Another description for books of prime entry, are a manual accounting system of special journals and subsidiary ledgers.
In a basic accounting system, or one that follows the original Venetian method, is to write a English statement of a transaction at time of occurrence in a diary. Then , a this entry , which has at least a detail of a date, an amount, a sentence describing what happened , is then transferred to the general journal as an entry as soon as possible, the entry will be a first step in accounting classification, naming accounts to debit and amounts to debit, and accounts to credit and amounts to credit, where sum of debits equals sum of credits, and the entry is dated. There may be a further description written in brackets under the debits and credits, which may describe more information , such as quantities sold, and to whom, or quantities bought, and from whom, and receipt numbers ).
The general journal entry is then latter entered in the appropriate general ledger accounts , with a date and possibly a back reference to the journal page, and forward references in the journal entry to the ledger account ID numbers to indicate posting from the general journal to the general ledger of accounts.
In a special journal / subsidiary ledger system , or books of prime entry system, several constraints are added:
Instead of making an entry for every transaction in the general journal, there are several journals as named above.
The posting rules are:
- credit sales are entered in the day sales journals. Likewise, sales returns are entered in the day sales returns journals.
- purchases on credit are entered in the day purchases journal. Likewise, purchase returns are entered in the purchase returns journal.
- cash payments i.e. payments by cheque , or by eftpos, or via direct bank transactions such as bank fees and interest paid, are made to the cash payments journal.
- cash receipts i.e. payments by cheque, direct deposits , visa receipts with reference numbers ,are made in the cash receipts journal.
- At the end of each day, any entries into credit sales, sales returns, credit purchases, purchase returns, cash receipts, and cash payments, are posted to the relevant subsidiary ledger accounts. There will be subsidiary accounts receivables for each regular customer, and subsidiary accounts payable for each regular supplier.
- In general , credit sales are posted as debits to the relevant subsidiary account receivables, and cash receipts from that customer are posted as credits that account. Credit purchases are credits in the subsidiary accounts payables, and cash payments to the same supplier are debits to that same subsidiary accounts payable.
- At the end of each month, each column of the credit sales journal, credit purchases journal, cash receipts journal, and cash payments journal, as well as the sales returns and purchase returns journal, is totalled at the bottom of each column, and then posted to the relevant control ledger account. For instance, a more elaborate credit sales journal for gst collections , will have a debit column for accounts receivables, whose end of month total is posted to accounts receivables control, as well as a credit column for sales ledger account, which is not posted daily but totalled for monthly posting, and a credit column for GST collections, which is also posted as a monthly credit to the GST collections account (liability). Likewise,credit purchase journal will have a debit column for purchases , a debit column for GST paid, and a credit column for accounts payable. The credits for accounts payable are posted daily to subsidiary accounts payable(creditors) , and the monthly total of accounts payable as a credit to accounts payable control. The GST paid debit column is posted as a monthly total to GST paid (a contra-liability account). The purchases are totalled monthly , and posted to the purchases account , which in the periodic inventory system , is , at period's end, added to the beginning inventory in the income statement to give cost of goods available for sale, and the stocktake determined ending inventory subtracted to find the cost of goods sold, which can be subtracted from gross revenue, to get gross profit.
- the reason for the daily posting to subsidiary ledger accounts , and the monthly posting to the control ledger accounts, is that a monthly cross check can be made by doing a monthly schedule of accounts receivables, and a schedule of accounts payable : the sum of the ending balances of one type of subsidiary ledger accounts should equal the balance of the control account after the monthly control posting e.g. subsidiary accounts receivable balance sum equals accounts receivable control balance.
- the cash receipts journal and the cash payments journal have the expected main case of debit and credit columns , but have additional columns for special cases:
cash receipts journal has a debit column for cash in bank, and a credit column for
accounts receivable ( because of cash payments from customers honoring credit terms ) . However , there will be other debit and credit columns for other uses of cash
- cash sales will need a credit column for sales, and a credit column for gst collections.
- Discounts allowed for credit sales early repayment will need a debit column for discount allowed (financial) expense account, and a debit column for gst collections , in order to reverse previously accrued gst collection equal to 10% of the discount allowed.
- A sundry credit column may be needed for cash receipts such as loans (a credit to a liability account ), or sale of non-current/ non-inventory assets.
cash payment journal, for the main function of paying suppliers/creditors, has a debit column for accounts
payable, a debit column for gst outlays (refundable asset), and a credit column for cash in bank. Cash in bank is the source account for cash, and each credit to this asset account reduces its balance.
- For the extended supplier case of early payment within discounted credit terms, there will be a discount receivedcredit column (other income credit), and a credit for gst outlays ( a reduction in refund for 10% of the discount allowed).
- For the secondary cases of payment of bills, insurance, rent , rates , and for cash payments for supplies and equipment, a debit column for other or sundry cash payments ( debits for assets purchased, or debits for expense accounts).
- cash receipts journal has a debit column for cash in bank, and a credit column for accounts receivable ( because of cash payments from customers honoring credit terms ) . However , there will be other debit and credit columns for other uses of cash receipts :-
- The general journal is for other entries that are not related to cash or credit, such as period-opening, reversing entries; period-ending , adjusting entries, ; and closing entries transferring income and expense account balances to the summary profit and loss temporary account.
- Closing of temporary income and expense accounts can be to a temporary profit and loss summary account , made initially in the general journal, and then posted to the income accounts, expense accounts, and profit and loss summary account..
- petty cash payments may operate with the interest system, where there is a fixed interest amount for which a petty cash fund is reimbursed to, and on reimbursement, an entry is made in the cash payments journal, with debits for the previously petty cash expenses recorded in the petty cash voucher book, and a credit to cash in bank for the cheque that is used to reimburse the petty cash. (If there are also receipts of petty cash, then reimbursement might consist of the sum of unaccounted petty cash payments vouchers, less the sum of unaccounted petty cash receipt vouchers, with possibly separate voucher books for payments and receipts).