Books of prime entry

This chapter introduces the books of prime entry. These are the first accounting records where transactions are entered from source documents. We use them to record sales, purchases, returns, cash transactions, and adjustments.

Because these books are the starting point of the accounting system, mistakes made here can carry through to the ledgers and, eventually, the financial statements.

Learning objective by the end of this lesson, you should be able to

Identify the main types of business transactions, for example, sales, purchases, payments, and receipts.

Definitions

Books of prime entry

These are the books in which transactions evidenced by source documents are first entered.

Source documents

These are the original records that provide evidence that a transaction has occurred. They include invoices, receipts, credit notes, and cheques. Each source document triggers an entry into the appropriate book of prime entry, creating an auditable trail from transaction to financial statement.

The main books of prime entry are:

• Sales journal
• Purchases journal
• Return inwards journal
• Return outwards journal
• Cash book
• Petty cash book
• General journal

Definitions

Sales journal

This is the prime book of entry for the credit notes issued. It records all credit sales transactions on a daily basis.

Purchases journal

This is the prime book of entry for the credit notes received. It records all credit purchase transactions on a daily basis.

Return inwards journal

This is also referred to as the sales returns journal or daybooks. It is the prime book of entry for all goods returned by customers who previously purchased on credit from the firm. It serves as a specialized journal to systematically track customer returns.

Return outwards journal

Also referred to as purchase returns journal or daybooks. It is the prime book of entry for all previously purchased goods returned by the firm to suppliers.

General journal

It is also called the Journal Proper. It is the book of prime entry used for recording transactions that cannot be entered in any of the journals or books of prime entry.

It also records non-routine, adjusting, or transfer transactions before posting them into the ledger.

Examples of entries in the General Journal

• Opening entries (to bring in balances at the start of the year).
• Closing entries (to transfer balances to final accounts).
• Adjustment entries (e.g., accruals, prepayments).
• Non-cash items (e.g., depreciation, bad debts written off).
• Error corrections.
• Transfers between accounts.

Because the general journal is used for transactions that don’t fit into the specialised journals, each entry typically includes a short narrative explanation. This narrative matters because it explains the reason for the entry and supports review work (for example, at period end) and audit checks.

Cash book

The cash book is the prime book of entry for all cash and bank (cheque) receipts and payments. It shows:

• money received
• money paid out
• the running balance

This makes it a key tool for day-to-day cash management.

The cash book also serves as both a book of prime entry and a ledger. The ledger aspect is covered later in this course.

A cash book typically has two sides:

• the debit side records money received (receipts)
• the credit side records money paid out (payments)

At any point, the balance on the cash book shows how much cash and bank funds the business has available.

Petty cash book

The petty cash book records small, routine business expenses paid from a petty cash fund. It usually operates using an imprest system, where a fixed amount of petty cash is maintained by reimbursing the exact amount spent.

Common petty cash expenses include stationery, refreshments, postage, and local transport.

Under the imprest system:

• the petty cashier starts the period with a fixed float
• Each small payment is supported by a receipt or voucher
• at the end of the period, the main cashier reimburses the total spent
• the float is restored to its original fixed amount

This approach makes petty cash easier to control and reconcile.

Illustration question: Identification of business transactions

ABC Trading Company had the following transactions during the first week of March 2024. Required: For each of the transactions below, identify the appropriate book of prime entry in which it should be recorded and state the corresponding amount.

Example 1: Started business with cash $20,000 and inventory $15,000.

Do you know the answer?

Example 2: Purchased goods on credit from DEF Suppliers for $8,000, less 20% trade discount.

Do you know the answer?

Example 3: Sold goods on credit to GHI Limited for $12,000.

Do you know the answer?

Example 4: Received cash $5,000 from GHI Limited on account.

Do you know the answer?

Example 5: Paid rent for the month of $2,000 by cash.

Do you know the answer?

Example 6: Purchased office equipment for $3,500 on credit from JKL Company.

Do you know the answer?

Example 7: Returned defective goods worth $800 to DEF Suppliers.

Do you know the answer?