Subsidiary Books (Books of Original Entry) and Source Documents

Source Documents
All entries in the books must be supported by documentary evidence. Therefore the source documents
provide detailed information for the preparation of the books of accounts. It constitutes the source of all
original information in the financial transaction of a business.
The Need For Source Documents
1. They serve as evidence of financial transactions thereby making audit possible.
2. They serve as evidence of financial transactions thereby guiding against fraud.
3. In some cases, there could be more than one source document for a transaction but they would
complement one another.
Main Source Documents
The main source documents are as highlighted below:
1. Sales Invoice
2. Purchases Invoice
3. Credit notes
4. Debit notes
5. Payment vouchers
6. Bank pay-in-slips
7. Cheque counterfoils
8. Receipts
1. Sales Invoice
A sales invoice serves as the source document to records in the sales day book. This is a document
sent by the seller (usually for credit sales) requesting the buyer to pay for the amount stated on the
invoice for goods or services rendered to him. Usually bills are sent for service rendered while
invoices are sent for goods sold.
A sales invoice would contain the following particulars:
1. Name and address of the seller and purchaser
2. Date of the sales
3. Description and quantity of the goods sold
4. Unit price and the total amount of invoice
5. Amount charged for Value Added Tax (VAT)
6. Conditions and terms of sales such as trade discount, cash discount and the date payment fall due
7. Signature of the parties.
2. Purchases Invoice
A purchase invoice serves as the source document to records in the purchase day book. It contains the
same details as the sales invoice but the only difference is that purchases invoice are in the books of
the buyer and are received from various customers.
3. Credit Note
A credit note is a document relating to goods returned by the buyer or refunds to him when the buyer
has been overcharged. Goods may be returned by a customer for any of the following reasons:
1. Damage to the goods before delivery
2. Wrong specification from the one ordered by the customer.
The purpose of credit note is to inform the buyer that his indebtedness has been reduced by the
amount stated on the credit note.
Credit note issued represents returns on sales while credit note received represents returns on
purchases. A credit note is made out in red to distinguish it from an invoice.
4. Debit Note
The buyer normally issue a debit note to a supplier to request for a credit note. The buyer may not
debit the account of the supplier until his request is approved by him evidenced by the issue of the
credit note to the buyer.
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 A debit note is also prepared whenever it becomes necessary for one reason or the other to increase
the amount due from a debtor. An example is where the seller has under charged a customer on an
invoice.
It can however be said that while credit note is issued in order to correct an overcharge, debit notr is
issued to correct an under charge.
5. Payment Voucher
In an organization every payment must be supported by a payment voucher. Payment voucher is an
authorizing document for payment for a particular expense or service. The voucher must be checked
and authorized by a responsible an authorizing officer before cash can be paid.
6. Bank pay-in slip
This serves as evidence of cheque and cash paid into the bank by an organization. It is the major
source document for recording in the bank columns of cashbook (debit side).
Pay-in-slip contains the following information:
1. Name of the business and account number
2. Name of the person paying in the cheque or cash
3. If it is cash, the total amount of each cash denomination is stated
4. Column for signature of the person paying in
5. Column for signature of the bank official receiving the cheque with the bank’s official stamp.
7. Cheque Counterfoils
Cheque counterfoils serve as evidence of payment to creditors through the bank and withdrawals
made for office or personal use. In most organisations, al cash received must be paid to the bank and
all cash payments must be made through the bank (except petty cash that is operated through the
imprest system). Therefore for many business, cheque counterfoils have become major source
documents for recording in the bank column of the cash book (credit side).
8. Receipts
Receipts are issued for cash received from a customer for goods sold or services rendered to him. The
original is issued to the buyer and it represents the document for recording cash paid in his cash book.
The seller retains the duplicate which is the document for recording cash received in the cashbook of
the seller.

Subsidiary Books
Subsidiary books are books of original or prime entry. They are used to make first entry of transactions.
Before any entry can be made in the ledgers, it must first be recorded in the subsidiary books. However,
the subsidiary books do not form part of the double entry.
Note that we have two books of accounts i.e the principal book which is the ledger and the subsidiary
books.

Reasons for Subsidiary books

1. To know the total sales and purchases.
2. They are used as books to make first entry of transactions.
3. To keep tract of the people to whom money is owed and of the people who owed money.
4. They provide records of transactions in chronological order.
5. They help to prevent error. The total in the book of original entry can be reconciled with the total in
the individual accounts.

