Chapter 4
Recording, Summarising and
Posting Transactions
Source Documents
What type of source documents
• Petty cash vouchers
• Cheques Received (lodgements)
• Cheque Stubs (payments)
• Wage, salary and payroll records.
These records are recorded so that the business knows
what they owe people and who owes the business
money.
These documents are recorded in the books of prime entry.
Due to the volume of document they are summarised in the
books of prime entry and then posted to the general
ledger accounts.
Books of Prime Entry
Book of prime entry
Documents Recorded Summarised and posted to
Sales day book
Sales Inv, credit note
Receivable ledger/control ac
Purchase day bk
Pur Inv,credit note rec
Payables ledger/control ac
Cash Book
Cash paid and rec
General Ledger
Petty Cash Book
Notes/coin paid/rec
General Ledger
Journal
Adjustments
General Ledger
Question
State which book of prime entry the following transactions
would be entered into.
(a) Your business pays J Sunderland (a supplier) €6,200
(b) You send Hall & Co (a customer) an invoice for €1,320
(c) You receive an invoice from J Sunderland for €1,750
(d) You pay Hall & Co €1,000
(e) Sarti (a customer) returns goods to the value of €100
(f) You return goods to Elphick & Co to the value of
€2,400
(g) Sarti pays you €760
Posting to the ledger
Trace diagram on page 57.
Personnel
Small Company – small number of people recording
accounts
Large Company – greater amount of people recording
accounts. Separation of departments, segregation of
duties to prevent fraud. In other words the person
sending out the sales invoices will not be receiving the
cheque from the client. The individual could invoice the
client and lodge cheque into their own account.
Accounts Dept
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A receivable ledger controller
A credit controller
A payables ledger controller
An assistant accountant
A payroll controller
A management accountant
A financial accountant
A financial controller – to supervisor all other accounting
staff.
Payables ledger controller
The petty cash will be managed by the payables ledger
controller and must be authorised by the accountant.
The payables ledger controller will prepare cheques for
payment after checking that:
• There is a purchase order for the goods
• The correct goods were received (GRN)
• They were received in good condition (any faults should
be detailed on Delivery note)
• The invoice is correct – correct quantities, price, vat
calculation.
Main Books of Prime Entry
The main books of prime entry are:
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Sales day book
Purchase day book
Journal
Cash book
Petty cash book
Sales day book
The sales day book is a list of all invoices sent out to
customers each day.
The sales ledger reference is the reference of the page that
the customer is on in the sales ledger. In a
computerised accounting system this will be an account
name, e.g. University of Limerick (as a customer) might
have an account called UL02.
There may be further analysis columns in the sales day
book for difference types of sales. For example, in a car
sales showroom might have sales of private vehicles and
sales of commercial vehicles under different columns.
Sales Returns Day Book
When customers return goods due to faults etc, the returns
are recorded in the sales returns day book.
The sales returns book looks mush the same as the sales
book
Purchases Day Book
• Entered into the system once the invoice comes from
supplier
• A debit to the income statement (purchases) and the
credit to the payables ledger and payables ledger control
account.
• A computerised system will update all accounts
• When the supplier statement arrives the supplier account
balance can be checked against it.
• The payables ledger control account must be reconciled
to the payables ledger.
Purchases Returns day book
The purchase returns day book is kept to record credit
notes received in respect of goods which the business
sends back to its suppliers. The business might expect
a credit note from the supplier. In the mean time it might
issue a debit note to the supplier, indicating the amount
by which the business expects its total debt to the
supplier to be reduced.
See extract from purchase returns day book Pg 59.
Cash Book
The cash book is a book of prime entry, used to keep a
cumulative record of money received and money paid
out by the business via its bank account.
Could be money received on the premises such as cash
sales and cash or cheques received from debtors. Also
recorded in the cash book will be amounts going through
the bank which you may not know about until you
receive the bank statement. These will be items such as
bank transfers, bank charges or interest.
The cash book may be recorded in a book on a page
divided in two. On the left side (debit ) the income will be
recorded and on the right side (credit) the payments will
be recorded.
Recording Receipts
Batching Transactions
When a business receives a large number of receipts, it is
often a good idea to split them up into manageable
batches of transactions, and to process each batch.
Checking Receipts from credit customers against the
invoice
When money is received from a credit customer, the receipt
should be matched with the invoice that the customer is
paying. Sometimes, a customer might pay several
invoices at the same time.
Cash Book
The details are entered into the cash book as follows:
Date – this is the date the money is received
Reference - this might be the name of the customer or
might say cash or credit sale
Total – This will be the total amount received
Debtors – If the receipt is a receipt from a credit customer
then the total amount should be entered in to the debtors
column. The amount will not be analysed out to sales
and VAT as this has been done already when the sale
was made. It was recorded already in the sales book and
should not be recorded again in the cash book.
Cash Book
Cash Sales – If the receipt is for cash sales, the total amount
received is shown in the Total column. The cash sales column
is used to record the amount of the sales excluding VAT.
VAT – This column is used to record any VAT received for
anything except credit sales invoices. If it is a cash sale the
total will go to the total column the vat amount will go to the
vat column and the net amount in the cash sale column.
The reason for recording VAT on cash sales here as this is the
first time the VAT on the sale is recorded.
Other - This might be interest on deposit account or bank loan
Settlement Discount – This is a memorandum record of the
discount allowed for early payment. This is totalled and
posted to the discount allowed account in the ledger.
Example
The following amounts were received on 19 October 2006
(a) Payment of invoice number 69 by BL Lorries (account
number S239), total €4,700
(b) Payment of invoice number 70 by MA Meters (account
number S314), total €2,820. A settlement discount of
€40 was taken by this customer.
