BOOKS OF ORIGINAL ENTRY

INTRODUCTION

In many businesses today, some form of documentation usually supports business transactions. These source documents, as they are called, are used to record information in daily journals or books of original entries. These journals are the first form of official records of any transaction. Generally, they are not part of the double entry system. With the exception of the cash book and the general journal the terms debit and credit do not appear in any other book of original entry. In this study guide, you will be introduced to the documents that form the basis of accounting records as well as use the documents to make records in these journals. You will also learn about journals that are used to record changes in stock levels as well as cash and bank transactions. You will learn to make records in these journals as well as post them to their specific ledgers.

GENERAL OBJECTIVES

At the end of this Study Guide, you should:

1. understand the need for proper documentation of business transactions;

2. appreciate the importance of keeping records of all business transactions.

SPECIFIC OBJECTIVES

You should be able to:

1. explain the uses of the books of original entry;

2. distinguish between cash and credit transactions;

3. identify source documents related to books of original entry;

4. distinguish between cash and trade discounts;

5. use source documents to make entries into books of original entry;

6. indicate treatment of totals from books of original entry.

CONTENT

· Books of Original Entry

· Cash and credit transactions

· Source documents

· Trade and cash discounts

· Discounts allowed and received

· Balancing the Cash Book

· The imprest system and the Petty Cash Book

BOOKS OF ORIGINAL ENTRY

The use of Books of Original Entry promotes the division of the ledger which assists management in data analysis. They make it easier to retrieve information on debtors and creditors, saves time and eliminates many details from the ledger.

The following table shows a list of the books of original entry as well as the source document (s) which form the basis of the recording in the books.

Book of Original Entry	Transactions Recorded	Source Document Used
Sales day book	Credit sales of inventory (stock)	Sales invoices
Purchases day book	Credit purchases of inventory (stock)	Purchases invoices
Cash book	All cash and bank transactions, for example, cash sales, receipts from debtors (accounts receivables), payments to creditors	Bank deposit and withdrawal slips, cheques debit and credit card receipts
Return Inwards Journal	Goods returned by customers	Credit note sent
Return Outwards Journal	Goods returned to suppliers	Credit note received
Petty Cash Book	Cash transactions of small value	Petty cash vouchers, cash bills
General Journal	All transactions which cannot be recorded in any other book of original entry	Bills, receipts, vouchers, cancelled cheques.

CASH AND CREDIT TRANSACTIONS

Cash transactions occur when payment is received or made when the transaction takes place. This includes the use of credit cards and debit cards. A credit transaction is one where payment is to be made some time in the future, after the transaction. It is important to distinguish between these two types of transactions since the accounting treatment differs as well as the impact on the balance sheet.

(Activity 3.1)

Robert is the owner of an Auto Part shop located in Papine, Kingston. He purchases 500 carburetors from Massey Marketing at $35 each, together with 100 shock absorbers at $10 each and 75 disc pads at $25 each. The goods were delivered one week after the order was placed. On checking the order Robert discovers that the disc pads were the wrong brand and he returns them to Massey Marketing. On checking, Massey Marketing did not have the correct brand in stock and so Robert was forced to purchase the disc pads for cash at Car Tech Limited.

Answer the following questions which are based on the scenario above:

1. Identify the document Robert receives from Massey Marketing with his order.

2. Name the document Massey Marketing would issue to Robert after he returns the disc pads.

(Activity 3.1 – cont’d)

3. What document would Robert receive from Car Tech Ltd when he purchases the correct brand of disc pads?

4. Name the prime entry books in Robert’s business where the above transactions would be recorded.

Feedback

(a) The document received would be a Sales Invoice

(b) Credit Note

(c) Cash Bill

(d) Purchases Journal, Return Outwards Journal, Cash Book

Debit Cards

These are issued by commercial banks to customers allowing them to access their accounts using automatic banking machines (ABM’s). I am sure you have seen commercials for debit cards. In Trinidad and Tobago they are referred to as ‘LINX’cards. The customer’s account is immediately debited at the point of sale and the seller’s account is credited. This type of payment has become more popular to avoid a large amount of cash on the premises. The receipts from debit cards are used to make records in the cash book.

