Sources and Recording of Data

The Double Entry System of Book-keeping

 The double entry system of bookkeeping involves giving two effects to each business

transaction, one which debits to the A/C receiving and the other which credits where the

amount is being deducted.

 The rules of double-entry bookkeeping are:

o Debit the receiver, credit the giver.

o Debit what comes in, credit what goes out.

o Debit the expense, credit the income.

 Day-to-day transactions are recorded using the double-entry bookkeeping system.

 Ledgers are used to record financial transactions, and their format is as follows:

Ledger (T) Format:

Date Details $ Date Details $

xx
x
 Sales, for cash 100 dollars: Dr. Cash A/C for 100 (as cash is the receiving A/C) and Cr

Sales A/C for 100 (as sales are responsible for/giving the cash).

 Purchases of goods 150 dollars (on credit): Dr Purchases A/C for 150 and Cr Seller’s

A/C for 150.

o Crediting the seller’s A/C creates a liability as the business is now obligated to pay for

the goods.

 Drawings (assets taken by a business owner for personal use, out of the business) of

goods 50 dollars. Dr Drawings and Cr Purchases, both with 50. The drawings increase,

and the goods decrease.

 Payment of 150 dollars (through bank) to the seller for goods bought earlier: Credit

Bank A/C for 150 and Dr. Seller’s A/C for 150. There is no outstanding balance on the

seller’s A/C, as the debit equals the credit.

 When an A/C of a person or another business is maintained and has a Dr. Balance, the

business is owed money by that entity and vice versa, as shown in the example.

o Sales of 60 dollars to B Dawg (on credit): Cr Sales A/C and Dr B Dawg A/C.

o An A/C, a liability to the business due to regular trading, is known as a trade

creditor/trade payables/ creditor.

 An A/C, an asset (because the entity owes money to the business, it’s almost as good

as having the money) due to regular trading, is known as a trade debtor/ trade

receivables/Debtor.

 Balancing a ledger at the end of the month:

o The debit and credit columns are individually totaled. The difference is noted. If the debit

side is heavier than the credit side, the difference is entered as a credit entry (Balance

c/d) and vice versa.

o Total the debit and credit columns and write them.

o If the balance c/d were Dr, the balance b/d would be Cr, and vice versa.

 The balance c/d entry is done on the last day of the month, and the balance b/d entry is

made on the first day of the following month.

Business Documents
 Invoice

o Contents: The name & address of the supplier & customer, the date. Full details,

quantities & the prices of goods sold

o Issued when: Goods on credit are sold by the supplier. It can also be issued when

goods are sold for cheque/cash.

o Notes: Trade discount is shown as being deducted, whereas it is mentioned that cash

discount is only allowed if the invoice is paid within a time limit.

o Uses: Customer records Cr purchases & Supplier records Cr sales.

 Dr note

o Contents: Name & address of supplier & customer, date, full details & quantities

(sometimes prices) of goods returned or overcharged

o Issued when: Goods are not satisfactory, wrong goods, etc. Issued by the supplier or

customer

o Notes: Customer checks goods & invoices for overcharge/ Wrong goods, etc. When the

price is included, there is always a lower trade discount.

o Uses: Communication medium | No entries made; however, sometimes they are issued

in place of a rectified invoice

 Cr Note

o Contents: Name & address of the supplier & customer, date, full details, quantities &

prices of goods returned or overcharged

o Issued when: Faulty goods/ overcharged goods. Issued by the supplier

o Notes: Sometimes printed in red/any other color to distinguish between an invoice

o Uses: Customer records return outwards & supplier records return inwards.

 Statement of A/C
o Contents: Name & address of supplier & customer, date, balance owing at the start of

the period, invoices & Cr notes issued, payments received, any cash discounts allowed,

balance owing at the end of the period.

o Issued when: At the end of each month by a supplier. Given to each customer.

o Notes: Contains a summary of all transactions.

o Uses: No one makes any entries. Reminder to the customer of Amount Outstanding &

can also be used to check for errors for both.

