ACCA FA – Chapter 4 Study Notes

Recording Transactions

Exam Weight: ⭐⭐⭐⭐⭐ (Very Important)
This chapter explains how business transactions are recorded using source documents, books of prime entry, and the accounting system. It forms the basis for preparing ledger accounts and the trial balance.

Chapter Mind Map

Recording Transactions
│
├── Source Documents
├── Books of Prime Entry
├── Sales Day Book
├── Purchases Day Book
├── Returns Books
├── Cash Book
├── Petty Cash Book
├── Discounts
├── Trade Receivables & Payables
└── Posting to Ledger

1. Recording Transactions

Every accounting transaction follows this sequence:

Business Transaction
        ↓
Source Document
        ↓
Book of Prime Entry
        ↓
Ledger Account
        ↓
Trial Balance
        ↓
Financial Statements

2. Source Documents

Definition

A source document is the original evidence of a business transaction.

Importance

• Provides proof of transactions.
• Supports accounting records.
• Helps prevent fraud.
• Required for audit purposes.

Common Source Documents

3. Books of Prime Entry

Definition

Books where transactions are first recorded before posting to ledger accounts.

Types

4. Sales Day Book

Records

Only credit sales of goods.

Do not record:

• Cash sales
• Sale of non-current assets

Example

Ledger Entry

Dr Trade Receivables
    Cr Sales Revenue

5. Purchases Day Book

Records

Only credit purchases of inventory.

Do not include:

• Cash purchases
• Purchase of machinery or furniture

Entry

Dr Purchases (Inventory)
    Cr Trade Payables

6. Sales Returns Day Book

Records goods returned by customers.

Entry

Dr Sales Returns
    Cr Trade Receivables

7. Purchases Returns Day Book

Records goods returned to suppliers.

Entry

Dr Trade Payables
    Cr Purchases Returns

8. Cash Book

The Cash Book records:

• Cash receipts
• Cash payments
• Bank receipts
• Bank payments

It acts as:

• A book of prime entry
• A ledger account for cash and bank

Cash Book Format

9. Petty Cash Book

Used to record small day-to-day expenses.

Examples:

• Postage
• Stationery
• Tea & refreshments
• Bus fare
• Courier charges

Advantages

• Saves time
• Better control over small expenses
• Reduces workload

10. Imprest System

Under the Imprest System:

• A fixed amount is given to the petty cashier.
• At the end of the period, the amount spent is reimbursed.

Example

Opening petty cash = ₹2,000

Spent = ₹1,450

Reimbursement = ₹1,450

Closing balance after reimbursement = ₹2,000

11. Trade Discount

Definition

A reduction in list price given before recording the sale.

Example:

Price = ₹10,000

Trade discount = 20%

Invoice amount = ₹8,000

Accounting Treatment

Trade discount is not recorded in the accounts.

12. Cash Discount

Definition

A discount allowed for early payment.

Example:

Invoice = ₹10,000

Discount = ₹200

Customer pays = ₹9,800

Journal Entry

Dr Cash                 ₹9,800
Dr Discount Allowed       ₹200
    Cr Trade Receivables ₹10,000

13. Discounts Allowed vs Discounts Received

14. Trade Receivables

Money owed by customers.

Increase

Dr Trade Receivables

Decrease

Cr Trade Receivables

15. Trade Payables

Money owed to suppliers.

Increase

Cr Trade Payables

Decrease

Dr Trade Payables

16. Journal

Used for transactions not recorded in other books.

Examples:

• Correction of errors
• Depreciation
• Opening entries
• Closing entries

17. Posting to Ledger

After recording in the books of prime entry:

Books of Prime Entry
          ↓
Ledger Accounts
          ↓
Trial Balance

18. Common Journal Entries

Credit Sale

Dr Trade Receivables
    Cr Sales Revenue

Credit Purchase

Dr Purchases
    Cr Trade Payables

Customer Returns Goods

Dr Sales Returns
    Cr Trade Receivables

Return Goods to Supplier

Dr Trade Payables
    Cr Purchases Returns

Receive Cash from Customer

Dr Cash
    Cr Trade Receivables

Pay Supplier

Dr Trade Payables
    Cr Cash

19. Flow of Accounting Records

Source Document
        ↓
Books of Prime Entry
        ↓
Ledger Accounts
        ↓
Trial Balance
        ↓
Financial Statements

Common Exam Mistakes

❌ Recording cash sales in the Sales Day Book.

✔ Cash sales are recorded in the Cash Book.

❌ Recording machinery purchases in the Purchases Day Book.

✔ Only credit purchases of inventory go in the Purchases Day Book.

❌ Recording trade discounts in the ledger.

✔ Trade discounts are never recorded.

❌ Confusing trade receivables with trade payables.

✔ Receivables = Customers owe us.

✔ Payables = We owe suppliers.

Memory Tricks

Books of Prime Entry

SPSRCPJ

• Sales Day Book
• Purchases Day Book
• Sales Returns Book
• Returns Outwards (Purchases Returns)
• Cash Book
• Petty Cash Book
• Journal

Discounts

Trade = Ignore

Cash = Record

Receivables & Payables

Receive = Receivable = Customer owes us

Pay = Payable = We owe supplier

Most Tested Topics ⭐⭐⭐⭐⭐

• Source documents
• Books of prime entry
• Sales Day Book
• Purchases Day Book
• Returns books
• Cash Book
• Petty Cash Book
• Imprest system
• Trade discount vs Cash discount
• Trade receivables vs Trade payables
• Journal entries
• Posting to ledger

One-Minute Revision Sheet

Source Documents

• Invoice
• Receipt
• Credit Note
• Debit Note
• Bank Statement

Books of Prime Entry

• Sales Day Book
• Purchases Day Book
• Sales Returns Book
• Purchases Returns Book
• Cash Book
• Petty Cash Book
• Journal

Discounts

• Trade Discount → Not recorded
• Cash Discount → Recorded

Receivables

Customer owes us → Asset

Payables

We owe supplier → Liability

Recording Process

Transaction → Source Document → Book of Prime Entry → Ledger → Trial Balance → Financial Statements

These notes are prepared in the same concise, exam-oriented style as Chapters 1–3 and cover the core concepts of Chapter 4: Recording Transactions for ACCA FA revision.