2.2 Books of Prime Entry & Source Documents

Introduction to the Accounting System Cycle

Recording financial transactions directly into the general ledger for every single occurrence would be chaotic for any business handling a large volume of activity. Instead, businesses use a structured flow of information. The accounting cycle begins with a transaction, which is evidenced by a source document. Information from these documents is then summarized in the books of prime entry (also known as books of original entry or day books) before finally being posted to the ledger accounts.

Source Documents

Source documents are the primary evidence that a transaction has occurred. They are crucial for both accurately recording data and for providing an audit trail. An auditor will trace transactions from the ledger back to the original source document to verify their authenticity and accuracy.

Common Source Documents

• Sales Invoice: Issued by a business to a customer when goods or services are sold on credit. It details the items sold, quantities, prices, sales tax (if applicable), total amount due, and payment terms. It is the source document for recording a credit sale.
• Purchase Invoice: Received from a supplier when a business buys goods or services on credit. It is essentially the supplier's sales invoice. It is the source document for recording a credit purchase.
• Credit Note: Issued by a supplier to a customer to cancel all or part of a previously issued sales invoice. This happens when goods are returned (e.g., they were damaged or faulty) or if an overcharge occurred. A customer receiving a credit note considers it a 'purchase returns' document, while the issuer considers it a 'sales returns' document.
• Debit Note: A less common document sent by a customer to a supplier to request a credit note (e.g., notifying the supplier of a return). Sometimes it is used internally as a formal request to raise an invoice.
• Remittance Advice: A document sent by a customer to a supplier alongside a payment (often a cheque or bank transfer notification), detailing exactly which invoices are being paid. This helps the supplier correctly allocate the payment to the customer's account.
• Petty Cash Voucher: An internal document filled out when an employee claims reimbursement for a small cash expense. Receipts must be attached to the voucher to prove the expenditure.
• Bank Statement: A document from the bank showing all transactions into and out of the bank account. It acts as the source document for bank charges, interest, direct debits, and standing orders.

Books of Prime Entry

Books of prime entry are used to list and summarize similar transactions chronologically. Periodically (usually daily, weekly, or monthly), the totals from these books are posted to the nominal (general) ledger. This significantly reduces the volume of entries in the general ledger.

The main books of prime entry are:

1. Sales Day Book (SDB)

The Sales Day Book is used strictly to record credit sales. It is populated from the sales invoices issued by the business. Cash sales are not recorded here; they go straight to the Cash Book.

• Format: Date, Invoice Number, Customer Name, Total Amount, Sales Tax Amount, Net Amount.
• Posting: Periodically, the total of the SDB is credited to the Sales account and debited to the Receivables Control account in the general ledger.

2. Purchases Day Book (PDB)

The Purchases Day Book records credit purchases. It is populated from the purchase invoices received from suppliers.

• Format: Date, Invoice Number, Supplier Name, Total Amount, Sales Tax Amount, Net Amount.
• Posting: The total is debited to the Purchases account (and other relevant expense accounts) and credited to the Payables Control account.

3. Sales Returns Day Book (SRDB)

Records goods returned by customers that were previously sold on credit. It is populated from credit notes issued by the business.

• Posting: The total is debited to Sales Returns (or Sales) and credited to the Receivables Control account.

4. Purchases Returns Day Book (PRDB)

Records goods returned to suppliers that were previously purchased on credit. It is populated from credit notes received from suppliers.

• Posting: The total is credited to Purchases Returns and debited to the Payables Control account.

5. The Cash Book

The Cash Book is unique because it serves dual purposes: it is a book of prime entry and it also acts as the actual ledger accounts for Cash and Bank. Therefore, its totals do not need to be posted to a separate Cash account in the general ledger. It records all receipts and payments of cash and bank funds.

• Two-column cash book: Contains columns for Cash and Bank transactions on both the debit (receipts) and credit (payments) sides.
• Three-column cash book: Includes an additional column for Discount Allowed (on the debit side) and Discount Received (on the credit side) to record settlement discounts when customers pay or when paying suppliers.

6. The Petty Cash Book & The Imprest System

Businesses keep a small amount of physical cash on premises to pay for minor expenses like postage, milk, or taxi fares. This is recorded in the Petty Cash Book.

Most businesses use the Imprest System for petty cash. Under this system, a fixed 'float' (e.g., $200) is established.

1. The float is initially created by cashing a cheque: Dr Petty Cash $200, Cr Bank $200.
2. Employees make small purchases and submit receipts with a petty cash voucher to receive cash from the float.
3. At the end of the period, the petty cashier tallies the vouchers (e.g., $145 spent).
4. A cheque is drawn for exactly the amount spent to restore the float back to its imprest limit ($145). The cash box now contains $55 in coins/notes and a $145 cheque, totaling $200.
5. The expenditure is recorded: Dr Various Expenses $145, Cr Bank $145.

This system ensures strict control over physical cash, as at any given time, the cash on hand plus the sum of un-reimbursed vouchers must equal the total imprest amount.

7. The General Journal (The Journal)

The Journal is a book of prime entry used to record transactions that do not fit into any of the other day books. These are usually one-off, complex, or non-routine transactions.

Typical uses of the Journal include:

• Recording the purchase or sale of non-current assets on credit.
• Correction of errors.
• Period-end adjustments (accruals, prepayments, depreciation, bad debts).
• Writing off irrecoverable debts.
• Opening balances for a newly established accounting system.

A journal entry must always specify the accounts to be debited and credited, the amounts, and include a brief narrative explaining the transaction.