Which one of the following is the first book in which the transactions of a business unit are recorded ?

Correct — D, (d) Journal. The journal is the book of original entry, also called the book of prime entry or the day book — the word comes from the French jour, a day, because entries are made in it in the order in which transactions occur. A transaction reaches the books through a source document such as an invoice, a receipt, a voucher or a cheque counterfoil; the accountant analyses it into the account to be debited and the account to be credited, and records it in the journal with the date, the two accounts (the debited account written first, the credited account below it prefixed by 'To'), a ledger folio column, the two money columns, and a narration in brackets stating what the entry is for. Only after that is it posted to the individual accounts in the ledger. The order matters and it is the whole of the accounting cycle: source document, journal, ledger, trial balance, final accounts. Two things the journal preserves are lost everywhere downstream, which is why it comes first and why it survives. It preserves chronology — the ledger is arranged by account, so once posted, the sequence of the day's events is gone — and it preserves the reason, in the narration, so that a reader can tell why an entry was made and not merely that it was. In a business of any size the journal is subdivided for convenience into subsidiary books: the purchases book, the sales book, the purchases returns and sales returns books, the bills receivable and bills payable books, the cash book, and the journal proper, which takes everything the special books do not cover — opening entries, closing entries, adjusting entries, rectifying entries, and credit purchases of assets. That subdivision does not change the answer: each of those books is a book of original entry because each is a piece of the journal, and the journal remains the first book in which a transaction is recorded.

Why the others are wrong

• (a)Balance Sheet — The balance sheet is the last thing prepared, not the first, and it is not a book at all. It is a statement of what the entity owns and owes on a particular date — assets on one side, liabilities and capital on the other — and nothing is ever recorded in it. Its figures are lifted from the trial balance after the trading and profit and loss account has taken up the nominal balances, so the chain runs journal, ledger, trial balance, trading and profit and loss account, balance sheet. The option also fails a simple test of sense. If the balance sheet were the first book of record, the totals of assets and liabilities would have to exist before the transactions that create them had been written down anywhere. Note the related point that a balance sheet is prepared as on a date, while the profit and loss account and the journal both cover a period.
• (b)Cash Book — This is the strongest of the three wrong options and it deserves a careful answer rather than a flat one, because the cash book genuinely is a book of original entry. Cash and bank transactions are written straight into it from the vouchers and never pass through the journal proper, and it has a double character that no other book has: it is a book of original entry and simultaneously the ledger account for cash and bank, which is why no separate cash account is opened in the ledger. What it is not is the first book for the transactions of the business at large, which is what the question asks about. The cash book covers exactly one class of transaction, those settled in cash or through the bank. Credit purchases and credit sales, returns, bills of exchange, depreciation, outstanding and prepaid expenses, provisions and the opening entry never touch it. The cash book is a specialised subdivision of the journal, and this option names the part where the question asks for the whole.
• (c)Ledger — The ledger is the second book, not the first, and its traditional names say so: it is the principal book of accounts and the book of final entry. Entries arrive in it by posting from the journal and the subsidiary books, and it is arranged not by date but by account — one account to a page or folio, so that everything affecting a particular customer, supplier, asset or expense is collected in one place. That arrangement is what makes a balance possible: an account is balanced off, and it is those balances that the trial balance lists. The relationship is easy to fix if you remember that the journal answers 'what happened, and when', while the ledger answers 'where does this account stand'. A transaction cannot be posted to the ledger before it has been analysed into debit and credit somewhere, and that somewhere is the journal.

Books of account are divided into books of original entry and the book of final entry. The journal is the book of original entry: every transaction is first analysed there into a debit and an equal credit and recorded in date order with a narration. The ledger is the book of final entry: entries are posted into it from the journal and grouped by account, and each account is balanced to show where it stands. Because writing every transaction in one journal is impractical for a business with volume, the journal is split into subsidiary books — purchases book, sales book, purchases returns book, sales returns book, bills receivable book, bills payable book, cash book, and the journal proper for everything else. Each of these is a book of original entry in its own right; the distinction between original and final entry survives the split. The cash book is the special case worth learning properly, because it is both a book of original entry and a ledger account for cash and bank, and comes in single column, double column and triple column forms, with a separate petty cash book usually kept on the imprest system. The full sequence — source document, journal or subsidiary book, ledger, trial balance, trading and profit and loss account, balance sheet — is the accounting cycle, and most examination questions on books of account are really questions about where in that sequence a particular record sits.

Key facts

• The journal is the book of original entry, also called the book of prime entry or the day book.
• A journal entry carries the date, the account debited, the account credited prefixed by 'To', a ledger folio column, two money columns, and a narration.
• The accounting cycle runs source document, journal, ledger, trial balance, trading and profit and loss account, balance sheet.
• The ledger is the principal book and the book of final entry; entries reach it by posting and are arranged by account, not by date.
• Subsidiary books — purchases, sales, purchases returns, sales returns, bills receivable, bills payable, cash book and journal proper — are subdivisions of the journal and are all books of original entry.
• The cash book is both a book of original entry and the ledger account for cash and bank, so no separate cash account is opened in the ledger.
• The journal proper takes opening, closing, adjusting and rectifying entries and credit purchases of assets.

Common traps

• Answering 'cash book' because cash transactions are written into it directly. It is a book of original entry, but only for one class of transaction.
• Confusing the ledger, the book of final entry, with the journal, the book of original entry.
• Treating the balance sheet or the trial balance as books. Both are statements, and nothing is recorded in either.
• Assuming that subdividing the journal into subsidiary books abolishes the journal. The journal proper remains, and it carries the opening, closing, adjusting and rectifying entries.
• Forgetting the narration when asked to write a journal entry in a descriptive paper; it is part of the entry, not a decoration.

• practice — not a real PYQ

  Which one of the following is known as the book of final entry ?

  • (a)Journal
  • (b)Ledger
  • (c)Purchases Book
  • (d)Trial Balance

  Answer(b) Ledger

• practice — not a real PYQ

  The brief explanation written within brackets below a journal entry, stating the reason for the entry, is known as which one of the following ?

  • (a)Narration
  • (b)Posting
  • (c)Folio
  • (d)Casting

  Answer(a) Narration