Which of the following books of prime entry is used to record the sales of non-current assets on credit?
A. The general ledger
B. The general journal
C. The sales day book
D. The cash book
The correct answer and explanation is:
The correct answer is B. The general journal.
The general journal is used to record all types of transactions that do not have a specific book of prime entry. This includes the sale of non-current assets on credit. A non-current asset, such as property, equipment, or machinery, is sold when it is no longer useful to the business or when the company decides to replace it. These types of sales are not routine sales of goods or services, and as such, they do not belong in the sales day book (which is for recording regular sales of goods on credit).
When a non-current asset is sold on credit, the business records the transaction in the general journal for several reasons:
- Double-entry bookkeeping: The sale of the asset impacts both the asset account and the receivables account. The asset’s book value is removed from the books, and a receivable is created, reflecting the amount the customer owes.
- Narrative details: The general journal allows for a detailed explanation of the transaction, such as the reason for the sale, the asset involved, and other relevant details.
- Accounting accuracy: Since the sale of non-current assets is not a regular operational transaction, it needs to be carefully recorded to avoid errors in the financial statements.
In contrast, the other books of prime entry are used for specific transactions. The sales day book (C) is used for regular credit sales, the cash book (D) is for cash transactions, and the general ledger (A) is a collection of all the accounts, not a book of entry itself. Therefore, the general journal is the appropriate book to record the sale of non-current assets on credit.