Wednesday, 3 July 2013

BOOKS OF ORIGINAL ENTRY



BOOKS OF ORIGINAL ENTRY

 

INTRODUCTION


In many businesses today, some form of documentation usually supports business transactions.  These source documents, as they are called, are used to record information in daily journals or books of original entries.  These journals are the first form of official records of any transaction.  Generally, they are not part of the double entry system.   With the exception of the cash book and the general journal the terms debit and credit do not appear in any other book of original entry. In this study guide, you will be introduced to the documents that form the basis of accounting records as well as use the documents to make records in these journals.  You will also learn about journals that are used to record changes in stock levels as well as cash and bank transactions.   You will learn to make records in these journals as well as post them to their specific ledgers.



BOOKS OF ORIGINAL ENTRY


The use of Books of Original Entry promotes the division of the ledger which assists management in data analysis.  They make it easier to retrieve information on debtors and creditors, saves time and eliminates many details from the ledger.

The following table shows a list of the books of original entry as well as the source document (s) which form the basis of the recording in the books.

Book of Original Entry

Transactions Recorded

Source Document Used

Sales day book

Credit sales of inventory (stock)

Sales invoices

Purchases day book

Credit purchases of inventory (stock)

Purchases invoices

Cash book

All cash and bank transactions, for example, cash sales, receipts from debtors (accounts receivables), payments to creditors

Bank deposit  and withdrawal slips, cheques debit and credit card receipts

Return Inwards Journal

Goods returned by customers

Credit note sent

Return Outwards Journal

Goods returned to suppliers

Credit note received

Petty Cash Book

Cash transactions of small value

Petty cash vouchers, cash bills

General Journal

All transactions which cannot be recorded in any other book of original entry

Bills, receipts, vouchers, cancelled cheques.


 

CASH AND CREDIT TRANSACTIONS


Cash transactions occur when payment is received or made when the transaction takes place.  This includes the use of credit cards and debit cards.   A credit transaction is one where payment is to be made some time in the future, after the transaction.   It is important to distinguish between these two types of transactions since the accounting treatment differs as well as the impact on the balance sheet.

(Activity 3.1)

Robert is the owner of an Auto Part shop located in Papine, Kingston.  He purchases 500 carburetors from Massey Marketing at $35 each, together with 100 shock absorbers at $10 each and 75 disc pads at $25 each.  The goods were delivered one week after the order was placed.    On checking the order Robert discovers that the disc pads were the wrong brand and he returns them to Massey Marketing.  On checking, Massey Marketing did not have the correct brand in stock and so Robert was forced to purchase the disc pads for cash at Car Tech Limited.

Answer the following questions which are based on the scenario above:

1.          Identify the document Robert receives from Massey Marketing with his order.
2.          Name the document Massey Marketing would issue to Robert after he returns the disc pads.
(Activity 3.1 – cont’d)

3.          What document would Robert receive from Car Tech Ltd when he purchases the correct brand of disc pads?
4.          Name the prime entry books in Robert’s business where the above transactions would be recorded.


Feedback


(a)           The document received would be a Sales Invoice

(b)           Credit Note                   

(c)           Cash Bill
(d)           Purchases Journal, Return Outwards Journal, Cash Book

Debit Cards


These are issued by commercial banks to customers allowing them to access their accounts using automatic banking machines (ABM’s).  I am sure you have seen commercials for debit cards.  In Trinidad and Tobago they are referred to as ‘LINX’cards. The customer’s account is immediately debited at the point of sale and the seller’s account is credited.  This type of payment has become more popular to avoid a large amount of cash on the premises. The receipts from debit cards are used to make records in the cash book.

Credit Cards


Credit cards allow customers to charge their purchases of goods and services instead of paying cash.  When the credit card is presented to the seller, it must be verified to ensure the sale does not exceed the approved amount.  The use of computers allows the sellers’ account to be credited with the amount.  A percentage of the sale price is charged by commercial banks for all credit card transactions.  Popular credit card companies include VISA, Master Card and American Express.

 

SOURCE DOCUMENTS


A source document records the essential elements of any transaction; the date, name and address of the names of the parties involved and the value of the transaction.  They form the basis for the accounting records that are kept by the business.  These documents are retained for future verification.  Let us now examine a very common document that is used in most transactions, an Invoice.

