Books of Prime Entry
Books of prime entry are the first place where transactions are recorded. This chapter explains which book is used for each type of transaction, how cash and petty cash books work, and how journals are posted to ledger accounts.
Topic 1: First recording of transactions
Books of prime entry organise transactions before they are posted to ledger accounts.
1. What are Books of Prime Entry?
They are useful because they:
- save time
- reduce errors
- prevent the nominal (general) ledger from becoming overcrowded
The main books of prime entry are the cash book, petty cash book, sales journal, sales returns journal, purchases journal, purchases returns journal and general journal.
2. Which Book is Used?
| Transaction | Book of prime entry |
|---|---|
| Cash and bank transactions | Cash book |
| Small cash payments | Petty cash book |
| Credit sales of goods | Sales journal |
| Goods returned by credit customers | Sales returns journal |
| Credit purchases of goods | Purchases journal |
| Goods returned to credit suppliers | Purchases returns journal |
| Irregular transactions | General journal |
3. Trade Discount and Cash Discount
Trade Discount
Given for reasons such as buying in bulk.
List price = $5,000
Trade discount = 10%
Discount = $500
Amount recorded:
$5,000 − $500 = $4,500
Trade discount is not separately recorded in the accounting records.
Cash Discount
Given for paying a debt promptly.
There are two types:
- Discount allowed → given to a customer → expense
- Discount received → received from a supplier → income
Customer owes $1,000 and receives a 2% cash discount.
Discount:
$1,000 × 2% = $20Cash received:
$1,000 − $20 = $980
Topic 2: Cash book
The cash book records money received and paid through cash, bank, cheques and electronic transfers.
4. Cash Book
The cash book records money received and money paid through:
- cash
- bank
- cheques
- bank transfers and other electronic payments
1. It is a book of prime entry.
2. It also acts as the cash and bank ledger accounts.
Debit side
- Cash and bank receipts are recorded.
- Example: received $800 cash from a customer.
- Debit cash $800
Credit side
- Cash and bank payments are recorded.
- Example: paid rent $300 by cheque.
- Credit bank $300
5. Two-Column Cash Book
A two-column cash book contains:
- cash column
- bank column
These columns appear on both the debit and credit sides.
Opening balances:
Cash = $500
Bank = $2,000
Cash sales = $400
Paid wages in cash = $200
Paid rent by cheque = $500
Closing balances:
Cash:
$500 + $400 − $200 = $700Bank:
$2,000 − $500 = $1,500
6. Contra Entries
It is marked with C in the cash book.
Cash paid into bank
Cash of $500 is deposited into the bank:
Cash withdrawn from bank for business use
Business withdraws $300:
7. Bank Overdraft
Bank balance = $500
Business pays a cheque of $800.
New balance:
$500 − $800 = −$300The business has a $300 bank overdraft.
A bank overdraft appears as a credit balance in the bank column.
8. Dishonoured Cheque
A customer's cheque may be dishonoured because, for example, there is not enough money in the customer's bank account.
Ali owes the business $600 and pays by cheque.
The cheque is later dishonoured.
The original payment must be reversed:
9. Three-Column Cash Book
A three-column cash book contains:
- discount
- cash
- bank
Debit Side Discount
Records discounts allowed to customers.
Customer owes $500 but pays $490.
Discount allowed:
$500 − $490 = $10Cash book debit side records:
• Discount allowed = $10
• Bank/cash received = $490
Credit Side Discount
Records discounts received from suppliers.
Business owes supplier $800 but pays $760.
Discount received:
$800 − $760 = $40Cash book credit side records:
• Discount received = $40
• Bank/cash paid = $760
• Total discount allowed → Debit Discounts Allowed account
• Total discount received → Credit Discounts Received account
Topic 3: Petty cash book
Petty cash records small cash payments and helps prevent the main cash book from becoming overcrowded.
10. Petty Cash Book
The petty cash book records small cash payments such as:
- postage
- stationery
- cleaning
- travelling expenses
- small payments to suppliers
This avoids overcrowding the main cash book.
11. Imprest System
At the end of the period, the amount spent is normally restored.
Imprest = $200
Petty cash expenses:
• Postage = $30
• Stationery = $40
• Cleaning = $20
Total spent:
$30 + $40 + $20 = $90Cash remaining:
$200 − $90 = $110Amount required to restore imprest:
$90The petty cashier therefore starts the next period with $200 again.
The imprest system helps control how much is being spent on small expenses.
12. Analytical Petty Cash Book
An analytical petty cash book has separate columns for different expenses.
| Payment | Total | Postage | Cleaning | Stationery |
|---|---|---|---|---|
| Stamps | $10 | $10 | – | – |
| Cleaning | $15 | – | $15 | – |
| Pens | $20 | – | – | $20 |
Topic 4: Sales and purchases journals
Specialised journals record credit sales, credit purchases and returns involving goods.
13. Sales Journal
Source document: Sales invoice
Credit sales:
Ali = $500
Sara = $700
Sales journal total:
$1,200Posting:
• Dr Ali $500
• Dr Sara $700
• Cr Sales $1,200
The customer accounts are posted individually, while the total is credited to the Sales account.
14. Sales Returns Journal
The sales returns journal records goods returned by credit customers.
Source document: Credit note
Ali returns goods worth $100.
Posting:
15. Purchases Journal
Source document: Purchases invoice
Goods bought on credit:
ABC Ltd = $800
XYZ Ltd = $500
Purchases journal total:
$1,300Posting:
• Cr ABC Ltd $800
• Cr XYZ Ltd $500
• Dr Purchases $1,300
16. Purchases Returns Journal
Also called the returns outwards journal.
It records goods returned to credit suppliers.
Source document: Credit note received from the supplier
Goods worth $150 returned to ABC Ltd.
Posting:
Topic 5: General journal and opening entry
The general journal is used for irregular, special or one-off transactions.
17. General Journal
It contains:
- date
- account to be debited
- account to be credited
- amount
- narrative – a short explanation of the transaction
It is commonly used for:
- opening entries
- irrecoverable debts
- purchases or sales of non-current assets on credit
- correction of errors
- unusual or one-off transactions
Equipment costing $4,000 is bought on credit from ABC Equipment.
| Details | Debit $ | Credit $ |
|---|---|---|
| Equipment | 4,000 | |
| ABC Equipment | 4,000 |
18. Opening Entry
When accounting records are first opened:
- Assets → Debit
- Liabilities → Credit
- Capital → Credit
Assets:
• Cash = $5,000
• Equipment = $10,000
Liabilities:
• Loan = $3,000
Capital:
$15,000 − $3,000 = $12,000
| Details | Debit $ | Credit $ |
|---|---|---|
| Cash | 5,000 | |
| Equipment | 10,000 | |
| Loan | 3,000 | |
| Capital | 12,000 | |
| Total | 15,000 | 15,000 |
Topic 6: Quick guides and most important points
Use this section for fast exam revision before attempting ledger and journal questions.
Quick Guide to Remember
| Book | What goes into it? |
|---|---|
| Cash book | Cash and bank transactions |
| Petty cash book | Small cash transactions |
| Sales journal | Credit sales of goods |
| Sales returns journal | Goods returned by credit customers |
| Purchases journal | Credit purchases of goods for resale |
| Purchases returns journal | Goods returned to credit suppliers |
| General journal | Irregular and special transactions |