MOUNTAIN TOP
UNIVERSITY
DEPARTMENT OF ACCOUNTING AND FINANCE
INTRODUCTION TO FINANCIAL ACCOUNTING I
(ACC 101)
3 UNITS
Topic:
SOURCE DOCUMENTS AND SUBSIDIARY BOOKS
Lecturer: Oladipo, S. I.
Source Documents
What are source documents?
Generally, source documents are business documents confirming
the occurrence of financial transaction between two parties.
It is a business paper that shows the nature of a transaction and
provides all the information needed to account for it.
They are written financial information exchange between two or
more parties as evidence of business transaction between them.
These documents are used for the first entries in the books of
accounts. These include invoices, receipts, debit notes, credit notes,
payment vouchers, bank tellers, cheque books, etc.
Introduction to Financial Accounting I 2
Source Documents
Invoice
This is a document that shows the transfer of goods and/or provision
of services for which payment is yet to be received.
Normally, invoice is use for credit transactions which encompasses
both credit purchases and credit sales. Thereafter, the invoices will
be recorded in sales day book or purchases day book if sales or
purchase invoice respectively.
Receipt
This is a document confirming the receipt of money for goods
sold/bought and/or service rendered/received.
Receipts are normally recorded in the cash book as evidence of cash
transactions.
Introduction to Financial Accounting I 3
Source Documents
Debit Note
This is a document used when a customer’s account is to be
increased, and to establish costs against the recipient.
It is usually use to effect correction when a customer/purchaser has
been undercharged.
Credit Note
This is the opposite of debit note. It is a document showing a claim
or refund in favour of the receiver.
It is normally use to correct overcharge on an invoice, allowance for
minor damages to goods, and refund on goods returned.
Introduction to Financial Accounting I 4
Source Documents
Bank Teller
This is usually use for bank lodgement or withdrawals from a bank
account.
Cheque
It is a negotiable instrument normally use to withdraw money from
current account operator in a bank.
Payment Voucher
This is a document normally use to record full details of money paid
for a particular purpose. It shows that money has left a particular
account to another party or for the settlement of financial
obligation.
Introduction to Financial Accounting I 5
Subsidiary Books
Normally, transactions are not posted directly from source
documents to the ledger in financial accounting, but first to
subsidiary books, and thereafter to the appropriate ledger.
Therefore, subsidiary books can be defined as the books into which
financial transactions are recorded on a daily basis as obtained from
the source documents and from which transfer are made at periodic
intervals to the relevant accounts in the ledger.
It is important to note that subsidiary books help in preventing the
ledger from containing too much detail.
Subsidiary books are also known as books of original entries, books
of prime entries, book of first entry, as well as journal.
Introduction to Financial Accounting I 6
Subsidiary Books
Journal
This is a primary book for recording the day to day transactions in a
chronological order. Therefore, it is a historical record of business
transactions or events. It is a form of diary for business transactions.
It is important to note that subsidiary books are not account except
for cash book, rather, their balances are used in updating accounts.
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Subsidiary Books
The usual subsidiary books in financial accounting are:
i. Sales day book or sales journal (use for recording credit sales)
ii. Purchases day book or purchases journal (use for recording
credit purchases)
iii. Returns inward day book or returns inward journal (use for
recording returns from customers)
iv. Returns outward day book or returns outward journal (use for
recording returns to suppliers)
v. Cash book (use for recording receipt and payment of money)
vi. Journal or journal proper (use for recording other transactions)
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Subsidiary Books
Sales Day Book
This is one of the subsidiary books used in recording all goods sold
on credit in their chronological order as evidently obtained from the
credit sale invoices. It cannot be used to record cash sales nor any
other cash transactions.
Normally, it provides detail concerning the date of the sale, the
customer’s name, the invoice number, as well as the amount. The
credit sales which have been recorded in the sales journal will then
be transferred to individual customer’s (receivables) account, while
the total credit sales for the period will be transferred to the sales
account.
Introduction to Financial Accounting I 9
Subsidiary Books
Purchases Day Book
This subsidiary book is use for recording all goods bought on credit
in their chronological order as evidently obtained from the credit
purchase invoices. It cannot be used to record cash purchases nor
any other cash transactions.
Like sales journal, it provides detail concerning the date of the
purchase, the supplier’s name, the invoice number, as well as the
amount. The credit purchases which have been recorded in the
purchases journal will then be transferred to individual supplier’s
(payables) account, while the total credit purchases for the period
will be transferred to the purchases account.
Introduction to Financial Accounting I 10
Subsidiary Books
Returns Inward Day Book
This subsidiary book is use for recording all goods previously sold to
customers, but were returned either completely or partly due to:
i. Deficiency
ii. Shortage in quantity, weight and other measuring discrepancies
iii. Wrong specification, model, colour, etc.
iv. Disagreement between the buyer and seller that can be traced
to either pricing, discount, payment terms, etc.
v. Government policy
When customers return goods, credit notes are issued to the
customers indicating that their personal accounts are being credited
with the value of goods they returned. Therefore, the total of the
returns inward day book is then transferred to the debit side of
returns inward account, while the affected customers’ accounts will
be credited to reduce their indebtedness to the firm.
