A business will enter many transactions during the year.
All of these need to be recorded and summarized to produce the entity’s financial statements.
The flow of information:
Business transactions are recorded on source documents.
These documents are the source of all the information recorded by a business.
Examples include sales and purchase orders, invoices and credit notes.
Books of prime entry
The information from a source document is entered in Books of prime entry.
These can be:
Sales Day Book
Purchase Day Book
The totals of Books of prime entry for the week or month are posted to the nominal ledger.
Each month, journal entries will be made when monthly accounts are being finalised, then the ledger accounts will be balanced off and a trial balance extracted.
Trial balance is then used for the preparation of the financial statements.