Recording of Transactions-I
Source Documents:
Source documents are the first-hand evidence that suggests a particular transaction has taken place.
They are always in the form of a written document.
Types of Source Documents:
The types of source documents recording of transactions are:
Invoices: The seller issues it at the time of sale of goods. It contains details like date of sale, quantity,
item names, amount, tax rate and amount, etc.
Format of Invoice:
Debit Notes: Debit notes are essential for passing purchase return entries. Issued by the buyer, they
come into the picture when the goods purchased are returned to the seller.
Credit Notes: Credit notes are important for passing sales return entries. They are prepared by the seller
when he receives goods that are sold to the buyer
Cash Memo: The seller prepares them at the time of sale of goods for cash.
Format of Cash Memo:
CASH MEMO
(NAME OF THE FIRM)
Address:__________
_________________
Transaction Voucher:
A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared
for such transaction is known as Transaction Voucher.
Accounting Vouchers:
Accounting vouchers are crucial for passing entries for business transactions. It is a piece of essential evidence
proving the existence of a business transaction.
Types and Classification of Accounting Vouchers
As per the chapter recording of transactions, the following accounting vouchers are explained: -
Cash Vouchers: Cash vouchers are mainly prepared for cash transactions. Cash vouchers are further classified
into Debit Vouchers and Credit Vouchers. Debit Vouchers show payments made in cash and Credit Vouchers depict cash receipts.
Non-Cash Vouchers: Such vouchers are called Transfer Vouchers, mainly used for transactions that do not involve cash.
Accounting Equation:
An Accounting equation is based on the dual concept of accounting, according to which, every transaction has two aspects
namely Debit and Credit. It means that every transaction in accounting effect both Debit (DR.) and Credit (Cr.) side equally.
Total assets of the business firm are financed through the funds raised from either the outsiders (which consists generally
Creditors and lenders) or the Owners (which is called Capital).
According to Business entity concept, Business is separate legal entity from its owner thus the amount invested by the owner
in the business is liability of the business is called Capital. Accounting equation thus referred to a equation in which total assets
is always equal to total Liabilities (i.e. Capital + Liabilities)
Assets = Capital + Liabilities
ANALYSIS OF BUSINESS TRANSACTIONS:
Business transaction may affect either both sides of the equation or one side of the equation but the ultimate effect
must be equal on the both sides. All the effects are as follows:-
1. Transaction affecting both sides of the equation: A. Commenced business with Cash Rs. 3,00,000.
Explanation:- As Cash is invested by the owner, it should be shown in Capital (anything which is bring in by the owner
is termed as Capital) & Business is receiving asset in the form of cash, it is to be shown in the Assets side as Cash.
2. Bought goods from Ram Rs. 30,00 Effect.
Explanation:- As goods is purchased on credit, one effect is that it should be shown in the assets side as Goods & other
effect is that goods are purchased on credit so it is to be shown in Liabilities as Creditors.
3. Sold goods (costing Rs. 10000) for cash at Rs. 13000 Effect.
Explanation:- The transaction will affect both sides as cash has been received so it is to be added back in cash (Rs 13,000)
& Goods are to be reduced by 10,000 as goods has been sold also profit of Rs. 3,000 Is to be added back in Capital. Net effect
will remain same for both sides.
4. Paid to creditors Rs. 20,000.
Explanation:- The transaction will affect both sides as cash has been paid so it is to be deducted from cash as well from
creditors as payment made to them. Transaction related to Expenses.All the expense or Losses is to born by the owner although
business has separate legal entity from its owner as He/ She is the person who has taken risk to do business.
5. Rent paid Rs. 5,000. Effect.
Explanation:- The transaction will affect both sides as cash has been paid so it is to be reduced as well as Capital is to be reduced
because expense is to be born by the owner
Transaction related to Income
Income or Profit is the reward for taking risk, as risk is taken by the owner so it is to be added in Capital.
6. Commission received Rs. 8,000. Effect.
Explanation:- The transaction will affect both sides as cash has been received so it is to be added back in cash as well
as in Capital.
Transaction related to Accrued/outstanding Income
Income is to be added back into the capital but as it is not received should be shown in the Assets Side as accrued Income
because it meant to be received in this financial year.
1. Accrued Interest Rs. 10,00 Effect.
Explanation:- The transaction will effect both sides as Accrued Income has been added back to the capital & as it is not
received so it is to be shown in the assets side as an asset.
Transaction related to Prepaid or Advance Income
As Income received in advance so it is not belong to current financial year, so it cannot be added back to the Capital.
It as an amount which is received by the business firm for the future course of activity till the activity not happened it
is the Liability of the business.
Explanation:- The transaction will effect both sides as Prepaid Income is a Liability should be shown in the Liability
side & Cash received by the business should be added back to the Cash column of assets side.
2. Transaction affecting one side of the equation:
I. Transaction affecting Assets side of the equation:
Transaction related to Prepaid or Advance Expense
As Expense paid in advance so it is not belong to current financial year, so it can not be deducted from Capital. It as
an amount which is paid by the business firm for the future course of activity till the activity not happened it is the Assets
of the business.
A. Prepaid insurance paid Rs. 4,000 Effect.
Explanation:- The transaction will affect both sides as Prepaid expense is a Asset should be shown in the Assets
side & Cash paid by the business should be deducted from Cash column of assets side.
