Journals and Day Books

Learning objectives

By the end of this chapter you should be able to:

• Explain why journals (day books) are used as the first stage of recording routine transactions and how they fit into the accounting cycle.
• Distinguish between cash and credit transactions and select the correct book of first entry for each.
• Record sales returns using credit notes and post them to Sales Returns and Trade Receivables.
• Account for settlement discounts by calculating the discount, recording the cash movement, and recognising the discount in the ledger.
• Prepare correcting entries for common errors, including mispostings and reclassifications, so that ledger balances and financial statements are reliable.

Overview & key concepts

Businesses typically process large numbers of repetitive transactions: sales, purchases, receipts and payments. Journals (often called day books) organise these routine transactions into separate lists before posting them to the ledger.

This approach achieves three practical benefits:

• Efficiency:similar transactions are recorded in a consistent format and posted in batches.
• Accuracy:categorising transactions reduces posting mistakes and improves consistency.
• Audit trail:source documents (invoices, receipts, credit notes) can be traced from the journal to the ledger.

Journals do not replace double entry. They are a structured method of capturing transactions before they are posted into ledger accounts, where balances are maintained.

Purpose of journals and day books

A journal/day book is a book of first entry used to record transactions in date order and by type. The main journals are:

• Sales Journal (Sales Day Book)
• Purchases Journal (Purchases Day Book)
• Sales Returns Journal
• Purchases Returns Journal
• Cash Book (often split into Cash Receipts and Cash Payments sections, or presented as a columnar cash book)
• General Journal (for adjustments and non-routine entries)

Books used for routine transactions

Sales Journal (credit sales of goods)

Use the Sales Journal for credit sales of goods made in the normal course of trade.

Typical posting to the ledger:

• Debit:Trade receivables
• Credit:Sales revenue

Cash sales are not recorded here (they go in the cash book).

Purchases Journal (credit purchases: goods and often credit expenses)

Use the Purchases Journal for invoices received on credit. In many bookkeeping systems (and in many exam questions) this includes:

• credit purchases of goods for resale, and
• regular credit expenses/services(for example, carriage inwards, utilities, rent, repairs), often analysed into columns.

Purchases of non-current assets on credit are commonly kept out of the Purchases Journal and recorded through the General Journal (or a separate asset register), depending on how the bookkeeping system is designed.

Typical postings to the ledger (depending on what was purchased):

• goods for resale:Dr Inventory (or Purchases)/Cr Trade payables
• credit expenses:Dr relevant expense/Cr Trade payables

Cash book (cash and bank inflows and outflows)

Cash and bank movements are recorded in the cash book. In many bookkeeping systems, the cash book is both:

• abook of first entry(recording receipts and payments from source documents), and
• theledger accountfor bank/cash (especially where a columnar cash book is used).

Because it also functions as a ledger, the cash book may include entries such as contra transfers (for example, moving cash from till to bank), where the debit and credit are recorded within the cash book columns.

Cash Receipts section (cash and bank inflows)

Use this section for all money received, whether from customers, loans, asset sales, or other sources.

The credit entry depends on the source of the receipt, for example:

• cash sale: credit Sales revenue
• receipt from a customer: credit Trade receivables
• bank loan received: credit Loan payable
• advance payment from a customer: credit Deferred income (unearned revenue)

Cash Payments section (cash and bank outflows)

Use this section for all money paid out, including supplier payments, expenses, asset purchases, and loan repayments.

The debit entry depends on what the payment relates to, for example:

• supplier payment: debit Trade payables
• utilities paid: debit Utilities expense
• equipment purchased for cash: debit Property, plant and equipment
• loan repayment: debit Loan payable (principal portion) and debit Interest expense (interest portion)

Sales Returns Journal (returns inwards / credit notes to customers)

Use the Sales Returns Journal for sales returns on credit and credit notes issued to customers.

Typical posting to the ledger:

• Debit:Sales returns (a contra-revenue account)
• Credit:Trade receivables

This reduces the amount owed by the customer and records returns separately from sales.

Purchases Returns Journal (returns outwards / supplier credit notes)

Use the Purchases Returns Journal for returns to suppliers on credit and supplier credit notes.

The posting depends on the inventory system and how purchases are recorded:

• Periodic approach (common in basic bookkeeping):
  • Debit:Trade payables
  • Credit:Purchases returns (returns outwards)(a contra-purchases account)
• Perpetual inventory approach (where inventory is updated continuously):
  • Debit:Trade payables
  • Credit:Inventory

Using a purchases returns account in a periodic system keeps purchases and returns transparent.