Credit Cards

Credit cards allow customers to charge their purchases of goods and services instead of paying cash. When the credit card is presented to the seller, it must be verified to ensure the sale does not exceed the approved amount. The use of computers allows the sellers’ account to be credited with the amount. A percentage of the sale price is charged by commercial banks for all credit card transactions. Popular credit card companies include VISA, Master Card and American Express.

SOURCE DOCUMENTS

A source document records the essential elements of any transaction; the date, name and address of the names of the parties involved and the value of the transaction. They form the basis for the accounting records that are kept by the business. These documents are retained for future verification. Let us now examine a very common document that is used in most transactions, an Invoice.

Invoice

An invoice is a document sent to credit customers giving a detailed description of the items, unit price and the terms and conditions of the transaction. The order number, as well as the name and address of the customer, are also printed on the invoice. Sometimes the invoice would also alert customers of interest charges when there are overdue balances. An invoice is made in triplicate and the copies are used by different departments to keep their own records. Sales invoices are used to record transactions in the Sales Journal. The Purchases Invoice is sent by vendors and is used to make records in the Purchases Journal. Both the buyer and the seller receive copies of the invoice and use them to make records.

INVOICE
THE PLANT EMPORIUM Orange Valley Road San Juan			Invoice No: 45678
			Date
Customer Name		Address	Order No.

Telephone		Fax:

Qty	Description		Unit Price	Total

	Total
Payment:
	Terms and Conditions		E&OE

Credit Note

This is a document sent to a buyer when there is a reduction in the amount charged on an invoice. This may occur when goods are returned or when there is an error in pricing. Goods would normally be returned if they are faulty or damaged in some way.

Debit Note

If errors occur when an invoice is being prepared the document which is sent to customers to change the amount charged on the original invoice is a debit note. It is sometimes referred to as a supplementary invoice. Errors may occur if additional goods were sent to the customer or there was an error on the original invoice.

Discounts

A discount is a reduction in the price of an item. In accounting there are two types of discounts; cash discounts and trade discounts. Cash discounts are given as incentives to customers to make payments on their account within a specified period of time. Trade discounts reduce the catalogue price of an item and are intended to encourage trade. Although they are shown on the sellers invoice, trade discounts are not recorded in the ledger of the buyer or seller.

(Activity 3.2)

Grey Singh received an order from Jim Young, a credit customer with the following details on September 30 2007:

6x20 inch planter @ $18.00 each

12kgs Fertilizer @12.50 per kg

20 bottles of Liquid Grow @ $18.50

The following terms and conditions applied:

Trade discount 10%

5½% 7 days

2½% 30 days

E & O E

1. You are required to prepare the invoice to be sent to Jim Young.

2. Explain the meaning of the terms and conditions outlined.

Feedback

INVOICE
*GREY SINGH* *Orange Valley Road* *San Juan*					*Invoice No:* *1245*
					Date 30/09/07
*Customer Name* Jim Young		*Address* Railway Road Sea View			*Order No.* *005*

*Telephone: 640 8767*		*Fax:*	989	2007
*Qty*	*Description*				*Unit Price*	*Total*
12 kgs 6 20	Fertilizer 20” Planters - green Bottles Liquid Grow				$12.50 $18.00 $18.50	$150.00 $108.00 $370.00
						$628.00
Payment:	Less 10% Trade discount					$62.80
	*Total*					$565.20
Terms & Conditions	5½% 7 days 2½% 30 days				E&OE Carriage Paid

The Terms of payment suggest a cash discount of 5½% if the total of $565.20 is paid within 7 days after receipt of the invoice. If the total due is paid within 30 days, Mr. Young is entitled to a 2½% discount. E&OE stands for errors and omissions excepted. It allows the seller the right to alter the invoice even after it has been sent to the buyer if any errors or omissions are discovered.

RECORDING TRANSACTIONS

Specialized Journals for Stock

As we discussed in an earlier Study Guide, a Journal is a daily record of business in chronological order. The Sales, Purchases and Return Journals, also called books of original entry or day books, record transactions dealing only with stock (inventories). The Sales journal record only credit sales of stock and the Purchases Journal records credit purchases of stock. The Returns Journals records goods previously bought or sold on credit that have been returned to suppliers or by customers. Cash sales and purchases of goods are not recorded here, neither the purchase nor sale of fixed assets. These are recorded in the Cash book and the General Journal, respectively. The layout of the journal is shown below.

