Professor Vipin 2014
Unit 3
Recording of Business Transactions
Voucher
A document recording a liability or allowing for the payment of a liability, or debt. A voucher would be
held by the person or company who will receive payment.
For example, if a supplier has documentation that provides evidence that they are owed money for
supplies they sold, they would have a voucher. Vouchers are used as evidence that a transaction has
taken place and that there is a liability by one of the parties to the transaction.
Accounting Equation
The double entry system of book keeping can be explained using the accounting equation as follows
Accounting Cycle
Following are the major steps involved in the accounting cycle:
Analyzing and recording transactions via journal entries
Posting journal entries to ledger accounts
Preparing unadjusted trial balance
Preparing adjusting entries at the end of the period
Preparing adjusted trial balance
Preparing financial statements
Closing temporary accounts via closing entries
Preparing post-closing trial balance
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Journals
Meaning
The journal records all the daily transactions in a business in the order in which they occur. A journal is a
book which contains the chronological order of transactions. A journal precedes the ledger. Recording a
transaction in a journal is called ‘journalizing’
Journal Format
Date
Particulars Ledger Folio
Debit
Credit
Rules for Debit and Credit / Types of Accounts
The object of book-keeping is to keep a complete record of all the transactions that place in the
business. To achieve this object, business transactions have been classified into three categories:
Transactions relating to persons.
Transactions relating to properties and assets
Transactions relating to incomes and expenses.
The accounts falling under the first heading are known as ‘personal Accounts’. The accounts falling
under the second heading are known as ‘Real Accounts’, The accounts falling under the third heading
are called ‘Nominal Accounts’. The accounts can also be classified as personal and impersonal. The
following chart will show the various types of accounts
Personal Accounts
It includes the accounts of persons with whom the business is dealing with. It can be classified into:
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a) Natural Person account (living persons)
b) Artificial person (companies, club, government)
c) Representative account (Landlord, employees)
The Rule is
Debit – The Receiver
Credit – The Giver
Real Accounts
This may include:
a) Tangible Real Account (Buildings, land, plant and machinery)
b) Intangible Real Account (Patents, goodwill)
The rule is
Debit – What Comes in
Credit – What goes out
Nominal Accounts
These are accounts opened to explain the nature of the transaction. They do not really exist.
Debit – All expenses and incomes
Credit – All gains and losses
Example 1
Journalize the following transactions. Also state the nature of each account involved in the journal entry.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Dec 1st 1998. Ajit started a business with cash Rs. 40,000
Dec 3rd. He paid to the bank Rs. 2000
Dec 5th he purchased goods for cash Rs. 15,000
Dec 8th he sold goods for cash Rs. 6000
Dec 10th he purchased furniture and paid by cheque Rs. 5000
Dec 12th he sold goods to Arvind Rs. 4000
Dec 14th he purchased goods from Amrit Rs. 10,000
Dec 15th he returned goods to Amrit Rs. 5000
Dec 16th he received from Arvind Rs. 3960 in full settlement
Dec 18th, he withdrew goods for personal use Rs. 1000
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11.
12.
13.
14.
15.
Dec 20th he withdrew cash from business for personal use Rs. 2000
Dec 24th he paid telephone charges Rs. 1000
Dec 26th paid cash to Amrit in full settlement of Rs. 4900
Dec 31st paid for stationery Rs. 200, rent Rs. 500 and salaries to staff Rs. 2000
Dec 31st, goods distributed by way of free samples Rs. 1000
Solution 1
Sl
No
1
Date
1-Dec
Particulars
Nature of
Account
Cash A/c
Real A/C
To Capital Account
Personal A/c
L/F
Debit
Credit
40,000
40,000
(Being Commencement of Business)
2
3-Dec
Bank A/C
Personal A/c
To Cash A/c
Real A/C
2000
2000
(Being cash deposited in Bank)
3
5-Dec
Purchases A/c
Real A/C
To Cash A/c
Real A/C
15000
15000
(Being purchase of goods for cash)
4
8-Dec
Cash A/c
Real A/C
To Sales A/C
Real A/C
6000
6000
(Being goods sold for cash)
5
10-Dec
Furniture A/C
Real A/C
To Bank A/C
Personal A/c
5000
5000
(Being purchase of furniture by cheque)
6
12-Dec
Arvind A/C
Personal A/c
To Sales A/C
Real A/C
4000
4000
(Being Sale of goods)
7
14-Dec
Purchases A/c
Real A/C
To Amrit A/C
Personal A/c
10000
10000
(Being purchase of goods from amrit)
8
15-Dec
Amrit A/C
Personal A/c
To Purchase Returns A/C
Real A/C
5000
5000
(Being goods returned to Amrit A/c)
9
16-Dec
Cash A/c
Real A/C
Discount A/C
Nominal A/C
To Arvind A/c
Personal A/c
3960
40
4000
(Being cash received in full and Rs. 40 discount allowed)
10
18-Dec
Drawings A/C
Personal A/c
To Purchases A/c
Real A/C
1000
1000
(Being goods withdrawn for personal use)
11
20-Dec