General Journal (non-routine entries and adjustments)

Use the General Journal when a transaction does not belong in a specialised journal, or when the entry is an adjustment rather than a straightforward invoice/receipt/payment.

Common uses include:

• credit purchase of a non-current asset (e.g., equipment bought on credit)
• accruals, prepayments, and deferred income adjustments
• depreciation, impairment, inventory write-downs
• allowance for doubtful debts
• loan interest accruals
• equity transactions (share issues, dividends declared)
• correcting entries and reclassifications (where ledger transfers are used)

Core theory and frameworks

Double entry and the accounting equation

Every transaction affects at least two accounts and keeps the accounting equation in balance:

Assets = Liabilities + Equity

Income and expenses ultimately affect equity through retained earnings:

• Income increases equity
• Expenses decrease equity

Double entry ensures the equation stays balanced by recording equal debits and credits.

Debits and credits: a practical rule set

In ledger accounts:

• Assets:debits increase, credits decrease
• Liabilities:credits increase, debits decrease
• Equity:credits increase, debits decrease
• Income:credits increase, debits decrease
• Expenses:debits increase, credits decrease

When you prepare an entry:

1. Identify which accounts change.
2. Decide whether each account increases or decreases, then apply the rules above.

Cash vs credit transactions

• Acash transactioninvolves immediate payment (bank/cash moves now). Record it in the cash book.
• Acredit transactioninvolves payment later (a receivable or payable is created). Record it in the sales/purchases/returns journals (or the general journal for adjustments or non-trade items).

A quick check is: Did money move today?

• If yes, it belongs in the cash book.
• If no, it belongs in a credit journal or the general journal.

If part is paid now and part later, split the entry: record the cash element in the cash book and record the remaining balance as a receivable or payable.

Goods for resale, operating expenses, and non-current assets

Correct classification affects both profit and financial position:

• Inventory (goods for resale):recorded as an asset when purchased. It becomes an expense (cost of sales) when the goods are sold or written down.
• Operating expenses (e.g., utilities, rent, stationery):recorded as expenses when incurred (subject to accruals and prepayments).
• Non-current assets (e.g., equipment):recorded as assets and expensed over time through depreciation.

A purchase of stationery is an expense, not inventory. A purchase of resale goods is inventory, not an operating expense.

Returns and credit notes

A credit note issued to a customer reduces the customer’s balance and records a return (sales returns).

A credit note received from a supplier reduces the amount payable and records a purchases return (or reduces inventory in a perpetual system).

Settlement discounts

Settlement discounts encourage early payment.

• Discount allowed(given to a customer) is often recorded in a separate discount account.
• Discount received(taken from a supplier) is often recorded in a separate discount account, or treated as a reduction in purchase cost, depending on the bookkeeping approach.

Double entry form:

Customer pays with discount (discount allowed):

• Debit Bank (cash received)
• Debit Discount allowed
• Credit Trade receivables (full amount cleared)

Supplier is paid with discount (discount received):

• Debit Trade payables (full amount cleared)
• Credit Bank (cash paid)
• Credit Discount received(or credit Purchases/Inventory as a reduction in cost, depending on the system used)

Exam note: In basic bookkeeping questions it is common to use discount allowed/received accounts. In more advanced reporting, discounts may be presented as adjustments to revenue or to cost, depending on policy and circumstances. Follow the method implied by the question and apply it consistently.

Correcting entries and reclassifications

Correcting entries fix errors already recorded. They may affect profit if the error involved revenue or expenses.

Reclassifications change presentation categories (for example, separating the portion of a liability due within 12 months from the portion due later). Reclassifications do not change total liabilities or profit; they affect only how balances are shown. Often this is done at the reporting date as part of financial statement preparation and may not require day-to-day ledger postings unless the system uses specific ledger accounts for the split.

Posting flow from journals to the ledger

A typical posting process is:

1. Record transactions in the appropriate journal using source documents.
2. Post individual items to personal accounts (customers and suppliers) where required.
3. Post totals (or analysed totals) to the relevant general ledger accounts.
4. Use ledger balances to prepare a trial balance and then financial statements.

