CHAPTER2
BOOKS OF PRIME ENTRY
The following details relate to a carpet retailer Adeel Traders for the month of November. Each transaction can be
related to relevant book of prime entry as follow:
ACCOUNTING FOR SALES
• This is the discount given by a business to its customers
DISCOUNT ALLOWED
• This is a definite price reduction given to a customer at the time of
sales transaction
For example, an entity sells an item with list price of Rs. 100 to a
Trade discount credit customer who negotiates 5% discount at
the time of transaction, the sales invoice of Rs. 95 shall be issued
and sales revenue of Rs. 95 will be recorded.
• A settlement discount might be offered in order to persuade
Cash discount / credit customers to pay earlier. For example, a cash
discount of 4% may be offered to a customer if pays within 10
Settlement discount / days, otherwise he will pay full amount within 30
Prompt payment discount days that is normal credit term of the business.
Maria Enterprises (ME) sold goods of Rs. 10,000 to Zahra Traders (ZT) on 8th
August 2021 to be paid on 31st August 2021. However, if ZT pays within 10 days,
it will be entitled to 4% cash discount and will have to pay only Rs. 9,600.
How the above transactions along with following independent scenarios will be
treated in the books of ME on 8th August and on the date of payment:
(a) ME expected that ZT will not pay within 10 days and ZT actually paid on 31st
August.
(b) ME expected that ZT will not pay within 10 days but ZT actually paid on 17th
August.
(c) ME expected that ZT will pay within 10 days and ZT actually paid on 17th
August.
(d) ME expected that ZT will pay within 10 days but ZT actually paid on 31st
August.
DISHONOURED CHEQUES
These are cheques received from customers where subsequently the bank refuses to make payment.
When a business receives a cheque from a customer it recognizes that as an amount paid. If the business
presents
the cheque to the bank for payment and the bank refuses to accept it (perhaps because of insufficient funds in
the customer’s account) the business is still owed the money and must reverse the original entry.
The double entry for this reversal is (debit Receivables, credit Bank).
ACCOUNTING FOR
PURCHASES
• This is the discount given by a supplier to the business.
DISCOUNT Received
• This is definite price reduction given by a supplier. The invoice is
issued at the reduced amount so there are no
double entry problems caused by this type of discount. The
Trade discount purchase is simply recorded at net (of trade discount)
amount.
• A settlement discount might be offered by a supplier to
Cash discount / persuade earlier payment. For example, a cash discount
of 4% may be offered by a supplier if the business pays within
Settlement discount / 10 days, otherwise full amount will be paid within
Prompt payment discount 30 days as per normal credit terms
Maria Enterprises (ME) sold goods of Rs. 10,000 to Zahra Traders (ZT) on 8th August 2021 to be paid on 31st
August 2021. However, if ZT pays within 10 days, it will be entitled to 4% cash discount and will have to pay
only Rs. 9,600.
How the above transactions along with following independent scenarios will be treated in the
books of ZT on 8th August and on the date of payment:
(a) ZT did not take advantage of settlement discount terms and paid on 31st August.
(b) (b) ZT took advantage of settlement discount and paid on 17th August.
CONTRA SETTLEMENT
A business might sell goods or services to another business, and also buy goods or services from the same
business. The other business is both a customer and a supplier and might therefore be a receivable and a trade
payable at the same time. When this happens, the two businesses might agree to offset the amounts that they
owe each other, leaving a net amount payable by the business with the higher debt.
The double entry for this offset is (debit Trade payables, credit Trade receivables)
ACCOUNTING FOR
CASH
TYPES OF CASH BOOK
There are four basic types of a cash book.
• Single column cash book
• Two column cash book
• Three column cash book
• Petty cash book
Single column cash book
Two column cash book
Three column cash book
Petty cash Book
Petty cash is cash (notes and coins) held by a business to pay for small items of expense, in situations where it
is more convenient to pay in notes and coin than to pay through the bank account.
Imprest system: A very common petty cash system is called the imprest system.
Under this system a set amount is established (say Rs.10,000). This set amount is called the imprest.
At any moment in time, the petty cash balance plus the amounts on invoices and notes should sum to the
imprest.
Periodically the invoices are removed and replaced by cash to re-establish the imprest in cash.
GENERAL JOURNAL
The general journal (journal for short) is a book of prime entry that is used to record transactions that are not
recorded in any other book of original entry.
The journal might be used to provide a record and explanation of:
• year-end adjustments;
• settlement discounts;
• contra settlement;
• correction of errors; or
• any other adjustment.
In practice, not all entries are recorded in a journal or journalized but of course it is possible to write a journal
for any transaction.
VOUCHERS AS AN ALTERNATIVE TO DAY BOOKS
Voucher is an internal document prepared as proof that a monetary transaction has occurred between two parties
and it is often supported by bill, invoice, copy of cheque, etc. In business, a voucher can be used for a variety of
purposes, sometimes for payment of cash in a transaction, acting as a receipt, or indicating that an invoice has
been approved for payment.
In practice, especially in computerized accounting systems, voucher system replaces (or supports) the books of
prime entry. Every transaction is recorded on relevant vouchers as input to accounting system, which produces
ledgers, trial balances and other reports through using automated processes.