B. Purchased Machinery for Cash Rs. 80,000 Effect
Explanation:- The transaction will affect one side as cash has been paid for purchased of machinery & Machine
is an fixed asset so it is separately shown in the asset side as well as cash is to be reduced.
II. Transaction affecting Liability side of the equation:
Transaction related to outstanding Expense
As Expense not paid yet or Outstanding but belong to current financial year so it is deducted from Capital & business
has to pay it in near future so it is the liability of the firm.
A. Salary outstanding Rs. 8,000 Effect.
Explanation:- The transaction will affect Liability side as outstanding expense is a Liability should be shown
in the Liability side & Expense should be deducted from Capital.
Transaction related to Interest on Capital
As interest on capital is the Expense of business it should be shown or deducted in the capital as well as interest
of capital is the amount which is to be given to the owner as capital is the amount which is invested by the owner,
therefore it is to be added back to Capital.
A. Interest on Capital Rs. 10,000.
Explanation:- The transaction will affect Liability side as Interest of Capital should be added back & deducted from
Capital as both of them belong to the owner.
Transaction related to interest on Drawing
As interest on Drawing is the Income of business it should be shown or added back in the capital as well as interest of
Drawing is the amount which is to be given by the owner to the business so it is treated as drawing and deducted from the Capital.
A. Interest on Drawing Rs. 1,000 Effect.
Explanation:- The transaction will effect Liability side as Interest of Drawing should be added back & deducted from
Capital as both of them belong to the owner.
Transaction related to Drawing
As Drawing is the amount withdrawn by owner from business so it is to be deducted from Capital & also from the Cash.
A. Owner withdrew cash of Rs. 10,000.
Explanation:- The transaction will affect both sides as Drawing should be deducted from Capital & also deducted from
Cash as withdraw by owner.
Rules of Debit and Credit
All accounts are divided into five categories for the purposes of recording the transactions:
a) Asset
b) Liability
c) Capital
d) Expenses/Losses, and
e) Revenues/Gains.
Two fundamental rules are followed to record the changes in these accounts:
1) For recording changes in Assets/Expenses (Losses):
I. “Increase in asset is debited, and decrease in asset is credited.”
II. “Increase in expenses/losses is debited, and decrease in expenses/ losses is credited.”
2) For recording changes in Liabilities and Capital/Revenues (Gains):
I. “Increase in liabilities is credited and decrease in liabilities is debited.”
II. “Increase in capital is credited and decrease in capital is debited.”
III. “Increase in revenue/gain is credited and decrease in revenue/gain is debited.”
Books of Original Entry.
Journal : The book in which the transaction is recorded for the first time is called journal or book of original entry.
I. Journalising : The process of recording transactions in journal is called journalising.
II. Posting : The process of transferring journal entry to individual accounts is called posting.
The book of original entry: This sequence causes the journal to be called the Book of Original Entry and the ledger
account as the Principal Book of entry.
Entry process is like this:
Entry into the Journal (Journalising)
Transfer to the indivisual accounts (Posting to Leader)
(E.g: cash account, sale account, purchage account, bank account)
⇓
The journal is subdivided into a number of books of original entry as follows:
a) Journal Proper
b) Cash book
c) Other day books:
i. Purchases (journal) book
ii. Sales (journal) book
iii. Purchase Returns (journal) book
iv. Sale Returns (journal) book
v. Bills Receivable (journal) book
vi. Bills Payable (journal) book
JOURNAL AND LEDGER:
JOURNAL: Journal is a book of prime entry or book of original entry in which transactions are first recorded in
chronological order.
FEATURES OF A JOURNAL:
• It shows complete record of transactions.
• It is a book of original entry in which transactions are first recorded.
• Day to day transactions are recorded in a journal in chronological order.
• It records both aspects of a transaction i,e. debit and credit.
ADVANTAGES OF JOURNAL:
• It helps to provide accounting data in chronological order.
• It reduces possibility of errors by recording transactions both sides debit as well as credit.
• It provides explanations of transactions along with recording in journal for better understanding of transactions.
• It hepls in ledger posting of transactions.
• It ensures arthmetical accuracy.
• Classification of all transactions become easier.
LIMITATIONS OF JOURNAL:
• It is unsuitable for large volume of transactions.
• It is not a simple system of recording of transactions.
• It is not a substitute of ledger.
• It is time consuming process.
• It does not facilitate internal control, because in journa, l transactions are recorded in chronological order.
Journal is divided into 5 columns.
These are as follows:
• Date
• Particulars
• Ledger Folio
• Debit Amount
• Credit Amount
Example - Mr. A started business and introduced capital of rs. 5,00,000. the transaction is recorded
by passing following journnal entry:
LEDGER -
• Means a book which contains, in a summerisedand and classified record of all transactions.
• Ledger is called principal book of account.
• Ledger is called book of final entry.
FEATURES OF LEDGER
• It is prepred from journal.
• Trial balance and final accounts are prepared from ledger accounts.
• Ledger accounts shows current balances of all accounts.
• Ledger is a master record of all transactions
• It holds relevent informations at one place relating to a particular account.
UTILITY OF LEDGER
• ledger helps to prepare a separate account for each income and expense.
• It provides complete information about a particular account.
• It helps in prepration of trial balance.
• It also helps in prepration of final accounts. I,e. trading A/c, P&L A/c and balance sheet.
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