Books of Prime Entry, Ledgers & Capital
1. Books of Prime Entry
Definition: Books of prime entry = books of original entry = books in which transactions are first recorded through source documents. Both names are accepted.
Source document: a document that is evidence / proof that the transaction happened — invoices, credit notes, cheque counterfoils, receipts…
Transaction → Book of original entry
| # | Type of transaction | Source doc | Book of original entry |
|---|---|---|---|
| 1 | Sale of goods / services on credit | Sales invoice | Sales Journal (= Sales Day Book) |
| 2 | Purchase of goods / services on credit | Purchase invoice | Purchase Journal (= Purchase Day Book) |
| 3 | Goods returned by customer | Credit note (issued to customer) | Return Inwards Journal (= Sales Return Day Book) |
| 4 | Goods returned to supplier | Credit note (received from supplier) | Return Outwards Journal (= Purchase Return Day Book) |
| 5 | Receipt / payment by cash or cheque, or sales / purchases by cash or cheque | Receipt, cheque counterfoil | Cash Book |
| 6 | All other non-routine transactions | Invoice / documentary record | The Journal (= General Journal) |
- Sales / purchase journals hold credit transactions only — never cash sales or cash purchases.
- Cash book has two columns: cash and bank. There is no such thing as a "bank book" — always write cash book.
- Any transaction involving cash or bank (even a sale/purchase for cash) → cash book.
- Usually 6 books; the 7th is the petty cash book (small cash payments) — added in the new CIE syllabus (2020). If a question gives a threshold amount, small payments go to petty cash; only cash goes there, bank items always go to the cash book.
Debit note & Credit note (returns)
MCQ trick: credit note issued to customer ⇒ return inwards. Credit note received (from supplier) ⇒ return outwards.
2. The Journal — Non-Routine Transactions
"Once in a blue moon" transactions that don't fit the five routine books go into the journal (general journal). Examples:
| Non-routine transaction | Note |
|---|---|
| Purchase / sale of non-current asset on credit | furniture, equipment, vehicle — not sales / purchase journal (those are for stock only) |
| Correction of errors | errors are corrected by journal entry |
| Drawing of goods (stock) | e.g. owner takes a phone from his mobile shop. Dr Drawings, Cr Purchases |
| Expense incurred on credit | expense recorded, not yet paid |
| Bad debts, bad debts recovered, provision for doubtful debts | |
| Depreciation, etc. |
3. Ledgers
Definition: A ledger = a collection of accounts — a book containing accounts.
Account = place where similar transactions are grouped together. Ledger = place where all the accounts are gathered.
4. Effect on Capital
Capital: the amount first invested by the owner, and afterwards whatever remains in the business after paying off all liabilities = the owner's residual interest (what belongs to the owner).
Only four transactions change capital — no others!
| # | Transaction | Effect on capital |
|---|---|---|
| 1 | Introduce additional capital | Increase ↑ |
| 2 | Drawings in cash or goods form | Decrease ↓ |
| 3 | Profit / gain / income | Increase ↑ |
| 4 | Loss / expense | Decrease ↓ |
Drawing goods: Dr Drawings, Cr Purchases — purchases fall, drawings reduce capital.
5. Discounts
① Trade / Bulk-purchase discount
Definition: a discount received or given at the time of purchase, applied on the list price of goods. Given / received when buying or selling in bulk quantity, or when we sell to a regular customer or a trader so that he can also earn some profit on resale.
Trader: phone advertised at 20,000 — wholesaler gives 2,000 off ⇒ pays 18,000 and resells at 20,000 (earns the 2,000).
3 reasons for trade discount: bulk buying · buyer is a trader (needs a margin to resell) · regular / valued customer we don't want to lose.
② Cash discount (= settlement / early-payment discount)
Definition: discount at the time of payment for paying (or receiving money) early. Always recorded in the books of customer / supplier.
| Discount ALLOWED | Discount RECEIVED | |
|---|---|---|
| When? | we give it to a customer who pays us early | we get it from a supplier when we pay him early |
| Nature | Expense (cost of doing business) | Income |
| Double entry | Dr Discount allowed Cr Customer a/c |
Dr Supplier a/c Cr Discount received |
| Why? | customer owes us less, so his balance (an asset) is reduced ⇒ credited | we owe the supplier less, so his balance (a liability) is reduced ⇒ debited |
6. Working Capital
Definition: the "day-to-day / rolling" capital — money available to run the business (pay employees, bills, suppliers). Money tied up in a building, machinery or motor van (non-current assets) can't be used for this.
(= net current assets)
To find the WC effect: list every current asset / current liability that changes and net them. Stock, debtors, bank, cash = current assets; creditors = current liability.
