Recording of Transactions - I — NCERT Solutions

Debits are listed first in journal entries.

By convention:

• The account(s) to be debited are written first on the left side, starting from the margin.
• The account(s) to be credited are written below the debited accounts and are indented (written slightly to the right), preceded by the word 'To'.

Example:
$$\text{Cash A/c} \quad Dr. \quad 1{,}00{,}000$$
$$\quad \text{To Capital A/c} \quad 1{,}00{,}000$$
(Being business commenced with cash)

So, credits are indented (not debits). This format makes it easy to distinguish between the debit and credit aspects of a transaction.

Some accounting systems are called double entry accounting systems (not 'double accounting systems') because they are based on the principle that every transaction has two aspects — a debit aspect and a credit aspect — and both aspects are recorded simultaneously.

Reasons for the name:

1. Every transaction affects at least two accounts — one is debited and another is credited.
2. The total of debits always equals the total of credits for every transaction.
3. This dual recording ensures that the accounting equation (Assets = Liabilities + Capital) always remains balanced.
4. It provides a complete and accurate record of all transactions.

For example, when goods are purchased for cash:

• Purchases Account is debited (one entry)
• Cash Account is credited (second entry)

This dual recording is why it is called the double entry system.

A specimen (T-format) of a Ledger Account is shown below:

Name of the Account

Explanation of columns:

• Date: Date of the transaction.
• Particulars: Name of the corresponding account.
• J.F. (Journal Folio): Page number of the Journal from which the entry is posted.
• Amount: The monetary value of the transaction.

The rules of debit and credit are the same for both Liability and Capital accounts because both represent claims against the assets of the business — they are sources of funds for the business.

Rules (same for both):

• Increase → Credit (right side)
• Decrease → Debit (left side)

Reason:

1. From the business entity's perspective, both liabilities (owed to outsiders) and capital (owed to the owner) are obligations of the business.
2. The accounting equation is: $\text{Assets} = \text{Liabilities} + \text{Capital}$. Both liabilities and capital appear on the right side (credit side) of this equation.
3. When either liability or capital increases, it means the business has received more funds — this is recorded as a credit.
4. When either decreases, funds are being returned — this is recorded as a debit.

Thus, both are treated identically in terms of debit and credit rules.

The Journal Folio (J.F.) number serves the following purposes:

1. Cross-referencing: It creates a link between the Journal entry and the corresponding Ledger account, making it easy to trace any entry from the Journal to the Ledger and vice versa.

2. Verification: It helps auditors and accountants verify whether all journal entries have been correctly posted to the ledger.

3. Avoiding Duplication: Once a J.F. number is entered in the ledger, it indicates that the entry has already been posted, preventing double posting of the same entry.

4. Error Detection: If a J.F. number is missing in the ledger, it signals that the posting has not been done, helping detect omissions.

5. Audit Trail: It maintains a complete audit trail, enabling easy tracking of transactions from source documents → Journal → Ledger.

(a) Increase Revenue → Credit
Revenue accounts have a credit balance. When revenue increases, the revenue account is credited.
$$\text{Example: Cash A/c Dr. | To Sales A/c (Cr.)}$$

(b) Decrease in Expense → Credit
Expense accounts have a debit balance. When an expense decreases (e.g., expense reversed or reduced), the expense account is credited.
$$\text{Example: Cash A/c Dr. | To Expense A/c (Cr.)}$$

(c) Record Drawings → Debit Drawings Account
Drawings reduce the owner's capital. Drawings Account is debited and Cash/Goods Account is credited.
$$\text{Drawings A/c Dr. | To Cash A/c (Cr.)}$$

(d) Record Fresh Capital Introduced → Credit Capital Account
When the owner introduces fresh capital, Capital Account (owner's equity) increases → Credit Capital Account. Cash/Asset Account increases → Debit.
$$\text{Cash A/c Dr. | To Capital A/c (Cr.)}$$

Decrease in an Asset:
A decrease in an asset is recorded as a Credit.

Reason: Assets normally have a debit balance. When an asset decreases, it is recorded on the credit (right) side of the asset account.

Example: When cash is paid out, Cash Account (asset) decreases → Credit Cash Account.
$$\text{Expense A/c Dr. | To Cash A/c (Cr.)} \quad \leftarrow \text{Cash decreases (Credit)}$$

Decrease in a Liability:
A decrease in a liability is recorded as a Debit.

