5.1 Posting to General and Subsidiary Ledgers

Introduction to Double-Entry Bookkeeping

Double-entry bookkeeping is the foundation of modern accounting. Every financial transaction has a dual effect: it impacts at least two accounts in opposite directions. The fundamental rule of double-entry is that for every debit entry, there must be a corresponding and equal credit entry.

To help remember which side of an account is affected, the DEAD CLIC acronym is widely taught:

• Debit: Expenses, Assets, Drawings (increase on the debit side, decrease on the credit side).
• Credit: Liabilities, Income, Capital (increase on the credit side, decrease on the debit side).

General Ledger vs. Subsidiary Ledgers

In bookkeeping, accounts are organized into different ledgers:

1. The General Ledger (Nominal Ledger): This contains the primary accounts that form the double-entry system. Key accounts include Purchases, Sales, Bank, VAT Control, and the Control Accounts (Receivables Ledger Control Account and Purchases Ledger Control Account).
2. Subsidiary Ledgers: These are memorandum ledgers used to track transactions with individual customers and suppliers. They do not form part of the double-entry system.
   • Receivables Ledger (Sales Ledger): Contains individual accounts for each credit customer (e.g., J. Smith Account). These accounts show how much each customer owes.
   • Payables Ledger (Purchases Ledger): Contains individual accounts for each credit supplier (e.g., T. Jones Account). These accounts show how much is owed to each supplier.

By separating these, the General Ledger remains manageable, as it only records the monthly or weekly totals of transactions, while the detailed customer and supplier transactions are recorded in the subsidiary ledgers for credit control.

Posting from Books of Prime Entry to the General Ledger

Books of prime entry (day books, cash book, petty cash book) summarize transactions before they are posted to the ledgers. The totals from these books are posted to the General Ledger at the end of each period (e.g., monthly).

1. Sales Day Book (SDB)

The Sales Day Book summarizes credit sales invoices issued to customers.

• Total Gross Column: Posted as a Debit to the Sales Ledger Control Account (SLCA) in the General Ledger (representing an increase in receivables, which is an asset).
• Total Net Column: Posted as a Credit to the Sales Account in the General Ledger (representing an increase in sales income).
• Total VAT Column: Posted as a Credit to the VAT Control Account in the General Ledger (representing output VAT liability collected on behalf of HMRC).

2. Sales Returns Day Book (SRDB)

The Sales Returns Day Book summarizes credit notes issued to customers for returned goods or overcharges.

• Total Gross Column: Posted as a Credit to the Sales Ledger Control Account (SLCA) in the General Ledger (representing a decrease in receivables).
• Total Net Column: Posted as a Debit to the Sales Returns Account in the General Ledger (representing a decrease in sales income).
• Total VAT Column: Posted as a Debit to the VAT Control Account in the General Ledger (reducing the output VAT liability).

3. Purchases Day Book (PDB)

The Purchases Day Book summarizes invoices received from credit suppliers.

• Total Gross Column: Posted as a Credit to the Purchases Ledger Control Account (PLCA) in the General Ledger (representing an increase in payables, which is a liability).
• Total Net Column: Posted as a Debit to the Purchases Account in the General Ledger (representing an increase in purchases expenses).
• Total VAT Column: Posted as a Debit to the VAT Control Account in the General Ledger (representing input VAT asset reclaimable from HMRC).

4. Purchases Returns Day Book (PRDB)

The Purchases Returns Day Book summarizes credit notes received from suppliers for returned goods.

• Total Gross Column: Posted as a Debit to the Purchases Ledger Control Account (PLCA) in the General Ledger (representing a decrease in payables).
• Total Net Column: Posted as a Credit to the Purchases Returns Account in the General Ledger (representing a decrease in purchases expenses).
• Total VAT Column: Posted as a Credit to the VAT Control Account in the General Ledger (reducing the input VAT asset).

5. Cash Book (CB)

The Cash Book records receipts and payments.

• Receipts Side (Bank Debit):
  • Receivables Ledger Column Total: Posted as a Credit to the Sales Ledger Control Account (SLCA) in the General Ledger (representing cash received from credit customers, reducing receivables).
  • Cash Sales (Net): Posted as a Credit to the Sales Account in the General Ledger.
  • VAT Column (on cash sales): Posted as a Credit to the VAT Control Account in the General Ledger.
• Payments Side (Bank Credit):
  • Payables Ledger Column Total: Posted as a Debit to the Purchases Ledger Control Account (PLCA) in the General Ledger (representing cash paid to credit suppliers, reducing payables).
  • Cash Purchases/Expenses (Net): Posted as a Debit to the Purchases or relevant expense accounts in the General Ledger.
  • VAT Column (on cash purchases/expenses): Posted as a Debit to the VAT Control Account in the General Ledger.

6. Petty Cash Book (PCB)

The Petty Cash Book records small cash payments, usually analyzed into columns (e.g., stationery, cleaning, travel).

• Analysis Column Totals (Net): Posted as a Debit to the respective nominal expense accounts in the General Ledger.
• VAT Column Total: Posted as a Debit to the VAT Control Account in the General Ledger.
• Total Payments: Posted as a Credit to the Petty Cash Account in the General Ledger.

Posting to Subsidiary Ledgers (Memorandum Accounts)

While the totals of the day books are posted to the control accounts in the General Ledger, the individual invoices and credit notes must be posted to the customer and supplier accounts in the subsidiary ledgers. This is done on a daily basis to ensure credit records are up to date.

• Sales Day Book Invoices: Posted as a Debit to the individual customer's account in the Receivables Ledger (representing that the customer owes more money).
• Sales Returns Day Book Credit Notes: Posted as a Credit to the individual customer's account in the Receivables Ledger (representing that the customer owes less money).
• Purchases Day Book Invoices: Posted as a Credit to the individual supplier's account in the Payables Ledger (representing that we owe the supplier more money).
• Purchases Returns Day Book Credit Notes: Posted as a Debit to the individual supplier's account in the Payables Ledger (representing that we owe the supplier less money).
• Cash Book Payments: Posted as a Debit to the individual supplier's account in the Payables Ledger.
• Cash Book Receipts: Posted as a Credit to the individual customer's account in the Receivables Ledger.

Worked Example

A business has the following day book totals and individual invoices for the month of March:

• Sales Day Book: Invoice No. 101 to J. Smith for £1,200 (Net £1,000, VAT £200).
• Purchases Day Book: Invoice No. 899 from T. Jones for £600 (Net £500, VAT £100).

Let's trace the double entry and subsidiary ledger postings.

General Ledger Postings:

• Debit Sales Ledger Control Account: £1,200

• Credit Sales Account: £1,000

• Credit VAT Control Account: £200 (This records the credit sales total and output VAT liability)

• Debit Purchases Account: £500

• Debit VAT Control Account: £100

• Credit Purchases Ledger Control Account: £600 (This records the credit purchases total and reclaimable input VAT)

Subsidiary Ledger Postings:

• Receivables Ledger:
  • Debit J. Smith Account: £1,200
• Payables Ledger:
  • Credit T. Jones Account: £600