Books of Prime Entry, Sales and Purchases: Day Books, Returns, Discounts and Contra Entries

In a real business there are far too many transactions to post each one separately to the ledger. A shop may make a thousand credit sales a month. So transactions are first written in special records called books of prime entry, and only the totals are posted to the ledger accounts.

This topic explains the books of prime entry, the source documents that feed them, and how credit sales, credit purchases, returns and discounts are recorded in them. It also introduces the control accounts for receivables and payables and the contra entry that offsets amounts owed both ways.

Examiners test this material in short Section A items, such as which document starts the sales day book or which book records a trade discount, and in Section B parts that ask you to define the day books, list source documents or record a month of sales and purchases in the day books. Read the trial balance topic and the topic on double entry, journals and ledgers first.

The next topic covers value added tax, which is charged on most of the invoices described here.

Books of prime entry

Book-keeping is the process of recording financial transactions in the accounting records, the books, of an entity, with a separate account for each type of transaction. In practice transactions are often not entered directly in the ledger accounts as they happen. They are first entered in special records called books of prime entry, also called books of original entry. Each book is designated for one type of transaction.

Periodically the totals from these books are transferred to the relevant ledger accounts in the general ledger by double entry.

Books of prime entry summarise large numbers of similar transactions, such as credit sales, credit purchases and cash receipts and payments. They also reduce the number of postings to the general ledger. Instead of 1,000 separate sales entries, a business totals the sales and makes one double entry. Because the ledger then holds one total account for all receivables, the business needs another record of what each customer owes. The solution has three parts.

• A control account is a summary account in the general ledger that reflects the total of a large number of individual transactions recorded in a subsidiary ledger. Examples are the receivables control account, the payables control account and a payroll control account.
• The Receivables ledger, also called the sales ledger or debtors ledger, holds an account for each customer.
• The Payables ledger, also called the purchases ledger or creditors ledger, holds an account for each supplier.

The process of transferring details from the books of prime entry to the ledger accounts is called Posting. The control account and the ledger are updated at the same time. The balance on the control account should always equal the total of the individual balances in the ledger. If they differ, an error has occurred and must be found. This is the subject of the topic on control accounts.

The control account belongs to the double entry system, so every entry in it needs an opposite entry elsewhere in the general ledger. The receivables ledger does not. It mirrors the entries in the control account without recording the other side, which is why it is called a Memorandum account. The same applies to purchases and the payables ledger.

The main accountant maintains the general ledger and extracts information from it, and accounts clerks handle the daily postings to the subsidiary records.

Source documents

Every entry in a book of prime entry should rest on a document. Not every document leads to an accounting entry. Sales and purchase orders, despatch notes and delivery notes only describe the progress of an order. The documents that create an entry are the invoice and the credit note.

Documents in the sales cycle

A business sells for cash, by coin, debit card, credit card, cheque or banker’s draft, or on credit.

For example, a business invoices a customer ₦20,000 and later agrees to reduce the amount by ₦1,000 because some goods were poor. It issues a credit note for ₦1,000, and the customer now pays ₦19,000.

Documents in the purchases cycle

Purchases mirror sales, except that the business is the buyer.

Background: debit notes and other documents. The examiner has set items on the debit note. A Debit note is sent by a supplier to a customer when the original invoice was understated, to ask for the extra amount. A customer can also raise one to tell a supplier that goods have been returned, and the supplier then answers with a credit note.

A pro-forma invoice is a quotation and not a demand for payment, so no entry is made from it. A cheque stub, a payment voucher, a paying-in slip and a receipt are source documents for the cash book. The journal itself is a book of prime entry, so it is not a source document.

Recording credit sales

The sales day book is the book of prime entry that makes the first record of sales on credit. Credit sales are listed in date order. At regular intervals, daily, weekly or monthly, the total of the sales since the last posting goes to the general ledger by double entry:

Each individual sale is also posted to the receivables ledger by debiting the account of that customer. This keeps the control account in agreement with the total of the customers’ balances.

The general ledger posting is a debit of ₦75,000 to the receivables control account and a credit of ₦75,000 to the sales account. It may be written as a journal entry with the narration “Being posting of the sales from the sales day book”. In the receivables ledger the Danish, Fahad and Hasan accounts are debited with ₦25,000, ₦10,000 and ₦40,000.