Invoice

An invoice is a document sent to credit customers giving a detailed description of the items, unit price and the terms and conditions of the transaction.  The order number, as well as the name and address of the customer, are also printed on the invoice. Sometimes the invoice would also alert customers of interest charges when there are overdue balances.  An invoice is made in triplicate and the copies are used by different departments to keep their own records.  Sales invoices are used to record transactions in the Sales Journal.  The Purchases Invoice is sent by vendors and is used to make records in the Purchases Journal. Both the buyer and the seller receive copies of the invoice and use them to make records.





INVOICE

THE PLANT EMPORIUM
Orange Valley Road
San Juan
Invoice No:
45678
Date
Customer Name

Address


Order No.

Telephone
Fax:






Qty
Description
Unit Price
Total







Total


Payment:




Terms and Conditions
E&OE











Credit Note


This is a document sent to a buyer when there is a reduction in the amount charged on an invoice.  This may occur when goods are returned or when there is an error in pricing.  Goods would normally be returned if they are faulty or damaged in some way.

Debit Note

If errors occur when an invoice is being prepared the document which is sent to customers to change the amount charged on the original invoice is a debit note.  It is sometimes referred to as a supplementary invoice.  Errors may occur if additional goods were sent to the customer or there was an error on the original invoice.

Discounts


A discount is a reduction in the price of an item.  In accounting there are two types of discounts; cash discounts and trade discounts. Cash discounts are given as incentives to customers to make payments on their account within a specified period of time.  Trade discounts reduce the catalogue price of an item and are intended to encourage trade.   Although they are shown on the sellers invoice, trade discounts are not recorded in the ledger of the buyer or seller.







(Activity 3.2)

Grey Singh received an order from Jim Young, a credit customer with the following details on September 30 2007:

6x20 inch planter @ $18.00 each
12kgs Fertilizer @12.50 per kg
20 bottles of Liquid Grow @ $18.50

The following terms and conditions applied:

Trade discount 10%
5½% 7 days
2½% 30 days
E & O E

1.             You are required to prepare the invoice to be sent to Jim Young.

2.             Explain the meaning of the terms and conditions outlined.

Feedback

INVOICE

GREY SINGH
Orange Valley Road
San Juan
Invoice No:
1245

Date

30/09/07
Customer Name
Jim Young
Address
Railway Road
Sea View

Order No.
005

Telephone: 640 8767
Fax:
989
2007

Qty
Description
Unit Price
Total
12 kgs
6
20
Fertilizer
20” Planters - green
Bottles Liquid Grow
$12.50
$18.00
$18.50

$150.00
$108.00
$370.00



$628.00
Payment:
Less 10% Trade discount

$62.80

Total

$565.20
Terms & Conditions
5½% 7 days
2½% 30 days
E&OE
Carriage Paid









The Terms of payment suggest a cash discount of 5½% if the total of $565.20 is paid within 7 days after receipt of the invoice.  If the total due is paid within 30 days, Mr. Young is entitled to a 2½% discount.  E&OE stands for errors and omissions excepted.  It allows the seller the right to alter the invoice even after it has been sent to the buyer if any errors or omissions are discovered.
RECORDING TRANSACTIONS

Specialized Journals for Stock

 As we discussed in an earlier Study Guide, a Journal is a daily record of business in chronological order.  The Sales, Purchases and Return Journals, also called books of original entry or day books, record transactions dealing only with stock (inventories).  The Sales journal record only credit sales of stock and the Purchases Journal records credit purchases of stock.  The Returns Journals records goods previously bought or sold on credit that have been returned to suppliers or by customers. Cash sales and purchases of goods are not recorded here, neither the purchase nor sale of fixed assets. These are recorded in the Cash book and the General Journal, respectively.  The layout of the journal is shown below.

Illustration: Format of Journal

Date
Details
Folio
Rectangular Callout: Net amountAmount












Rectangular Callout: Shows the ledger page 
where the account is to be opened   Rectangular Callout: Name of supplier (creditor) or customer (debtor)           
 Date on the  
 Invoice                                                              



Any business involved in a large amounts of credit transactions would find it advantageous to use specialized journals.    Managers can quickly get totals regarding credit sales and purchases.  The Purchases and Return Inwards Journal record increases in stock whilst the Sales and Return Outwards Journals records decreases in stock.

