Analysing Classification of Books of Prime Entry

Books of Prime Entry

Skill: Analyse

Stimulus

Question

(a) For each transaction A to E, analyse whether the book of prime entry chosen by Cik Nadia is correct or wrong. For any that are wrong, state the book of prime entry that should have been used.

(b) Explain the effect of the misclassification of transactions A and D on the accuracy of Perabot Sri Melor's accounting figures.

(c) Explain why the sale of the old computer (D) cannot be recorded in the Sales Journal.

Thinking steps

1. Recall the function of each book of prime entry: Purchases Journal (credit purchase of trade goods), Sales Journal (credit sale of trade goods), General Journal (credit purchase/sale of non-current assets, drawings of goods, corrections), Cash Book (cash & cheque receipts/payments including cash drawings), Petty Cash Book (small petty expenses from the float).
2. Distinguish 'trade goods' (bought for resale) from non-current assets (used in the business). This distinction decides transactions A, C and D.
3. Test each transaction A to E against those rules one by one, comparing the correct book with the book Cik Nadia chose.
4. Identify the misclassified transactions and state the book that should have been used.
5. Analyse the effect of each error: impact on the Purchases/Sales figures (and hence gross profit) and on the petty cash imprest balance.
6. Draw a conclusion: even though the double entry still balances, misclassification distorts the accounting information used for decision-making.

Model answer

A: Wrong. It should go in the Purchases Journal because this is a credit purchase of trade goods. Recording it in the General Journal understates purchases, so cost of sales is understated and gross profit is overstated.

B: Wrong. It belongs on the credit side of the Cash Book (as cash drawings). The Petty Cash Book only records small expenses paid out of the imprest float, not the owner's private drawings; the error distorts the petty cash balance.

C: Wrong. It belongs in the Petty Cash Book because postage stamps are a small petty expense. Recording it in the Purchases Journal falsely inflates the trade purchases figure.

D: Wrong. It belongs in the General Journal because the computer is a non-current asset, not trade goods; a credit sale of an asset does not pass through the Sales Journal. If misclassified, trade sales are overstated by RM800.

E: Correct. A cheque payment to a creditor is recorded on the credit (bank column) side of the Cash Book.

Analysis conclusion: four of the five transactions are misclassified. The errors keep the double entry in balance but distort the Purchases and Sales figures, harming the accuracy of gross profit and the imprest balance.