Illustration: Format of Journal

*Date*	*Details*	*Folio*	*Amount*

Rectangular Callout: Shows the ledger page
where the account is to be opened

Rectangular Callout: Name of supplier (creditor) or customer (debtor)

Date on the

Invoice

Any business involved in a large amounts of credit transactions would find it advantageous to use specialized journals. Managers can quickly get totals regarding credit sales and purchases. The Purchases and Return Inwards Journal record increases in stock whilst the Sales and Return Outwards Journals records decreases in stock.

Example

Demonstrating the recording of transactions in Books of Original Entry

J. Flowers is the sole owner of The Plant Emporium. Her records show the following transactions for the month of June 2006.

June 01 Sold goods on credit to Green Leaf $110, R. Fig $689 and S. Tato $725

June 05 Received Invoices from T. Tin $1 750 and S. Steel $1 105

June 10 Bought goods on credit from Planters Place $1875

June 13 S. Tato returned $125 worth of goods

June 18 Sold goods on credit to R. Fig with a list price of $1800, allowing a 2.5% Trade discount

June 20 Returned goods to T. Tin $250

Record the above transactions in the appropriate books of original entry.

Feedback to Example

JOURNAL

*Date*	*Details*	*Folio*		*Amount ($)*
06/01/06	Green Leaf	SL		110.00
	R. Figg	SL		689.00
	S. Tato	SL		725.00
06/18/06	R. Figg	SL	1800
	Less 2½% trade discount		(45)	1 755.00
	*Total Credited to the Sales A/C*			3279.00

PURCHASES JOURNAL

*Date*	*Details*	*Folio*	*Amount*	*Amount*
06/05	T. Tin	PL		1 750.00
	S. Steel	PL		1 105.00
06/10	Planters Place	PL		1 875.00
06/30	*Total Debited to Purchases A/C*	GL		4 730.00

RETURN OUTWARDS JOURNAL

*Date*	*Details*	*Folio*	*Amount*	*Amount*
06/20	T. Tin	PL		250

	*Total Credited to Return Outwards a/c*			250

RETURN INWARDS JOURNAL

*Date*	*Details*	*Folio*	*Amount*	*Amount*
06/13	S. Tato			125

	*Total Debited to Return Inward a/c*			125

(Activity 3.3)

Now that you are familiar with the recording procedures of the day books you are to enter up the sales, purchases, and returns day books from the following details for the month of May 2006.

May 1 Sold goods on credit to L. Long $800, S. Short $1250 and B. Stone $1 620

May 3 Bought goods on credit from S. Lewis $730, J. Makoy $950

May 4 S. Short returned goods to us $370

May 8 Bought goods on credit from A. Ladi $840, B. Ready $1750

May 9 Returned faulty goods to B. Ready $500

May 10 Sold goods on credit to Tovadis Limited $1 290 less 10% trade discount

May 15 Credit purchases from S. Lewis $510, J. Makoy $ 450

May 18 Returned goods to J. Makoy $190

May 24 Credit sales to L. Long $2 700, B. Stone $970

May 28 B. Stone returns some of the goods purchased on May 24, $180

May 30 Tovadis Limited returned goods with a list price of $200

Record the above transactions and determine the amount to be transferred to the Sales a/c, Purchases a/c, Return Inwards and Return Outwards a/cs.

Feedback

Total credit sales $8 501

Total credit purchases $5 230

Total return inwards $730

Total return outwards $690

The General Journal

We just learnt that the specialized journals are used to record transactions dealing with credit sales and purchases of stock. Other transactions that are unable to fit into those categories, such as the credit purchase or sale of fixed assets, are recorded in the General Journal. Although the format is essentially the same as that of the specialized journals, the general journal further analyses the transactions into debit and credit, indicating which account is to be debited and which account is to be credited. The format of the General Journal is shown below.

GENERAL JOURNAL

Date	Details	Folio	A/C Debited	A/C Credited

Journalising is the process of recording entries in the Journal. As with the specialized journals, transactions are recorded in chronological order. The accounts involved are identified and the account to be debited is written first. Indented on the second line is the account to be credited. A special feature of the general journal is the narration, which follows every journal entry. The narration briefly explains the transaction recorded.

Example

Demonstrate the use of the General Journal in recording varying transactions.

