Double-entry bookkeeping and books of original entry
From document to ledger
Every transaction begins with a source document and is first recorded in a book of original entry: sales day book (credit sales), purchases day book, sales returns day book, purchases returns day book, cash book including petty cash, and the general journal for everything else. Amounts are then posted to the ledger - the sales and purchases ledgers hold personal accounts, while the nominal (general) ledger holds expenses, income, assets and liabilities.
Debit and credit rules
Use DEAD CLIC: Debit expenses, assets and drawings; Credit liabilities, income and capital. Every transaction has two equal effects - the dual aspect.
Traps
- Sales returns: when a credit note is issued, debit returns inwards and credit the customer's account. Candidates often reverse this.
- Discount allowed (to customers) is an expense; discount received (from suppliers) is income.
- The cash book is both a book of prime entry and a ledger account. A contra entry appears on both sides of the cash book.
- Petty cash works on the imprest system: reimburse exactly what was spent so the float returns to its original figure.
- Do not post a credit note received from a supplier through the sales returns day book; it belongs to purchases returns.
Worked example
Goods sold on credit for P500: debit the customer's account P500, credit sales P500. The customer returns P80 of goods: debit returns inwards P80, credit the customer's account P80. The customer now owes P420.