Books of Original Entry and Types of Ledgers: Your Accounting Starting Point!

Hello! Welcome to one of the most fundamental topics in accounting. Don't worry if you're new to this, we're going to break it down step-by-step. Think of a business's daily activities – selling products, buying supplies, paying rent. How do they keep track of everything without getting into a huge mess? The answer is by using Source Documents, Books of Original Entry, and Ledgers.

In this chapter, you'll learn how businesses first record their financial transactions and then how they organise them neatly. Mastering this is like learning the basic grammar of accounting – it's the key to everything that comes later!

Analogy Time: Imagine you're keeping a food diary. The Source Document is your grocery receipt. The Book of Original Entry is your daily log where you write down everything you eat, in the order you eat it. The Ledger is like a summary report where you have separate pages to total up your "Breakfasts", "Lunches", and "Dinners". All are essential to see the full picture!


Part 1: The Big Picture - A Quick Recap of the Accounting Flow

Before we dive in, let's remember the first few steps of the accounting cycle. It’s a logical flow that makes perfect sense once you see it.

Business Transaction Happens ➔ Source Document Created / Received (e.g., Sales Invoice) ➔ Record in Book of Original Entry (the first diary entry) ➔ Post to a Ledger (organise it in the filing cabinet) ➔ Prepare a Trial Balance (check our work).

Quick Review: Double-Entry & DEAD CLIC

Every transaction has two effects, a Debit (Dr) and a Credit (Cr), and they must always be equal.

A super helpful mnemonic to remember what to Debit and Credit is DEAD CLIC:

  • Debits increase: Expenses, Assets, Drawings
  • Credits increase: Liabilities, Income (Revenue), Capital

Keep this in your mind as we go through the examples. You've got this!


Part 2: Source Documents and Discounts

Every entry in accounting begins with a source document — written evidence proving a transaction took place.

Common Source Documents

  • Sales Invoice: Sent to a customer when selling goods on credit. Used to write up the Sales Day Book.
  • Purchases Invoice: Received from a supplier when buying goods on credit. Used to write up the Purchases Day Book.
  • Credit Note (Issued): Sent to a customer when they return goods or receive an allowance. Used to write up the Sales Returns Day Book.
  • Credit Note (Received) / Debit Note: Received from a supplier when returning goods. Used to write up the Purchases Returns Day Book.
  • Receipts, Cheque Counterfoils, Pay-in Slips, Bank Statements: Evidence for cash and bank transactions recorded in the Cash Book.
  • Petty Cash Voucher: Evidence for small cash payments in the Petty Cash Book.

Trade Discount vs. Cash Discount

It is vital for HKDSE to distinguish between the two types of discounts:

  • Trade Discount: A price reduction given for buying in bulk or to trade customers. It is deducted immediately on the invoice and is NEVER recorded in any ledger account. Day books record the net amount after deducting trade discount.
  • Cash Discount (Settlement Discount): An allowance given to encourage prompt payment within a specific credit period. It IS recorded in the accounting books:
    • Discounts Allowed: Given to credit customers for paying early (an expense for us; debited in General Ledger).
    • Discounts Received: Received from suppliers for paying early (an income/saving for us; credited in General Ledger).

Part 3: Books of Original Entry (The Daily Diaries)

A Book of Original Entry (also called a Day Book or Journal) is where a transaction is formally recorded for the very first time.

The Main Types of Books of Original Entry

1. The Sales Day Book (or Sales Journal)

Source Document: Copy of Sales Invoice.

Job: To record all CREDIT SALES of GOODS at net invoice price (after trade discount).

Double-entry impact: Individual customers debited in Sales Ledger; monthly total credited to Sales Account in General Ledger.

2. The Purchases Day Book (or Purchases Journal)

Source Document: Incoming Purchases Invoice.

Job: To record all CREDIT PURCHASES of GOODS at net invoice price.

Double-entry impact: Individual suppliers credited in Purchases Ledger; monthly total debited to Purchases Account in General Ledger.

3. The Sales Returns Day Book (or Returns Inwards Journal)

Source Document: Copy of Credit Note issued to customer.

Job: To record GOODS returned to us by our CREDIT CUSTOMERS.

Double-entry impact: Individual customers credited in Sales Ledger; monthly total debited to Returns Inwards / Sales Returns Account in General Ledger.

4. The Purchases Returns Day Book (or Returns Outwards Journal)

Source Document: Credit Note received from supplier.

Job: To record GOODS we return to our CREDIT SUPPLIERS.

Double-entry impact: Individual suppliers debited in Purchases Ledger; monthly total credited to Returns Outwards / Purchases Returns Account in General Ledger.

5. The Cash Book (Two-Column & Three-Column)

This one is special! The Cash Book is both a book of original entry AND part of the ledger.

Job: To record all receipts and payments of money through CASH or the BANK.

  • Two-Column Cash Book: Columns for Cash and Bank on both debit and credit sides.
  • Three-Column Cash Book: Adds a Discounts Allowed column on the debit side and a Discounts Received column on the credit side. The discount columns act as memorandum books of original entry — their totals are posted periodically to the General Ledger.
Focus on: Contra Entries

A contra entry appears on both sides of the Cash Book when money moves between cash in hand and the bank account (e.g., depositing cash into the bank, or withdrawing cash from the bank for office use). It is labelled with 'C' in the folio column and requires no separate ledger posting.

6. The General Journal (or Journal Proper)

Source Document: Correspondence, contracts, vouchers, invoices for non-current assets.

Job: The catch-all journal for non-routine transactions not recorded in other day books:

  • Purchase or sale of non-current assets on credit.
  • Writing off bad debts.
  • Opening entries when starting business or new books.
  • Correction of errors and period-end adjustments.

Entries must include the date, accounts to be debited and credited, amounts, and a clear narrative (explanation).


Part 4: Ledgers (The Filing Cabinets)

The ledger is a collection of all individual accounts. Transferring entries from books of original entry to ledgers is called posting.

Types of Ledgers

  • Sales Ledger (Trade Receivables Ledger): Personal accounts of credit customers (Trade Receivables).
  • Purchases Ledger (Trade Payables Ledger): Personal accounts of credit suppliers (Trade Payables).
  • General Ledger (Nominal Ledger): All impersonal accounts, including Real accounts (assets like Machinery, Inventory) and Nominal accounts (expenses, revenues, capital, drawings, discounts, and control/total accounts).

How Posting Works: Summary Example

Transaction: We sell \$500 of goods on credit to Tom, less 10% trade discount. Net invoice amount = \$450.

  1. Book of Original Entry: Enter \$450 in the Sales Day Book under Tom's name (trade discount of \$50 is not posted).
  2. Sales Ledger: Debit Tom's personal account with \$450.
  3. General Ledger: At month-end, credit the Sales Account with the total of the Sales Day Book.

Part 5: Common Mistakes to Avoid

  • Recording Trade Discounts in Ledger Accounts: Trade discounts are deducted directly on the invoice; only cash discounts enter the double-entry system.
  • Confusing Goods and Non-Current Assets: Buying non-current assets on credit belongs in the General Journal, not the Purchases Day Book.
  • Omitting Narratives: HKDSE requires a concise narrative explaining every General Journal entry.
  • Mixing up Returns Inwards and Returns Outwards: Inwards = goods returned by credit customers (Sales Returns, Debit balance); Outwards = goods returned to credit suppliers (Purchases Returns, Credit balance).