The use of ledgers and prime entry records

CAT MA1 Course Notes Contents Page

The use of ledgers and prime entry records in both integrated and interlocking accounting systems

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

• The general or nominal ledger, which records all the ‘T’ accounts, such as wages, sales, purchases, 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 here. 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 here. 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.

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 double entry system, and entries are made from there to the ledgers.  

The functions and benefits of a computerised accounting system

Most accounting information is numerical and, of course, computers excel at dealing with that type of data. Computerised accounting systems should offer the following advantages over manual systems:

• faster provision of information
• provision of information that would not be easily available without a computerised accounting system
• once the system is set up, cheaper information
• more accurate information because arithmetic and certain other errors will be eliminated.

Of course sometimes things go wrong and systems break down or incorrect information is produced. In particular, if incorrect data is entered, incorrect information will be produced (garbage-in, garbage-out, GIGO).

A computerised accounting system can be represented as:

For example: Input: Orders are input over the internet Processing: Prices are accessed on a product file and the order value worked out. The customers’ account in the receivables ledger (now held on a computer file) is debited. Inventory records (now on a computer file) are updated. Output: An invoice is printed for the customer. Despatch information is displayed on a screen in the warehouse to show the goods that have to be sent. There are several important pieces of terminology that you should know: File: A group of similar records. So, a receivables ledger file contains records for each customer. Record: Each record refers to a single entity. So, a customer record will hold all the information about a customer; a product record will hold all the information about a product. Records are collected together into files. Field: (Also known as an attribute.) Each field holds a separate piece of data relating to a record. Thus a customer record would have fields for: name, address, telephone number, credit limit, invoices outstanding, etc. Key field: The field that uniquely identifies a record. For example, a part code or an employee number. Character: Characters make up fields and are typically a – z, 0 – 9. Often a character holds no meaning on its own, but occasionally a character will be the whole field. For example M or F for male or female.  

The type of data held can be divided into:

Transaction data: this records information about each transaction and this data changes often as transaction progress and are completed. Standing or reference data: data that is relatively permanent such as names and addresses, descriptions and prices of products. In general, there are two types of processing that can be carried out: batch processing and real-time on-line processing. Batch processing: transactions are accumulated into batches and then all processed together. Because transactions have to be accumulated it means that there is a delay in processing them so the information held in the accounting system is generally out-of-date. For example, if sales transactions were accumulated during the week and processed to the receivables file on the last day of the week, for most of the time the balances shown owing from each customer would be understated. The balances would be correct only just after processing. Batch processing is not so common now. Real-time, on-line processing: ‘real-time’ means that files are updated as transaction happen; ‘on-line’ means that the files are permanently accessible to be updated.  For example, when you withdraw cash from a cash machine, the machine can access your bank account record (it is on-line) to see if you have the funds. When you take the money out your bank account is immediately updated (real-time).