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FUNDAMENTALS OF FINANCIAL ACCOUNTING
ORGANISING THE BOOKKEEPING SYSTEM
These books are part of ‘ the classifi cation of monetary transactions ’ that we mentioned in
Chapter 1. We begin by classifying accounting transactions in a number of categories – sales
to credit customers, purchases from suppliers, receipts of cash, payments of cash and so on.
We keep a separate record for each of these categories, and we log each transaction as it arises
in the appropriate record.
Most businesses of any size maintain records of their transactions in the following books
of prime entry:
●
sales daybook records goods sold to credit customers;
●
purchases daybook records goods purchased on credit from suppliers (e.g. fi nished goods
for resale in the case of a retail business; or raw materials for use in a manufacturing
business). Traditionally, the purchases daybook was used only for such purchases, as
businesses had few other types of purchase on credit – nowadays businesses have a much
wider variety of expenses, and thus the purchases daybook is often used for all credit
purchases and expenses. In practice, this usually means all purchases and expenses, as
few businesses buy things for immediate payment;
●
returns inwards daybook (or sales returns daybook ) records goods returned by customers,
perhaps because they were defective;
●
returns outwards daybook (or purchases returns daybook ) records goods returned to suppliers;
●
cash book records payments made from the business bank account, and receipts of money
into the business bank account;
●
petty cash book records small payments made in cash (i.e. notes and coins);
●
journal records ‘ unusual ’ items, not falling into any of the categories above. The journal
is also used for rectifying errors in the accounting entries.
Notice that the cash book and petty cash book are also mentioned as ‘ divisions of the
ledger ’ in Section 8.1. This is because these books fulfi l a dual role. They are ‘ of prime
entry ’ because it is important that cash and bank accounts are kept as up to date as possi-
ble, so we want no delays in capturing such transactions, and they are also ledger accounts
because they record the movements in cash and bank.
8.3.1 Source documents
Every transaction should be evidenced by a document showing the details of the transac-
tion. These are known as ‘ source documents ’ . There are different kinds for different types
of transaction. Some originate outside the organisation (such as invoices received from
suppliers), some originate inside the organisation but are sent to outsiders (such as invoices
sent to customers), and others originate inside and remain inside the organisation (such as
details of accruals at the end of the period).
We shall look at the cash books and the journal later in this chapter. First, we shall look
at the fi rst four daybooks described above – those that deal with credit sales and purchases.
8.4 Sales, purchases and returns daybooks
The source document for sales and purchases is known as an invoice; for returns, the source
document is a credit note. A typical invoice (or credit note) will contain the following details:
●
invoice (credit note) number and date;
●
name and address of the supplier;