EM2855 - Examining Accounts: Accounting Systems: Double-Entry Books

In a proper double-entry system there will be two layers of books. The prime records do not form part of the double-entry system. The prime records are

• Sales day book
• Purchases day book
• Petty cash book
• Sales and purchases returns books (if kept separately)
• Wages book.

These books are used day to day to record the bulk of business transactions, relieving the double-entry books of some detail. The double-entry books are comprised of the

• Cash book (including bank account)
• Sales ledger for customers’ personal accounts
• Purchase ledger for suppliers’ personal accounts
• Nominal ledger for all other accounts - expenses, assets, loans etc.

There may be a private ledger as well. This will include sensitive information concerning the proprietor’s or directors’ personal affairs and may not be completed by the usual book-keeper.

All the information in a set of full accounts should be found in the double-entry books, the ledgers. To go behind that information you will want to see the prime records, and beyond those the basic documentation such as invoices, paid cheques, delivery notes etc.

It may be that the ledgers or prime records do not exist in a conventional form but have been created in the accountant’s papers. The accountant should be able to explain what does exist and how it enabled him or her to prepare accounts.

Always remember that if you are dealing with records maintained on a computerised system that the exact same information will be available, but merely in a printout or on a disc rather than a book.

How the system works

Typically, the system should work as follows.

Sales are invoiced and details are entered in the day book from the invoice. The sales are debited to a customer’s personal account in the sales ledger. This is the first part of the double-entry which is completed when at regular intervals the sub-total of the sales day book is credited to the nominal ledger. Purchases are the mirror image in the respective books. Expenses payments are often credited to the cash book when paid and debited to the nominal ledger on the same day, but they may be treated in a manner similar to purchases through a day book.

In any accounting system which includes a sales or purchases ledger, you may find that a control account is prepared. This can be called a total account as it is a summary of the totals of a ledger for a given period. It can be reconciled at whatever interval management requires. Its purpose is to prove the arithmetical accuracy of the particular ledger, in much the same way that the trial balance proves the arithmetical accuracy of the whole system. If control accounts are prepared they should show any differences written off to purchases or sales. The account does not form part of the double-entry.