Preparation of books of original entries is a fundamental skill for Human Resource professionals involved in financial record-keeping and payroll management within Kenyan organizations. Accurate classification of transactions ensures that financial data is correctly captured for subsequent reporting and decision-making. This chapter explores how transactions are grouped and recorded in the initial accounting documents, providing HR practitioners with the tools to maintain reliable financial records in various institutional contexts such as county government offices, universities, and banks.

2.1 Classification of ledgers

A ledger is the principal book of account in which the transactions first recorded in the books of original entry are collected under separate accounts. Because a business has hundreds of accounts, they are divided into groups, or classes, of ledgers so that each group can be kept by a different person, checked separately and found quickly. The three main classes are the general ledger, the sales ledger and the purchases ledger. Classifying ledgers in this way spreads the work, supports internal control, and means the total of each group can be checked against a control account. Example: a county referral hospital in Nyeri keeps its salary and asset accounts in one ledger, its patient and insurer accounts in another, and its drug supplier accounts in a third, each handled by a different clerk.

General ledger

The general ledger, also called the nominal ledger, holds the accounts that make up the financial statements: assets, liabilities, capital, income and expenses. It is the main ledger of the business, and the trial balance is drawn up from its balances together with the control accounts of the other ledgers. Example: a secondary school in Kakamega keeps accounts for school fees income, salaries, electricity, buildings, furniture, bank and capital in its general ledger.

Accounts found in the general ledger

• Asset accounts: Land, buildings, vehicles, equipment, stock, bank and cash, which show what the business owns.
• Liability accounts: Loans, accrued expenses and other amounts owed, which show what the business owes.
• Capital and drawings accounts: The owners' investment in the business and what they take out of it.
• Income accounts: Sales, fees, rent received, interest received and discount received.
• Expense accounts: Wages, rent, insurance, transport, repairs, depreciation and discount allowed.
• Control accounts: Total accounts, such as the sales ledger control account and the purchases ledger control account, which summarise the individual accounts kept in the other two ledgers.

Features of the general ledger

• Contains impersonal accounts: Most accounts are real or nominal, not personal accounts of named customers or suppliers.
• Source of the trial balance: The balances of the general ledger, with the control accounts, are listed to test the arithmetic of the books.
• Source of the final accounts: The trading, profit and loss account and the statement of financial position are drawn up from it.
• Kept by a senior bookkeeper: Because it feeds the final accounts, it is normally maintained by the most experienced accounting staff.

Sales ledger

The sales ledger, also called the debtors ledger or accounts receivable ledger, holds the personal accounts of customers who buy goods or services on credit. Each account shows what the customer has bought, what has been paid and what is still owed. Example: a hotel in Naivasha keeps an account for each company that books conferences on credit, and the clerk uses these accounts to send monthly statements and chase late payers.

Accounts and entries in the sales ledger

• Customer accounts: One account per credit customer, named and often numbered.
• Debit entries: Credit sales, which increase the amount the customer owes.
• Credit entries: Payments received, discounts allowed and goods returned, which reduce what the customer owes.
• Debit balance: The normal balance, showing the amount due from the customer, which is an asset called a trade receivable.
• Source documents: Sales invoices, credit notes, receipts and remittance advices.
• Posting source: The sales day book, the sales returns day book and the cash book.

Uses of the sales ledger

• Credit control: Managers see how much each customer owes and how long it has been unpaid.
• Statements: Monthly statements are prepared from each account and sent to customers.
• Debt collection: Overdue balances are identified and followed up before they become bad debts.
• Control account check: The total of all customer balances must equal the balance of the sales ledger control account in the general ledger.

Purchases ledger

The purchases ledger, also called the creditors ledger or accounts payable ledger, holds the personal accounts of suppliers from whom the business buys goods or services on credit. Each account shows what has been bought, what has been paid and what is still owed. Example: a building contractor in Thika keeps a separate account for each supplier of cement, timber and hardware, so that payments are made on the correct due dates and discounts are not lost.

Accounts and entries in the purchases ledger

• Supplier accounts: One account per supplier on credit terms.
• Credit entries: Credit purchases, which increase the amount the business owes the supplier.
• Debit entries: Payments made, discounts received and goods returned, which reduce the amount owed.
• Credit balance: The normal balance, showing the amount owed to the supplier, which is a liability called a trade payable.
• Source documents: Suppliers' invoices, credit notes, statements and payment vouchers.
• Posting source: The purchases day book, the purchases returns day book and the cash book.

Uses of the purchases ledger

• Payment planning: The accounts show which suppliers are due for payment, so that cash is planned ahead.
• Discount control: Early settlement dates are noted so that cash discounts are earned.
• Checking suppliers' statements: The ledger balance is compared with each supplier's statement to find errors or omitted invoices.
• Control account check: The total of all supplier balances must equal the balance of the purchases ledger control account in the general ledger.

Comparing the three ledgers

2.1.1 Classification by Transaction Frequency and Value

Transactions can also be classified based on how often they occur and their monetary size, which influences how HR departments prioritize record-keeping and controls.

Frequency-Based Classification

• Regular Transactions: Routine payments such as monthly salaries, pension contributions, and statutory deductions occur consistently and require systematic recording.
• Irregular Transactions: These include one-off training workshops, recruitment drives, or severance payments, which require special attention to ensure correct classification.
• Exceptional Transactions: Rare or unusual events such as settlement of legal claims related to employee disputes are treated separately for clarity and audit trails.

Value-Based Classification

• High-Value Transactions: Significant payments, such as annual bonuses or large-scale training contracts, necessitate stringent authorization and detailed documentation.
• Low-Value Transactions: Routine petty cash expenses for office supplies or minor welfare expenses are often grouped for simplified recording but still require accountability.

2.1.2 Impact of Transaction Classification on HR Financial Management

Proper classification of transactions enhances financial control and accountability within HR departments. It supports accurate budgeting, compliance with statutory requirements, and insightful financial reporting that informs strategic human capital decisions.

Benefits of Accurate Classification

• Improved Budget Monitoring: Clear categorization enables HR managers in county governments to track payroll and training budgets effectively, avoiding overspending.
• Regulatory Compliance: Proper segregation of statutory deductions such as NSSF and NHIF contributions ensures timely remittances and adherence to Kenyan labor laws.
• Enhanced Audit Preparedness: Detailed classification with supporting documents facilitates smooth internal and external audits, minimizing risks of financial misstatements.
• Informed Decision-Making: Accurate financial data allows HR leaders in universities or banks to assess the cost-effectiveness of employee development programs.
• Fraud Prevention: Segregation of transactions by type and value helps identify irregularities, such as unauthorized salary advances or ghost employees, strengthening internal controls.

Chapter Summary

This chapter explored the classification of transactions into cash and credit types, highlighting their distinct characteristics and impacts on financial records. It examined various source documents such as invoices, vouchers, and receipts, explaining their roles in verifying and supporting financial transactions. The discussion then focused on books of original entry, detailing key records including the purchases day book, sales day book, and petty cash book, each serving a specific function in capturing transaction data. Emphasis was placed on the systematic recording of source documents to ensure accurate and reliable accounting information. Through understanding these components, learners gain the foundational skills necessary to maintain organized and compliant financial records. The chapter underscores the importance of proper documentation and classification in preparing books of original entry effectively.