Division of Subsidiary Books

Subsidiary books can be divided into six books which will be explained separately to show their nature.
1. Sales day book or journal.
2. Purchases day book or journal
3. Sales returns or return inwards journal.
4. Purchases returns or return outwards journal.
5. General journal or principal journal or journal proper.
6. Cash book
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Sales Day Book or Journal
This is a book of original entry in which credit sales are recorded before posting to the ledgers. In the
sales day book, cash transactions must not be recorded. Equally, sales of fixed assets must be excluded
from the day book. The sales journal is not part of the double entry and it is always entered by the seller
from the sales invoice.
Posting to sales journal
Total of sales day book will be transferred to the credit side of sales account in the general ledger and
personal account debited. The act of entering in the customers account is known as posting.
Trade Discounts
This is the allowance off the selling price or catalogue price of goods supplied. It is normally given to the
buyers by the manufacturers. Trade discounts are simply a percentage deduction from the retail price.
Therefore, no entry for it should be made in the double entry records.
Specimen of a sales day book
Date Particulars Folio Amount Total
N N
Name of customer stating x x
the quantity of goods sold
The procedures are:
(a) Invoices are typed as and when sales occur.
(b) The sales day book is entered daily.
(c) The sales account in the general ledger is credited with the total
(d) The customers account in the double entry system is debited.
Purchases Day Book
This is the book for recording goods bought on credit from the suppliers and it can be referred to as
purchases journal. Addition of the purchases journal is done monthly or weekly and the total will be
posted to the debit side of the purchases account and credited to the personal ledgers of suppliers. It has
column for date, particulars, folio, amount and total.
The procedures are:
(a) Purchases day book is entered daily.
(b) The purchases account in the general ledger is debited.
(c) The suppliers account in the double entry system is debited.
Purchases Returns Book
This is the book for recording goods returned to suppliers as a result of one reason or the other e.g.
defectiveness, damages or wrong kind etc. another name it has is Return Outwards day book. The
treatment of discount will be the same with the treatment in the purchases day book.
The procedures are:
(a) Return outwards book is entered immediately goods are returned.
(b) The return outwards account in the general ledger is credited.
(c) The suppliers account is debited.

Sales Returns Journal

The sales returns journal is used to record goods returned by customers. It may be due to wrong colour,
wrong type, inferior quality or breakage. It is also called Return inwards day book.
The procedures are:
(a) Return inwards book is entered immediately goods are returned by the customers.
(b) The return inwards account in the general ledger is debited.
(c) The customer’s account is credited.
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The Journal (Principal Journal)
The journal is a book of original entries or prime entries which records transactions in chronological order
(i.e the day to day recording of transactions arranged according to when something happened). It is a
book that is used to record transactions that do not fit into other subsidiary books. Journal can equally be
referred to as a daily record into which transactions are entered and classified as debit and credit before
they are posted to the ledgers. It has columns for date, particulars, folio, debit and credit. The entries are
recorded and explanations will be given to show the nature of the transactions. This is referred to as
narration.
Advantages of Journal
(a) Its main purpose is to provide a convenient record of transactions in chronological order.
(b) Journal reduces the risk of omission of transactions.
(c) The explanation of the entries are made known by the journal.
Uses of Journal
1. Opening entries.
2. Closing entries.
3. Correction of errors
4. Transfer between accounts
5. Purchase of fixed assets on credit.
6. Sales of fixed assets on credit.
7. To answer questions on double entry principle.
Classes of Entries
The entries in the principal journal may be simple or composite.
1. Simple Entries: Here, Only two accounts are involved. One account will be debited and the other
credited.
2. Composite Entries: There may be several accounts to be debited and only one account to be credited
and vice versa. This kind of entry is known as composite entry.

Specimen of a typical Journal

Date Particulars Folio Debit Credit
Name of account to be debited x
Name of account to be credited x
Narration

The Double Entry System of Accounting

Double entry principle: The double entry principle states that “for every debit entry, there must be a
corresponding credit entry and for every credit entry, there must be a corresponding debit entry”. It is the
foundation of book keeping. Experience has however shown that many students fail accounts due to lack
of indepth knowledge of this principle. The principle operates on the basis that every financial transaction
must have two aspects i.e Dual aspect concept.
Summary of the principle
Dr. Receiver (Receiving account)
Cr. Giver (Giving account)
The procedures are:
(a) The keeping of books of accounts.
(b) The division of each book into separate accounts.

