Topic 4: Books of Prime Entry
What are Books of Prime Entry?
Books of Prime Entry are books in which business transactions are first recorded before they are posted to the ledgers.
What is a Journal?
A journal is a book of accounting entries where transactions are recorded chronologically. The journal is also called a ‘day book’, a ‘book of prime entry’ or a ‘book of original entry’.
What are the types of books of prime entry / books of original entry?
They can be classified as:·
1. Purchases Journal – records all credit purchases of goods meant for resale. (Source documents used: invoices received)
2. Sales Journal – for recording sales of goods on credit. (Source documents used: invoices, sales invoices)
3. Returns Outwards Journal / Purchases Returns Journal – for recording returns of goods previously purchased on credit. (Source documents used: Credit notes received)
4. Returns Inwards Journal – for recording returns of goods previously sold on credit (Source documents used: Credit notes sent)
1. Opening entries
2. Closing entries
3. Sale and purchase of fixed asset on credit
4. Correction of errors, adjusting entries, and others not recorded in other books of prime entry.
For recording cash transactions involving Cash and Book Accounts
Petty Cash Book
For recording spending of petty cash and its reimbursements to maintain a stable petty cash fund
What are the advantages of using special journals?
Similar transactions are recorded into one book in order of date (e.g. credit sales of goods only into the Sales Journal and so on).
Unnecessary detail in the ledger is cut down as only totals are posted to the ledger.
Use of special journals provides an important middle step between source documents and the ledger accounts
What are the advantages of using General Journal?
The narrative makes it easy to recall and understand the business transaction.
It is easier to trace a particular transaction and hence detect fraud.
Why businesses prefer paying by cheque?
It is safer to pay by cheque than cash.
There is an automatic verification from the bank statement if payment is made by cheque.
What are the advantages of keeping cash in the bank?
For security reasons and for convenience, only a small amount of money is kept in the office, while the rest is kept in a current account at a bank.
What are the advantages of using Cash Book?
The Cash Book reduces the number of entries in the ledger.
One person can be put in charge of the book, thus increasing efficiency.
Reference to the Cash and Bank Accounts is made easier with the use of a separate book.
What is a trade discount?
Trade discount is a deduction off the list or catalogue price of goods given by one trader when he sells to another trader.
Why give Trade Discounts?
Help save on cost of reprinting expensive catalogues each time the cost of production changes.
Encourage a particular customer to buy more regularly and in larger amounts from the business by giving him a higher trade discount.
Help the business to make a profit when it resells the goods at the list price.
What determines the amount of trade discount given?
The amount of trade discount given will depend on:
The quantity of goods purchased – the larger the quantity purchased, the greater the discount.
The regularity of purchase – the more regular the purchase, the bigger the trade discount.
The nature of goods – goods which do not sell very quickly such as expensive pianos get a higher discount than those that sell faster like food items.
Why are goods sometimes returned to suppliers?
Goods previously purchased may be returned. The suppliers will be willing to accept returned goods if they are:
2. Of wrong specification, type, quality, size and quantity
What are dishonoured cheques?
A dishonoured cheque is a cheque, which when presented, is refused payment by the bank because of insufficient funds or because it is not in order.
What are the reasons for dishonoured cheques?
Cheques may contain errors (e.g. signature missing, amounts differ, etc)
The drawer’s account may be closed.
The drawer may not have sufficient funds in his account
What is a bank overdraft?
Bank overdraft refers to money owing to the bank when the business has overdrawn on the money it has with the bank. It is shown in the Balance Sheet as a Current Liability.
What is a Bank Loan?
Bank Loans are money owing to the bank and is to be repaid over several years. It is shown in the Balance Sheet as a Long-Term Liability.
What are some frauds involving cheques?
Altering the number of the dollar amount printed on cheques payable to a person.
Putting the fraudster’s name as the payee on cheques intended for other parties.
What is a bank reconciliation statement?
A bank reconciliation statement is prepared to account for the difference between the balance in the Cash Book and the balance in the Bank Statement.
Why is there a difference between the Cash Book balance and the Bank Statement balance?
A difference in the timing of recording certain transactions can cause discrepancies between the Cash Book and the Bank Statement.
What are unpresented cheques?
Unpresented cheques are cheques issued by the business to make payments but which are not yet recorded in the Bank Statement.
What are uncredited cheques?
Uncredited cheques are cheques received by the business that are recorded in the Cash Book but are not recorded in the Bank Statement.
What are Credit Transfers?
Credit transfers are proceeds received by the bank on behalf of its account holder.
What are Standing Orders?
Standing Orders are instructions to the bank to make regular payments of fixed amounts by a given date.
What are Direct Debits?
Direct debits are payments made directly by the bank on behalf of the account holder. The amounts are not fixed. E.g. are GIRO payments such as electricity and water bills.
What is the Petty Cash Book?
The Petty Cash Book records all payments made from the petty cash fund.
Where is the Petty Cash fund found?
The petty cash fund is a current asset and is found in the Balance Sheet.
What is the Petty Cash Impress System?
In the Imprest System, the petty cashier is always reimbursed with the amount of petty cash paid out so that at the beginning of every period, he will start with the same amount of petty cash float.
Advantages of the Petty Cash Imprest System
1. The Imprest System is very useful in controlling and monitoring the flow of petty cash for the following reasons:
The elements of safety and accountability are maintained since the petty cash is under the responsibility of a particular employee.
Prevention of fraud – All payments of petty cash must be verified by the petty cash vouchers, endorsed by another officer and supported by receipts or memos. The vouchers also bear the signature of the claimant to the money.
Control is enhanced by serial numbering of petty cash vouchers.
2. There will not be overcrowding of the Bank Account in the ledger as petty items are not entered in the Bank Account.
What is a Purchases (Creditors) ledger?
Purchases (Creditors) ledger is a subsidiary ledger containing individual accounts of all the trade creditors.
What is a Sales (Debtors) ledger?
Sales (Debtors) ledger is a subsidiary ledger containing individual accounts of all the trade debtors.
What are Temporary (Nominal) Accounts?
Temporary (Nominal) Accounts contain information for one accounting period. These accounts are closed and their balances transferred to other accounts at the end of each accounting period. E.g. all assets accounts, all liabilities accounts, capital account
What are Permanent (Real) Accounts?
Permanent (Real) Accounts contain results of all transactions since the business started. Their balances are carried forward to each accounting period. E.g. all revenue accounts, all expenses accounts, drawings account.