Reason: Liabilities normally have a credit balance. When a liability decreases (e.g., a creditor is paid off), it is recorded on the debit (left) side of the liability account.

Example: When a creditor is paid, Creditors Account (liability) decreases → Debit Creditors Account.
$$\text{Creditors A/c (Dr.)} \quad | \quad \text{To Cash A/c (Cr.)} \quad \leftarrow \text{Liability decreases (Debit)}$$

Events Recorded in Accounting Systems:

Accounting records business transactions — events that have a monetary value and affect the financial position of the business. These include:

1. External Transactions: Transactions between the business and outside parties, e.g., purchase of goods, sale of goods, payment of expenses, receipt of income.
2. Internal Transactions: Events within the business that affect accounts, e.g., depreciation, outstanding expenses, prepaid expenses, goods used for personal purpose.
3. Financial Events: Events that change assets, liabilities, or capital, e.g., introduction of capital, drawings, loans taken or repaid.

Not all events are recorded — only those that can be measured in monetary terms and affect the financial position.

Importance of Source Documents:

Source documents are the original records (invoices, cash memos, receipts, vouchers, cheques, debit/credit notes) that provide evidence of a transaction. Their importance:

1. Basis of Recording: Every journal entry is made on the basis of a source document. Without it, no entry should be recorded.
2. Legal Evidence: Source documents serve as legal proof in case of disputes between buyer and seller.
3. Authenticity: They ensure that only genuine transactions are recorded, preventing fraud.
4. Audit Verification: Auditors use source documents to verify the accuracy and completeness of accounting records.
5. Chronological Reference: They provide date, amount, parties, and nature of transaction — all essential details for recording.
6. Internal Control: They help management control business operations by providing a paper trail of all transactions.

Examples of Source Documents:

• Cash Memo (for cash sales/purchases)
• Invoice/Bill (for credit transactions)
• Receipt (for cash received)
• Cheque (for bank payments)
• Debit Note (for goods returned by buyer)
• Credit Note (for goods returned to seller)
• Pay-in-slip (for bank deposits)

Debits and Credits — Meaning:

• The left side of an account is called the Debit (Dr.) side.
• The right side of an account is called the Credit (Cr.) side.

Rules of Debit and Credit:

Steps to Analyse a Transaction Using Debits and Credits:

Step 1: Identify the accounts affected by the transaction.
Step 2: Determine the type of each account (asset, liability, capital, revenue, expense).
Step 3: Determine whether each account increases or decreases.
Step 4: Apply the rules — debit the account that increases (for assets/expenses) or decreases (for liabilities/capital/revenue); credit accordingly.

Illustration:

Transaction: Purchased goods for cash ₹20,000.

• Accounts affected: Purchases Account and Cash Account.
• Purchases → Expense → Increases → Debit Purchases A/c.
• Cash → Asset → Decreases → Credit Cash A/c.

$$\text{Purchases A/c} \quad Dr. \quad 20{,}000$$
$$\quad \text{To Cash A/c} \quad 20{,}000$$

Transaction: Sold goods on credit ₹15,000.

• Accounts: Debtors Account (Asset ↑ → Debit) and Sales Account (Revenue ↑ → Credit).

$$\text{Debtors A/c} \quad Dr. \quad 15{,}000$$
$$\quad \text{To Sales A/c} \quad 15{,}000$$

This systematic analysis ensures that the accounting equation always remains balanced.

Meaning of an Account:
An account is a summarised record of all transactions relating to a particular item (person, asset, liability, income, or expense). It is maintained in the Ledger.

Format of an Account (T-Format):

Every account has two sides:

• Left side = Debit (Dr.) side
• Right side = Credit (Cr.) side

Types of Accounts:

1. Personal Accounts — Accounts of persons, firms, companies (e.g., Ramesh A/c, Bank A/c).
2. Real Accounts — Accounts of tangible and intangible assets (e.g., Cash A/c, Building A/c, Goodwill A/c).
3. Nominal Accounts — Accounts of expenses, losses, incomes, and gains (e.g., Salary A/c, Sales A/c).

How Accounts Record Transaction Effects:

1. When a transaction occurs, it is first journalised.
2. The journal entry identifies which accounts are debited and which are credited.
3. The amounts are then posted to the respective accounts in the ledger.
4. Each account accumulates all debits on the left and all credits on the right.
5. At the end of the period, the account is balanced — the difference between total debits and total credits gives the balance of the account.
6. These balances are used to prepare the Trial Balance and Financial Statements.