 

            Example

Demonstrating the recording of transactions in Books of Original Entry

J. Flowers is the sole owner of The Plant Emporium.  Her records show the following transactions for the month of June 2006.

June 01   Sold goods on credit to Green Leaf $110, R. Fig $689 and S. Tato $725 
June 05   Received Invoices from T. Tin $1 750 and S. Steel $1 105
June 10   Bought goods on credit from Planters Place $1875
June 13   S. Tato returned $125 worth of goods
June 18   Sold goods on credit to R. Fig with a list price of $1800, allowing a 2.5% Trade discount
June 20   Returned goods to T. Tin $250

Record the above transactions in the appropriate books of original entry.


 
Feedback to Example
 
JOURNAL
 
Date
Details
Folio

Amount ($)
06/01/06
Green Leaf
SL

110.00

R. Figg
SL

689.00

S. Tato
SL

725.00
06/18/06
R. Figg
SL
1800


Less 2½% trade discount

   (45)
1 755.00

Total Credited to the Sales A/C


3279.00
PURCHASES JOURNAL

Date
Details
Folio
Amount
Amount
06/05
T. Tin
PL

1 750.00

S. Steel
PL

1 105.00
06/10
Planters Place
PL

1 875.00
06/30
Total Debited to Purchases A/C
GL

4 730.00

RETURN OUTWARDS JOURNAL

Date
Details
Folio
Amount
Amount
06/20
T. Tin
PL

250






Total Credited to Return Outwards a/c


250

RETURN INWARDS JOURNAL

Date
Details
Folio
Amount
Amount
06/13
S. Tato


125






Total Debited to Return Inward a/c


125



(Activity 3.3)

Now that you are familiar with the recording procedures of the day books you are to enter up the sales, purchases, and returns day books from the following details for the month of May 2006.

May      1          Sold goods on credit to L. Long $800, S. Short $1250 and B. Stone $1 620
May      3          Bought goods on credit from S. Lewis $730, J. Makoy $950
May      4          S. Short returned goods to us $370
May      8          Bought goods on credit from A. Ladi $840, B. Ready $1750
May      9          Returned faulty goods to B. Ready $500
May      10         Sold goods on credit to Tovadis Limited $1 290 less 10% trade discount
May      15         Credit purchases from S. Lewis $510, J. Makoy $ 450
May      18         Returned goods to J. Makoy $190
May      24         Credit sales to L. Long $2 700, B. Stone $970
May      28         B. Stone returns some of the goods purchased on May 24, $180
May      30         Tovadis Limited returned goods with a list price of $200

Record the above transactions and determine the amount to be transferred to the Sales a/c, Purchases a/c, Return Inwards and Return Outwards a/cs.

Feedback

Total credit sales            $8 501
Total credit purchases $5 230
Total return inwards       $730
Total return outwards     $690

The General Journal

We just learnt that the specialized journals are used to record transactions dealing with credit sales and purchases of stock.  Other transactions that are unable to fit into those categories, such as the credit purchase or sale of fixed assets, are recorded in the General Journal.  Although the format is essentially the same as that of the specialized journals, the general journal further analyses the transactions into debit and credit, indicating which account is to be debited and which account is to be credited.  The format of the General Journal is shown below.

GENERAL JOURNAL
Date
Details
Folio
A/C Debited
A/C Credited











Journalising is the process of recording entries in the Journal.  As with the specialized journals, transactions are recorded in chronological order.  The accounts involved are identified and the account to be debited is written first.  Indented on the second line is the account to be credited.  A special feature of the general journal is the narration, which follows every journal entry.  The narration briefly explains the transaction recorded. 




 

               Example

Demonstrate the use of the General Journal in recording varying transactions.

1.             May 16 2006 The Plant Emporium purchased, on credit, machinery costing $17 890, from Mackal Limited.
2.             May 20 2006, the Cashier received a voucher for $1150 to pay the insurance for the owner’s personal car.
3.             May 30th 2006, the owner invested a further $21000 into the business from her private savings.

Before these are recorded in the journal, the accounts involved are identified. Then, using double entry rules of entry they are recorded in the general journal.

