Introduction to Books of Prime Entry
Welcome! In this chapter, we are looking at the very first steps an accountant takes when recording business activity. Imagine a busy supermarket—thousands of items are sold every single day. If the accountant tried to record every single individual chocolate bar sold directly into the main accounts (the General Ledger) immediately, the system would become a messy, cluttered nightmare!
Books of Prime Entry act like a "waiting room" or a sorting office. They are the books of first entry where transactions are listed in chronological order before they are summarized and moved into the formal ledgers. By the end of this section, you’ll understand the different types of books, the documents that trigger them, and how to manage small cash payments using the Imprest System.
The Big Picture: Why Do We Need Them?
Think of it like your phone’s "Recent Calls" log. Before you decide to save a number to your contacts (the Ledger), it first appears in your call log (the Book of Prime Entry). It organizes information so the main system stays clean and manageable.
Key Terms to Remember:
• Source Document: The "paper trail" (like an invoice or receipt) that proves a transaction happened.
• Books of Prime Entry: The first place a transaction is written down.
• Ledger: The final home where accounts are balanced.
The Main Books of Prime Entry
Most businesses use several specific books to categorize transactions. Don’t worry if this seems like a lot; they are named very logically!
1. The Sales Day Book (SDB)
This book records all credit sales. If a customer buys something and agrees to pay later, it goes here.
Important Note: Cash sales do not go here—they go in the Cash Book!
2. The Purchase Day Book (PDB)
This records all credit purchases. This is for when the business buys inventory from a supplier and will pay for it in 30 days, for example.
3. The Sales Returns Day Book
Sometimes customers send goods back because they are damaged or the wrong color. We record these "returns inwards" here based on a document called a Credit Note.
4. The Purchase Returns Day Book
When our business sends goods back to a supplier ("returns outwards"), we record it here.
Quick Review:
Sales/Purchase Day Books = Credit transactions only.
Source Document for Sales/Purchases = Invoices.
Source Document for Returns = Credit Notes.
The Cash Book
The Cash Book is unique because it often functions as both a book of prime entry and a ledger account. It records all money coming in and money going out of the business bank accounts.
In many exams, you will see a "Two-column Cash Book" which has a column for Cash (physical notes and coins) and a column for Bank (electronic transfers and checks).
Petty Cash and the Imprest System
Most businesses keep a small amount of physical cash in the office for tiny expenses like milk, stamps, or a taxi fare. This is the Petty Cash Book. To keep this money safe and organized, we use the Imprest System.
How the Imprest System Works:
1. The business sets a float (a fixed amount), let's say \( \$100 \).
\n2. During the month, the staff spends money and puts vouchers (receipts) in the tin.
\n3. At the end of the month, the total of the vouchers is calculated.
\n4. The business "tops up" the tin with exactly enough cash to get back to the \( \$100 \) float.
Example:
If your float is \( \$100 \) and you spend \( \$35 \) on stamps and \( \$10 \) on tea, you have \( \$55 \) left. To restore the float, you will receive a "reimbursement" of \( \$45 \).
The formula is: Amount Spent = Amount Reimbursed.
Did you know?
The word "Imprest" comes from old French, meaning "to lend." Essentially, the business is lending the petty cashier a set amount of money to manage small costs!
The Journal
What happens if a transaction doesn't involve cash, and it isn't a credit sale or purchase of goods? For example, buying a delivery van on credit, or correcting an error?
These "odd one out" transactions go into The Journal. Every entry in the Journal must include a Narration—which is just a short, simple sentence explaining why the entry was made.
Common Journal Entries:
• Buying or selling non-current assets (like machinery) on credit.
• Correcting mistakes in the accounts.
• Year-end adjustments (like depreciation).
• Writing off a bad debt.
Common Pitfalls to Avoid
• Mixing up Cash and Credit: Remember, if a customer pays immediately, it goes in the Cash Book. If they pay later, it starts in the Sales Day Book.
• Invoices vs. Credit Notes: An invoice is a request for payment (Sales/Purchases). A credit note "cancels" an invoice (Returns).
• Petty Cash Float: Students often think the reimbursement is the "new" balance. No! The reimbursement is just the amount needed to get back to the original starting float.
Summary and Key Takeaways
• Books of Prime Entry are the first place transactions are recorded chronologically.
• Day Books handle credit sales, credit purchases, and returns.
• The Cash Book records all bank and cash movements.
• The Petty Cash Book uses the Imprest System to maintain a steady float of small change.
• The Journal is for non-routine transactions and always requires a narration.
• Everything recorded here will eventually be totaled and posted to the General Ledger using double-entry bookkeeping.
Don't worry if this feels like a lot of paperwork! Just remember: the Books of Prime Entry are simply the "sorting folders" that keep the business organized before the real accounting math begins.