Example: Cash Account records all cash receipts (debit side) and all cash payments (credit side). The balance shows cash in hand.

Thus, accounts provide a classified, summarised record of the financial effects of all transactions on each item of the business.

Meaning of Journal:
A Journal is the book of original (first) entry in which all business transactions are recorded in chronological order (date-wise) as they occur. The process of recording transactions in the journal is called Journalising. Each entry in the journal is called a Journal Entry and consists of:

• Date of transaction
• Name of accounts debited and credited
• Journal Folio (L.F.) number
• Amount (Dr. and Cr.)
• Narration (brief explanation)

Specimen of Journal:

Distinction between Source Documents and Vouchers:

In summary: Source documents are the original external evidence of transactions, while vouchers are internally prepared documents that authorise the recording of those transactions in the accounting books.

Statement: The Accounting Equation $\text{Assets} = \text{Liabilities} + \text{Capital}$ always remains balanced, regardless of the nature of the transaction.

Justification:
Every business transaction affects at least two accounts, and the dual effect always keeps the equation balanced. The equation can be affected in the following ways:

1. Both sides increase equally.
2. Both sides decrease equally.
3. One side increases and decreases by the same amount (no net change).

Illustration:

Let us take the following transactions:

(a) Started business with cash ₹2,00,000:

• Cash (Asset) ↑ by ₹2,00,000; Capital ↑ by ₹2,00,000

$$\text{Assets} = 2{,}00{,}000 = \text{Capital} = 2{,}00{,}000 \quad \checkmark$$

(b) Purchased goods for cash ₹40,000:

• Goods (Asset) ↑ by ₹40,000; Cash (Asset) ↓ by ₹40,000

$$\text{Assets} = 1{,}60{,}000 + 40{,}000 = 2{,}00{,}000 = \text{Capital} = 2{,}00{,}000 \quad \checkmark$$

(c) Purchased furniture on credit ₹7,000:

• Furniture (Asset) ↑ by ₹7,000; Creditors (Liability) ↑ by ₹7,000

$$\text{Assets} = 2{,}07{,}000 = \text{Liabilities} (7{,}000) + \text{Capital} (2{,}00{,}000) = 2{,}07{,}000 \quad \checkmark$$

(d) Sold goods (cost ₹10,000) for ₹12,000:

• Cash (Asset) ↑ by ₹12,000; Goods (Asset) ↓ by ₹10,000; Capital ↑ by ₹2,000 (profit)

$$\text{Assets} = 2{,}09{,}000 = \text{Liabilities} (7{,}000) + \text{Capital} (2{,}02{,}000) = 2{,}09{,}000 \quad \checkmark$$

In every case, the equation remains balanced. Hence, the accounting equation remains intact under all circumstances.

Double Entry Mechanism:

The double entry system is based on the principle that every business transaction has two aspects — a debit aspect and a credit aspect — and both must be recorded simultaneously. For every debit, there is an equal and corresponding credit.

Basis: The accounting equation $\text{Assets} = \text{Liabilities} + \text{Capital}$ must always remain balanced.

Rules of Double Entry:

Illustrative Example:

Suppose Ravi starts a business with the following transactions:

(1) Introduced cash ₹1,00,000 as capital:

• Cash (Asset) increases → Debit Cash A/c
• Capital increases → Credit Capital A/c

$$\text{Cash A/c} \quad Dr. \quad 1{,}00{,}000$$
$$\quad \text{To Capital A/c} \quad 1{,}00{,}000$$

(2) Purchased goods for cash ₹30,000:

• Purchases (Expense) increases → Debit Purchases A/c
• Cash (Asset) decreases → Credit Cash A/c

$$\text{Purchases A/c} \quad Dr. \quad 30{,}000$$
$$\quad \text{To Cash A/c} \quad 30{,}000$$

(3) Sold goods on credit to Mohan ₹20,000:

• Mohan/Debtors (Asset) increases → Debit Mohan's A/c
• Sales (Revenue) increases → Credit Sales A/c

$$\text{Mohan's A/c} \quad Dr. \quad 20{,}000$$
$$\quad \text{To Sales A/c} \quad 20{,}000$$

(4) Paid rent ₹2,000:

• Rent (Expense) increases → Debit Rent A/c
• Cash (Asset) decreases → Credit Cash A/c

$$\text{Rent A/c} \quad Dr. \quad 2{,}000$$
$$\quad \text{To Cash A/c} \quad 2{,}000$$

In each transaction, the total debit equals the total credit, maintaining the balance of the accounting equation. This is the essence of the double entry mechanism.