Sales returns

The sales returns day book records goods returned by customers, often because they are damaged or unsatisfactory. A credit note is issued for each return. At regular intervals the total goes to the general ledger and each amount to the customer’s account:

Suppose four customers A, B, C and D buy on credit for ₦40,000, ₦50,000, ₦30,000 and ₦20,000, a total of ₦140,000. A returns goods of ₦5,000. B pays ₦40,000 and C pays ₦20,000, a total of ₦60,000 in cash received.

The total of the four balances, ₦75,000, equals the balance on the receivables control account: debit ₦140,000 less credits of ₦5,000 and ₦60,000. Each account in the receivables ledger shows the credit sales to that customer, returns shown by credit notes, payments received, and the amount currently owed.

Discounts: trade and settlement

Businesses give two kinds of discount.

Trade discount

A trade discount is a reduction in price given to a customer, for example for buying in bulk. The invoice is issued at the reduced price, so there is no double entry problem: the business simply makes a sale at a lower price. A building merchant selling cement at ₦500 a bag, with a trade discount to ₦450 for orders of ten bags or more, records a sale of 20 bags at ₦9,000.

The ₦200 of discount is never recorded in the books. That is why a trade discount appears on the invoice and in no ledger account.

Settlement discount

A settlement discount, also called a cash discount, is offered to encourage credit customers to pay before the end of the agreed credit period. When a business grants one it is a discount allowed. The customer decides whether to take it. If a merchant allows 3% for payment within 30 days, Benjamin Builders owing ₦80,000 pays only ₦77,600 (97%) if he pays in time and the full ₦80,000 if he does not.

A discount allowed is first treated as an expense, recorded separately from sales revenue. It then explains how International Financial Reporting Standard (IFRS) 15 Revenue from Contracts with Customers changes the way the revenue is measured. IFRS 15 requires revenue to be recognised at the amount the business expects to receive (paragraph 47, which says the entity considers the contract terms and its customary business practice).

A settlement discount is variable consideration (paragraphs 50 and 51 list discounts among the examples), and paragraphs 50 to 59 govern how it is estimated.

Adjustments to revenue must also be made in the customer’s account in the receivables ledger. Background: in many examination questions, especially those with a cash book that has a discount allowed column, the discount is recorded the traditional way: Dr Discount allowed (an expense), Cr Receivables when the customer pays less than the invoice. Follow the method the question asks for.

When it is silent, the discount allowed column of the cash book is the usual treatment.

When the examiner combines both kinds of discount, deduct the trade discount first and then compute the settlement discount on the reduced figure. A seller invoices 30 units at a list price of ₦4,000, with a 10% quantity discount and a 5% early-settlement discount. The list total is ₦120,000 and the trade discount is ₦12,000, so the invoice is ₦108,000. If the customer pays within the window, the settlement discount of ₦5,400 leaves ₦102,600 to pay.

The receivables control account

The receivables ledger control account is the account in the general ledger that holds the total of receivables. It records all transactions with credit customers. Debit entries add to the total of receivables and credit entries reduce it.

A dishonoured cheque is a cheque received from a customer that the bank later refuses to pay, for instance because of insufficient funds in the customer’s account. The business recorded the cheque as a payment when it arrived, but it is still owed the money, so the original entry is reversed: Dr Receivables, Cr Bank.

Only transactions on credit sales are recorded in the control account. Cash sales (Dr Bank, Cr Sales) and changes in the allowance for irrecoverable debts are not. The balance on the control account is described as Trade receivables on the statement of financial position. Bad debts written off and the allowance are the subject of a later topic. Different names are in use for the same records.

Recording credit purchases

The purchases day book is the book of prime entry for credit purchases. They are listed as they occur. Periodically the total goes to purchases and to other expense accounts, with the other side posted to the payables control account, and the individual amounts update the suppliers’ balances in the payables ledger.

The payables ledger also records invoices for rent, telephone, electricity and gas and similar costs, and details of these expenses are posted from it to the right expense accounts. To make that possible the day book usually has Analysis columns that show the type of expense.

The postings are Dr Purchases 8,500, Dr Energy expenses 3,000 and Dr Sundry expenses 3,100, with Cr Payables control account 14,600 in total. Check the analysis: 8,500 + 3,000 + 3,100 = 14,600. Each invoice is also credited to the supplier in the payables ledger.