Date
Details
Folio
A/C Debited
A/C Credited
May 16 06
Machinery
GL
17 800


          Mackal  Limited
GL

 17 800

Fixed asset purchases on  credit








May 20 06
Drawings
GL
1 150


            Cash     
GL

1 150

Cash paid for owners personal insurance



May 30 06
Bank
GL
21 000


                Capital


21 000

Additional investment by owner




The following transactions are usually recorded in the General Journal:

1.             Opening entries – this is a list of assets and liabilities used to begin a new accounting period.  (See the example below).

2.             The purchase and sale of fixed assets on credit.
3.             Correction of errors.*
4.             Closing entries.*
5.             Writing off uncollectible debts (bad debts).*
6.             Depreciating fixed assets.*

*These topics are to be dealt with in a subsequent study guide.




The following shows the opening entries of R. Bull at February 01 2006

Date
Details (Account Titles)
Folio
Debit
$
Credit
$
02/01
Motor Vehicles
Furniture
Building
Cash in hand
Bank
Stock on hand
Debtor: R. Syms
Creditor: Beltronics Limited
Bank Loan
Capital

35 000
60 000
120 000
1 200
35 490
14 500
8 210







26 100
40 000
208 300

Being Assets, Liabilities and Capital as at Feb. 01.06

274400
274400

You should note that the columns are totalled. 

(Activity 3.4)

J. Hermanson began his second year of trading as a sole trader on June 01 2006 with the following balances: Cash $1650; Bank $8200, Debtors: W. Wilde $750, Plant and Machinery $97000; Office Equipment $34000; Stock $4370; Creditor: S. Sweete $1450.

Journalise the above opening entries.

Feedback

Date
Details (Account Titles)
Folio
Debit
$
Credit
$
1/6/06
Plant and Machinery
Office Equipment
Stock
Cash in hand
Bank
Debtor: W. Wilde
Creditor: S.Sweete
Capital

97 000
34 000
4 370
1 650
8 200
750







1 450
144 520

Being Assets, Liabilities and Capital as at Feb. 01.06

145 970
145 970

The Cash Book

I am sure you will agree that cash is the lifeblood of any business.  Therefore, care should be taken when recording transactions relating to cash or bank.  The Cash book is a unique book of original entry.  Although it is a journal, it also acts as an account for Cash and Bank.  This is the only book of original entry that is balanced and the double entry is completed in the ledger.  The cash book records the receipts and payments of cash and bank.  Discounts received and allowed are also recorded in the cashbook for convenience.  The format of the Cash book is also unique, in that the accounts for cash and bank stand side by side along with the discount column.  All receipts are debited and payments credited.
 
The illustration below shows the basic format of a three-column cash book, (which includes the discount columns). A two column cash book is one without the discount column.

THE CASH BOOK

Date
Details
(RECEIPTS)
F
Cash
Bank
Dis All
Date
Details
(PAYMENTS)
F
Cash
Bank
Dis
Rec













DEBIT SIDE





CREDIT SIDE


















Recording Entries in the Cash Book

When a document is received, the first analysis is to determine where it should be recorded.  Any document relating to cash or bank, such as, cheque vouchers, cash bills and receipts are used to make records in the cash book.  Again it is done in chronological order and the name of the account in the ledger is written in the details column.  If the transaction involves the bank then the amount is written in the bank column.  If it is a cash transaction, then the amount is written in the cash column.  Any discount received or allowed is placed in the discount column.

(Activity 3.5)

List at least five source documents that can be used to make entries in a three column cash book.


Feedback

Your answer should include:  Receipts, Cash bills, Payment vouchers, Deposit slips, Cash register slips, cheque counterfoil.                                                               
                                                           
Contra Entries

Since both cash and bank accounts are in the cash book, it is possible to complete the double entry in the cash book if the transaction involves both accounts.  When this happens it is described as a contra entry.  These occur when cash is deposited into the bank or cash is withdrawn from the bank for use in the office.