Worked example

Narrative scenario

ABC Ltd is a retail company. During January 2026 it records the following transactions:

1. Credit sale of goods, USD 5,000, to XYZ Corp.
2. Cash sale of goods, USD 2,000
3. Credit purchase of inventory, USD 3,000, from Supplier A.
4. Cash purchase of office supplies, USD 500
5. Goods returned by XYZ Corp, USD 200 (credit note issued).
6. Payment to Supplier A: ABC Ltd settles USD 2,800 of the amount due and takes a 5% settlement discount on that amount.
7. Receipt from XYZ Corp: the customer settles the amount outstanding after the return and takes a 4% settlement discount.
8. Error correction: the office supplies payment was incorrectly entered as USD 600 instead of USD 500
9. Reclassification at the reporting date: a USD 1,000 liability currently shown as current should be shown as non-current.
10. Payment of utilities, USD 300
11. Receipt of USD 1,000 from a non-trade debtor.
12. Error correction: the cash sale was mistakenly posted as USD 2,050 instead of USD 2,000.

Required

• Record each transaction in the appropriate journal.
• Calculate and record settlement discounts.
• Prepare correcting entries for the errors and the reclassification.
• Post the transactions to the ledger and determine the key balances.
• Explain the impact on the financial statements.

Solution

1) Entries in the appropriate journals (double entry shown)

1. Credit sale (Sales Journal)

• Dr Trade receivables – XYZ Corp 5,000
• Cr Sales revenue 5,000

2. Cash sale (Cash book: receipts)

• Dr Bank 2,000
• Cr Sales revenue 2,000

3. Credit purchase of inventory (Purchases Journal)

• Dr Inventory 3,000
• Cr Trade payables – Supplier A 3,000

4. Cash purchase of office supplies (Cash book: payments)

• Dr Office supplies expense 500
• Cr Bank 500

5. Sales return / credit note issued (Sales Returns Journal)

• Dr Sales returns 200
• Cr Trade receivables – XYZ Corp 200

6. Payment to Supplier A with settlement discount (Cash book: payments)

Discount = 5% × 2,800 = 140
Cash paid = 2,800 − 140 = 2,660

• Dr Trade payables – Supplier A 2,800
• Cr Bank 2,660
• Cr Discount received 140

7. Receipt from XYZ Corp with settlement discount (Cash book: receipts)

Amount outstanding after return = 5,000 − 200 = 4,800
Discount = 4% × 4,800 = 192
Cash received = 4,800 − 192 = 4,608

• Dr Bank 4,608
• Dr Discount allowed 192
• Cr Trade receivables – XYZ Corp 4,800

10. Utilities paid (Cash book: payments)

• Dr Utilities expense 300
• Cr Bank 300

11. Receipt from a non-trade debtor (Cash book: receipts)

• Dr Bank 1,000
• Cr Other receivables 1,000

2) Correcting entries and reclassification

8. Correct office supplies error (recorded as 600 instead of 500)
The expense is overstated by 100 and bank is understated by 100. Correct by reversing the overstatement:

• Dr Bank 100
• Cr Office supplies expense 100

9. Reclassification at reporting date (presentation adjustment)
This does not usually require a journal in day-to-day books unless the system uses specific ledger accounts for the split. The financial statements should present USD 1,000 as non-current rather than current.

Where a ledger transfer is required (between named accounts), one acceptable form is:

• Dr Liability X – current portion 1,000
• Cr Liability X – non-current portion 1,000

(Any equivalent transfer between specific liability accounts is acceptable, provided it reflects the item being re-presented.)

12. Correct misposting of cash sale (posted as 2,050 instead of 2,000)
Sales and bank are overstated by 50. Reduce both:

• Dr Sales revenue 50
• Cr Bank 50

3) Key ledger balances after posting (summary)

The postings below summarise the key closing balances rather than showing full ledger T-accounts.

Trade receivables – XYZ Corp

• Debit: 5,000 (credit sale)
• Credit: 200 (return)
• Credit: 4,800 (settlement)
• Closing balance: 0

Trade payables – Supplier A

• Credit: 3,000 (credit purchase)
• Debit: 2,800 (part settlement)
• Closing balance: 200 payable

Bank (net movement)

• Inflows: 2,000 + 4,608 + 1,000 = 7,608
• Outflows: 500 + 2,660 + 300 = 3,460
• Corrections: +100 − 50 = +50
• Net increase in bank: 7,608 − 3,460 + 50 = 4,198

Sales revenue (net)

• Credit: 5,000 + 2,000 = 7,000
• Debit: 50 (correction reducing sales)
• Closing credit balance: 6,950

Sales returns
Debit: 200

Discount allowed
Debit: 192

Discount received
Credit: 140

Office supplies expense (net)

• Debit: 500
• Credit: 100 (correction)
• Closing debit balance: 400

Utilities expense
Debit: 300

Inventory
Debit: 3,000 (purchase of goods for resale)
(No cost of sales entry is shown because the cost information needed to record the expense on sale is not provided in the scenario.)

