Double entry accounting 3 / 4

Books of Prime Entry

As we have seen in the previous chapter, repetitive transactions may initially be captured in day books (also known as books of prime entry) 

e.g., all the sales invoices may be listed in the sales day book. 

These day books are not part of the double-entry system but enable the number of double-entries to be reduced by ascertaining an aggregate

Nominal Ledger

The total of the day book, or the single transaction, is recorded in the double-entry system by being posted to the nominal accounts in the general/nominal ledger. 

Each nominal account (or T account) has two sides:

  • DEBIT side (DR)

    = the left hand side

  • CREDIT side (CR)

    = the right hand side

ACCA FA C1c Nominal Ledger graph

Nominal accounts are normally opened for each asset and liability (or class thereof), and one for each type of expense and income.

In addition a sole trader will also have an account for capital.

Double-entry rules

Rule 1: - The duality rule

Every transaction has two effects:

  • one of which will be recorded as a DEBIT in one account and

  • the other which will be recorded as a CREDIT in another account

  • TOTAL DEBITS = TOTAL CREDITS

If this rule is broken, the trial balance will not agree and a suspense account is opened.

This will be discussed later in “Correction of Errors”.

Rule 2: - The when to DR and CR rule

The rules as to when to debit a T account and when to credit a T account can be summarized in the following table.

The Debit/Credit Table:

Rule 3: - Debit is on the left and credit is on the right

Nominal Ledger & Double Entry

The cash receipts book is summarised and posted to the nominal ledger. 

The sales day, purchase day and returns books are posted to the receivables/payables control accounts.

  1. When the sales day book is posted to the nominal ledger

    - The gross invoice column will be debited to receivables
    - The sales (net of sales tax) will be credited to sales
    -  The sales tax amount will be credited to sales tax

  2. When the purchase day book is posted to the nominal ledger

    - The gross invoice column will be credited to payables
    - The purchases (net of sales tax) will be debited to purchases
    - The sales tax amount will be debited to sales tax

  3. When the cash receipts book is posted to the nominal ledger

    -  The gross column will be debited to bank
    -  Credit receivables
    -  Credit sales
    -  Credit sales tax