CAT FA1 Course Notes Contents Page
This chapter shows how the day books and journal are used to feed information into the double-entry system and into the receivables and payables ledgers.
The accounting system
For convenience, the diagram of the accounting system is produced again:
We will look first at what day books are used for.
The purchases day book (PDB)
This book records of all the invoices received by a business from its credit suppliers. Before invoices are listed here, they should be approved for payment as the invoices will progress from here to the ledgers and eventual payment.
The PDB is just a list. A simple PDB would be as follows:
Notes:
- Despite its name, the purchases day book does not have to be totalled every day.
- The total of the net amount, sales tax amount and gross amount columns should add across (known as cross-casting). If they don’t, an error has been made somewhere.
- The total of the gross amount column is how much extra we owe suppliers because of these invoices.
- The total of the net amount column is the cost of how much extra has been purchased.
- The total of the sales tax amount is simply the total of the sales tax relating to these invoices. This can be recovered from the government.
The postings that would be made to account for these purchases transactions are:
In the general ledger
These entries reflect that $3,300 is owed to suppliers for goods of $2,750 and sales tax of $550.
In addition, in the Payables Ledger, each of the suppliers is credited with the gross amount of their invoices
Note: the Payables Ledger is not part of the double entry system: it is a memorandum entry.
If everything has been done properly, the sum of the detailed accounts in the payables ledger will agree with the payables Control Account in the general ledger.
This system fulfils the following functions:
- The control account provides an instant answer as to what is owed to suppliers in total
- The detailed ledger accounts in the Payables Ledger give information about exactly what is owed to whom
- Ensuring the control account and the sum of the ledger balances agree will reduce the chance of an error having occurred in the postings.
The sales day book (SDB)
This book records of all the invoices issued by a business to its credit customers before they are sent out to customers.
The SDB is simply a list. A simple SDB would be as follows:
Notes
- Despite its name the sales day book does not have to be totalled every day.
- The total of the net amount, sales tax amount and gross amount columns should add across (known as cross-casting). If they don’t, an error has been made somewhere.
- The total of the gross amount column is how much extra we are owed by customers because of these invoices.
- The total of the net amount column is the pre-tax sales value of the extra sales.
- The total of the sales tax amount is simply the total of the sales tax relating to these invoices. This will be paid to the government (after off-setting any input sales tax).
The posting that would be made to account for these sales transactions are:
In the general ledger
These entries reflect that $1,224 is owed by customers for goods of $1,020 and sales tax of $204.
In addition, in the Receivables Ledger, each of the customers is debited with the gross amount of their invoices
Note: the Receivables Ledger is not part of the double entry system: it is a memorandum entry. If everything has been done properly, the sum of the detailed accounts in the receivables ledger will agree with the receivables Control Account in the general ledger.
This system fulfils the following functions:
- The control account provides an instant answer as to what is owed by customers in total
- The detailed ledger accounts in the Receivables Ledger give information about exactly who owes what.
- Ensuring the control account and the sum of the ledger balances agree will reduce the chance of an error having occurred in the postings.
Control account reconciliations
The receivables and payables control accounts should always agree with the sum of the balances on the receivables and payables ledgers respectively. If they don’t, then an error must haven been made and needs to be corrected.
Correcting control account and ledger errors is a common exam requirement.
It is vital to understand which entries come from where.
Individual lines in the day book affect postings to the receivables (or payables) ledger Totals in the day book affect postings to the receivables (or payables) control account.
Returns day books
In addition to sales and purchases day books, some businesses have sales returns day books and purchases returns day books. Credit notes issued to customers or received from suppliers are listed there.
They act as ‘negative’ day books. Therefore the following postings are made:
Sales returns day book:
The journal
The journal is used as the book of prime entry for transactions or adjustments that are not initiated anywhere else. Examples include:
- Correction of errors
- Off-set of amounts owed and owing. For example $1,400 is owed from ABC Ltd in the receivables ledger and $1,600 is owed to ABC Ltd in the payables ledger (ABC Ltd is both a customer and a supplier). The two amounts can be offset and only $200 needs to be paid.
- Dealing with irrecoverable debts
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