Books of Original Entry and Ledger Accounting
What this domain tests
You must choose the correct book of original entry for a transaction, record it there, and post it correctly to the ledgers. Expect questions on the sales and purchases journals, returns journals, the three-column cash book, the petty cash imprest system and the general journal, plus the division of the ledger into general, debtors and creditors ledgers.
Core rules
- Sales journal: credit sales of goods only, from invoices. Total posted: debit debtors control, credit sales.
- Purchases journal: credit purchases of goods for resale. Total posted: debit purchases, credit creditors control.
- Returns inwards journal: goods returned by customers. Debit returns inwards, credit the customer's account.
- Returns outwards journal: goods returned to suppliers. Debit the supplier's account, credit returns outwards.
- General journal: opening entries, credit purchase or sale of non-current assets, bad debts written off, and corrections of errors.
- The cash book is both a book of original entry and a ledger account. The three-column version records cash, bank and discounts: discount allowed on the debit side, discount received on the credit side.
- Petty cash uses a fixed imprest float; the reimbursement equals the analysed payments, restoring the float.
- Trade discount is never entered in the books; cash discount is.
- A contra entry (cash banked or cash withdrawn for office use) appears on both sides of the cash book and needs no ledger posting.
Worked example
Goods with a list price of $800 are sold on credit to J. Balkissoon, subject to 10% trade discount and 5% cash discount for payment within 10 days. The sales journal records $800 − $80 = $720: debit J. Balkissoon $720, credit sales $720. The trade discount is not recorded anywhere. If Balkissoon pays after 8 days: debit cash book $684, debit discount allowed $36, credit J. Balkissoon $720. The $36 is a cash discount and is an expense; the $80 trade discount never appears in any account.
Traps that cost marks
- Putting cash sales into the sales journal instead of the cash book.
- Recording trade discount in the discount columns.
- Posting the journal total to the individual debtor and the individual amount to the control account - the reverse is correct.
- Debiting returns outwards instead of crediting it.
- Showing a bank overdraft as a debit balance in the cash book; it is a credit balance.