 Cheque

o Contents: Pre-printed details. The date, amount & payee have to be filled.

o Issued when: Payment through bank.

o Notes: Used to pay a pre-stated sum to the payee. It comes in a book of pre-printed

cheques (Issued by the bank)

o Uses: Supplier: Counterfoil of paying-in slip used to make an entry in cash book & for

discount allowed. Customer: Makes the cheque counterfoil to make cash book entry &

discount received.

 Receipt

o Issued when: Goods sold by cash, and not when by cheque (the cheque acts as one)

o Uses: Proof of payment

Books of Prime Entry

 Prime books of entry are listing devices which help to remove a lot of detail from the

ledgers. It also means that bookkeeping can be divided between several people.

 They are also called books of original entry/subsidiary books.

 Transactions are recorded here before being recorded in the ledgers.

 The cash book & the petty cash book are both ledgers & prime books of entries.

 Trade discount does not appear in the ledger A/C; it may be shown in the prime books.

The value of the goods bought reduces.

 There are 7 books of prime entry:

o Sales Journal

o Sales returns Journal

o Purchases journal

o Purchases returns Journal

o Cash Book

o Petty Cash Book

o General Journal

Sales and Sales Returns Journal

General
Prime Book Format Notes:
Description
The Dr entry is made in
the debtor’s ledger A/C
Date-Name- as the sales are
A list of A/Cs
Invoice recorded in the journal
Sales to which Cr
Number-Folio- with the total of the
Journal/Sales sales were
Amount ($)The invoice at the end of the
book/sales day made, their
invoice number month, the sales A/C is
book values & the
pertains to the credited with the total of
dates
invoice issued the sales journal as
total credit sales of the
month
Sales A list of the Date-Name-Cr Written up using copies
Returns/Returns names of the Note Number- of Cr notes Cr entries
inwards businesses, Folio- are simultaneously
book/returns the value of AmountThe made into the
inwards journal goods credit note customer’s A/[Link] the
returned & number end of the month, the
 General
Prime Book Format Notes:
Description
pertains to the
totals will be posted to
date credit note
the sales returns A/C.
issued
Purchases and Purchases returns Journal

General
Prime Book Format Notes:
Description
Written up using
Date-Name- invoices from
A list of the
Invoice no.- suppliers. The
names of
Folio- supplier’s A/C is
Purchases Journal/ businesses
AmountThe simultaneously
Purchases book/ from which Cr
invoice credited with invoice
Purchases Day purchases
number totals. The total is
book have been
pertains to the posted into the
made, value &
invoice purchase A/C as the
date.
received total Cr purchases of
the month.
Written up using Cr
Date-Name-Cr notes from suppliers.
Purchases Return Note Number- The Suppliers A/C is
A list of names
Journal/Purchase Folio- simultaneously
of businesses
returns AmountThe debited with the total
to whom goods
book/Returns credit note from the Cr [Link]
have been
outwards number the end of the month,
returned, value
book/Returns pertains to the the total (from the
& date
outwards journal. credit note journal) is posted in
received the purchases returns
A/C.
Cash Book

 In practice, it is common to have the cash A/C & bank A/C shown side by side in what is

called a cash book. This book is moved away from the ledger; however, this still follows

the double entry system of bookkeeping. Certain businesses maintain a 3-column cash

book where there is an added cash discount column on the Dr & the Cr side. They are

both ledgers as well as prime books of entries

 Two-Column Cash Book:

Date Details Cash $ Bank $ Date Details Cash $ Bank $

xxx xxx xxx xxx
Three Column Cash Book:

Disco Disco
Ba
Dat Detai unt Cas Dat Detai unt Cas Ban
nk
e ls Allowe h$ e ls Receiv h$ k$
$
d ed
xxx xxx xxx xxx
 Credit transactions are not shown in the cash book.

 Contra Entries: withdrawal of cash/deposition of cash. The Cash column can never

have a Cr balance as it is a physical quantity, i.e. it can either be nil or it has a Dr

Balance. However, the bank column can have a Cr balance; this is known as a bank

overdraft wherein the bank allows one to pay more than their bank balance is & then

charges interest on the sum (most of the times-in practicality). A Cr balance on the bank

column of the cash book represents a liability.

