Sources and Recording of Data
What you must understand
Transactions are first recorded in books of prime entry: sales day book, purchases day book, sales returns day book, purchases returns day book, cash book and the general journal. From these, entries are posted to the ledger using the double-entry system. Know the T-account layout, the meaning of debit and credit, and the cash book as both a book of prime entry and a ledger account (including the three-column cash book with discount columns). Understand contra entries (cash withdrawn for business use) and the use of the petty cash book with the imprest system.
Traps in questions
- Reversing debit and credit for returns: sales returns are debited to the returns inwards account and credited to the customer.
- Forgetting that discount allowed is an expense and discount received is income.
- Posting a contra entry to only one account.
- Confusing the imprest amount with the amount reimbursed.
Worked example
Goods sold on credit to A. Brown, $400. Entry: debit A. Brown's account $400; credit sales account $400. When Brown returns $50 of goods: debit sales returns $50; credit A. Brown $50. Brown now owes $350. Rule of thumb: the account named in the transaction (the person or business) is the one you debit when they owe you, and credit when you owe them.