7. Worked Question — Mr ARD, November
Transactions:
- 1st Sold stock on credit to Mr X for $500, costing $350
- 5th Bought goods on credit from Mr Y for $300
- 11th Mr X returned faulty goods worth $50
- 17th Paid wages for the week by cheque $150
- 19th Sent details of the month's transactions to Mr X
- 23rd Returned damaged stock to Mr Y worth $30
- 25th Paid rent for Nov by cheque $100
- 27th Sold old motor vehicle (book value $1,000) for $1,250 to Mr Ali on credit
- 29th Sold goods for cash $125 to Mr Hussain, costing $150
Required: for each — journal entry (Dr / Cr), source document, book of original entry, effect on capital, effect on working capital.
Board helper work (top of the board)
The completed table
| Date | Debit $ | Credit $ | Source doc | Book of original entry | Effect on capital | Effect on WC |
|---|---|---|---|---|---|---|
| Nov 1 | Mr X 500 | Sales 500 | Sales invoice | Sales journal | +150 | +150 |
| 5 | Purchases 300 | Mr Y 300 | Purchase invoice | Purchase journal | no effect | no effect |
| 11 | Return inwards 50 | Mr X 50 | Credit note (issued to customer) | Return inwards journal | −15 | −15 |
| 17 | Wages 150 | Bank 150 | Pay slip / wage sheet | Cash book | −150 | −150 |
| 19 | — | — | Statement of account | — | — | — |
| 23 | Mr Y 30 | Return outwards 30 | Credit note (received from supplier) | Return outwards journal | no effect | no effect |
| 25 | Rent 100 | Bank 100 | Cheque counterfoil | Cash book | −100 | −100 |
| 27 | Mr Ali 1,250 | Motor vehicle 1,250 | Invoice | The journal | +250 | +1,250 |
| 29 | Cash 125 | Sales 125 | Receipt | Cash book | −25 | −25 |
Why each answer? (teacher's reasoning)
Dr Mr X (debtor — he will pay later) · Cr Sales (goods leaving business). Use the selling price ($500). Sales invoice issued by seller → sales journal.
Dr Purchases (goods coming in) · Cr Mr Y (supplier = liability ↑ ⇒ credit). Same invoice: sales invoice for the seller, purchase invoice for the buyer. → purchase journal.
Capital: no effect — buying doesn't make profit; selling does. WC: stock ↑300 (CA) and creditor ↑300 (CL) cancel ⇒ no effect.
Dr Return inwards (goods coming in) · Cr Mr X (he won't pay the $50). Credit note issued to customer → return inwards journal. (Return inwards = newer name for "sales return".)
If all $500 had come back, the +150 would turn into −150.
Dr Wages (expense) · Cr Bank (cheque, or cash only if stated). Source: pay slip (one per employee) or wage sheet (all employees). → cash book (petty cash book only if small and cash).
Capital: expense ⇒ −150. WC: bank (CA) ↓ ⇒ −150.
A summary / reminder sent to Mr X (a debtor) of the month's transactions — not a new transaction, no double entry, no book, no effect. e.g. mineral-water firm, newsagent, grocer sends a month-end statement to say "you owe us this much".
Dr Mr Y (liability ↓ ⇒ debit) · Cr Return outwards (goods leaving). Source: credit note received from supplier (we send a debit note, but it has no value). → return outwards journal.
Capital: no effect. WC: stock ↓30 (CA) and creditor ↓30 (CL) cancel ⇒ no effect.
Dr Rent (expense) · Cr Bank. Source: cheque counterfoil — the small part left in the chequebook, recording payee, amount, date. It's proof of payment; the supplier can also sign the back. → cash book.
Capital: −100 (expense). WC: bank ↓ ⇒ −100.
Dr Mr Ali 1,250 (the selling price, not book value) · Cr Motor vehicle 1,250. Not sales a/c — sales / purchases / return inwards / return outwards are used only for stock. Source: plain invoice (not "sales invoice"). Book: the journal (non-routine — we can't sell a vehicle every day).
Dr Cash 125 · Cr Sales 125. Rule: when cash / bank is involved don't use the person's name — Hussain gets an account only if he buys on credit. Source: receipt. → cash book.
Quick Recap — Chapter Cheat-Sheet
- Credit sale → sales invoice → sales journal · Credit purchase → purchase invoice → purchase journal
- Customer returns → credit note issued → return inwards journal · Return to supplier → credit note received → return outwards journal
- Cash / cheque anything → receipt, cheque counterfoil → cash book (small cash → petty cash book) · Wages → pay slip / wage sheet
- Non-routine (NCA on credit, errors, drawings of goods, expenses owed, bad debts, provisions, depreciation) → journal · NCA on credit uses plain invoice
- Statement of account = reminder, no entry
- Sales ledger = debtors · Purchase ledger = creditors · General (nominal) = all others incl. sales & purchases a/c
- Capital ↑: additional capital, profit / income · Capital ↓: drawings, loss / expense (only these 4)
- Trade discount: on list price, never recorded · Cash discount: always recorded
- Discount allowed = expense: Dr Disc. allowed, Cr Customer · Discount received = income: Dr Supplier, Cr Disc. received
- Working capital = CA − CL · assets move WC the same way, liabilities the opposite · Profit on a return = value × margin %
- No cash/cheque stated ⇒ write Bank · Cash sale to named person ⇒ Cash, not his name