Source documents, books of prime entry and discounts

Last time

Before we start: last time, in Double entry, ledger accounts and the divisions of the ledger, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Where the numbers come from

Every entry in the accounts starts with a piece of paper or a digital record: an invoice, a receipt, a credit note. These are source documents. They are first listed in books of prime entry, then posted to the ledger. This lesson covers both, and the two kinds of discount.

Source documents

Here are the main source documents, and what each one shows.

Books of prime entry

Books of prime entry list transactions of the same type, before they are posted to the ledger. The sales journal lists credit sales, from sales invoices. The purchases journal lists credit purchases, from purchase invoices. The sales returns journal and purchases returns journal list goods returned, from credit notes.

The other books

The cash book records all cash and bank receipts and payments. It is both a book of prime entry and part of the ledger. The general journal records anything else: buying assets on credit, correcting errors, and opening entries. Each journal entry shows the debit, the credit, and a narrative explaining it.

Posting the sales journal

Each credit sale is posted to the debit of that customer's account in the sales ledger. The total of the sales journal for the month is posted to the credit of the sales account in the general ledger. So the double entry is complete: debits to customers, one credit to sales.

Why use books of prime entry?

They keep similar transactions together, so the ledger is not crowded with detail. Only monthly totals need posting to the general ledger, which saves time and reduces errors. And the work can be divided among different staff.

Trade discount

A trade discount is a reduction in the list price given to another business, usually for buying in bulk or because it is in the same trade. It is deducted on the invoice, and never entered in the ledger accounts. A list price of 2,000 dollars with 25 per cent trade discount gives an invoice of 1,500 dollars.

Cash discount

A cash discount is a reduction for paying within a set time, such as 2 per cent if paid within 30 days. Two per cent of the 1,500 dollars invoice is 30 dollars, so a quick payer pays 1,470. Cash discount is recorded: discount allowed, given to customers, is an expense; discount received, from suppliers, is income.

Trade or cash discount?

The two discounts compared.

Advantages of a sales journal

A question asked for one advantage of keeping a sales journal. One answer: it reduces the number of entries in the sales account. Another: all credit sales are listed in one place, so they are easy to find and check. One clear advantage, well stated, earns the mark.

Mistakes that lose marks

Mistake one: recording trade discount in the ledger. Mistake two: putting cash sales in the sales journal. It is for credit sales only. Mistake three: treating discount allowed as income. It is an expense. The fix: the right book for the right transaction, and the right discount treatment.

The full-marks tip

The full-marks tip: match each source document to its book of prime entry. Never record trade discount; record cash discount as allowed, an expense, or received, an income.

On one card

So, on one card: books of prime entry. Keep it for revision.