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(c) Each account is divided into two halves, the left hand side, debit (Dr) and the right hand side,
Credit (Cr).
(d) All transactions must be recorded into two accounts, one account is debited and the other account
credited.
(e) The giver (giving account) is credited with the value of whatever it gives and the receiver
(receiving account) is debited with the same amount.
Cash and Credit Transactions
Financial transactions may be classified into cash and credit transactions.
a. Cash Transactions: This is the type of transaction whereby the buyer pays immediately for
goods bought. Here, no account will be opened in respect of a supplier or customer.
Steps in recording cash transactions
(a) Prepare two accounts
(b) Identify the giving account and the receiving account
(c) Now apply the double entry principle i.e credit the giver and debit the receiver.
Note: All transactions must pass through the cashbook.
b. Credit Transactions: The majority of commercial transactions are termed credit transactions
which means that the transfer of ownership take place before payment to the supplier. In fact, every
transaction should be treated as credit transaction unless otherwise stated.
Steps in recording credit transactions
(a) Prepare day books: sales, purchases, returns and journal proper
(b) Prepare two accounts
(c) Identify the giving account and the receiving account
(d) Apply the principle of double entry i.e Debit the receiver and credit the giver.

Graphical Representation
Transactions

Cash transactions Credit transactions

Cash Book Day books

Ledger accounts Ledger accounts

Rules on Debit and credit Item

A debit entry represents: A credit entry represents:
1. An increase in the value of assets A decrease in the value of assets
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 2. A decrease in the amount of liability An increase in the value of a liability
3. An item of expenditure or expense An item of income or gain

LEDGER
Ledger is a principal book which contains group of accounts. It is the final destination of all transactions
in the subsidiary books. It is the most important book of accounts. It can be defined as a book which
contains in a classified and summarized form, a permanent record of all transactions. A ledger is used for
the double entry book keeping.
Importance of Ledger Accounts
(1) They serve as the means of keeping permanent records of assets, liabilities, income and expenses.
(2) They provide relevant information that is required to prepare the income statement and the statement
of financial position (Balance sheet).
(3) They give the origin of every transaction and the parties involved.
(4) They show the details of the movement in each account. For instance, a bank account will show what
amount had been deposited or how much had been withdrawn and for what purpose.
(5) The trial balance is extracted from the ledger accounts at the end of the accounting period.
Divisions of Ledger
The classification of ledger are as follows:
(1) Personal Ledger: These are the ledgers for creditors’ accounts and debtors accounts eg. Purchases
and sales ledger.
a. Sales Ledger or Debtors Ledger: This contains all the personal accounts of customers otherwise
referred to as debtors
b. Purchases or Creditors ledger: This contains the personal account of suppliers of goods and
services otherwise referred to as creditors.
(2) General Ledger: These are the ledgers for real and nominal accounts eg. Expenses accounts,
income accounts, sales account, purchases account and asset accounts.
(3) Private Ledger: These are the ledgers for capital and drawings account of a proprietor.

Format of a ledger
Dr. Cr.
Date Particulars folio Amount Date Particulars Folio Amount

Definition of an account
An account can be defined as a record in a double entry system that is kept for each class of asset,
liability, revenue and expenses. The principles of double entry have been adequately explained and the
next thing is the application of the system in the principal book (ledger). It should be noted however that
when entering a transaction in the ledger (posting) always use the name of the other account in the
account you are posting.
Type of Accounts
Accounts can be classified into two:
(1) Personal Accounts
(2) Impersonal Accounts
Personal Accounts
These are accounts for the name of individuals, firms, corporate bodies or even partnership eg. Segun
account, Emmanuel Nig Ltd accounts, Debtors and creditors account. Before these accounts can exist,
there must have been credit transactions unlike the real accounts where both cash and credit transactions
are involved.

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Impersonal Accounts
These are accounts for properties, items of expenditure and income. It can be further divided into two
namely:
(a) Real Account: These are accounts for tangible things we can see, touch or move e.g cars, cash,
goods, land and building, machinery etc. They are accounts for assets.
(b) Nominal Accounts: These are accounts for expenses incurred, income received, losses or gains e.g
rent account, discount allowed account, insurance and interest accounts.
Note:
(1) When you are faced with any financial transaction, ask yourself these questions:
a. What two accounts are affected?, name them.
b. Which one is to be debited and which one is to be credited.
(2) Unless you are told that cash or cheque is involved , the transaction must be assumed to be on credit.
(3) Put yourself in the position of the owner of the business (proprietor) and always ask yourself “How
does this transaction affect me?
(4) Avoid the mistake of posting on the wrong side of an account.

Restrictions on the use of the words purchases and sales in Accounts

Always know that purchases is only used when goods meant for resale are bought by the firm. The prime
intention is selling and not for use. Any other item bought should be called by its name eg. To a motor
dealer, all motor vehicles bought for resale are referred to as “purchases”. A computer system bought for
office use should be tagged computer or equipment and not purchases.
Similarly sales is only used when goods bought for resale are sold. The sale of an old asset (eg. plant)
should be referred to as disposal of plant and not sales as the firm is not into sales of plants.