Chapter 4

Recording, Summarising and Posting Transactions

Source DocumentsWhat type of source documents• Petty cash vouchers• Cheques Received (lodgements)• Cheque Stubs (payments)• Wage, salary and payroll records.

These records are recorded so that the business knows what they owe people and who owes the business money.

These documents are recorded in the books of prime entry.

Due to the volume of document they are summarised in the books of prime entry and then posted to the general ledger accounts.

Books of Prime Entry

Book of prime entry Documents Recorded Summarised and posted to

Sales day book Sales Inv, credit note Receivable ledger/control ac

Purchase day bk Pur Inv,credit note rec Payables ledger/control ac

Cash Book Cash paid and rec General Ledger

Petty Cash Book Notes/coin paid/rec General Ledger

Journal Adjustments General Ledger

Question

State which book of prime entry the following transactions would be entered into.

(a) Your business pays J Sunderland (a supplier) €6,200

(b) You send Hall & Co (a customer) an invoice for €1,320

(c) You receive an invoice from J Sunderland for €1,750

(d) You pay Hall & Co €1,000

(e) Sarti (a customer) returns goods to the value of €100

(f) You return goods to Elphick & Co to the value of €2,400

(g) Sarti pays you €760

Posting to the ledger

Trace diagram on page 57.

Personnel

Small Company – small number of people recording accounts

Large Company – greater amount of people recording accounts. Separation of departments, segregation of duties to prevent fraud. In other words the person sending out the sales invoices will not be receiving the cheque from the client. The individual could invoice the client and lodge cheque into their own account.

Accounts Dept

• A receivable ledger controller • A credit controller• A payables ledger controller• An assistant accountant• A payroll controller• A management accountant• A financial accountant• A financial controller – to supervisor all other accounting

staff.

Payables ledger controller

The petty cash will be managed by the payables ledger controller and must be authorised by the accountant.

The payables ledger controller will prepare cheques for payment after checking that:

• There is a purchase order for the goods• The correct goods were received (GRN)• They were received in good condition (any faults should

be detailed on Delivery note)• The invoice is correct – correct quantities, price, vat

calculation.

Main Books of Prime Entry

The main books of prime entry are:

• Sales day book

• Purchase day book

• Journal

• Cash book

• Petty cash book

Sales day book

The sales day book is a list of all invoices sent out to customers each day.

The sales ledger reference is the reference of the page that the customer is on in the sales ledger. In a computerised accounting system this will be an account name, e.g. University of Limerick (as a customer) might have an account called UL02.

There may be further analysis columns in the sales day book for difference types of sales. For example, in a car sales showroom might have sales of private vehicles and sales of commercial vehicles under different columns.

Sales Returns Day Book

When customers return goods due to faults etc, the returns are recorded in the sales returns day book.

The sales returns book looks mush the same as the sales book

Purchases Day Book

• Entered into the system once the invoice comes from supplier

• A debit to the income statement (purchases) and the credit to the payables ledger and payables ledger control account.

• A computerised system will update all accounts• When the supplier statement arrives the supplier account

balance can be checked against it.• The payables ledger control account must be reconciled

to the payables ledger.

Purchases Returns day book

The purchase returns day book is kept to record credit notes received in respect of goods which the business sends back to its suppliers. The business might expect a credit note from the supplier. In the mean time it might issue a debit note to the supplier, indicating the amount by which the business expects its total debt to the supplier to be reduced.

See extract from purchase returns day book Pg 59.

Cash Book

The cash book is a book of prime entry, used to keep a cumulative record of money received and money paid out by the business via its bank account.

Could be money received on the premises such as cash sales and cash or cheques received from debtors. Also recorded in the cash book will be amounts going through the bank which you may not know about until you receive the bank statement. These will be items such as bank transfers, bank charges or interest.

The cash book may be recorded in a book on a page divided in two. On the left side (debit ) the income will be recorded and on the right side (credit) the payments will be recorded.

Recording Receipts

Batching Transactions

When a business receives a large number of receipts, it is often a good idea to split them up into manageable batches of transactions, and to process each batch.

Checking Receipts from credit customers against the invoice

When money is received from a credit customer, the receipt should be matched with the invoice that the customer is paying. Sometimes, a customer might pay several invoices at the same time.

Cash Book

The details are entered into the cash book as follows:

Date – this is the date the money is received

Reference - this might be the name of the customer or might say cash or credit sale

Total – This will be the total amount received

Debtors – If the receipt is a receipt from a credit customer then the total amount should be entered in to the debtors column. The amount will not be analysed out to sales and VAT as this has been done already when the sale was made. It was recorded already in the sales book and should not be recorded again in the cash book.

Cash Book

Cash Sales – If the receipt is for cash sales, the total amount received is shown in the Total column. The cash sales column is used to record the amount of the sales excluding VAT.

VAT – This column is used to record any VAT received for anything except credit sales invoices. If it is a cash sale the total will go to the total column the vat amount will go to the vat column and the net amount in the cash sale column.

The reason for recording VAT on cash sales here as this is the first time the VAT on the sale is recorded.

Other - This might be interest on deposit account or bank loan

Settlement Discount – This is a memorandum record of the discount allowed for early payment. This is totalled and posted to the discount allowed account in the ledger.

Example

The following amounts were received on 19 October 2006

(a) Payment of invoice number 69 by BL Lorries (account number S239), total €4,700

(b) Payment of invoice number 70 by MA Meters (account number S314), total €2,820. A settlement discount of €40 was taken by this customer.