Purchases returns

The purchases returns day book records goods returned to suppliers. When goods go back, the business receives a credit note from the supplier, and the day book records the credit notes. The total goes to the general ledger by Dr Payables control account, which reduces the amount owed, and Cr Purchase returns (or possibly Cr Purchases). Each return is debited to the supplier in the payables ledger.

Suppose purchases from suppliers A, B, C and D are ₦30,000, ₦60,000, ₦20,000 and ₦70,000, a total of ₦180,000. Goods of ₦20,000 are returned to B. Payments are ₦29,000 to A and ₦25,000 to D, a total of ₦54,000, and A also allows a discount of ₦1,000.

The payables control account has credits of 180,000 and debits of 20,000, 54,000 and 1,000. The balance carried down is a credit of 105,000, which equals the total of the supplier balances. The ledger contains an account for each supplier of goods or services on credit, with the purchases, returns, payments and the amount still owed.

Discounts received

Discounts received are settlement discounts offered by suppliers, which the business takes up by paying early and so paying less. The invoice is recorded in payables at its full amount when it arrives. The discount is recognised only when the business pays within the time limit and becomes entitled to it. The payment entry is:

The credit to discount received is a reduction in an expense. In the statement of profit or loss it is shown as other income or as a negative expense. Two points matter in the exam. Discounts received Do not change total purchases or the cost of sales, which is different from purchase returns, which do reduce purchases.

And they are accounted for as an addition to profit in the period and not as a deduction from purchases.

For example, a supplier invoices ₦80,000 and offers 3% for payment within 20 days. The buyer pays in 19 days. At purchase: Dr Purchases ₦80,000, Cr Trade payables ₦80,000. At payment: Dr Trade payables ₦80,000, Cr Bank ₦77,600 (97%), Cr Discount received ₦2,400 (3%). The discount is also recorded in the supplier’s account in the payables ledger.

The payables control account

The payables ledger control account is the general ledger account for total trade payables. Its opening balance is a credit, because amounts payable are liabilities. It records all transactions with credit suppliers, and since most purchases are on credit, it records virtually all purchases. Credit entries add to payables and debit entries reduce them.

The balance is described as trade payables on the statement of financial position. Other names for the same records are the purchases journal, the creditors ledger or purchases ledger. The payables control account is also called the purchases ledger control account, total purchases control account, creditor control account, accounts payable control account or bought ledger adjustment account.

Contra entries

A business may both sell goods to and buy goods from the same party, which then is a receivable and a trade payable at the same time. The two businesses may agree to offset the amounts, leaving a net amount payable by the one with the higher debt. A contra entry is a double entry that offsets one amount against another.

It must be made in the general ledger and in both subsidiary ledgers.

• General ledger: Dr Payables control account, Cr Receivables control account. This reduces both balances.
• Receivables ledger: credit the party’s account, reducing what it owes.
• Payables ledger: debit the party’s account, reducing what the business owes it.

If Z owes the business ₦50,000 and the business owes Z ₦50,000, the contra entry of ₦50,000 clears both.

The ideas in more depth

Why prime entry reduces effort

A day book is a list. The business adds up the list and makes one entry in the general ledger, however many invoices are on it. Without the books of prime entry the general ledger would have one posting for every transaction.

The control account is double entry and the ledger is not

This is the point that students most often forget. If you debit the receivables control account, you must credit another general ledger account, such as sales. Debiting a customer in the receivables ledger needs no credit, because the ledger is a memorandum. That is how the customer’s details can be kept without breaking the rule that debits equal credits.

Returns and discounts compared

A return takes goods back, so it reduces the purchases or sales, and the amount owed falls by the invoice value of the goods. A settlement discount leaves the goods with the buyer and only changes the amount paid. For the buyer, a return reduces purchases but a discount received is a separate credit.

For the seller, a return reduces sales, while a discount allowed is an expense or an adjustment to revenue under IFRS 15.

What the dishonoured cheque does

Receiving a cheque feels like being paid, but the money is not safe until the bank pays. If the cheque bounces, the bank account falls and the customer owes the debt again. The entry is the exact reverse of the original receipt.

Analysis columns and the other expenses

The purchases day book holds more than goods. Invoices for rent, power and stationery are also entered, and the analysis columns let one total per column be posted to the right expense account.