Introduction to Financial Accounting I 11
Subsidiary Books
Returns Outward Day Book
This subsidiary book is use for recording all goods previously bought
from suppliers, but were returned to the supplier either completely
or partly due to:
i. Deficiency
ii. Shortage in quantity, weight and other measuring discrepancies
iii. Wrong specification, model, colour, etc.
iv. Disagreement between the buyer and seller that can be traced
to either pricing, discount, payment terms, etc.
v. Government policy
When goods are returned to suppliers, debit notes are issued to
them to indicate that their personal accounts are being debited with
the value of goods returned to them. Therefore, the total of the
returns outward day book is then transferred to the credit side of
returns outward account, while the affected suppliers’ accounts will
be debited to reduce the firm indebtedness to the suppliers.
Introduction to Financial Accounting I 12
Subsidiary Books
Journal Proper
Journal proper is use for recording transactions which are
inappropriate for recording into the other subsidiary books, before
being posted to their respective ledgers. More so, the process of
recording a transaction in the journal is called journalising.
Some of the transactions meant for journal proper are:
i. Purchase and sale of non-current assets on credit
ii. Opening entries
iii. Correction of errors
iv. Transfer from one account to another
v. Drawing of goods by the owner from the business for his private
use, as well as
vi. Any other transaction which cannot be recorded in any of the
other subsidiary books.
Introduction to Financial Accounting I 13
Subsidiary Books
Benefits of Journal
Some of the benefits of using journal are as follows:
i. Transactions are recorded in journal as and when they occur,
thereby reducing the chances of error.
ii. It aids in the preparation of ledger.
iii. The entry recorded in journal are self explanatory as it includes
narration.
iv. Any transfer from one account to another account is made
through journal.
v. Every transaction is recorded in chronological order, thereby
reducing the occurrence of manipulations.
vi. It is use to record any other transaction which cannot be
entered in other subsidiary books.
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Subsidiary Books
Steps to Journalising:
The basic steps in entering financial transactions in the journal are as
follows:
i. Ascertain the accounts involved in a transaction.
ii. Ascertain the nature of the accounts involved.
iii. Ascertain the account to be debited, and the one to be credited.
iv. Enter in the date column the date of the transaction, and record
the name of the account to be debited in the particular column,
as well as fill in the amount into the Debit (Dr.) column of the
journal.
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Subsidiary Books
Steps to Journalising: (Cont’d)
v. Record the name of the account to be credited below the name
of the account to be debited, as well as fill in the amount into
the Credit (Cr.) column of the journal.
vi. Write a brief description/explanation of the transaction in
bracket next to the name of the account to be credited.
vii. Draw a line across the entries made to separate one journal
entry from the other.
Introduction to Financial Accounting I 16
Subsidiary Books
Illustration 1
Journalise the following transactions:
N
July 1, 2019 Faithful commenced business with cash 60,000
July 4, 2019 Purchased goods from Bassey on credit 40,000
July 5, 2019 Cash sales to Bimpe 26,000
July 7, 2019 Bought furniture for business use from Woodland by cash 8,500
July 16, 2019 Paid staff salary 10,000
July 18, 2019 Paid rent by cash 2,500
July 20, 2019 Withdrew cash for personal use 3,000
July 22, 2019 Paid Bassey by cash 20,000
July 24, 2019 Sold goods on credit to Albert 15,000
Introduction to Financial Accounting I 17
Subsidiary Books
Cash Book
Cash book is also a subsidiary book used for recording all cash
and/or bank transactions of a business, which can be cash sales,
cash purchases, payment to suppliers, receipt from customers,
acquisition of properties/assets by cash, as well as all other cash
transactions of a business. Unlike other subsidiary books, cash book
follows double entry principles of accounting.
Cash book could be a single column cash book (with cash column
only on both sides of the cash book), or double column cash book
(with cash and bank columns on both sides of the cash book), or
three-column cash book (with cash, bank, and discount column on
both sides of the cash book). More so, there is yet another form of
cash book known as petty cash book.
Introduction to Financial Accounting I 18
Subsidiary Books
Cash Book (Cont’d)
Contra Entry
Contra entry is when double entry is made for a particular
transaction in the cash book i.e. it appears on both sides of the cash
book.
Contra entries are made in the cash book when cash in hand (excess
or idle cash) of a business is being deposited into the bank account
of the business, or vice versa.
Assignment
Compare and contrast trade discount and cash discount.
Introduction to Financial Accounting I 19
Subsidiary Books
Illustration 2
Easy Store is a big merchant in Magboro who sells frozen foods and
dairy products in large quantities to retailers who in turn sell to the
consumers. Mr Easy sales for the first week of January 2019 is as
follows:
Jan. 1 6 cartons of crayfish at N1,350 per carton to Jemima.
8 cartons of gizzard to Femi at N2,500 per carton.
3 cartons of shrimps to Femi at N1,750 per carton, and he
received 10% discount for his patronage.
Jan. 2 Folahanmi bought a carton each of crayfish, gizzard,
shrimps, as well as a crate of egg for N1,350, N2,500,
N1,750, and N850 respectively, and received 5% trade
discount.
Introduction to Financial Accounting I 20
Subsidiary Books
Illustration 1 (Cont’d)
Jan. 3 Jemima return 2 cartons of crayfish
Jan. 4 Mr Easy bought 10 crates of egg from Obalende at N780
per crate. 15 cartons of crayfish from Alade at N1,220 per
carton as well 12 cartons of shrimps at N1,610 per
carton, and received 10% trade discount.
Jan. 5 Mr Easy return 2 crates of egg to Obalende, as well as 3
cartons of crayfish to Alade.
You are required to prepare the necessary subsidiary books for Easy
Store as far as possible.
Introduction to Financial Accounting I 21