Books of Prime Entry and the Ledger
This domain tests the accounting record chain from source document to ledger. Expect questions on which book records which transaction, posting to ledger accounts, and the treatment of trade and cash discounts.
The record chain
Source document → book of prime entry → ledger → trial balance → financial statements. Source documents include invoices, receipts, credit notes, debit notes and cheque counterfoils.
Books of prime entry
- Sales journal: credit sales, from invoices.
- Purchases journal: credit purchases.
- Sales returns journal: credit notes issued to customers.
- Purchases returns journal: credit notes received from suppliers.
- Cash book: cash and bank receipts and payments; it is both a book of prime entry and a ledger.
- General journal: non-routine entries, such as buying an asset on credit, corrections and opening entries.
Each entry is posted to the ledger using double entry. Trade discount is deducted before recording and is not entered in the ledger; cash discount is recorded.
Worked example
Goods are sold on credit for Rs. 40,000 with 10% trade discount. The sales journal records Rs. 36,000. Ledger: debit the customer’s account Rs. 36,000; credit sales Rs. 36,000. If the customer later pays within the discount period and receives 2% cash discount, the cash book records cash Rs. 35,280 and discount allowed Rs. 720, and the customer’s account is credited with Rs. 36,000.
Traps
Recording trade discount; putting cash sales in the sales journal; crediting the customer when a sale is made; confusing returns inwards with returns outwards.