Accounting Equation: Assets = Liabilities + Capital

Note on (c): Bhanu is a debtor but cash is received → Cash increases by ₹12,000; Goods decrease by ₹10,000; Profit of ₹2,000 increases Capital.

Verification:
$$\text{Assets} = \text{Cash } (1{,}60{,}000) + \text{Goods } (30{,}000) + \text{Debtors } (12{,}000) + \text{Furniture } (7{,}000) = ₹2{,}09{,}000$$

Wait — re-reading (c): goods sold to Bhanu (debtor) for ₹12,000. So Debtors = ₹12,000, Cash does not increase.

Corrected Table:

$$\boxed{\text{Assets} = ₹1{,}60{,}000 + ₹30{,}000 + ₹12{,}000 + ₹7{,}000 = ₹2{,}09{,}000}$$
$$\boxed{\text{Liabilities + Capital} = ₹7{,}000 + ₹2{,}02{,}000 = ₹2{,}09{,}000}$$

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹2{,}39{,}000 + ₹35{,}000 + ₹20{,}000 = ₹2{,}94{,}000$$
$$\text{Liabilities + Capital} = ₹40{,}000 + ₹2{,}54{,}000 = ₹2{,}94{,}000 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹1{,}32{,}500 + ₹32{,}500 + ₹10{,}000 = ₹1{,}75{,}000$$
$$\text{Capital} = ₹1{,}75{,}000 \quad \checkmark$$

(Note: Discount received from Rohit = ₹50,000 − ₹48,500 = ₹1,500 increases capital.)

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹17{,}500 + ₹15{,}000 + ₹40{,}000 = ₹72{,}500$$
$$\text{Liabilities + Capital} = ₹2{,}000 + ₹70{,}500 = ₹72{,}500 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Note: The answer given in the book shows Cash = ₹1,21,200. Let us recheck (e): Prepaid insurance — cash paid ₹1,000 reduces cash and creates prepaid insurance (asset). Cash = 1,20,000 − 10,000 + 5,000 − 1,000 + 700 + 7,000 = 1,21,700. The book answer shows ₹1,21,200 which may account for a slight variation. Our calculation gives ₹1,21,700.

Verification:
$$\text{Assets} = ₹1{,}21{,}700 + ₹4{,}500 + ₹1{,}000 = ₹1{,}27{,}200$$
$$\text{Liabilities + Capital} = ₹2{,}000 + ₹1{,}25{,}200 = ₹1{,}27{,}200 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹2{,}92{,}000 + ₹1{,}25{,}000 + ₹1{,}92{,}000 + ₹6{,}000 = ₹6{,}15{,}000$$
$$\text{Liabilities + Capital} = ₹30{,}000 + ₹5{,}000 + ₹5{,}000 + ₹5{,}75{,}000 = ₹6{,}15{,}000 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹37{,}000 + ₹50{,}000 + ₹25{,}000 + ₹20{,}000 = ₹1{,}32{,}000$$
$$\text{Capital} = ₹1{,}32{,}000 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Let us track each account systematically:

Starting Position (a):

• Cash = ₹2,30,000; Goods = ₹1,00,000; Building = ₹2,00,000
• Capital = ₹5,30,000

Verification:
$$\text{Assets} = ₹2{,}42{,}000 + ₹1{,}43{,}000 + ₹1{,}90{,}000 + ₹2{,}000 = ₹5{,}77{,}000$$
$$\text{Liabilities + Capital} = ₹10{,}000 + ₹3{,}000 + ₹5{,}64{,}000 = ₹5{,}77{,}000 \quad \checkmark$$

Accounting Equation: Assets = Liabilities + Capital

Verification:
$$\text{Assets} = ₹78{,}200 + ₹33{,}000 + ₹10{,}000 + ₹9{,}000 = ₹1{,}30{,}200$$
$$\text{Capital} = ₹1{,}30{,}200 \quad \checkmark$$

Step 1: Analysis of Transactions

(a) Cash ↑ ₹4,00,000; Office Equipment ↑ ₹1,50,000; Capital ↑ ₹5,50,000

(b) Land ↑ ₹1,50,000; Building ↑ ₹3,50,000; Cash ↓ ₹2,00,000; Long-term Note Payable ↑ ₹3,00,000

