BOOKS OF PRIME ENTRY

The role of books of prime entry

Book-keeping is the process of recording financial transactions in the accounting records (the ‘books’) of an entity. Transactions are recorded in accounts, and there is a separate account for each different type of transaction.

It is often the case that individual transactions are not recorded in the ledger accounts as they occur. Instead, they are recorded initially in records called books of prime entry (also known as books of original entry). Each of these ‘books’ or ‘journals’ is used to record different types of transaction. Periodically the totals of each type of transaction are double entered into the appropriate ledger accounts in the general ledger.

Books of prime entry include the following:

Sales day book: Records sales on credit (receivables) from sales invoices.

Sales returns day Book: Records items returned by credit customers (credit notes issued to customers).

Purchases day book: Records purchases on credit from suppliers (trade payables) from purchase invoices.

Purchases returns day book: Records returns of purchases on credit.

Cash book: Records cash received into the bank account and cash paid out of the bank account. Cash receipts and payments are very much a part of the sales and purchases cycles.

Journal: Records transactions that are not recorded in any of the other books of original entry.

Books of prime entry are a useful means of summarising large numbers of similar transactions like credit sales, credit purchases and cash and bank payments and receipts.

Posting transactions

Books of prime entry are used to reduce the number of transactions that have to be recorded in the general ledger. For example, instead of recording 1,000 separate sales, a business could add them up and perform a single double entry on the totals. This means that the general ledger will contain one account for receivables in total rather than an account for each individual customer. This account is called the receivables control account. (Note, that in practice it might have another name but that does not affect its function).

Definition: Control account

An account which summarises a large number of transactions. (Examples include receivables control account, payables control account and payroll control account).

However, this does create another problem. A business must have information about the individual customers to whom sales have been made and who owe them money. In order to provide this information a second record is kept of the individual balances of individual customers. This record is called the receivables ledger (or the sales ledger).

The receivables control account and the receivables ledger are updated at the same time. The process of transferring the details of transactions from the books of prime entry to the accounts in the ledgers is called ‘posting’ the transactions.

The balance on the receivables control account should always equal the total of the list of balances in the receivables ledger. If this is not the case an error has been made and must be investigated.

The receivables control account is part of the double entry system. Any entry into the receivables control account must be accompanied by an equal and opposite entry elsewhere in the general ledger.

The receivables ledger is not part of the double entry system. Any entry in it simply reflects entries that have been made in the receivables control account in the general ledger and not the other side of those entries. ). It is sometimes described as a memorandum account.

Note that all the comments above could equally have been made in respect of purchases. Purchases are recorded in a purchases day book and posted to a payables control account in the general ledger. This is supported by a payables ledger which is a list of amounts owed by the business to individual suppliers