CIMA - C2 Fundamentals of Financial Accounting
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50 4: Sources, records and the books of prime entry ⏐ Part B Accounting systems and accounts preparation
Most businesses
'
analyse
'
their sales as it gives the managers of the business useful information which helps them to
decide how best to run the business. For example, a business sells boots and shoes. The sale to Smith was entirely
boots, the sale to Alex was entirely shoes and the other two sales were a mixture of both. Then the sales day book might
look like this.
SALES DAY BOOK
Sales ledger Total amount
Date Invoice Customer ref invoiced Boot sales Shoe sales
20X0
$
$
$
Jan 10
247
Jones & Co
SL 14
105.00
60.00
45.00
248
Smith Ltd
SL 8
86.40
86.40
249
Alex & Co
SL 6
31.80
31.80
250
Enor College
SL 9
1,264.60
800.30
464.30
1,487.80
946.70
541.10
3.2 The purchase day book
The purchase day book lists all invoices received from suppliers.
An extract from a purchase day book might look like this.
PURCHASE DAY BOOK
Purchase Total amount
Date Supplier ledger ref invoiced Purchases Electricity etc
20X8
$
$
$
Mar 15
Cook & Co
PL 31
315.00
315.00
W Butler
PL 46
29.40
29.40
EEB
PL 42
116.80
116.80
Show Fair Ltd
PL 12
100.00
100.00
561.20
444.40
116.80
The
'
purchase ledger reference' is a reference to the purchase ledger which is a record of what each supplier is owed.
There is no
'
invoice number
'
column in this example, because the purchase day book records other people
'
s invoices,
which have all sorts of different numbers. However, some businesses might allocate their own sequential reference
number to purchase invoices received.
The purchase day book analyses the invoices which have been received. In this example, three of the invoices related to
goods which the business intends to re-sell (called simply
'
purchases
'
) and the other invoice was an electricity bill.
4 Sales and purchase returns day books
4.1 The sales returns day book
The sales returns day book lists goods (or services) returned (or rejected) by customers for which credit notes are
issued.
An extract from the sales returns day book might look like this.
SALES RETURNS DAY BOOK
Sales ledger
Date Customer and goods ref Amount
20X8 $
30 April Owen Plenty
3 pairs 'Texas' boots SL 82 135.00
Key term
Key term
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Part B Accounting systems and accounts preparation ⏐ 4: Sources, records and the books of prime entry 51
Some sales returns day books analyse what goods were returned; it makes sense to keep as complete a record as
possible.
4.2 The purchase returns day book
The purchase returns day book lists goods (or services) returned to suppliers (or rejected) for which credit notes have
been received or are expected.
An extract from the purchase returns day book might look like this.
PURCHASE RETURNS DAY BOOK
Purchase ledger
Date Supplier and goods ref Amount
20X8 $
29 April Boxes Ltd
300 cardboard boxes PL 123 46.60
Question
Invoice received
An invoice received from supplier is recorded in:
A The sales day book
B The purchase day book
C The sales returns day book
D The purchases returns day book
Answer
B is correct.
Question
Invoice sent out
An invoice sent to a customer is recorded in:
A The sales day book
B The purchases day book
C The sales returns day book
D The purchases returns day book
Answer
A is correct.
Key term
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52 4: Sources, records and the books of prime entry ⏐ Part B Accounting systems and accounts preparation
5 Cash books
The cash book lists all money received into and paid out of the business bank account.
5.1 The cash book
The cash book records transactions involving the bank account, such as cheque payments, lodgements of cash and
cheques into the bank account, standing orders, direct debits and bank charges.
Some cash, in notes and coins, is usually kept on the premises in order to make occasional payments for small items of
expense. This cash is accounted for separately in a petty cash book (which we will look at shortly).
5.2 Example: cash book
At the beginning of 1 September, Robin Plenty had $900 in the bank.
During 1 September 20X7, Robin Plenty had the following receipts and payments.
