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: appreciate the function of the purchases and sales day books; returns inwards and returns outwards day books recognise the invoice as the source document for credit purchases and credit sales recognise the credit note as the source document for returns entries 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 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 May Year Invoice No XT 436 To: E Lyons Wild Road Bristol B6 4RN Quantity Description Unit Price (£) Total (£) 60 Boxes, square 300 40 Boxes, round 280 30 Bags 240 820 Less trade discount at 164 20% 656 Terms: 2½% cash discount for payment within one month 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 or 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 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 Year Invoice No Amount (£) May E Lyons XT 436 656 “ L Wallaby XT 437 418 “ 15 M Shawn XT 438 835 “ 23 T Merlin XT 439 360 “ 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-todate as possible; (2) the total of credit sales for May Year 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 E Lyons Year May (£) Sales Dr 656 L Wallaby Year May (£) Sales Dr 418 M Shawn Year May 15 (£) Sales Dr 835 T Merlin Year May 23 (£) Sales Dr 360 W Royale Year May 29 Total £3,389 (Dr) (£) Sales 1,120 GENERAL LEDGER Sales Cr Year May 31 I.3 Advantages of having a sales day book (£) Sundries 3,389 * 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 Sales Ledger (debtor accounts debited) II monthly transfer General Ledger (Sales account credited) 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 Year Invoice No(*) Amount (£) May Samantha & Co 56/637 656 “ Tenerby & Sons 56/638 330 “ 15 Wenderby & Platt 56/639 412 “ 23 W Fisher 56/640 208 To Purchases account 1,606 (*) E Lyons would number each invoice as purchases are recorded in his system PURCHASES LEDGER Samantha & Co Year May (£) Purchases 656 Tenerby & Sons Year May (£) Purchases 330 Wenderby & Platt Year (£) May 15 Purchases 412 W Fisher Year (£) May 23 Purchases 208 GENERAL LEDGER Purchases Year 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 General Ledger (Purchases accounts debited) promptly Purchases Ledger (creditor accounts 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 May Year Samantha & Company 15 West Street Old bridge OQ16EP May Year Credit Note No 6/57 To: E Lyons Wild Road Bristol B6 4RN Quantity 30 Description Bags Unit Price (£) Total (£) 240 240 Less trade discount at 48 20% 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 Year Credit Note No Amount (£) May N Peters 6/56 64 “ E Lyons 6/57 192 “ 21 M Shawn 6/58 220 To Returns Inwards account 476 The ledger entries will appear as follows: SALES LEDGER N Peter Year May (£) Returns inwards 64 E Lyons Year (£) May Returns inwards 192 M Shawn Year May 21 (£) Returns inwards 220 GENERAL LEDGER Returns Inwards Year 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) III.2 Returns Outwards Day book credited) 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 Year Credit Note No (£) May T Walters 5378 86 “ Samantha & Co 6/57 192 “ 24 Wilder & Co 446 116 To Returns Outwards account The ledger entries will appear as follows: PURCHASES LEDGER T Walters Year May (£) Returns outwards 86 Samantha & Co Year May (£) Returns outwards 192 Wilder & Co Year (£) 394 Amount May 24 Returns outwards 116 GENERAL LEDGER Returns Outwards Year 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 Cash sales and purchases are not entered in the day books 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 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 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 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 (n) Sổ gốc credit note (n) Giấy biên nhận hàng trả lại day book (n) Sổ nhật ký invoice (n) Hóa đơn promptly (adv) Ngay purchases day book (n) Sổ nhật ký mua hàng returns inwards day book (n) Sổ nhật ký hàng bán bị trả lại returns outwards day book (n) Sổ nhật ký hàng mua trả lại sales day book (n) Sổ nhật ký bán hàng trade discount (n) Chiết khấu thương mại ... No(*) Amount (£) May Samantha & Co 56/ 637 65 6 “ Tenerby & Sons 56/ 638 330 “ 15 Wenderby & Platt 56/ 639 412 “ 23 W Fisher 56/ 640 208 To Purchases account 1 ,60 6 (*) E Lyons would number each invoice... INWARDS DAY BOOK Year Credit Note No Amount (£) May N Peters 6/ 56 64 “ E Lyons 6/ 57 192 “ 21 M Shawn 6/ 58 220 To Returns Inwards account 4 76 The ledger entries will appear as follows: SALES LEDGER... Samantha & Company SALES DAY BOOK Year Invoice No Amount (£) May E Lyons XT 4 36 6 56 “ L Wallaby XT 437 418 “ 15 M Shawn XT 438 835 “ 23 T Merlin XT 439 360 “ 29 W Royal XT 440 1,120 To Sales account