Drawings A/C
Personal A/c
To Cash A/c
Real A/C
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2000
2000
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Professor Vipin 2014
(Being cash withdrawn for personal use)
12
24-Dec
Telephone Expenses A/C
Nominal A/C
To Cash A/c
Real A/C
1000
1000
(Being telephone expenses paid)
13
14
26-Dec
31-Dec
Amrit A/C
Personal A/c
5000
To Cash A/c
Real A/C
To Discount A//C
(Being cash paid to Amrit and discount Rs. 100
received)
Nominal A/C
Stationery Expenses A/C
Nominal A/C
200
Rent A/C
Nominal A/C
500
Salaries A/c
Nominal A/C
2000
To Cash A/c
Real A/C
4900
100
2700
(Being expenses paid)
15
31-Dec
Advertisement Expenses A/C
Nominal A/C
To Purchases A/C
Real A/C
1000
1000
(Being free samples distributed)
Total
121,700
121,700
Note: The logic behind debiting and crediting
1. Take for example entry No. 13. In the case of Amrit, you are making a payment of Rs. 5000
hence it is debited, cash is going out so it is credited by Rs. 4900 and Rs. 100 is credited in the
form of discount, thus the credit entry.
2. Now take for example journal entry No. 7. Puchases are debited because it is a tangible asset.
Payment is made to Amrit because Amrit is a real person and the payment made to him is an
income for him.
Compound Journal Entry
This happens when there are a number of transactions on the same date relating to one particular
account or of one particular nature. Such transactions may be recorded by means of a single journal
entry rather than multiple journal entries. This is called ‘Compound Journal Entry’.
It may happen when:
a) One particular account may be debited while several other accounts may be credited
b) One particular account may be credited while several other accounts may be debited
c) Several accounts may be debited and several other accounts may be credited.
Example 2
Pass a compound journal entry in each of the following cases:
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1. Payment made to Ram Rs. 1000. He allowed a cash discount of Rs. 50
2. Received cash from Suresh Rs. 800 and allowed a discount of Rs. 50
3. A running business was purchased by Mohan with following assets and liabilities:
a) Cash Rs. 2000
b) Land Rs. 4000
c) Furniture Rs. 1000
d) Stock Rs. 2000
e) Creditors Rs. 1000
f) Bank overdraft Rs. 2000
Solution 2
Sl No
Date
1
Particulars
Ram
L/F
Debit
Credit
1050
To Cash A/C
1000
To Discount A/c
50
(Being payment made to Ram Rs. 1000 and Rs. 50 discount)
2
Cash A/C
Discount A/c
800
50
To Suresh A/C
850
(Being cash received from Suresh Rs. 800 and Rs. 50 discount)
3
Cash A/C
2,000
Land A/C
4,000
Furniture A/C
1,000
Stock A/C
2,000
To Creditors
1000
To Bank overdraft
2000
To Capital A/c
(Being commencement of business by taking over a running
business)
6,000
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Ledger
Definition
Definition: The Ledger is the main or principal book of accounts in which all the business transactions
would ultimately find their place under various accounts in a duly classified form.
According to L.C. Cropper,” The book which contains a classified and permanent record of all the
transactions of a business is called the ledger.”
Features of a Ledger
1. It has two identical sides – left hand side and right hand side. The left hand side is called debit
side and right hand side is called credit side.
2. Debit aspects of all the concerned transactions is recorded on the debit side, while credit aspect
on credit side according to date.
3. The difference of the total of the two sides represents balance. The excess of debit side over
credit side indicates debit balance, while excess of credit side over debit side indicates credit
balance. If the total of the two sides are equal there will be no balance.
4. Usually balance is drawn at the year end and recorded on the deficit side to make the two sides
equal. This balance is known as closing balance.
5. The closing balance of the current year will be the opening balance of the next year.
Method of Posting in a Ledger
The act of separately transferring each entry from journal to the respective account in the ledger is
called posting. Posting consists of:
1. Recording the relevant amount on the left hand side of the account which according to journal is
to be debited.
2. Recording the amount on the right hand side of the account which, according to the journal, is
to be credited.
3. In the ledger account, the first entry on the debit side is preceded by the word “To” and the first
entry on the credit side is preceded by the word “By.” The sign of ditto is placed before the
subsequent entries.
Format of a Ledger
Dr
Date
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Particulars
Rs
Date
Particulars
Cr
Rs.
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Using ‘To’ and ‘By’ in a Ledger
It is customary to use words ‘to’ and ‘by’ while posting transactions in the ledger. The word ‘to’ is used
with the accounts which appear on the debit side of a ledger account. For example, in the salaries
account, instead of writing only ‘Cash’ as shown above, the words ‘To Cash’ are used.