(a) Cash sale – receipt of $80
(b) Payment from credit customer Hay $400 less discount allowed $20
(c) Payment from credit customer Been $720
(d) Payment from credit customer Seed $150 less discount allowed $10
(e) Cheque received for cash to provide a short-term loan from Len Dinger $1,800
(f) Second cash sale – receipts of $150
(g) Cash received for sale of machine $200
(h) Payment to supplier Kew $120
(i) Payment to supplier Hare $310
(j) Payment of telephone bill $400
(k) Payment of gas bill $280
(l) $100 in cash withdrawn from bank for petty cash
(m) Payment of $1,500 to Hess for new plant and machinery
Solution
The receipts part of the cash book for 1 September would look like this.
CASH BOOK (RECEIPTS)
Date
Narrative
Total
20X7
$
1 Sept
Balance b/d*
900
Cash sale
80
Receivable: Hay
380
Receivable: Been
720
Receivable: Seed
140
Loan: Len Dinger
1,800
Cash sale
150
Sale of non-current asset
200
4,370
2 Sept
Balance b/d*
1,660
*
'
b/d
'
= brought down (ie brought forward)
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Part B Accounting systems and accounts preparation ⏐ 4: Sources, records and the books of prime entry 53
The cash received in the day amounted to $3,470. Added to the $900 at the start of the day, this comes to $4,370.
However this is not the amount to be carried forward to the next day. First we have to subtract all the payments made
during 1 September.
The payments part of the cash book for 1 September would look like this.
CASH BOOK (PAYMENTS)
Date
Narrative
Total
20X7
$
1 Sept
Payable: Kew
120
Payable: Hare
310
Telephone
400
Gas bill
280
Petty cash
100
Machinery purchase
1,500
Balance c/d
1,660
4,370
Payments during 1 September totalled $2,710. We know that the total of receipts was $4,370. That means that there is a
balance of $4,370 – $2,710 = $1,660 to be
'
carried down
'
to the start of the next day. As you can see this
'
balance
carried down
'
is noted at the end of the payments column, so that the receipts and payments totals show the same figure
of $4,370 at the end of 1 September. And if you look to the receipts part of this example, you can see that $1,660 has
been brought down ready for the next day.
It is usual to analyse the receipts and payments. With analysis columns completed, the cash book given in the examples
above might look as follows.
CASH BOOK (RECEIPTS)
Date
Narrative
Total
Receivables
Cash sales
Other
$
$
$
$
20X7
1 Sept
Balance b/d
900
Cash sale
80
80
Receivable – Hay
380
380
Receivable – Been
720
720
Receivable – Seed
140
140
Loan – Len Dinger
1,800
1,800
Cash sale
150
150
Sale of fixed asset
200
200
4,370
1,240
230
2,000
CASH BOOK (PAYMENTS)
Date
Narrative
Total
Payables
Petty cash
Wages
Other
$
$
$
$
$
20X7
1 Sept
Payable – Kew
120
120
Payable – Hare
310
310
Telephone
400
400
Gas bill
280
280
Petty cash
100
100
Machinery purchase
1,500
1,500
Balance c/d
1,660
4,370
430
100
–
2,180
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54 4: Sources, records and the books of prime entry ⏐ Part B Accounting systems and accounts preparation
5.3 Bank statements
Weekly or monthly, a business will receive a bank statement. Bank statements are used to check that the balance shown
in the cash book agrees with the amount on the bank statement. This agreement or
'reconciliation' is the subject of a
later chapter.
5.4 Petty cash book
The petty cash book lists all cash payments for small items, and occasional small receipts.
Most businesses keep a small amount of cash on the premises to make occasional small payments in cash – eg to pay
the milkman, to buy a few postage stamps etc. This is often called the cash float or petty cash account. Petty cash can
also be used for occasional small receipts, such as cash paid by a visitor to make a phone call or to take some
photocopies.
There are usually more payments than receipts and petty cash must be
'
topped up
'
with cash from the business bank
account.