(c) Office Supplies ↑ ₹12,000; Creditors ↑ ₹12,000

(d) Motor Car ↑ ₹90,000; Capital ↑ ₹90,000

(e) Office Equipment ↑ ₹30,000; Creditors ↑ ₹30,000

(f) Salary Expense ↑ ₹7,500; Cash ↓ ₹7,500; Capital ↓ ₹7,500

(g) Cash ↑ ₹30,000; Capital ↑ ₹30,000 (revenue)

(h) Utilities Expense ↑ ₹4,000; Cash ↓ ₹4,000; Capital ↓ ₹4,000

(i) Creditors ↓ ₹12,000; Cash ↓ ₹12,000

(j) New Office Equipment ↑ ₹1,00,000; Old Office Equipment ↓ ₹7,000; Cash ↓ ₹93,000
(Total new equipment = ₹93,000 cash + ₹7,000 trade-in = ₹1,00,000)

(k) Client (Debtors) ↑ ₹26,000; Capital ↑ ₹26,000 (revenue)

(l) Cash ↑ ₹19,000; Client/Debtors ↓ ₹19,000

(m) Withdrawals ↑ ₹20,000; Cash ↓ ₹20,000; Capital ↓ ₹20,000

Step 2: T-Accounts

Cash Account

Client Account (Debtors)

Office Supplies Account

Motor Car Account

Building Account

Land Account

Office Equipment Account

Long-term Note Payable Account

Creditors Account

Capital Account

Withdrawals Account

Salary Expense Account

Utilities Expense Account

Accounting Equation Check:
$$\text{Assets} = \text{Cash } (1{,}12{,}500) + \text{Client } (7{,}000) + \text{Supplies } (12{,}000) + \text{Motor Car } (90{,}000) + \text{Building } (3{,}50{,}000) + \text{Land } (1{,}50{,}000) + \text{Equipment } (2{,}73{,}000) = ₹9{,}94{,}500$$
$$\text{Liabilities} = \text{Note Payable } (3{,}00{,}000) + \text{Creditors } (30{,}000) = ₹3{,}30{,}000$$
$$\text{Capital} = ₹6{,}64{,}500$$
$$\text{L + C} = ₹3{,}30{,}000 + ₹6{,}64{,}500 = ₹9{,}94{,}500 \quad \checkmark$$

Journal of Himanshu

Journal of Mudit

Journal of Hema

Journal of Harpreet Bros.

Calculations:

• (c) Depreciation = $\frac{10}{100} \times 30{,}000 \times \frac{2}{12} = ₹500$
• (d) Interest on Capital = $\frac{6}{100} \times 1{,}50{,}000 \times \frac{9}{12} = ₹6{,}750$
• (e) Cash received from Rahul = $60 \text{ paise} \times 2{,}000 = ₹1{,}200$; Bad Debt = ₹2,000 − ₹1,200 = ₹800

Calculations:

• (c) Interest on Capital = $\frac{7}{100} \times 70{,}000 = ₹4{,}900$ (assuming for 1 year)
• (h) Cash received from Sudhir = $0.45 \times 3{,}000 = ₹1{,}350$; Bad Debt = ₹3,000 − ₹1,350 = ₹1,650

Journal

JOURNAL

LEDGER

Cash Account

Capital Account

Purchases Account

Harish Account

Sales Account

Furniture Account

Bank Account

Drawings Account

Discount Received Account

Nitesh Account

Discount Allowed Account

Sundry Expenses, Cartage, Rent, Salary Accounts — each debited with respective amounts and balanced.

JOURNAL of M/s Goel Brothers

LEDGER (Selected Accounts)

Cash Account

Bank Account

Capital Account

Purchases Account

Sales Account

(Other accounts — Tara, Naman, Furniture, Drawings, Wages, Rent, Discount Allowed, Commission, Bank Charges, Insurance, Salary — are posted similarly from the journal entries above.)

JOURNAL of M/s Mohit Traders (August 2017)

LEDGER (Selected Accounts)

Cash Account

Hema Traders Account

(Note: Hema Traders balance = ₹42,000 − ₹2,000 − ₹40,000 = ₹0)

Gupta Traders Account

(Other accounts posted similarly.)

Note: The amount on Dec. 17 appears as ₹3,50,000 in the OCR but given the context (small business, returns of ₹3,500, cheque of ₹31,500), it is likely ₹35,000. We proceed with ₹35,000.

JOURNAL of M/s Bhanu Traders (December 2017)