(c) Payment of invoice number 78 by Tanktop Limted
(account number A205), total €3,100.
(d) A cash sale of €1,175 including VAT at 17.5%
Task: Write up the cash receipts book and total each of the
columns.
Example
Date
Ref
Total
Debtors
19.10. BL
06
Lorries
4,700
4,700
MA
Meters
2,820
2,820
TankTo
p
3,100
3,100
Cash
Sale
1,175
Cash
Sales
VAT
Discounts
Allowed
40
1,000 175
11,795 10,620 1,000 175
40
Balancing the Cash Book
If at the beginning of the day there was a cash balance of
€900 (debit balance), during the day there were receipts
of €2,490 and payments of €2,610 what is the balance at
the end of the day?
Opening balance 900
Receipts
2,490
3,390
Payments
(2,610)
Closing Balance
780
The balance c/d at the end of the day is €780 and the
balance b/f to the following day is €780. see pg 62.
Discounts, Rebates and allowanes
• Trade Discounts- Bulk buying
• Cash Discounts – Prompt payment
Accounting for trade discount
A trade discount is a reduction in the amount of money
demanded from a customer.
A cash discount is an optional reduction in the amount
payable by a customer.
The decision to take advantage of a cash discount is a
financing decision.
Accounting for Cash Discount
• Kathy buys goods from Nick for €1,200. She will receive
a discount for payment within two weeks. Show the
entries made in Nick’s accounts.
Invoice originally entered Dr Debtors €1,200
Cr Sales €1,200
Record Discount
Dr Discount Allowed€100
Cr Debtors
€100
Record Cash Receipt
Dr Cash
€1,100
Cr Debtors
€1,100
Bank Statements
The banks statements will be received on a regular basis.
The cash book should be reconciled to the bank
statement to ensure no monies have gone missing.
Petty Cash Book
• The petty cash book is the book of prime entry which
keeps a cumulative record of the small amounts of cash
received into and paid out of the cash float.
• The cash is used for small purchases such as milk and
biscuits, taxi or bus fares.
• The amount held in cash day one will be the float. At
any one time the amount of receipts and cash remaining
should total to the original float. The float will be topped
up from time to time and the amount it will be topped up
by will equal the amount of receipts in the petty cash
box. This system is called the imprest system.
Double Entry Bookkeeping
Double Entry Bookkeeping
Business Entity Concept
Dual Effect
Accounting Equation
Separate Entity
Ledger Accounting
Assets = Capital + Liabilities
Record from
Business Viewpoint
Debit
Credit
Closing Balances
Trial Balance
Adjustments
Financial Statements
Chapter 4
• Business is a separate entity from its owner
• Transactions are always recorded from the
business’ point of view
The Dual Effect Principle
Debit
 asset
 liability
Credit
 asset
 liability
 expenditure
 income
 expenditure
 income
 drawings
 capital
Debit
E
A
Credit
R
L
Expense
Asset
Revenue (Income)
Liability
The Dual Effect Principle
• Every transaction has two equal effects.
• Transactions recorded via ledger accounts
• A ledger account
Debit
(Dr)
Date
Credit
(Cr)
Name of account
e.g. sales, bank
Narrative
$
Date
Narrative
$
Double Entry Bookkeeping
Summary of steps to record a transaction
1. Identify the two accounts affected
2. Whether accounts are being increased or
decreased
3. Decide whether each account should be
debited or credited
General rule
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debit the receiving account
credit the giving account.
4. Check debit = credit
Recording Transactions
To record a cash payment
Dr Expense account
Cr Cash Account
To record a cash Receipt
Dr Cash Account
Cr Income/Sales Account
Question
(a) A cash sale (ie a receipt) of €60.
(b) Payment of a rent bill totalling €4,500
(c) Buying some goods for cash at €3,000
(d) Buying some shelves for cash at €6,000
Create the T accounts to record these transactions
Credit Transactions
Credit Sales
Dr Debtors
Cr Sales
When money is received
Dr Bank/Cash
Cr Debtors
Credit Purchases
Dr Purchases/Expenses
Cr Creditors
Credit Transactions
When the money is paid out
Dr Creditors
Cr Bank/Cash
Questions
1.
2.
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7.
8.
9.
Bought Machine on credit from A, cost €8,000
Bought goods on credit from B, cost €500
Sold goods on credit to C, value €1,200
Paid D (a supplier) €300
Collected €180 from E, a customer
Paid wages €4,000
Received rent bill of €700 from landlord G
Paid rent of €700 to landlord G
Paid insurance premium €90
Question
Opening balances: VAT Dr €500, Bank €10,000
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Sales on credit to T Wilde €1,000 excluding vat
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Purchases of goods on credit €500 excluding vat
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Received advertisement bill from news paper €200
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Sold goods Cash €1200 including VAT
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Purchased Van €4,000 on credit including VAT
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Paid wages €1,000 out of bank
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Paid Advertising bill €200
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Approved for loan from bank €10,000 lodged to bank
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Paid rent including VAT €2,000 out of bank account
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Received refund of VAT from previous return of €500.
Draw up T Accounts and balance off.
Questions
Your business, which is not registered for sales tax, has the
following transactions.
(a) The sale of goods on credit
(b) Credit notes to credit customers upon return of faulty
goods
(c) Daily cash takings paid into the bank
Task
For each transaction identify clearly the following:
(a) The original documents
(b) The book of prime entry for the transaction
(c) The way in which the data will be incorporated into the
double entry system