Book of Prime Entry Meaning
A book or record where certain types of transactions are recorded before recording it in the double-entry book-keeping system, and hence the prime entry. The common books of prime entry include the daybook, the cash book, and the journal. Here the information of the business transactions is recorded.
In our discussion today, we will uphold the topic of Books of Prime Entry in the case of Accounting and its importance in the sector. This is the basis of studying accountancy which the students must be enthusiastic about.
Books of Prime Entry in Accounting
In business, there are numerous daily financial transactions. So, there is a separate book to keep the track of the receipts and payments of this transaction.
The ledger accounts in a business are the main source of information that is used to prepare financial statements. While, if a business is required to update their ledgers then each time a transaction occurs, the ledger accounts would quickly become clustered and chances of errors might be made. This would also be a very lengthy process.
To avoid all such complications, the transactions are first recorded in a book of prime entry. The main books of prime entry are:
Sales daybook
Purchase daybook
Sales return daybook
Purchases return daybook
Bank Book
Cash Receipts Book
Cash Payments Book
Petty Cash Receipts Book
Petty Cash Payments Book
Journal
Importance of Books of Prime Entry
Now we are quite sure that the Books of Prime Entry are very much prevalent in the business, for their advantageous characteristics. The following are the advantages of a journal:
Provides a Chronological Record: Journal book records transactions in the occurrence of their date. Hence, it is possible to get day-to-day information.
The Book of Prime Entry Minimizes the possibility of errors: The nature of the transaction affects the financial position of the business; this is ascertained by recording and analyzing the transaction.
Helps to finalize the accounts: With the book of prime entry, it provides a basis for ledger posting and the ultimate draft of the Trial Balance.
Future references: References can be given to the financial transactions that become easy as these transactions are similar and are recorded in one journal.
Few mistakes and can be detected easily: With the help of Prime Entry, the mistakes in the ledger accounts can be easily detected.
Lessens the chance of business fraud, negligence, and mistakes: The Chronological recording of the financial transactions reduces the chance of business frauds, negligence, and mistakes.
Journals are shown in clarity: Journals show all these transactions in great detail so the business is not mandated to rewrite them in detail in the ledger section, thus it keeps the ledger accounts brief and uncluttered.
Perfect back-up of each other: If records are by chance lost then along with the ledger and the books of original entry the organization will get through. They act as a perfect backup for each other.
Bases the control on one ground: Handling of each type of journal entry by a different member of the staff causes variation, this prevents a single person from having exclusive control on the accounting system. This leads to fraud and is difficult to make. Hence, it is more likely that errors would be identified by this system.
Ensuring that the documents are not skipped: To ensure that the documents do not go unrecorded, the source of documents are normally copied twice with consecutive numbers and are noted in day books while recording the transactions.
The Significance of Prime Entry Books and Ledgers in both Integrated and Interlocking Accounting Systems
The term 'ledger' refers to a book. There are commonly three ledgers in accounting systems:
Wages, sales, purchases, electricity, travel, advertising, rent, insurance, repairs, receivables, payables, and non-current assets are all recorded in the General or nominal ledger. Although cash and bank accounts are legally part of this ledger, they are frequently kept in a separate book due to the volume of cash and bank transactions.
The Payables ledger (sometimes known as the creditors' ledger or the purchase ledger) is a record of all payments made to creditors. Although the overall amount owing to suppliers is noted in the general ledger, the specifics of what is owed to whom are documented here as well. Each supplier has his or her account. The payables balance in the general ledger should match the total of the amounts owed in this ledger.
The Receivables ledger (also known as the debtors' ledger or the sales ledger) is a book that keeps track of money owed to you. The overall amount owed by customers is recorded in the general ledger, but the specifics of what is owed from whom are also noted here. Each credit consumer has his or her account. The total of the sums owing in this ledger should match the main ledger's receivables balance.
These were the meaning and importance of The Book of Prime Entry.
FAQs on Books of Prime Entry: Explained
1. What are the Books of Prime Entry in accounting?
Books of Prime Entry, also known as subsidiary books or daybooks, are the accounting books where transactions are first recorded in chronological order. They serve as the initial point of entry before transactions are posted to the main ledger. This practice ensures that the ledger remains uncluttered and that transactions are systematically organised.