 Discount allowed/Cash Discount: Discount a business allows to its Cr customers to

encourage faster payment (within a set time span). This is an expense incurred by the

business in-order to have debts settled promptly. However, this is not shown on the

receipt.

 The discount columns are not a part of the double-entry system, they are used for

convenience. At the end of the trading periods, their totals are taken are carried to their

respective A/C s (Dr Entries for discount allowed & Cr entries for discount received).

This represents the double entry for all the individual debits in the creditors & credits in

the debtors.
 If a cheque is dishonoured (There is a problem with the cheque or there is an

insufficient balance in the debtor’s A/C, etc.), the reverse entry of that has to be made

when the cheque was deposited & the debtor or payee will have to be informed that the

amount is unpaid.

Petty Cash Book

 Businesses maintain a petty cash book (as to not record small cash payments in the

cash book & ledgers) That records any low value transactions. It lists the transactions to

be transferred to the ledger A/C & also acts as the ledger A/C for these petty cash

transactions.

 General working of a petty cash system: A junior cashier is given a float amount so

that the chief cashier focuses on more important transactions. They (chief cashier)

regularly checks the work of the junior cashier. When some petty cash is to be obtained,

a petty cash voucher is given to the petty cashier. (this show: purpose, date & signature

of receiving person). These are used to check against the petty cash spent.

 The imprest system: Petty cash expenditure is made from the float/imprest amt. The

imprest amount stays constant (but can be altered). After the balancing of the petty

cash book, the chief cashier will restore the imprest. This enables the chief cashier to

know exactly how much petty cash has been spent.

Petty Cash Book Format

Total Total
Cost 1 Cost 2 Ledger
Received Date Details Paid
(Stationery) (Transport) A/Cs
$ $
xxx xxx xxx xxx xxx
General Journal
 The journal or general journal is used whatever is not entered into any other book of

prime entry before they are recorded in the ledgers.

 A journal entry shows:

o The date of the transaction

o The A/C name to be debited and credited and the respective amounts

o A narrative: a short description of what is being recorded and why it is being recorded.

E.g. capital of $1000 cash invested.

 When a business begins operation, or begins recording its financial transactions, there

are opening journal entries that made made to record the investment of capital, any

liabilities the business has etc. These items are then posted into the ledger accounts.

 General Guidelines:

o Show the debit entries first.

o Slightly indent credit entries in the details column.

o Draw a line after each separate entry and its narrative if required (only in the details

column)

 The purchase and sales of non-current assets are not recorded in any other book of

prime entry, so they are recorded in the general journal and then posted into the ledger

A/C (s).

 Any sales made on cash or for a cheque will be recorded in the cash book & then in the

purchases A/C.

 Credit sales is recorded in the sales journal and debtor’s A/C when the sale was made.

The total is transferred to the sales A/C as total credit sales for month. The total of the
 cash sales is also transferred to the sales ledger from the cash book at the end of the

month.

 Sales Returns if for cash are recorded in the sales A/C (end of month) and cash book

during the transaction. Returns on goods bought for credit is entered in the sales returns

journal and debtor’s A/C at the date of the transaction and the total is posted to the

sales returns A/C at the end of the month as “total credit sales returns of month”

 There will be 2 effects in the ledger from all the books of prime entry other than the cash

book & petty cash book, where there will only be one effect (as they are also ledgers).

Debi
Date Details Credit
t
xxx xxx

The Ledger
 Ledgers are divided based on the types of accounts they contain, this is done so that

several people can bookkeep simultaneously, i.e. Work can be distributed (the same

applies for books of prime entries).

Ledger General Description/Contents

Sales Ledger Debtors Ledger
Purchases
Creditors Ledger
Ledger
Real A/C s (assets) & nominal A/C s (income, expenses &
Nominal Ledger
capital)
Cash book MCB & PCB