Rampersad Hardware: Choosing the Right Book of Original Entry
Rampersad Hardware is a small building-supply business in Chaguanas. Its bookkeeper, who has no formal training, uses a sales day book, a purchases day book, a sales returns book, a purchases returns book, a three-column cash book and a general journal. During March the following occurred: (i) paint costing $3,400 sold on credit to a contractor; (ii) an old delivery van sold on credit to an employee for $7,500; (iii) goods returned by a credit customer, $620; (iv) a credit note received from a supplier for damaged cement, $980; (v) a cash sale of $1,250; (vi) shop fittings bought on credit for $12,000; (vii) a customer's debt of $700 written off as irrecoverable. The bookkeeper recorded item (iv) in the sales returns book, debiting sales returns and crediting the supplier's account, and insists that because the trial balance still balances, nothing is wrong.
1. State the book of original entry in which each of items (i) to (vii) should be recorded, with a brief reason.
Read the worked answer
(i) Sales day book - a credit sale of goods in which the business trades. (ii) General journal - the van is a non-current asset, not stock; selling it is not a trading sale, so it must not swell the sales figure. (iii) Sales returns book - goods returned by a credit customer. (iv) Purchases returns book - a credit note received from a supplier reduces what is owed for goods bought for resale. (v) Cash book (receipts side) - cash received immediately. (vi) General journal - shop fittings are a non-current asset, not goods for resale, so the purchases day book is the wrong book even though the purchase is on credit. (vii) General journal - writing off a bad debt is not a sale or a return.
The governing principle is the nature of the item, not the fact that credit is involved. Any transaction that is not a routine credit sale, credit purchase or return belongs in the journal.
2. Write the journal entry that should have been made for item (iv), and explain the effect of the bookkeeper's entry on the supplier's account, returns outwards and gross profit.
Read the worked answer
Correct entry: Dr Supplier's account $980; Cr Returns outwards $980 - the business owes the supplier less, so the liability is reduced by a debit, and the cost of goods bought is reduced by a credit to returns outwards.
Bookkeeper's entry: Dr Sales returns $980; Cr Supplier's account $980.
Effects:
- Supplier's account: should have been debited $980 but was credited $980 - overstated by $1,960.
- Returns outwards: understated by $980, so purchases are not reduced and cost of sales is too high.
- Sales returns: overstated by $980, so sales are reduced.
- Gross profit: understated by $1,960 in total ($980 from the inflated sales returns and $980 from the missing reduction in purchases).
The trial balance still balances because debits equal credits - the entry was double, just wrong on both sides. A balanced trial balance proves only that debits equal credits; it does not prove the entries are correct.