The process of recording business transactions

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Introduction to the process of recording business transactions within the accounting and double entry system

This chapter gives a brief description of how transactions are recorded in accounting systems, including the use of codes to define information precisely.

Recording transactions.

Transactions are first recorded in the books of prime entry and then recorded on the ledger system.

A prime entry record (or book of prime entry) is where a transaction is first recorded.

These records consist of:

• The cash book: this records amounts paid into and out of the bank account
• The petty cash book: this records small amounts of cash paid for day to day expenses, such as buying postage stamps and teas or coffee for the office.
• The sales day book: sales invoices issued to credit customers
• The purchases day book: purchase invoices received from suppliers
• The journal: where adjustments, such as correcting errors, are first recorded.

Some businesses also have sales returns and purchases returns day books.

The books of prime entry serve to ‘capture’ transactions as soon as possible so that they are not subsequently lost or forgotten about.

The cash book and the petty cash book are part of the double entry system and record cash coming in and going out.

The day books and journal are not part of the ledger (double entry) system, and entries are made from there to the ledgers.

The word ‘ledger’ means a book. In accounting systems there are usually three ledgers:

• The general or nominal ledger, which records amounts such as wages, sales, purchases, sales, electricity, travel, advertising, rent, insurance, repairs, receivables, payables and non-current assets. The cash and bank accounts are technically part of this ledger but are usually physically kept in a separate book because cash and bank transactions are so numerous.
• The payables ledger (also known as the creditors’ ledger and sometime the purchase ledger). Although the total amount owed to suppliers is recorded in the general ledger, details of exactly what is owed to whom are also recorded in the payables ledger. There is a separate account for each supplier. The sum of the amounts owing in this ledger should agree with the payables balance in the general ledger.
• The receivables ledger (also known as the debtors’ ledger and sometimes the sales ledger). Although the total amount owed by customers is recorded in the general ledger, details of exactly what is owed from whom are also recorded in the receivables ledger. There is a separate account for each credit customer. The sum of the amounts owing in this ledger should agree with the receivables balance in the general ledger.

The accounting system in diagrammatic form

The accounting system can be depicted as follows:

To recap:

The double entry system consists of the general ledger, the cash book and the petty cash book.

The receivables and payables ledgers provide details of the total receivables and payables that are recorded in the nominal ledger.

The books of prime entry are the cash book, the petty cash book, the sales day book, the purchases day book and the journal.