4) Impact on the financial statements

Statement of financial position (extract effects):

• Bank increases by USD 4,198 (net).
• Inventory increases by USD 3,000.
• Trade receivables close at USD 0 (customer fully settled after return and discount).
• Trade payables include USD 200 still owed to Supplier A.
• A USD 1,000 liability is presented as non-current rather than current (reclassification only).
• Other receivables reduce by USD 1,000 (settled in cash).

Profit impact (excluding cost of sales):

• Sales returns reduce net sales.
• The cash sale correction reduces sales revenue by USD 50.
• Discount allowed and discount received affect profit according to the approach used in the question and the accounting policy applied.
• Operating expenses include office supplies (after correction) and utilities.

Common pitfalls and misunderstandings

• Recording cash sales in the Sales Journal:cash sales belong in the cash book because bank/cash moves immediately.
• Treating the Purchases Journal as “inventory only” in all systems:many bookkeeping systems (and many exam questions) treat it as the journal for credit invoices, often including analysed credit expenses.
• Recording returns directly in Sales:use sales returns and purchases returns so that gross figures and contra amounts remain visible.
• Confusing settlement discounts:discount allowed relates to customers; discount received relates to suppliers.
• Correcting an overstatement in the wrong direction:if an expense is overstated, credit the expense to reduce it (and debit the account that was understated).
• Assuming corrections never affect profit:a correction can affect profit if it involves revenue or expenses.
• Posting reclassifications to generic headings:transfers (if used) should be between specific named liability accounts; otherwise the change is made at the presentation stage.

Summary

Journals and day books organise routine transactions before posting to the ledger. Credit transactions are recorded in the sales/purchases/returns journals, while cash movements are recorded in the cash book, which commonly also serves as the bank/cash ledger account in many bookkeeping systems. Adjustments and non-routine entries are recorded in the general journal. Correct classification (cash vs credit, trade vs non-trade, inventory vs expense vs non-current asset) produces reliable ledger balances and supports accurate financial statements. Settlement discounts and error corrections require careful double entry to ensure receivables and payables are cleared correctly.

FAQ

Why use journals instead of writing everything straight into the ledger?
Journals group similar transactions and create a clear trail from source documents to ledger postings, improving efficiency and reducing posting errors.

Does the Purchases Journal record only goods for resale?
Not always. Many bookkeeping systems (and many exam questions) use it for credit invoices generally, often including analysed credit expenses. Non-current assets bought on credit are commonly recorded separately through the general journal or an asset register.

What is the cash book in bookkeeping questions?
It is the record of cash and bank receipts and payments and, in many systems, it also functions as the ledger account for bank/cash (especially where a columnar cash book is used).

What if part is paid now and part later?
Split the entry: record the cash element in the cash book and record the remaining balance as a receivable or payable.

Is a reclassification always recorded with a journal entry?
Often it is a reporting-date presentation adjustment. If a transfer is recorded in the ledger, it should be between specific accounts (for example, splitting a liability into current and non-current portions).

Glossary

Book of first entry
A record where transactions are first written up from source documents before being posted into ledger accounts.

Journals (day books)
Books of first entry that list routine transactions by type (such as sales, purchases, returns, receipts and payments) to support efficient posting and a clear audit trail.

Sales Journal (Sales Day Book)
A journal used to record credit sales of goods, posted to trade receivables and sales revenue.

Purchases Journal (Purchases Day Book)
A journal used to record credit invoices, commonly including purchases of goods and often analysed credit expenses. Non-current assets on credit may be excluded depending on the system.

Cash book
The record of cash and bank receipts and payments. In many bookkeeping systems it also serves as the ledger account for bank/cash and may include contra transfers.

Sales Returns Journal
A journal used to record returns by customers and credit notes issued, posted to sales returns and trade receivables.

Purchases Returns Journal
A journal used to record returns to suppliers and supplier credit notes, posted to trade payables and either purchases returns (periodic systems) or inventory (perpetual systems).

General Journal
A journal used for adjustments and non-routine entries such as accruals, prepayments, depreciation, allowances, corrections, and (where used) ledger transfers for reclassifications.

Settlement discount
A reduction in the amount paid or received when an invoice is settled early, recorded in a manner consistent with the question and the bookkeeping system used.