BALANCING THE CASH BOOK

The Cash Book is balanced to determine the amount of cash in hand and bank.  To balance the Cash Book means making both sides equal.  The columns for Cash and Bank on both sides of the cash book are totaled.   The difference (balance) is determined and added to the side with the smaller amount.   The cash column will always carry a debit balance; this means that the debit side will always be greater than the credit side, since it is not possible to overspend cash.  A credit balance (also called an overdraft) on the bank account signifies that the account has been overdrawn, that is, cheques were written in excess of the amount in the bank.  Sometimes this is done with the permission of the bank.  If no permission is given then any cheques presented for payment would not be honored by the bank for payment.

Now that you have some idea about recording transactions in the cash book go through the following example, which demonstrate recording of transactions in a three column cash book.

 

              Example

Record the following transactions of Seren Dippity, a retailer, in his three column cash book for the month of April 2006.
                                                                                                            $
April     01         Cash at bank                                                                 1 800
            03         Cash sales                                                                     1 490
            08         Paid cash for cleaning                                                        124               
            10         Received a cheque from B. Calm                                     1 500   
            15         Purchases paid by cheque                                               1 380
            17         Paid rent by cheque                                                           750
            19         Received a cheque from S. Leep to settle
                        his account of $700 less 5% discount
21         Paid cash into bank                                                        1 200
24         Received  $900 cash from P. Paine to settle his
            account of $950
26         Paid D. Serene by cheque to settle an account of
            $840 less 5% discount.                                                                     

Balance the cash book and bring down the balance at the end of the month.                                                                                              

Feedback to the example

                                                                        THE CASH BOOK

Date
Details
(RECEIPTS)
F
Cash
Bank
Dis All
Date
Details
(PAYMENTS)
F
Cash
Bank
Dis
Rec
4/1
Balance b/f


1800

4/8
Cleaning

124


4/3
Sales

1490


4/15
Purchases


1380

4/10
B. Calm
sl

1500

4/17
Rent


750

4/19
S. Leep
sl

665
35
4/21
Bank
C
1200


4/21
Cash
C

1200

4/26
S. Serene


798
42
4/24
P. Paine

900

50
4/30
Balance c/d

1066
2237




2390
5165
85



2390
5165
42
5/1
Balance b/d

1066
2237









(Activity 3.6)

Write up the three column cash book of S. Sui from the following details and balance the cash book at the end of the month.

Aug. 01             Started business with $1800 cash in hand and $16 000 in the bank
Aug. 02             Paid rent by cheque $300
Aug. 03             Paid utilities by cheque $1 240
Aug. 05             Cash sale $4 300
Aug. 07             Received a cheque from debtor C. Lebrity $3400 after allowing $135 discount
Aug. 09             Cash sales paid directly into bank $2 980
Aug. 11             Paid cash into bank $4 000
Aug. 15             Paid account at Vendor Ltd the amount owing $2 900 received 5% discount
Aug. 18             Mr. Sui withdrew $1500 from the bank for personal use
Aug. 20             Paid for motor repairs by cash $850
Aug. 25             Withdrew $500 from the bank for office use


Feedback
                                                            CASH BOOK

Date
Details
(RECEIPTS)
F
Cash
Bank
Dis All
Date
Details
(PAYMENTS)
F
Cash
Bank
Dis
Rec
1/8
Balance b/f

1800
16000

2/8
Rent


300

5/8
Sales

4300


3/8
Utilities


1240

7/8
C. Lebrity


3400
135
11/8
Bank
C
4000


9/8
Sales


2980

15/8
Vendor Ltd


2755
145
11/8
Cash
C

4000

18/8
Drawings


1500

25/8
Bank
C
500


20/8
Motor repairs

850








25/8
Cash
C

500







31/8
Balance c/d

1750
20085




6600
26380
135



6600
26380
145
5/1
Balance b/d

1750
20085








The Petty Cash Book

Small cash payments and receipts can be omitted from the Cash Book to avoid overcrowding.  When this is done, a Petty Cash Book is used.  The format of the PCB facilitates the analysis of transactions so that certain types of transactions can be posted in aggregate to the ledger.  The debit side of the PCB represents receipts whilst the credit side, which represents payments, is divided into several analysis columns.  (See example below). 

