LESSON 6 DAY BOOKS SALES AND

The objectives: After carefully studying this lesson, you should be able to: 1. appreciate the function of the purchases and sales day books; returns inwards and returns outwards day books 2. recognise the invoice as the source document for credit purchases and credit sales 3. recognise the credit note as the source document for returns entries 4. appreciate the accounting significance of trade discount and how this contrasts with cash discount

LESSON 6: DAY BOOKS: SALES AND

RETURNS DAY BOOKS

The objectives: After carefully studying this lesson, you should be able to:

1 appreciate the function of the purchases and sales day books; returns inwards and returns outwards day books

2 recognise the invoice as the source document for credit purchases and credit sales

3 recognise the credit note as the source document for returns entries

4 appreciate the accounting significance of trade discount and how this contrasts with cash discount

INTRODUCTION

You will learn how transactions are recorded in the purchases and sales day books; how returns transactions are recorded in the Returns Inwards and Returns Outwards day books and posted to the ledgers

You will also learn about the invoice & credit note and how they are used

as source documents to write up these day books

I SALES DAY BOOK

I.1 How to use the sales day book

A firm may sell

(a) completely for cash (including payment through a bank); or

(b) completely on credit; or

(c) partly for cash and partly on credit

Cash sales are recorded by

- debiting cash or bank (in the cash book)

- crediting sales account (in the general ledger)

and this we will continue to do

Credit sales are recorded in the sales day book, so that we are now modifying the way in which, up to now, we have shown credit sale transactions

I.1.1 Invoice

The basis of entry of credit sales is the invoice This is known as a ‘source document’- the point of reference for making an entry in the books of account The invoice is sent by the seller to the buyer It gives details of the goods sold, their prices, and the ‘term of sale’

E.g

INVOICE

Samantha & Company

15 West Street

Old bridge OQ16EP 3 May Year

5

Invoice No XT 436 To: E Lyons

6 Wild Road

Bristol B6 4RN

Quantity Description Unit Price (£) Total (£)

60

40

30

Boxes, square Boxes, round Bags

5

7

8

300

280

240

Less trade discount at

20%

Terms: 2½% cash discount

for payment within one month

820

164

656

Samantha & company, the seller, will keep one or more copies of the invoice From the copy sales invoice, the seller will make entries in the sales day book

I.1.2 Trade discount

Trade discount is an allowance to traders for buying in big quantities

A seller may offer 2 or 3 levels of trade discount (e.g 15%, 20%, 25% ), with those buying the biggest quantity obtaining the highest level of discount

Trade discount is part of the agreement between the seller and the buyer of the goods So we do not record the trade discount in the accounts: we record the net price only

In contrast, cash discount is recorded in the accounts Other conditions still have

to be met by the buyer/ debtor (payment by a certain date, in a suitable form of payment) before (s)he has a right to the discount

I.2 Characteristics of sales day book

Note: - Sales day book is know as a book of prime (original) entry where a

transaction is recorded for the first time, before posting to the Ledgers

- the Sales day book is a listing device only (a form of memorandum); it is not part of double-entry system

- the entry in the day book is quite brief, there is no need to include a description of the goods sold

The form of the Sales day book is as follow, starting with the entry of the invoice shown above:

Samantha & Company SALES DAY BOOK

(£)

“ 29 W Royal XT 440 1,120

To Sales account 3,389 Note that, in the examination, you might not be provided with invoice numbers If

so, you would omit that column, i.e you would show three columns only

Regarding the double-entry in the accounts:

(1) the ‘posting’ to the debtor accounts is made soon after the entry in the sales day book: for one thing, it is desirable to keep the personal accounts as up-to-date as possible;

(2) the total of credit sales for May Year 5 is transferred at the end of the month

to the credit of the sales account (in the General Ledger)

The accounts will appear thus:

SALES LEDGER

Dr M Shawn Total £3,389 (Dr)

May 29 Sales 1,120

GENERAL LEDGER

May 31 Sundries 3,389

I.3 Advantages of having a sales day book

* fewer items (transactions) have to be passed through the double-entry system

* the work of an accounts department can be divided up: one person can maintain the day book while another can concentrate on the ledger

I.4 Book of prime entry

Below is the structure of the Sales day book

Sales invoice

(= source document)

Sales Day Book

(= book of prime entry)

Promptly monthly transfer

Sales Ledger General Ledger

(debtor accounts (Sales account debited) credited)

II PURCHASES DAY BOOK

II.1 How to use Purchases Day book

Cash purchases will continue to be recorded by

• debiting purchases account (in the general ledger)

• crediting cash or bank (in the cash book)

Credit purchases therefore will be recorded first in the Purchases Day book

E.g from the invoice shown in part I: Sales Day book, we can see that E Lyons is

the buyer; therefore the invoice will be recorded in the purchases day book of E Lyons

