Double Entry and Books of Prime Entry
This domain tests the dual effect of every transaction, debit and credit rules, and the use of books of prime entry. Exam tasks include recording purchases, sales, returns, cash and journal entries, then identifying the correct ledger posting.
Core rules
- Every transaction affects at least two accounts; total debits equal total credits.
- Debit increases assets and expenses; credit increases liabilities, equity and income.
- Books of prime entry: sales day book, purchase day book, cash book, petty cash book, sales returns day book, purchase returns day book, general journal.
- Credit sales go to the sales day book; credit purchases go to the purchase day book.
- The general journal records non-routine transactions, corrections and adjustments.
- The cash book is both a book of prime entry and a ledger account for cash and bank.
Worked example
Inventory is bought on credit for 800. The dual effect is an increase in purchases (or inventory under a perpetual system) and an increase in payables. Entry: debit purchases 800; credit payables 800. If goods costing 200 are later returned, debit payables 200; credit purchase returns 200. The payable is reduced and the return is recorded separately so net purchases can be monitored. If the purchase had been for cash, the credit would be to cash or bank instead of payables.
Traps
- Reversing debit and credit for a purchase return.
- Using the sales day book for cash sales.
- Recording a credit sale directly in the cash book.
- Omitting the second effect of a transaction.