Business documents, coding and books of prime entry
Business Documents
The document trail
A credit transaction generates a sequence of documents. A quotation offers a price before any deal is agreed; a purchase order is the buyer's request to buy; a delivery note travels with the goods; a goods received note (GRN) is the buyer's internal record of what actually arrived; the invoice is the seller's request for payment and the document that triggers the ledger entries. Credit notes cancel all or part of an invoice (returns, overcharges, damaged goods) and debit notes are the mirror image raised by the buyer. A statement of account summarises the transactions and balance for a period, and a remittance advice tells the supplier which invoices are being paid.
Checking an invoice
Before it is recorded, an invoice is matched to the purchase order and the GRN - the three-way match - and checked for quantities, unit prices, trade discount, arithmetic and VAT.
Traps
- Trade discount is deducted before VAT is calculated; prompt payment (settlement) discount is not, and is only taken if the invoice is paid within the stated period.
- A credit note received from a supplier reduces what we owe and is entered on the debit side of the supplier's account - the name and the side feel contradictory.
- A delivery note or quotation never creates a ledger entry; the invoice does.
- A statement of account is a summary, not a request for payment.
Worked example
Invoice: £1,000 less 20% trade discount, plus VAT at 20%. Net = £800; VAT = £160; total payable = £960.
Coding, Books of Prime Entry
The books of prime entry
Transactions are first written in a book of prime entry and only later posted to the nominal ledger. There are six: the sales day book (credit sales), the sales returns day book, the purchase day book (credit purchases), the purchase returns day book, the cash book (including the petty cash book) and the journal. The four day books for sales and purchases are memorandum records that summarise the individual invoices behind a single double entry; the cash book and the journal are part of the double-entry system in their own right.
Coding
Every entry carries a code so that it reaches the right account. A typical structure separates the nominal ledger code (the type of account, e.g. 7500 stationery) from the cost centre or department code (who incurred it, e.g. MKT). Codes may also identify the customer or supplier in the receivables and payables ledgers.
Traps
- Cash sales do not go in the sales day book; they go in the cash book.
- Returns are never recorded as negative entries in a day book - they belong in the separate returns day book.
- The journal is used for opening entries, year-end adjustments and corrections, not routine credit sales.
- Getting the code right is only half the marks; the direction of the entry must still be correct.
Worked example
A stationery invoice for the marketing department is coded nominal 7500 / cost centre MKT. It is a credit purchase, so it is listed in the purchase day book and posted as a debit to stationery expense and a credit to payables.