                                                PETTY CASH BOOK

Receipts
Date
Particulars
Voucher No.
Total
Traveling
Postage
Stationery
Office Expenses




















The PCB operates with an Imprest System.  This means that the Petty Cashier is given a float (imprest) at the beginning of a period from which funds are disbursed. Requests for payment are written on vouchers which briefly explain the purpose of the payment and indicate the amount.  At the end of the period (week or month) the total cash paid is then reimbursed by the main cashier.  This is referred to as restoring the imprest. This means that the petty cashier is given the exact amount she has disbursed.   The totals of the analysis columns are then posted to the general ledger.  Small sums received in the office are also recorded in the petty cash book on the receipt side, although generally there is no analysis.  These small receipts would reduce the amount to be reimbursed.


           
              Example:  To determine the amount to restore the imprest
           
The imprest of a business is $1000 per week.  At the end of a week the petty cashier disbursed funds for the following: car wash $50, Stationery $145, received for telephone calls $15, cleaning $175, Coffee and Tea $230.  

Determine the amount to be reimbursed by the cashier

Solution:

Imprest at the start of the week              1000
Total expenses   *                                              585
Balance of cash remaining                                  415
Cash required to restore imprest                         585
Cash at the start of the following week     1000

*The total sum disbursed = 50+145+175+230=600 less 15 (received) =$585 to restore imprest.


(Activity 3.7)

Enter the following transactions in a petty cash book, having analysis columns for postages and stationery, traveling expenses, cleaning and miscellaneous.

June 1               Received imprest from the cashier                                   600
June 3               Bought postage stamps                                       V1        100
June 5               Stationery                                                          V2          80
June 9               Taxi fare                                                           V3          40
June 10             Office Cleaning                                                   V4          72
June 12             Snacks for meeting                                             V5        100
June 14             Paid for weekly newspaper                                 V6           20
June 17             Office cleaning                                                   V7           40
June 20             Taxi fare                                                           V8           20
June 23             Copy paper                                                        V9           30
June 30             Bulbs for the office                                             V10          16

Total the analysis columns and restore the imprest to the original amount.  Voucher numbers are consecutive.

 


Feedback

                                                            PETTY CASH BOOK

Receipts
Date
Particulars
Voucher No.
Total
Traveling
Postage&
Stationery
Cleaning Expenses
Misc.
Expenses
$600
1/6
Restore Imprest







3/6
Postage stamps
1
100

100



5/6
Stationery
2
80

80



9/6
Taxi fare
3
40
40




10/6
Cleaning
4
72


72


12/6
Refreshment
5
100



100

14/6
Newspaper
6
20



20

17/6
Cleaning
7
40


40


20/6
Taxi fare
8
20
20




23/6
Copy paper
9
30

30



30/6
Bulbs
10
16



16




518
60
210
112
136

30/6
Balance c/d

82
GL
GL
GL
GL
600



600




82
1/7
Balance b/d






518
1/7
Cash (restored imprest)










KEY POINTS

 

 


·                     Books of Original Entry are useful in eliminating bulky details from the ledger.

·                     Credit transactions occur when payment is made some time in the future, whereas a cash transaction is where payment is immediate. 

·                     Source documents record the essential elements of any transaction and are kept for future reference.

·                     Sales and Purchases Invoices, receipts, bills, debit notes and credit notes are examples of source documents used to make records in books of original entries.

·                     Trade discounts are reductions in the catalogue price of goods and are not recorded in the books whereas cash discounts are given as incentive for prompt payment and recorded in the cash book.

·                     The Sales, Purchases, Return Inwards and Return Outwards journals are used to record the credit stock transactions.

·                     The General Journal records unusual and onetime transactions and is unique in the way each transaction is analyzed and recorded.

·                     All non-credit transactions involving cash or bank are recorded in the cash book.  This would include credit and debit card transactions.

·                     The Petty Cash Book is an analysis book that records all small cash transactions such as the purchase of postage stamps and gas for office car.


 

 


     CONCLUSION




As a business grows, the number of transactions increases and it becomes necessary to separate the transactions and record in different journals.  The format of the journals, with the exception of the cash book, is very similar and recording in all the journals is done from original source documents.

This Study Guide would have enabled you to develop the skills needed to record transactions in the books of original entries, total the books and determine total credit sales and purchases.  You should also be able to record transactions in the cash book and balance the cash book. You should now be able to complete the end test and the tutor marked assignment.







 
 






















                


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