Sources and references

• IFRS 15 Revenue from Contracts with Customers: paragraph 47 (determining the transaction price), paragraphs 50 to 59 (variable consideration, including discounts at paragraph 51), as applied to settlement discounts.

Worked example: a month at Ogbomosho Supplies

1. Sales day book.
   400 + 250 + 350 = 1,000.
   Posting: Dr Receivables control 1,000, Cr Sales 1,000.
2. Sales returns day book. 30. Posting: Dr Sales returns 30, Cr Receivables control 30.
3. Purchases day book.
   Total 500 + 100 + 80 + 40 = 720, analysed as purchases 600, electricity 80 and sundry 40.
   Posting: Dr Purchases 600, Dr Electricity 80, Dr Sundry 40, Cr Payables control 720.
4. Purchases returns day book. 20. Posting: Dr Payables control 20, Cr Purchase returns 20.
5. Payment and discount. Dr Payables control 300, Cr Bank 290, Cr Discount received 10.
6. Contra. Chuka owes 350 less 200 paid = 150. The business owes Chuka 100. The contra entry is 100: Dr Payables control 100, Cr Receivables control 100. Chuka’s receivables account falls to 50 and its payables account to nil.
7. Receivables control. Debit: sales 1,000. Credits: returns 30, cash 500, contra 100 = 630. Balance carried down: debit 370.
8. Receivables ledger.
   Ade 400 − 300 = 100.
   Bola 250 − 30 = 220.
   Chuka 350 − 200 − 100 = 50.
   Total 100 + 220 + 50 = 370.
   It agrees with the control account.
9. Payables control. Credit: purchases 720. Debits: returns 20, payments 290, discount 10, contra 100 = 420. Balance carried down: credit 300.
10. Payables ledger.
    Zenith 500 − 20 − 290 − 10 = 180.
    Chuka 100 − 100 = 0.
    Power Co 80.
    Print Ltd 40.
    Total 180 + 0 + 80 + 40 = 300.
    It agrees with the control account.
11. Discount calculation. A separate sale of 40 units at a list price of ₦5,000 with 15% trade discount and 4% settlement discount for payment within 14 days. List total ₦200,000.
    Trade discount 15% = ₦30,000, so the invoice is ₦170,000.
    Settlement discount 4% × ₦170,000 = ₦6,800, so the customer who pays in time pays ₦163,200.
    Under IFRS 15, if the customer is expected to take it, the sale is recorded at ₦163,200.

Common mistakes in the exam

• Naming the journal as a source document. It is a book of prime entry.
• Posting the individual customer amounts to the control account as well as the total. The control account takes only the total.
• Debiting purchases returns to purchases and then also to payables. The entry is Dr Payables control, Cr Purchase returns.
• Recording a trade discount in a ledger account. It never appears in the books.
• Computing the settlement discount on the list price instead of on the figure after trade discount.
• Deducting discounts received from purchases, which wrongly changes the cost of sales.
• Forgetting that a dishonoured cheque makes the customer a debtor again: Dr Receivables, Cr Bank.
• Making the contra entry in the general ledger only. It is needed in the receivables and payables ledgers too.
• Posting a cash sale to the receivables control account. Only credit sales belong there.

Quick revision

• Prime entry: sales day book, sales returns, purchases day book, purchases returns, cash book, journal.
• Source documents that start an entry: sales invoice, credit note, purchase invoice. Orders, despatch, delivery and goods received notes, and statements do not.
• Credit sales: Dr Receivables control, Cr Sales. Returns: Dr Sales returns, Cr Receivables control.
• Credit purchases: Dr Purchases (and expenses), Cr Payables control. Returns: Dr Payables control, Cr Purchase returns.
• Control account: part of double entry. Receivables and payables ledgers: memorandum accounts.
• Trade discount: on the invoice, no entry. Settlement discount allowed: expense or revenue adjustment (IFRS 15). Discount received: credit to discounts received, no effect on purchases.
• Dishonoured cheque: Dr Receivables, Cr Bank.
• Contra: Dr Payables control, Cr Receivables control, and both ledgers.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer.

Section A style: multiple choice

Section B style: written questions

A further written question

Model answers

Spotted a mistake? Tell us and we will check it.