1. May 16 2006 The Plant Emporium purchased, on credit, machinery costing $17 890, from Mackal Limited.

2. May 20 2006, the Cashier received a voucher for $1150 to pay the insurance for the owner’s personal car.

3. May 30^th 2006, the owner invested a further $21000 into the business from her private savings.

Before these are recorded in the journal, the accounts involved are identified. Then, using double entry rules of entry they are recorded in the general journal.

Date	Details	Folio	A/C Debited	A/C Credited
May 16 06	Machinery	GL	17 800
	Mackal Limited	GL		17 800
	Fixed asset purchases on credit

May 20 06	Drawings	GL	1 150
	Cash	GL		1 150
	Cash paid for owners personal insurance
May 30 06	Bank	GL	21 000
	Capital			21 000
	Additional investment by owner

The following transactions are usually recorded in the General Journal:

1. Opening entries – this is a list of assets and liabilities used to begin a new accounting period. (See the example below).

2. The purchase and sale of fixed assets on credit.

3. Correction of errors.*

4. Closing entries.*

5. Writing off uncollectible debts (bad debts).*

6. Depreciating fixed assets.*

*These topics are to be dealt with in a subsequent study guide.

The following shows the opening entries of R. Bull at February 01 2006

Date	Details (Account Titles)	Folio	Debit $	Credit $
02/01	Motor Vehicles Furniture Building Cash in hand Bank Stock on hand Debtor: R. Syms Creditor: Beltronics Limited Bank Loan Capital		35 000 60 000 120 000 1 200 35 490 14 500 8 210	26 100 40 000 208 300
	Being Assets, Liabilities and Capital as at Feb. 01.06		274400	274400

You should note that the columns are totalled.

(Activity 3.4)

J. Hermanson began his second year of trading as a sole trader on June 01 2006 with the following balances: Cash $1650; Bank $8200, Debtors: W. Wilde $750, Plant and Machinery $97000; Office Equipment $34000; Stock $4370; Creditor: S. Sweete $1450.

Journalise the above opening entries.

Feedback

Date	Details (Account Titles)	Folio	Debit $	Credit $
1/6/06	Plant and Machinery Office Equipment Stock Cash in hand Bank Debtor: W. Wilde Creditor: S.Sweete Capital		97 000 34 000 4 370 1 650 8 200 750	1 450 144 520
	Being Assets, Liabilities and Capital as at Feb. 01.06		145 970	145 970

The Cash Book

I am sure you will agree that cash is the lifeblood of any business. Therefore, care should be taken when recording transactions relating to cash or bank. The Cash book is a unique book of original entry. Although it is a journal, it also acts as an account for Cash and Bank. This is the only book of original entry that is balanced and the double entry is completed in the ledger. The cash book records the receipts and payments of cash and bank. Discounts received and allowed are also recorded in the cashbook for convenience. The format of the Cash book is also unique, in that the accounts for cash and bank stand side by side along with the discount column. All receipts are debited and payments credited.

The illustration below shows the basic format of a three-column cash book, (which includes the discount columns). A two column cash book is one without the discount column.

THE CASH BOOK

Date	Details (RECEIPTS)	F	Cash	Bank	Dis All	Date	Details (PAYMENTS)	F	Cash	Bank	Dis Rec

	DEBIT SIDE						CREDIT SIDE

Recording Entries in the Cash Book

When a document is received, the first analysis is to determine where it should be recorded. Any document relating to cash or bank, such as, cheque vouchers, cash bills and receipts are used to make records in the cash book. Again it is done in chronological order and the name of the account in the ledger is written in the details column. If the transaction involves the bank then the amount is written in the bank column. If it is a cash transaction, then the amount is written in the cash column. Any discount received or allowed is placed in the discount column.

(Activity 3.5)

List at least five source documents that can be used to make entries in a three column cash book.

Feedback

Your answer should include: Receipts, Cash bills, Payment vouchers, Deposit slips, Cash register slips, cheque counterfoil.

Contra Entries

Since both cash and bank accounts are in the cash book, it is possible to complete the double entry in the cash book if the transaction involves both accounts. When this happens it is described as a contra entry. These occur when cash is deposited into the bank or cash is withdrawn from the bank for use in the office.

