Common Mistakes

Common Mistakes: Books of Prime Entry

This page gathers the mistakes students most often make when recording transactions in the books of prime entry, and how to avoid each one. Pay close attention to the debit and credit direction, choosing the right journal, the discount columns and the imprest system.

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General Journal: wrong debit and credit direction

Opening entries are often reversed. Remember the basic rule: all assets are debited, while liabilities and capital are credited. Capital is the balancing figure (total assets minus total liabilities), so settle the assets and liabilities first, then write capital last so both sides of the journal agree.
Owner's drawings of goods: debit the Drawings account and credit the Purchases account (not Sales), because the goods leave at cost, not at selling price. For drawings of a non-current asset, credit that asset account, not Purchases.
Additional capital other than cash and bank (e.g. the owner brings in a vehicle or fittings): debit the asset account brought in and credit the Capital account. Many students wrongly credit Cash or Bank even though no money is involved.
The narration (short explanation) is left out. Every General Journal entry must be followed by a narration, and the folio column filled in after posting to the ledger. Do not leave the folio column blank once the transaction has been posted.

Special Journals: choosing the wrong journal

The Purchases Journal and Sales Journal record only CREDIT purchases and sales of GOODS (trading stock). Cash purchases or sales of goods go to the Cash Book, while credit purchases/sales of non-current assets go to the General Journal, not a special journal.
Returns are often put in the wrong journal. Returns outwards (goods sent back to a supplier) go in the Purchases Returns Journal; returns inwards (goods sent back by a customer) go in the Sales Returns Journal. Read the source document carefully: a credit note we receive signals a purchase return, while a credit note we issue signals a sales return.
Remember a special journal is only a book of prime entry, not a ledger. After totalling, the monthly total must be posted to the correct control/nominal account (e.g. the Purchases Journal total is posted to the debit of the Purchases account). Closing the journal without posting the total leaves the ledger incomplete.

Three-column Cash Book: cash, bank and discount

Discount allowed and discount received are swapped. Discount allowed (to a debtor who pays us) is written in the discount column on the DEBIT side; discount received (from a creditor when we pay) is written in the discount column on the CREDIT side. Link discount allowed with money coming in and discount received with money going out.
The discount columns are NOT accounts; they are memorandum columns that are totalled, not balanced. Do not try to balance the two discount columns against each other. The discount allowed total is posted to the debit of the Discount Allowed account and the discount received total to the credit of the Discount Received account.
Contra transactions (paying cash into the bank, or withdrawing cash from the bank for office use) must be recorded on both sides and marked with the letter 'C' in the folio column, with no posting to another ledger because both accounts are inside the Cash Book.
Confusing the cash balance and the bank balance. The cash column cannot show a credit balance (you cannot hold negative cash), but the bank column can show a credit balance, which means a bank overdraft. State the position of each balance clearly when balancing off.

Petty Cash Book and the imprest system

Misunderstanding the imprest system. Under the imprest system, the reimbursement replaces only the amount that has been SPENT, so the opening balance of each period returns to the fixed imprest amount. The reimbursement is not the full imprest and is not the same fixed figure every time.
Wrong analysis column. Every petty expense must be entered in the correct analysis column (e.g. stationery, transport, refreshments) AND in the total payment column. Students often forget this double entry within the book, so the analysis columns do not add up to the total payments column.
Ignoring the classification of source documents. Receipts and vouchers must be analysed to decide whether each is a genuine petty expense. Large or non-petty items (such as buying an asset) should not be entered in the Petty Cash Book.
Reimbursement written on the wrong side. Receipt of the float and the reimbursement from the head cashier are recorded on the DEBIT (receipts) side of the Petty Cash Book, not on the payments side. The balance is carried down after totalling and balancing.

Quick guide: Cash Book discount columns

Type of discount	Side of Cash Book	Posted to
Discount allowed (to debtors)	Debit	Debit of Discount Allowed account
Discount received (from creditors)	Credit	Credit of Discount Received account

The discount columns are memorandum columns that are only totalled, not balanced.

How do I know whether a transaction goes to the General Journal or to a special journal?

Use a special journal for repetitive, uniform transactions: credit purchases, credit sales, purchase returns, sales returns of goods, and cash receipts and payments. Use the General Journal for transactions that fit no special journal or Cash Book, namely opening entries, credit purchase and sale of non-current assets, drawings, additional capital other than cash and bank, adjusting entries, correction of errors, closing entries and realisation.

Why are the discount columns in the Cash Book not balanced like the cash and bank columns?

The cash and bank columns are real accounts showing money balances, so they are balanced. The discount columns are only memorandum columns that gather discount information to make posting easier; they have no balance. They are therefore only totalled, then the discount allowed total is posted to the debit of the Discount Allowed account and the discount received total to the credit of the Discount Received account.

What is the correct reimbursement amount under the imprest system?

The reimbursement equals the total petty expenses paid during the period. For example, if the float is RM300 and expenses for the month total RM220, the reimbursement is RM220, and the next month's opening balance returns to RM300. Simple formula: reimbursement = fixed float minus the petty cash balance remaining.

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