PURCHASES DAY BOOK

(£)

May 3 Samantha & Co 56/637 656

“ 6 Tenerby & Sons 56/638 330

“ 15 Wenderby & Platt 56/639 412

To Purchases account 1,606

(*) E Lyons would number each invoice as purchases are recorded in his system

PURCHASES LEDGER

Samantha & Co

May 3 Purchases 656

Tenerby & Sons

May 6 Purchases 330

Wenderby & Platt

May 15 Purchases 412

W Fisher

May 23 Purchases 208

GENERAL LEDGER Purchases

May 31 Sundries 1,606

II.2 Book of prime entry

Below is the structure of the Purchases day book

Purchases Invoice

(= source document)

Purchases Day Book

(= book of prime entry)

Monthly transfer promptly

General Ledger Purchases Ledger

(Purchases accounts (creditor accounts debited) credited)

III RETURNS DAY BOOKS

III.1 Returns Inwards Day book

For any reason, the buyer may return the seller the whole or part of the goods previously bought Then, the seller is making an allowance against the original invoice The source document for returns entries is Credit note, so called because the seller will credit the account of the customer (debtor)

E.g Refer to the Invoice in Part I, you will suppose that E Lyons returned some

of the goods on 9 May Year 5

Samantha & Company

15 West Street

Old bridge OQ16EP 9 May Year

5

Credit Note No 6/57

To: E Lyons

6 Wild Road

Bristol B6 4RN

Quantity Description Unit Price (£) Total (£)

Less trade discount at

20%

240

48

192

Samantha & Company would send the credit note to E Lyons and keep one or more copies All credit notes issued would be entered by Samantha & Company

in a Returns Inwards book, alternatively called Sales returns book

From the day book,

• the items will be posted to the credit of customer accounts in the sales ledger

• monthly (or other period) totals will be transferred to the debit of returns inwards account in the general ledger

The form of the Returns inwards day book, including the entry of the credit note shown above, is as follow:

RETURNS INWARDS DAY BOOK

(£)

To Returns Inwards account 476 The ledger entries will appear as follows:

SALES LEDGER

N Peter

May 4 Returns inwards 64

E Lyons

May 9 Returns inwards 192

M Shawn

May 21 Returns inwards 220

GENERAL LEDGER Returns Inwards

May 31 Sundries 476

Below is the structure of Returns Inwards Day book

Credit Note issued

(= source document)

Returns Inwards Day Book

(= book of prime entry)

Monthly transfer promptly

General Ledger Purchases Ledger

(Returns Inwards accounts (debtor accounts

debited) credited)

III.2 Returns Outwards Day book

Credit Notes as received will be entered in a returns outwards day book (or Purchases Returns book)

From the day book

• the items will be posted to the debit of customer accounts in the purchases ledger

• Monthly totals will be transferred to the credit of returns outwards account in the general ledger

RETURNS OUTWARDS DAY BOOK

(£)

To Returns Outwards account 394 The ledger entries will appear as follows:

PURCHASES LEDGER

T Walters

May 3 Returns outwards 86

Samantha & Co

May 9 Returns outwards 192

Wilder & Co

May 24 Returns outwards 116

GENERAL LEDGER Returns Outwards

May 31 Sundries 394 Below is the structure of Returns Outwards Day book

Credit Note received

(= source document)

Returns Outwards Day Book

(= book of prime entry)

Promptly Monthly transfer

Purchases Ledger General Ledger

(Creditor accounts (Returns outwards

accounts

debited) credited)

SUMMARY

1 Cash sales and purchases are not entered in the day books

2 When goods are sold on credit , the seller sends an invoice to the buyer; to the seller it is a sales invoice and to the buyer it is a purchases invoice

3 A trade discount is a reduction in the list prices of goods; trade discount is not recorded in the accounts Cash discount is recorded in the accounts

4 The sales and purchases day books are not part of the double entry system; they are just a listing of the credit transactions for the month

5 The returns day books are not a part of the double entry system; they are just

a listing of the returns inwards and outwards for the month

I hope you will be successful!

GLOSSARY

book of prime entry

credit note (n) Gi ấ y biên nh ậ n hàng tr ả l ạ i day book (n) S ổ nh ậ t ký

invoice (n) Hóa đơ n

promptly (adv) Ngay l ậ p t ứ c

purchases day book

returns inwards day

book (n) S ổ nh ậ t ký hàng bán b ị tr ả l ạ i returns outwards day

book (n) S ổ nh ậ t ký hàng mua tr ả l ạ i sales day book (n) S ổ nh ậ t ký bán hàng

trade discount (n) Chi ế t kh ấ u th ươ ng m ạ i