Daybooks and ledgers
When a business is very small, all the double entry accounts can be kept in one book, which we would call a 'ledger'. As the business grows it would be impossible just to use one book, as the large number of pages needed for a lot of transactions would mean that the book would be too big to handle. Also, suppose the firm has several bookkeepers. They could not all do their work properly if there were only one ledger. The answer to this problem is for us to use more books- more ledgers. When we do this, we put similar types of transactions together and have a book for each type. In each book, we will not mix together transactions, which are different from each other.
Daybooks - books of original entry
When a transaction takes place, we need to record as much as possible of the details of the transaction. For example, if we sold goods to A Smith on credit. We would also want to record the address and contact information of A Smith and the date of the transaction. Some businesses would also record information like the identity of the person who sold them to A Smith and the time of the sale. Ledger accounts cannot give us all this information so, as a further system of keeping records, firms will also keep books of original entry.
Books of original entry are the books in which we first record transactions. These are not accounts; they are simply books that records the details of a transactions, almost like a diary. The firm will have a separate book for each kind of transaction. The type of the transaction will affect which book it, is entered into. Sales will be entered in one book, purchases in another book, cash in another book, and so on. The books of original entry are used to record the following:
- The date on which each transaction took place - the transactions should be shown in date order;
- Details relating to the sale are entered in a 'details' column;
- A folio column entry is made cross-referencing back to the original 'source document', e.g. the invoice;
- The monetary amounts are entered in columns included in the books of original entry for that purpose.
Advantages of keeping books of original entry
- Accounts can be found more easily by the use of the cross referencing nature of the books of original entry being kept.
- If records are lost then the ledgers and the books of original entry act as a back up for each other.
- Acts as a 'listing device' for posting totals to various accounts, thereby saving labour
Types of books of original entry
Books of original entry are also known as either 'journals' or 'daybooks'. The term 'day book' is, perhaps, more commonly used, as it more clearly indicates the nature of these books of original entry - entries are made to them every day.
The commonly used books of original entry are:
- Sales daybook (or Sales journal) - for credit sales
- Purchases daybook (or Purchases journal) - for credit purchases
- Returns inwards daybook (or Returns inwards journal) - for returns inwards
- Returns outwards daybook (or Returns outwards journal) - for returns outwards
- Cashbook - for receipts and payments of cash and cheques
- General journal (or just 'The journal' if the term 'Daybook' is used for other books of original entry) - for other items
The cashbook is a combined account of the cash account and the bank account. It is the only one of the six daybooks that is both an account and a daybook at the same time. Apart from the cashbook, all the other double-entry accounts are kept in one of the three ledgers.
Petty cash book
Some firms actually keep a separate cashbook and a petty cash book. The petty cash book is for dealing with small items of money. It may be case that the firm has lots of transactions, which involve relatively small amounts of money (e.g. petrol costs, postage costs and so on). If these were entered in the cashbook then it would quickly become cluttered up with entries for small amounts of money.
To stop this happening some firms will keep a petty cashbook, which deals with these items. At the end of each month the monthly totals can then be transferred to the main cashbook. This has the other advantage of allowing another member of staff (usually a junior) the responsibility of dealing with petty cashbook alone and this frees up time for the main cashier of the firm to deal with the main cashbook. Some very large firms may actually use the petty cashbook for dealing with all cash items of expenditure. The main cashbook would then only be used for bank transactions.
All the daybooks are constructed on the basis of transfers from original source documents. These are items of business use that contain financial data related to business transactions. The main source documents a firm is likely to use are as follows:
- Purchase invoice: Received by the firm from suppliers when buying goods on credit
- Sales invoice: Sent by the firm when selling goods on credit
- Debit notes: Received by the firm from suppliers when goods purchased are returned to the original supplier
- Credit notes: Sent by the firm to customers who have returned the goods
- Cheque counterfoils: From the chequebook to show cheques paid out
- Paying slip; Evidence of money paid into bank accounts
- Till rolls: Evidence of cash being received
- Petty cash vouchers: Slips to indicate small amounts of cash being paid
- Bank statements: A summary of the bank account from the banks point of view.
The following daybooks are constructed by the use of each of the following source documents:
Using more than one ledger
Entries are made in the books of original entry. The entries are then summarised and the summary information is entered, using double entry, to accounts kept in the various ledgers of the business. The act of using one book as a means of entering the transaction to the other account, so as to complete double entry, is known as 'posting' the items.
One reason why a set of ledgers is used rather than just one big ledger is that this makes it easier to divide the work of recording all the entries between different bookkeepers.
Types of ledgers
The different types of ledgers most businesses use are:
- Sales ledger. This is for customers' (debtors) personal accounts
- Purchases ledger. This is for suppliers' (creditors) personal accounts
- General ledger. This contains the remaining double entry accounts, such as those relating to expenses, sales, purchases, fixed assets, and capital
Types of accounts
Some people describe all accounts as personal accounts or as impersonal accounts.
- Personal accounts - these are for debtors and creditors (i.e. customers and suppliers)
- Impersonal accounts - divided between 'real' accounts and 'nominal' accounts:
- Real accounts - accounts in which possessions are recorded. Examples are buildings, machinery, fixtures and stock
- Nominal accounts - accounts in which expenses, income and capital are recorded
The use of folio columns
Each double entry account will contain the name of the other account in which the other half other transaction is contained. Apart from very small firms, this does not necessarily make it any easier to locate the other account - there may be hundreds of separate accounts.
A method of speeding up the ability to find an account is the use of folio columns. These are found in both accounts and also in daybooks. An extra column, usually quite small is placed besides the details of each transaction. In this folio column is placed an abbreviated reference to which ledger or daybook the transaction can be located in, and on what page of the relevant book.
For example, if a credit sale was record in the sales daybook with the folio reference SL54, then this would tell us that the customer's account could be found on page fifty-four of the sales ledger. If we actually looked at this relevant account then we would see that it also had a folio reference sending us back to the sales daybook itself. Common abbreviations are as follows:
- SL Sales ledger
- PL Purchases ledger
- GL General ledger
- CB Cashbook
If the entry 'C' appears in the folio column then this refers to a contra entry. This means that both halves of the transaction are contained in the same account. An example of this is dealt with in the section on cashbooks.
- Double entry bookkeeping
- Daybooks and ledgers
- Cashbooks and petty cashbooks
- The sales daybook
- Purchases daybook
- Returns daybooks
- The Journal
- Trading and profit and loss accounts
- Balance sheets
- Features of the VAT system
- VAT and the double entry system
- The trial balance
- Bank reconciliation statements
- Control accounts
- Suspense accounts and the correction of errors
- Computers in accounting
These notes are aimed at people studying for AQA A Level Accounting Unit 1, but will also be suitable for other courses and exam boards.
Originally submitted by duke_stix on TSR Forums.