Chapter 2: Sources and Recording of Data — Part 3

01 Purposes and Advantages

• Purpose: To prevent the ledgers from becoming cluttered with too much detail.
• Advantages: They allow for a division of labour (different clerks can manage different books) and act as a cross-check for errors.

02 The Seven Books of Prime Entry

1. Sales Journal: Records all credit sales of inventory.
2. Purchases Journal: Records all credit purchases of inventory.
3. Sales Returns Journal: Records inventory returned by credit customers.
4. Purchases Returns Journal: Records inventory returned to credit suppliers.
5. Cash Book: Records all receipts and payments of money (bank and cash). It is unique because it serves as both a book of prime entry and as the ledger accounts for bank and cash.
6. Petty Cash Book: Records small, sundry cash payments using the imprest system.
7. General Journal: Records non-routine transactions that do not fit elsewhere, such as the purchase/sale of non-current assets on credit, correction of errors, and writing off irrecoverable debts.

03 Trade Discount vs. Cash Discount

Distinguishing between these is a major exam focus.

Trade Discount

A reduction in price given for bulk buying or to businesses in the same trade.

• Accounting Treatment: Deducted from the invoice total. It is never recorded in the ledger accounts.

Cash Discount

A reduction in the amount due to encourage prompt payment (e.g., 5% if paid within 7 days).

• Accounting Treatment: Recorded in the Cash Book columns: Discount Allowed (Expense - Dr) or Discount Received (Income - Cr).

04 The Imprest System of Petty Cash

Under this system, the petty cashier is given a set amount of money called a float. At the end of the period, the main cashier replenishes the petty cash by the exact amount spent, thereby restoring the float to its original level.

Worked Example 1: Imprest System

Float: $200. During the month, petty payments total $85 (postage $25, stationery $40, refreshments $20).

• Petty Cash Book records each payment with analysis columns.
• Balance remaining in petty cash: $200 − $85 = $115
• Main cashier replenishes petty cash by $85 (exact amount spent).
• Float restored to $200.

05 Recording Receipts and Payments

The Cash Book records receipts and payments made by:

• Cash — physical notes and coins
• Cheques — recorded using cheque counterfoils (payments) or paying-in slips (receipts)
• Debit and credit cards — card payments appear on the bank statement
• Online and bank transfers — direct credits/debits to the bank account

Worked Example 2: Trade vs Cash Discount

Invoice: List price $1,000; Trade discount 20%; Terms 5% cash discount if paid within 7 days.

• Trade discount: $1,000 × 20% = $200 deducted on invoice. Amount recorded in Purchases Journal = $800. Trade discount is not entered in the ledger.
• Cash discount (if paid promptly): $800 × 5% = $40. Cash Book entry: Dr Creditor $800; Cr Bank $760; Cr Discount Received $40.

06 Manual vs Digital Original Entry

Benefits and Limitations of Keeping Cash at the Business

• Benefits: Convenient for small payments; no bank charges for petty items; immediate availability.
• Limitations: Risk of theft; no audit trail if not recorded properly; insurance may not cover large cash holdings.