Books of original entry, ledgers and the trial balance
What the examiner tests
This domain tests the flow from source document to ledger to trial balance, and whether you can distinguish books of prime entry from ledger accounts.
Core rules
- Books of prime entry: sales day book (credit sales), purchases day book (credit purchases), returns inwards book, returns outwards book, cash book, petty cash book and journal.
- Journal uses: opening entries, corrections, purchase or sale of non-current assets on credit, depreciation, and other non-regular transactions.
- Ledger: nominal ledger for income and expenses, receivables ledger for credit customers, payables ledger for credit suppliers, general ledger for the rest.
- Posting rule: debit the receiver, credit the giver. Assets and expenses are debit balances; liabilities, capital and income are credit balances.
- Trial balance: a list of ledger balances at a date. It proves debits equal credits, not that no error exists.
Worked example
Credit sale of N$3,000 to K. Haihambo; credit purchase of N$1,200 from P. Nakale; sales return of N$200 from Haihambo.
- Dr Receivables 3,000; Cr Sales 3,000.
- Dr Purchases 1,200; Cr Payables 1,200.
- Dr Sales returns 200; Cr Receivables 200. Haihambo's account is 2,800 debit; Nakale's account is 1,200 credit. The trial balance includes sales 3,000 credit, purchases 1,200 debit and sales returns 200 debit. The sales return is not entered as a negative sale; it is a separate debit balance.
Traps
Cash sales do not go in the sales day book. Do not post the total of the sales day book to the receivables ledger control only and forget the individual customer accounts. Do not use the journal for routine credit sales. A balanced trial balance can still hide errors of principle, omission, commission, original entry and compensating errors.