2. Why are transactions first recorded in Books of Prime Entry instead of directly in the ledger?
Recording transactions directly into the ledger for a business with numerous daily transactions would be highly inefficient. It would lead to a cluttered and bulky ledger, increasing the chances of errors and making it difficult to locate specific entries. Using Books of Prime Entry first helps to:
- Group similar transactions together (e.g., all credit sales in a Sales Book).
- Reduce the amount of detail in the main ledger.
- Enable division of labour, as different clerks can handle different subsidiary books.
- Minimise the possibility of errors and fraud.
3. What are the main types of subsidiary books used in accounting?
The main types of subsidiary books, or Books of Prime Entry, are designed to record specific types of frequent transactions. The primary ones include:
- Cash Book: For recording all cash and bank transactions.
- Purchases Book (or Purchases Day Book): For recording all credit purchases of goods.
- Sales Book (or Sales Day Book): For recording all credit sales of goods.
- Purchases Return Book: For recording goods returned to suppliers.
- Sales Return Book: For recording goods returned by customers.
- Bills Receivable Book: For recording details of all bills of exchange received.
- Bills Payable Book: For recording details of all bills of exchange accepted.
- Journal Proper: For recording transactions that do not fit in any other subsidiary book, such as opening entries, closing entries, and the purchase of assets on credit.
4. Which book is considered the principal Book of Prime Entry and why?
The Journal Proper is often considered the principal or fundamental Book of Prime Entry. This is because it embodies the core principle of the double-entry system by analysing each transaction into its debit and credit aspects. While other subsidiary books are specialised for high-volume transactions, the Journal Proper is the versatile, all-purpose book for entries that cannot be recorded elsewhere, making it foundational to the accounting process.
5. What is the specific purpose of a Purchase Day Book?
The specific purpose of a Purchase Day Book is to exclusively record all credit purchases of goods—the items that a business buys for the purpose of resale. It does not record cash purchases (which go into the Cash Book) or the credit purchase of assets (which are recorded in the Journal Proper). It provides a chronological record of invoices received from suppliers.
6. How does a Sales Day Book help in managing customer accounts?
A Sales Day Book meticulously records all credit sales of goods. This helps in managing customer accounts by providing a clear, chronological list of all invoices issued to customers. The total from this book is posted to the Sales Account in the General Ledger, while individual entries are posted to each customer's account in the Receivables Ledger. This makes it easy to track how much each customer owes at any given time.
7. What is the difference between a Cash Book and a Petty Cash Book?
A Cash Book is a primary subsidiary book that records all significant cash and banking transactions, including receipts and payments. It functions as both a journal and a ledger account for cash and bank. In contrast, a Petty Cash Book is used to record very small, routine expenses like postage, stationery, or daily travel. It typically operates on an 'imprest system' to control minor cash outflows efficiently, preventing the main Cash Book from being cluttered with numerous small entries.
8. What are the key advantages of maintaining Books of Prime Entry?
Maintaining Books of Prime Entry offers several significant advantages for a business, including:
- Chronological Record: It provides a detailed, date-wise history of all financial transactions.
- Error Minimisation: By grouping transactions and simplifying ledger posting, it reduces the likelihood of mistakes.
- Fraud Prevention: The systematic recording and division of duties help in establishing internal checks, lessening the chance of fraudulent activity.
- Efficiency: It saves time and effort by summarising similar transactions before posting to the ledger.
- Basis for Ledger Posting: It serves as the official source from which entries are posted to the various accounts in the ledger.
9. How do the Books of Prime Entry facilitate the preparation of a Trial Balance?
Books of Prime Entry are the starting point for the accounting cycle that ends with the Trial Balance. The periodic totals from subsidiary books (like the Purchases Book or Sales Book) are posted to their respective control accounts in the General Ledger. After all transactions are posted from these books to the ledger accounts, the balances of all ledger accounts are extracted. The Trial Balance is then prepared by listing these debit and credit balances to verify the arithmetical accuracy of the posting process.
10. What is the fundamental difference between a Journal and a Ledger?
The fundamental difference lies in their function and order. The Journal is the book of first or original entry where transactions are recorded chronologically as they occur. The process is called 'journalising'. The Ledger, on the other hand, is the principal or main book of accounts where transactions are posted from the journal to their respective accounts (e.g., Cash A/c, Sales A/c). The process is called 'posting'. In essence, the journal is a diary of transactions, while the ledger is a classified summary of all transactions related to a particular account.