BALANCING THE CASH BOOK

The Cash Book is balanced to determine the amount of cash in hand and bank. To balance the Cash Book means making both sides equal. The columns for Cash and Bank on both sides of the cash book are totaled. The difference (balance) is determined and added to the side with the smaller amount. The cash column will always carry a debit balance; this means that the debit side will always be greater than the credit side, since it is not possible to overspend cash. A credit balance (also called an overdraft) on the bank account signifies that the account has been overdrawn, that is, cheques were written in excess of the amount in the bank. Sometimes this is done with the permission of the bank. If no permission is given then any cheques presented for payment would not be honored by the bank for payment.

Now that you have some idea about recording transactions in the cash book go through the following example, which demonstrate recording of transactions in a three column cash book.

Example

Record the following transactions of Seren Dippity, a retailer, in his three column cash book for the month of April 2006.

April 01 Cash at bank 1 800

03 Cash sales 1 490

08 Paid cash for cleaning 124

10 Received a cheque from B. Calm 1 500

15 Purchases paid by cheque 1 380

17 Paid rent by cheque 750

19 Received a cheque from S. Leep to settle

his account of $700 less 5% discount

21 Paid cash into bank 1 200

24 Received $900 cash from P. Paine to settle his

account of $950

26 Paid D. Serene by cheque to settle an account of

$840 less 5% discount.

Balance the cash book and bring down the balance at the end of the month.

Feedback to the example

THE CASH BOOK

Date	Details (RECEIPTS)	F	Cash	Bank	Dis All	Date	Details (PAYMENTS)	F	Cash	Bank	Dis Rec
4/1	Balance b/f			1800		4/8	Cleaning		124
4/3	Sales		1490			4/15	Purchases			1380
4/10	B. Calm	sl		1500		4/17	Rent			750
4/19	S. Leep	sl		665	35	4/21	Bank	C	1200
4/21	Cash	C		1200		4/26	S. Serene			798	42
4/24	P. Paine		900		50	4/30	Balance c/d		1066	2237
			2390	5165	85				2390	5165	42
5/1	Balance b/d		1066	2237

(Activity 3.6)

Write up the three column cash book of S. Sui from the following details and balance the cash book at the end of the month.

Aug. 01 Started business with $1800 cash in hand and $16 000 in the bank

Aug. 02 Paid rent by cheque $300

Aug. 03 Paid utilities by cheque $1 240

Aug. 05 Cash sale $4 300

Aug. 07 Received a cheque from debtor C. Lebrity $3400 after allowing $135 discount

Aug. 09 Cash sales paid directly into bank $2 980

Aug. 11 Paid cash into bank $4 000

Aug. 15 Paid account at Vendor Ltd the amount owing $2 900 received 5% discount

Aug. 18 Mr. Sui withdrew $1500 from the bank for personal use

Aug. 20 Paid for motor repairs by cash $850

Aug. 25 Withdrew $500 from the bank for office use

Feedback

CASH BOOK

Date	Details (RECEIPTS)	F	Cash	Bank	Dis All	Date	Details (PAYMENTS)	F	Cash	Bank	Dis Rec
1/8	Balance b/f		1800	16000		2/8	Rent			300
5/8	Sales		4300			3/8	Utilities			1240
7/8	C. Lebrity			3400	135	11/8	Bank	C	4000
9/8	Sales			2980		15/8	Vendor Ltd			2755	145
11/8	Cash	C		4000		18/8	Drawings			1500
25/8	Bank	C	500			20/8	Motor repairs		850
						25/8	Cash	C		500
						31/8	Balance c/d		1750	20085
			6600	26380	135				6600	26380	145
5/1	Balance b/d		1750	20085

The Petty Cash Book

Small cash payments and receipts can be omitted from the Cash Book to avoid overcrowding. When this is done, a Petty Cash Book is used. The format of the PCB facilitates the analysis of transactions so that certain types of transactions can be posted in aggregate to the ledger. The debit side of the PCB represents receipts whilst the credit side, which represents payments, is divided into several analysis columns. (See example below).