(c) Payment of invoice number 78 by Tanktop Limted (account number A205), total €3,100.

(d) A cash sale of €1,175 including VAT at 17.5%

Task: Write up the cash receipts book and total each of the columns.

ExampleDate Ref Total Debtors Cash

SalesVAT Discounts

Allowed

19.10.06

BL Lorries

4,700 4,700

MA Meters

2,820 2,820 40

TankTop

3,100 3,100

Cash Sale

1,175 1,000 175

11,795 10,620 1,000 175 40

Balancing the Cash Book

If at the beginning of the day there was a cash balance of €900 (debit balance), during the day there were receipts of €2,490 and payments of €2,610 what is the balance at the end of the day?

Opening balance 900Receipts 2,490

3,390Payments (2,610)Closing Balance 780The balance c/d at the end of the day is €780 and the

balance b/f to the following day is €780. see pg 62.

Discounts, Rebates and allowanes

• Trade Discounts- Bulk buying• Cash Discounts – Prompt payment

Accounting for trade discount

A trade discount is a reduction in the amount of money demanded from a customer.

A cash discount is an optional reduction in the amount payable by a customer.

The decision to take advantage of a cash discount is a financing decision.

Accounting for Cash Discount

• Kathy buys goods from Nick for €1,200. She will receive a discount for payment within two weeks. Show the entries made in Nick’s accounts.

Invoice originally entered Dr Debtors €1,200Cr Sales €1,200

Record DiscountDr Discount Allowed €100Cr Debtors €100Record Cash ReceiptDr Cash €1,100Cr Debtors €1,100

Bank Statements

The banks statements will be received on a regular basis. The cash book should be reconciled to the bank statement to ensure no monies have gone missing.

Petty Cash Book

• The petty cash book is the book of prime entry which keeps a cumulative record of the small amounts of cash received into and paid out of the cash float.

• The cash is used for small purchases such as milk and biscuits, taxi or bus fares.

• The amount held in cash day one will be the float. At any one time the amount of receipts and cash remaining should total to the original float. The float will be topped up from time to time and the amount it will be topped up by will equal the amount of receipts in the petty cash box. This system is called the imprest system.

Double Entry BookkeepingDouble Entry BookkeepingDouble Entry Bookkeeping

Accounting EquationAccounting Equation

Record from Business Viewpoint

Record from Business Viewpoint

Assets = Capital + LiabilitiesAssets = Capital + LiabilitiesSeparate EntitySeparate Entity

Business Entity ConceptBusiness Entity Concept Dual EffectDual Effect

Ledger AccountingLedger Accounting

DebitDebit CreditCredit

Financial StatementsFinancial Statements

AdjustmentsAdjustments

Trial BalanceTrial Balance

Closing BalancesClosing Balances

Chapter 4

• Business is a separate entity from its owner

• Transactions are always recorded from the business’ point of view

The Dual Effect Principle

capital drawings

income income expenditure expenditure

liability liability asset assetCreditDebit

CreditDebit

LiabilityAssetRevenue (Income)Expense

R LE A

The Dual Effect Principle

• Every transaction has two equal effects.• Transactions recorded via ledger accounts• A ledger account

$NarrativeDate$NarrativeDate

Credit (Cr)

Name of account e.g. sales, bank

Debit

(Dr)

Summary of steps to record a transaction

1. Identify the two accounts affected

2. Whether accounts are being increased or decreased

3. Decide whether each account should be debited or creditedGeneral rule - debit the receiving account

- credit the giving account.

4. Check debit = credit

Double Entry Bookkeeping

Recording Transactions

To record a cash payment

Dr Expense account

Cr Cash Account

To record a cash Receipt

Dr Cash Account

Cr Income/Sales Account

Question

(a) A cash sale (ie a receipt) of €60.

(b) Payment of a rent bill totalling €4,500

(c) Buying some goods for cash at €3,000

(d) Buying some shelves for cash at €6,000

Create the T accounts to record these transactions

Credit Transactions

Credit Sales

Dr Debtors

Cr Sales

When money is received

Dr Bank/Cash

Cr Debtors

Credit Purchases

Dr Purchases/Expenses

Cr Creditors

Credit Transactions

When the money is paid out

Dr Creditors

Cr Bank/Cash

Questions

1. Bought Machine on credit from A, cost €8,000

2. Bought goods on credit from B, cost €500

3. Sold goods on credit to C, value €1,200

4. Paid D (a supplier) €300

5. Collected €180 from E, a customer

6. Paid wages €4,000

7. Received rent bill of €700 from landlord G

8. Paid rent of €700 to landlord G

9. Paid insurance premium €90

Question

Opening balances: VAT Dr €500, Bank €10,000• Sales on credit to T Wilde €1,000 excluding vat• Purchases of goods on credit €500 excluding vat• Received advertisement bill from news paper €200• Sold goods Cash €1200 including VAT• Purchased Van €4,000 on credit including VAT• Paid wages €1,000 out of bank • Paid Advertising bill €200• Approved for loan from bank €10,000 lodged to bank• Paid rent including VAT €2,000 out of bank account• Received refund of VAT from previous return of €500.Draw up T Accounts and balance off.

Questions

Your business, which is not registered for sales tax, has the following transactions.

(a) The sale of goods on credit(b) Credit notes to credit customers upon return of faulty

goods(c) Daily cash takings paid into the bankTaskFor each transaction identify clearly the following:(a) The original documents(b) The book of prime entry for the transaction(c) The way in which the data will be incorporated into the

double entry system