Under what is called the imprest system, the amount of money in petty cash is kept at an agreed sum or
'
float
'
(say
$100). Expense items are recorded on vouchers as they occur.
$
Cash still held in petty cash
X
Plus voucher payments
X
Must equal the agreed sum or float
X
The total float is made up regularly (to $100, or whatever the agreed sum is) by means of a cash payment from the bank
account into petty cash. The amount paid into petty cash will be the total of the voucher payments since the previous
top-up.
The format of a petty cash book is the same as for the cash book, with analysis columns for items of expenditure.
5.5 Summary of books of prime entry
Business transactions are recorded on source documents which are listed and summarised in books of prime entry.
Question
Books of prime entry
State in which books of prime entry the following transactions would be entered.
(a) Your business pays A Brown (a supplier) $450.00.
(b) You send D Smith (a customer) an invoice for $650.
(c) Your accounts manager asks you for $12 urgently in order to buy some envelopes.
(d) You receive an invoice from A Brown for $300.
(e) You pay D Smith $500.
(f) F Jones (a customer) returns goods to the value of $250.
(g) You return goods to J Green to the value of $504.
(h) F Jones pays you $500.
Key term
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Part B Accounting systems and accounts preparation ⏐ 4: Sources, records and the books of prime entry 55
Answer
(a) Cash book
(b) Sales day book
(c) Petty cash book
(d) Purchase day book
(e) Cash book
(f) Sales returns day book
(g) Purchase returns day book
(h) Cash book
6 Coding systems
The coding system is the means by which data is entered into the accounting system.
Each account in an accounting system has a unique code used to identify the correct account for a posting (to be keyed
into the computer if the system is computerised). If there are two suppliers called Jim Jones, you can only tell their
accounts apart by a different code.
Coding also saves time in copying out data because codes are shorter than 'longhand' descriptions. For the same
reason, and also to save storage space, computer systems make use of coded data.
6.1 Coding purchase invoices
In purchase accounting systems, the most obvious examples of codes are as follows.
• Supplier account numbers (to identify each individual supplier)
• Nominal ledger account numbers (which identify the accounts which record each category of purchases,
such as goods, electricity etc)
• Inventory item codes (to identify each individual inventory line)
These are all codes a business sets up and applies internally. External codes which affect the business include bank
account numbers and bank sort codes.
Various coding systems (or combinations of them) may be used when designing codes. The systems are described below.
6.2 Sequence codes
Sequence codes make no attempt to classify the item to be coded. It is simply given the next available number in a
rising sequence. New items can only be inserted at the end of the list and therefore the codes for similar items may be
very different. For example:
1 = saucepans
2 = kettles
3 = pianos
4 = dusters
Sequence codes are rarely used when a large number of items are involved, except for document numbering (eg invoice
numbers).
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56 4: Sources, records and the books of prime entry ⏐ Part B Accounting systems and accounts preparation
6.3 Block codes
Block codes provide a different sequence for each different group of items. For example , suppliers may be divided up
according to area.
North East code numbers 10,000-19,999
North West code numbers 20,000-29,999
Scotland code numbers 30,000-39,999
The coding of supplier accounts is then sequential within each block.
6.4 Significant digit codes
Significant digit codes use some digits which are part of the description of the item being coded. An example is:
5000 Electric light bulbs
5025 25 watt
5040 40 watt
5060 60 watt
5100 100 watt
etc
6.5 Hierarchical codes
Hierarchical codes are allocated on the basis of a tree structure, where the relationship between items is of utmost
importance. A well known example is the Universal Decimal Code used by most libraries. For example:
5 Business
5 2 Finance
5 2 1 Cost accounting
5 2 1.4 Standard costing
5 2 1.4 7 Variance analysis
5 2 1.4 7 3 Fixed overhead variances
6.6 Faceted codes
Faceted codes consist of a number of sections, each section of the code representing a different feature of the item. For
example in a clothing store there might be a code based on the following facets.
