The Journal

1 The books of prime entry

A transaction is not written straight into the ledgers. It is listed first in a book of prime entry (also called a day book or a book of original entry), and it is the TOTALS of that book that are posted to the general ledger. There are six:

• the sales day book — credit sales, listed from the copy sales invoices;
  

• the sales returns day book — credit notes issued to customers;
  

• the purchases day book — credit purchases, listed from the suppliers' invoices;
  

• the purchases returns day book — credit notes received from suppliers;
  

• the cash book — receipts into and payments out of the bank account;
  

• the petty cash book — small cash payments.
  

The journal, dealt with below, is the book of prime entry for everything else.

1.1 Entering sales invoices and credit notes

The sales day book lists each invoice and analyses it into net, sales tax and gross:

At the end of the period the TOTALS are posted once to the general ledger:

Debit Receivables control account $2,400

Credit Sales account $2,000

Credit Sales tax account $400

Separately — and this is a memorandum, not part of the double entry — each customer's GROSS invoice is posted to that customer's own account in the receivables ledger: ABC $1,200, DEF $480, GHI $720.

Credit notes issued to customers go through the sales returns day book in exactly the same way, and its totals are posted the other way round:

Debit Sales returns account $100

Debit Sales tax account $20

Credit Receivables control account $120

and $120 is credited to ABC Company's own account in the receivables ledger.

1.2 Entering supplier invoices and credit notes

The purchases day book is the mirror image. Say the totals for the month are net $2,750, sales tax $550, gross $3,300:

Debit Purchases account $2,750

Debit Sales tax account $550

Credit Payables control account $3,300

with each supplier's gross invoice posted to that supplier's own account in the payables ledger.

Credit notes received from suppliers go through the purchases returns day book. If they total net $200 and sales tax $40:

Debit Payables control account $240

Credit Purchases returns account $200

Credit Sales tax account $40

and $240 is debited to that supplier's own account in the payables ledger.

Note what the sales tax account does in all four: tax charged on sales is credited to it, tax suffered on purchases is debited to it, and a credit note reverses whichever it was.

2 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
  

That second example — the same business being both a customer and a supplier, and the two balances being set against each other — is what the syllabus calls a CONTRA ENTRY. It is put through by journal, and it appears in BOTH control accounts: debit the payables control account and credit the receivables control account with the lower of the two balances, and make the same two entries in the individual accounts in the memorandum ledgers.

The traditional way of setting out a journal is:

3 FA1 exam focus — Chapter 3