Similarly the word ‘by’ is used with accounts which appear on the credit side of the ledger account. For
example the words ‘By Salaries A/c’ will appear on the credit side of the cash account instead of only
‘salaries a/c’
Balancing a Ledger Account
1. Calculate the total of both sides of the ledger (one side in the case of revenue and expense
accounts).
2. Determine the larger of the two totals and place it in the total boxes on both sides of the ledger
(debit and credit totals). Should the debit total exceed the credit total, the ledger account would
have a debit balance and vice versa for the credit balance.
3. To balance the account properly, you need to introduce a balancing figure to the side on which
there is a deficit. This figure would be the balance carried down (or forward) at the end of the
period, which would be brought down (or forward) at the start of the next accounting period. As
such, the balancing figure is the balance carried down on the balance sheet accounts (accounts
that affect the statement of financial position/ balance sheet).
4. Recall that the balance sheet accounts would have a balancing figure that must be brought
down. You do this by going to the opposite side of the ledger account and detailing the balance
brought down, which is the same amount as the balancing figure. The balancing figure appears
before the total boxes while the brought down figure appears under the total boxes on the
opposite side to that of the balancing figure.
Example 3
Journalize the following transactions and post them in the ledger.
1.
2.
3.
4.
5.
6.
7.
8.
9.
Ram started business with a capital of Rs. 10,000
He purchased goods from Mohan on credit Rs. 2000
He paid cash to Mohan Rs. 1000
He sold goods to Suresh Rs. 2000
He received cash from Suresh Rs. 3000
He further purchased goods from Mohan Rs. 2000
He paid cash to Mohan Rs. 1000
He further sold goods to Suresh Rs. 2000
He received cash from Suresh Rs. 1000
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Solution 3
Sl
No
1
Particulars
L/F
Cash A/c
Debit
Credit
10,000
To Capital Account
10,000
(Being Commencement of Business)
2
Purchases A/c
2000
To Mohan A/C
2000
(Being purchase of goods on credit)
3
Mohan A/C
1000
To Cash A/C
1000
(Being payment of cash to Mohan)
4
Suresh A/C
2000
To Sales A/C
2000
(Being goods sold to Suresh)
5
Cash A/c
3000
To Suresh A/C
3000
(Being Cash received from Suresh)
6
Purchases A/c
2000
To Mohan A/C
2000
(Being purchase of goods)
7
Mohan A/C
1000
To Cash A/C
1000
(Being payment of cash to mohan)
8
Suresh A/C
2000
To Sales A/C
2000
(Being goods sold to Suresh)
9
Cash A/c
1000
To Suresh A/C
1000
(Being Cash received from Suresh)
Dr
Cash Account
Date
Particulars
Rs
Date
To Capital A/C
10000
To Suresh A/C
3000
To Suresh A/C
1000
14,000
1-Feb
To Balance B/D
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Cr
Particulars
By Mohan
By Mohan
31-Jan
By Balance c/d
Rs.
1000
1000
12000
14,000
12,000
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Dr
Capital Account
Date
31-Jan
Particulars
Rs
To Balance C/D
10000
Cr
Date
Particulars
10,000
By Balance B/d
Purchase Account
Date
Particulars
Rs
To Mohan A/C
2000
To Mohan A/C
2000
1000
10,000
1-Feb
Dr
Rs.
By Mohan
10000
Cr
Date
Particulars
31-Jan
Rs.
By Balance c/d
4000
4,000
1-Feb
To Balance B/D
Dr
4,000
4,000
Mohan Account
Date
Particulars
31-Jan
Rs
To Cash A/C
1000
To Cash A/C
1000
To Balance C/d
2000
Cr
Date
Particulars
Rs.
31-Jan
By Purchases A/C
2000
By Purchases A/C
2000
4,000
4,000
1-Feb
Dr
Date
By Balance B/D
Suresh Account
Particulars
Rs
To Sales
2000
To Sales
2000
2000
Cr
Date
Particulars
31-Jan
Rs.
By Cash A/C
3000
By Cash A/C
1000
4,000
Dr
4,000
Sales Account
Date
31-Jan
Particulars
To Balance C/D
Rs
Date
4000
Cr
Particulars
By Suresh A/C
2000
By Suresh A/C
2000
4,000
4,000
1-Feb
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Rs.
By Balance B/D
4,000
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It is to be noted that the balance of an account is always known by the side which is greater. For
example, in the above illustration, the debit side of the cash account is greater than the credit side of Rs.
12,000. It can therefore be said that the cash account is showing a debit balance of Rs. 12,000. Similarly,
the credit side of the capital account is greater than the debit side by Rs. 10,000. It can therefore be said
that the Capital account is showing a credit balance of Rs. 10,000
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