Garment Customer Colour Size Style
type type
If SU stood for suit, M for man and B for blue, a garment could be given the code SU M B 40 17. Similarly ND F W 14 23
could stand for a woman's white nightdress size 14, style 23. One of the great advantages of this system is that the type
of item can be recognised from the code.
Faceted codes may be entirely numeric. For example, a large international company allocates code numbers for each
suppliers' representative.
Digit 1 Continent (eg America – 1, Europe – 2)
Digits 2/3 Country (eg England – 06)
Digit 4 Area (eg North – 3)
Digits 5/6 Representative's name (eg Mr J Walker – 14)
The code number is then expressed as 2/06/3/14.
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Part B Accounting systems and accounts preparation ⏐ 4: Sources, records and the books of prime entry 57
6.7 Coding in the nominal ledger
A nominal ledger will consist of a large number of coded accounts. For example, part of a nominal ledger might be as
follows.
Account code
Account name
100200 Plant and machinery (cost)
100300
Motor vehicles (cost)
300000 Total receivables
400000
Total payables
500130 Wages and salaries
500140
Rent
500150 Advertising expenses
500160
Bank charges
500170 Motor expenses
500180
Telephone expenses
600000 Sales
700000
Cash
A business will, of course, choose its own codes for its nominal ledger accounts. The codes given in the above table are
purely imaginary.
Question
Coding
State what type of code is being used in paragraph 6.7 above. Explain your answer.
Answer
This is a significant digit code. The digits are part of the description of the item being coded. So 100000 represents non-
current assets and the '200' in 100200 represents plant and machinery, '300' motor vehicles, etc.
Question
Coding systems
An item is given the code 472.615. This is an example of what type of code?
A Sequence code
B Significant digit code
C Block code
D Hierarchical code
Answer
D This is an example of a hierarchical code.
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58 4: Sources, records and the books of prime entry ⏐ Part B Accounting systems and accounts preparation
Chapter roundup
• Source documents record business transactions. Examples are invoices, sales and purchase orders, wage slips, credit
notes, goods received notes, till rolls etc. They are the source of all information for the financial statements.
• Business transactions are sales or purchases, the paying or receiving of money or recognising that money is owed or
owing.
• Books of prime entry are used to list and summarise the information on source documents.
The following are the main books of prime entry.
– Sales day book
– Purchase day book
– Sales returns day book
– Purchase returns day book
– Cash book
– Petty cash book
– Journal (described in the next chapter)
• The cash book lists all money received into and paid out of the business bank account.
• Under what is called the imprest system, the amount of money in petty cash is kept at an agreed sum or 'float' (say
$100). Expense items are recorded on vouchers as they occur.
• Business transactions are recorded on source documents which are listed and summarised in books of prime entry.
• The coding system is the means by which data is entered into the accounting system.
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Part B Accounting systems and accounts preparation ⏐ 4: Sources, records and the books of prime entry 59
Quick quiz
1 Five pieces of information normally shown on an invoice are:
(1) _______________________
(2) _______________________
(3) _______________________
(4) _______________________
(5) _______________________
2 A business issues a credit note. Where is this first recorded?
A In the sales ledger
B In the sales returns day book
C In the sales day book
D In the journal
3 The sales day book is:
A A record of cash received from customers
B A record of the balances on customers accounts
C A record of invoices received
D A record of credit sales made
4 The purchase day book is:
A A record of cash paid to suppliers
B A record of the balances on suppliers accounts
C A record of invoices received from suppliers
D A record of invoices sent to customers
5 Fill in the blanks.
The cash book records _______________________________________________________________
_________________________________________________________________________________ .
The petty cash book records _________________________________________________________
_________________________________________________________________________________ .
6 On June there was $90 in the petty cash tin. By the end of June there were vouchers for $35 of expenses and $5 had
been paid in (by a member of staff for some private phone calls). A cheque for $30 was cashed to 'top up' the petty
cash. What is the imprest total?
A $30
B $40
C $60
D $90
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