PETTY CASH BOOK

Receipts	Date	Particulars	Voucher No.	Total	Traveling	Postage	Stationery	Office Expenses

The PCB operates with an Imprest System. This means that the Petty Cashier is given a float (imprest) at the beginning of a period from which funds are disbursed. Requests for payment are written on vouchers which briefly explain the purpose of the payment and indicate the amount. At the end of the period (week or month) the total cash paid is then reimbursed by the main cashier. This is referred to as restoring the imprest. This means that the petty cashier is given the exact amount she has disbursed. The totals of the analysis columns are then posted to the general ledger. Small sums received in the office are also recorded in the petty cash book on the receipt side, although generally there is no analysis. These small receipts would reduce the amount to be reimbursed.

Example: To determine the amount to restore the imprest

The imprest of a business is $1000 per week. At the end of a week the petty cashier disbursed funds for the following: car wash $50, Stationery $145, received for telephone calls $15, cleaning $175, Coffee and Tea $230.

Determine the amount to be reimbursed by the cashier

Solution:

Imprest at the start of the week 1000

Total expenses * 585

Balance of cash remaining 415

Cash required to restore imprest 585

Cash at the start of the following week 1000

*The total sum disbursed = 50+145+175+230=600 less 15 (received) =$585 to restore imprest.

(Activity 3.7)

Enter the following transactions in a petty cash book, having analysis columns for postages and stationery, traveling expenses, cleaning and miscellaneous.

June 1 Received imprest from the cashier 600

June 3 Bought postage stamps V1 100

June 5 Stationery V2 80

June 9 Taxi fare V3 40

June 10 Office Cleaning V4 72

June 12 Snacks for meeting V5 100

June 14 Paid for weekly newspaper V6 20

June 17 Office cleaning V7 40

June 20 Taxi fare V8 20

June 23 Copy paper V9 30

June 30 Bulbs for the office V10 16

Total the analysis columns and restore the imprest to the original amount. Voucher numbers are consecutive.

Feedback

PETTY CASH BOOK

Receipts	Date	Particulars	Voucher No.	Total	Traveling	Postage& Stationery	Cleaning Expenses	Misc. Expenses
$600	1/6	Restore Imprest
	3/6	Postage stamps	1	100		100
	5/6	Stationery	2	80		80
	9/6	Taxi fare	3	40	40
	10/6	Cleaning	4	72			72
	12/6	Refreshment	5	100				100
	14/6	Newspaper	6	20				20
	17/6	Cleaning	7	40			40
	20/6	Taxi fare	8	20	20
	23/6	Copy paper	9	30		30
	30/6	Bulbs	10	16				16
				518	60	210	112	136
	30/6	Balance c/d		82	GL	GL	GL	GL
*600*				600
82	1/7	Balance b/d
518	1/7	Cash (restored imprest)

KEY POINTS

· Books of Original Entry are useful in eliminating bulky details from the ledger.

· Credit transactions occur when payment is made some time in the future, whereas a cash transaction is where payment is immediate.

· Source documents record the essential elements of any transaction and are kept for future reference.

· Sales and Purchases Invoices, receipts, bills, debit notes and credit notes are examples of source documents used to make records in books of original entries.

· Trade discounts are reductions in the catalogue price of goods and are not recorded in the books whereas cash discounts are given as incentive for prompt payment and recorded in the cash book.

· The Sales, Purchases, Return Inwards and Return Outwards journals are used to record the credit stock transactions.

· The General Journal records unusual and onetime transactions and is unique in the way each transaction is analyzed and recorded.

· All non-credit transactions involving cash or bank are recorded in the cash book. This would include credit and debit card transactions.

· The Petty Cash Book is an analysis book that records all small cash transactions such as the purchase of postage stamps and gas for office car.

CONCLUSION

As a business grows, the number of transactions increases and it becomes necessary to separate the transactions and record in different journals. The format of the journals, with the exception of the cash book, is very similar and recording in all the journals is done from original source documents.

This Study Guide would have enabled you to develop the skills needed to record transactions in the books of original entries, total the books and determine total credit sales and purchases. You should also be able to record transactions in the cash book and balance the cash book. You should now be able to complete the end test and the tutor marked assignment.

Holdip, G. and Lamorell, C.		Principles of Accounts for Caribbean Examinations, Oxford: Macmillan Educational, 2004.
Wood, F.		Principles of Accounts for the Caribbean, London: Longman Publishing.

1.	c
2.	b
3.	d
4.	c
5.	b
6.	Credit note
7.	Debit note
8.	Trade discounts
9.	Cash discount
10.	Journalising

Monday, February 14, 2011