debited to its expense account, while total discount received is credited to its income account. Discount columns are totalled, not balanced like cash and bank. A bank overdraft is an amount owed to the bank, so it is a liability and shows as a credit balance on the bank account.

9:41Suppose that in a later month the bank receipts total one thousand dollars and the bank payments total fourteen hundred dollars. The balance carried down of four hundred dollars then goes on the debit side to make both bank columns total fourteen hundred dollars. The overdraft of four hundred dollars is brought down on the credit side. Physical cash cannot have a credit balance because the business cannot hold less than no cash.

10:04The cash column therefore always shows a debit balance or nothing. Keep the bank position separate from the amount physically held, since an overdraft can exist while the cash box still holds money. Physical cash receipts and payments use the cash column. Cheques received or issued, debit card payments, online payments and bank transfers use the bank column. A customer's credit card or debit card receipt that reaches the business bank account also belongs there.

10:29Record the account actually affected, rather than treating every payment method as physical cash. A business purchase on its own credit card is different because the card issuer lends the money. Debit the relevant expense or asset account because it increases, and credit the card issuer account because a liability arises. When the bank later pays the issuer, debit that liability and credit bank. The bank column records the settlement, not the earlier borrowing.

General journal and petty cash

10:54The general journal records transactions that do not belong in the other books of prime entry. Non-current assets are assets held for continuing use in the business rather than for resale. Typical general journal entries are opening entries, transfers, corrections, and purchases or sales of non-current assets on credit. Each entry shows the accounts debited and credited, together with a narrative that explains the transaction. On the sixth of June, Rowan Cycles buys a repair stand on credit for six hundred and forty dollars.

11:23Debit equipment because this non-current asset increases, and credit Workshop Equipment Supplies because the liability increases. The narrative states that a repair stand was purchased on credit for business use. Debits and credits each total six hundred and forty dollars, and both accounts are posted individually. The petty cash book records small cash payments and classifies them by type. A petty cashier handles items such as postage and local travel instead of interrupting the main cashier repeatedly.

11:51Payments are supported by petty cash vouchers, which provide evidence and authorisation. Analysis columns separate each category so its total can be posted efficiently. The imprest system restores petty cash to an agreed fixed amount at regular intervals. Its purpose is to control small payments and limit the amount entrusted to the petty cashier. The fixed amount is called the imprest or float. At any time, the cash held plus the vouchers paid should equal the imprest.

12:18Reimbursement equals the amount spent, rather than the full float. Rowan Cycles establishes a June imprest of one hundred and twenty dollars from the bank. Debit petty cash because that asset increases, and credit bank because bank money decreases. During June, the petty cashier pays postage of twenty-five dollars, travel of thirty-five dollars and cleaning of twenty dollars, each against a voucher. Together these payments total eighty dollars. The analysis columns of twenty-five, thirty-five and twenty dollars add up to the eighty dollar total paid.

12:50Postage, travel and cleaning are each debited with their column total because those expenses increase. Petty cash is credited with eighty dollars because its money decreases. One hundred and twenty dollars less eighty dollars leaves forty dollars, which is carried down so that both sides total one hundred and twenty dollars. On the first of July, the balance of forty dollars is brought down. The restoring amount equals the amount spent, so Rowan Cycles draws eighty dollars from the bank.

13:16Debit petty cash and credit bank with this reimbursement. Forty dollars plus eighty dollars restores the float to the imprest of one hundred and twenty dollars. Keeping cash at the business property allows immediate small payments and provides change for customers. However, cash can be stolen, lost or counted incorrectly. Secure storage and insurance can add costs, and large holdings expose more money to loss. Rowan Cycles can keep a limited float and bank excess cash to reduce that exposure.

Recording methods and exam recap

13:44Using manual methods for the original entry of business transactions means writing each entry by hand in paper books. This is inexpensive to start and requires no electricity or computer skills. However, recording and posting take time, and arithmetic or copying errors can occur. A lost or damaged book is difficult to replace unless separate copies have been kept. Digital methods for the original entry of business transactions capture each entry in accounting software or a spreadsheet.

14:10Software records entries quickly, calculates totals automatically and posts linked entries without copying, so arithmetic errors are fewer. Records are also easier to search and back up. Equipment, subscriptions and staff training create costs, while unauthorised access threatens data security. Incorrect input still produces incorrect accounts, even when every calculation is automatic. In Paper One, forty multiple-choice questions can test the correct journal, posting direction or discount treatment. Paper Two contains five compulsory structured questions and can require preparation of journals or cash books.

14:46Prepare means present information in a suitable format, and calculate means work out from given figures. Explain means give reasons why and how, supported by evidence. Consider an exam question that asks you to explain why a credit purchase of equipment belongs in the general journal. Equipment is a non-current asset for business use rather than goods bought for resale. The purchases journal records credit purchases of goods only. The general journal therefore records this transaction, with equipment debited and the supplier credited.

15:16Common errors disappear when you classify the transaction before recording its amount. Enter invoice amounts after trade discount, and record cash discount only when the account is settled. Post individual customer and supplier amounts separately from journal totals. Treat contra entries as transfers between assets, and remember that the cash book already supplies the cash or bank ledger entry. Books of prime entry organise evidence before transactions reach their classified accounts.

15:43Specialised journals separate credit goods transactions, while the cash book records immediate receipts and payments. The general journal handles other entries, and the imprest system controls small cash spending. Each record carries the source document amount into the ledger with a debit and an equal credit.