OVERVIEW

Objective

• To describe the form and content of "books of account".
• To explain how control accounts and memorandum ledgers relate to the double entry system.

1 BOOKS OF PRIME ENTRY

1.1 Need for

• In previous sessions, individual transactions were recorded directly into the
  ledger accounts which comprise the general ledger (also called nominal ledger).
• In manual systems this is not feasible, it is too tedious and time consuming to record "Dr Trade receivables . . . Cr Revenue . . ." every time a sale is made.
• Individual transactions are therefore recorded in books of prime (ie "original" or "first") entry in which they are summarised for posting to (ie recording in) the general ledger.

1.2 "Day books"

• "Day books" are simply diaries which
• record individual transactions in chronological (ie date) order
• are totalled periodically (usually monthly) for posting to general ledger accounts.

Title	Records
Sales day book Sales returns day book Purchases day book Purchase returns day book Cash book Petty cash book Journal	Sales made on credit Returns of goods (by customer) sold on credit Purchases and expenses acquired on credit Returns of goods (to supplier) purchased on credit Bank account movements (receipts and payments) Analyses movements of small cash amounts Period-end adjustments (eg doubtful debts) for inclusion in the double entry system.

2 SALES DAY BOOK

2.1 Double entries of totals

Illustration 1

Required

Record the double entries.

• This is just a list and is NOT part of the double entry bookkeeping system.
• In a manual system it is the total that is recorded in (posted to) the general ledger – rather than the individual amounts.

The full title of the "total receivables" a/c is "trade accounts receivable ledger control a/c" (although the words "trade" and or "accounts" are frequently dropped).

Businesses also need to keep a record of what individual customers owe to them. This record takes the form of individual customer accounts which are maintained in a separate book – the trade accounts receivables ledger (also called "sales ledger"). For convenience these are also presented as "T" a/cs. However, when the double entry has already been dealt with in the G/L the entries in this memorandum ledger DO NOT form part of the double entry bookkeeping system.

Illustration - continued

Record the transactions in the sales day book in "T" a/c format as they would appear in the individual customers accounts in the receivables ledger.

Solution

2.2 Double entries of individual amounts

Illustration 2

Ivan makes the following credit sales on 13 January.

He posts individual transactions to the double entry system on a daily basis.

Solution

• In Illustration 1 a total ("control") a/c was maintained in the general ledger with individual amounts being recorded in a memorandum ledger.
• So, if individual amounts are posted to the general ledger the totals are recorded outside the double entry system in a separate memorandum "control a/c".

2.3 Comparison of methods

3 PURCHASES DAY BOOK

3.1 Description

• Book of prime entry used for recording purchases (eg goods for resale) and expenditure obtained on credit.
• It is just a list and is NOT part of the double entry system.
• It is usually analysed between general ledger account headings to facilitate summarisation and posting to the general ledger.

3.2 Double entries of totals

3.2.1 Memorandum payables ledger

• Businesses also need to keep a record of what is owed to individual suppliers.
• This record takes the form of individual supplier’s accounts which are maintained in a separate book – the trade payables ledger (also called "purchase ledger" or "bought ledger").
• As for the receivables ledger, the entries in the payables ledger DO NOT form part of the double entry bookkeeping system the double entry is dealt with in the general ledger.

Illustration 3

Required

Record the January month end double entry for posting to the general ledger accounts. Record the transactions in the individual supplier’s account for Witovska in the payables ledger.

Solution

The correct term for the "total payables" a/c is "trade account payables ledger control a/c"

3.3 Double entries of individual accounts

Illustration 4

Ivan makes the following purchases on credit on 13 January.

He posts individual transactions to the double entry system on a daily basis.

Solution

4 CASH BOOK

4.1 Description

• The sales and purchases day books only deal with credit transactions.
• The cash book deals with "cash" transactions.
• "Cash" represents movements of
• physical cash (notes and coins)
• cheques
• money transfers

in and out of the entity’s principal bank (current) a/c.

• Individual transactions are entered daily – and the monthly totals posted to the general ledger accounts.
• The analysed cash book has a receipts side and a payments side. (Sometimes kept as two separate books.)

4.2 Cash book receipts

Illustration 1 - Revisited

Required

Write down the February month end double entries for posting to the general ledger accounts. Record the transactions as they would appear in the individual customers’ accounts in the receivables ledger. (Using the accounts prepared for Illustration 1.)

Note - Discounts allowed

• When a customer is allowed to take a discount for prompt payment, the amount received will be less than the invoiced amount.
• As the cashier is the person likely to first recognise that a discount has been taken, a discounts allowed column is kept as a memorandum in the cash book.
• At the end of the month, the double entry for the total of the discounts allowed column is

Solution

4.3 Cash book payments

Illustration 5

Solution

5 PETTY CASH BOOK

5.1 Description

• Most references to "cash" accounts, "cash" books and "cash" transactions are potentially misleading in that they usually concern bank transfers or cheques rather than cash.
• "Real" cash may be required for making sundry payments (eg postage stamps, coffee, taxi-fares) of a "petty" nature.
• Cash is easily lost or mislaid. It is controlled by keeping records in a petty cash book which is very similar to a cash book with several columns for analysis of expenses (and possibly sundry income also). At the end of each month, the petty cash book is totalled and posted to the general ledger accounts.

5.2 Imprest system

• A fixed sum of money is set aside (eg in a cash tin) for petty expenditure.
• At the end of each week (say) the cash tin is reimbursed for the amount of petty cash expenditure incurred during the week.
• At any point in time

physical cash + petty cash vouchers = imprest balance.

Illustration 6

At the end of the week $68 cash will be drawn from the bank to reimburse the petty cash tin (ie "top it up" to its original balance of $100).

6 THE JOURNAL

6.1 Purpose

• The journal records those rarer transactions which are not recorded in other day books.
• Examples
• depreciation
• asset disposals
• bad and doubtful debts
• inventory
• the correction of errors.

6.2 Layout

Being . . .†

† Each entry has a short narration to explain it. Traditionally, the narration begins with the word "Being . . ". For example, "Being the sale of vehicle registration J680 PDQ on 31 October".

7 CONTROL ACCOUNTS

7.1 Description

All transactions with customers and suppliers are recorded in two places

1   in total, in the control accounts

2   individually, in the receivables and payables ledgers

Remember, if D/E uses totals, the control a/cs are in the general ledger and the "sub-ledgers" are kept as memoranda. Alternatively, if D/E is based on individual transactions the control a/cs are kept as memoranda.

7.2 Importance

If (but only if) all postings are correct, then the sum of the individual balances in the memorandum sub-ledger must equal the balance on the control account.

7.3 Discrepancies

• Suppose individual postings to a memorandum receivables ledger are done daily, weekly, or monthly by the receivables ledger clerk. The ledger clerk will use a notation to indicate where the postings have been made (eg recording the account references in a column of the SDB). With so many transactions to post, some omissions, duplications or other mis-posting (eg transpositions) may arise.
• If there are errors in the control accounts maintained in the general ledger, the trial balance may not balance. If there are errors in the individual accounts, then (for example), suppliers may be paid wrong amounts.

Illustration 1 - continued

The balances on the accounts of K. Barber and M. Chandler are nil.

List of balances

In this oversimplified example, there is no difference between the total per the list of balances and the balance per the control a/c.

In the event of any difference, the balances must be reconciled

8 SUMMARY

8.1 Typical manual system

8.2 Typical computerised system

As above except that the control a/cs and individual a/cs are exchanged!