Recording of Transactions - I

Chapter 3 Recording of Transactions - I

In Chapter 1 and Chapter 2, we explored the development of accounting and its role in disseminating financial information. We also discussed basic accounting concepts that guide the recording of transactions. It was emphasized that accounting involves a process of identifying and analysing business transactions, recording them, classifying and summarizing their effects, and finally, communicating this information to interested users. In this chapter, we will delve into the details of each step involved in the accounting process. The first step is to identify transactions, prepare source documents, and record these in the journal, the basic book of original entry, before posting them to individual accounts in the ledger, the principal book.

3.1 Business Transactions and Source Documents

1. Example of a Business Transaction:

o Scenario: After securing good marks in your exam, your father buys you a computer for Rs 35,000, paying in cash.

o Analysis: This transaction is a reciprocal exchange involving:

§ Payment of cash (give aspect).

§ Delivery of a computer (take aspect).

o This example demonstrates that business transactions involve an exchange of economic consideration between parties, affecting at least two accounts.

2. Source Documents:

o Business transactions are usually evidenced by documents like cash memos, invoices, sales bills, pay-in-slips, cheques, salary slips, etc.

o These documents serve as proof of the transactions and are called Source Documents or Vouchers.

o In cases where no documentary evidence exists (e.g., petty expenses), vouchers can be prepared internally with necessary details and approval.

o Vouchers are arranged in chronological order, serially numbered, and kept in a file. All entries in the books of accounts are based on these vouchers.

3. Transaction Voucher Format:

o A typical transaction voucher includes:

§ Name of the firm

§ Voucher Number

§ Date of transaction

§ Debit account

§ Credit account

§ Amount in Rs

§ Narration (brief description of the transaction)

§ Authorized by and Prepared by signatures.

3.1.1 Preparation of Accounting Vouchers

1. Types of Accounting Vouchers:

o Accounting vouchers can be classified as:

§ Cash vouchers

§ Debit vouchers

§ Credit vouchers

§ Journal vouchers

o There is no fixed format for accounting vouchers; they are designed based on the business's nature, requirements, and convenience.

2. Essential Elements of an Accounting Voucher:

o Must be written on good quality paper.

o The firm's name should be printed at the top.

o The transaction date should be filled out, not the recording date.

o Vouchers should be serially numbered.

o Debit and credit accounts should be clearly mentioned.

o The amount should be written in figures against each account.

o A description of the transaction should be included.

o The name and signature of the preparer and the authorized person must be on the voucher.

3. Storage of Vouchers:

o Vouchers must be preserved until the audit and tax assessments for the relevant period are completed.

3.2 Accounting Equation

1. Understanding the Accounting Equation:

o The accounting equation shows that the assets of a business are always equal to the sum of its liabilities and capital:

§ A = L + C

§ Where:

§ A = Assets

§ L = Liabilities

§ C = Capital (Owner’s Equity)

o This equation, also known as the Balance Sheet Equation, illustrates the fundamental relationship among the components of the balance sheet.

2. Examples of Accounting Equation:

o Example 1:

§ Rohit starts a business with a capital of Rs 5,00,000.

§ Analysis: The business’s resources in the form of cash (Rs 5,00,000) are equal to Rohit's capital (Rs 5,00,000).

o Example 2:

§ Rohit opens a bank account with Rs 4,80,000.

§ Analysis: This increases the cash at the bank and decreases cash in hand.

o Example 3:

§ Furniture bought for Rs 60,000 by cheque.

§ Analysis: This increases furniture (assets) and decreases the bank balance (assets).

o Example 4:

§ Plant and machinery bought for Rs 1,25,000 with an advance of Rs 10,000 in cash.

§ Analysis: This increases plant and machinery (assets), decreases cash by Rs 10,000, and increases liabilities (M/s Ramjee Lal as creditors) by Rs 1,15,000.

1.3 Using Debit and Credit

Double Entry System: In double-entry accounting, every transaction affects and is recorded in at least two accounts. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
Debit and Credit: The terms "debit" and "credit" indicate where transactions are recorded:

Debit (Dr.): Recorded on the left side of an account.
Credit (Cr.): Recorded on the right side of an account.

Give and Take Aspect: Every transaction has a dual aspect — one account is debited, and the other is credited. For example, when you buy inventory for cash, the inventory account is debited, and the cash account is credited.
T-Account:

A T-account is a simplified version of an account that looks like the letter 'T'.
It helps to visually represent debits and credits with the left side (debit) and the right side (credit).

Recording Increases and Decreases:

For asset accounts, debits increase the balance, while credits decrease it.
For liability and equity accounts, credits increase the balance, while debits decrease it.
For revenue accounts, credits increase the balance, and debits decrease it.
For expense accounts, debits increase the balance, and credits decrease it.

Balancing Accounts: The ultimate position of each item (e.g., cash, sales, expenses) is determined by balancing the debits and credits at the end of the accounting period.
Example:

For a customer’s account, all sales to the customer are recorded on the left (debit) side, and all payments received from the customer are recorded on the right (credit) side.
The difference between the debits and credits represents the balance due from or to the customer.

Consistency in Debiting and Crediting:

Debiting an Account: Means entering an amount on the left side of the account.
Crediting an Account: Means entering an amount on the right side of the account.

Ensuring Balance: In every transaction, the total amount debited must always equal the total amount credited, maintaining the balance in the accounts.

This system allows accountants to track the financial position and performance of a business accurately over time.

3. Double Entry System:

o Every transaction in double-entry accounting affects at least two accounts.

o The total amount debited must equal the total amount credited.

o Accounts are divided into five categories:

1. Assets

2. Liabilities

3. Capital

4. Expenses/Losses

5. Revenues/Gains

Account Title
(left Side)	(Right Side)

1.3.1Rules for Recording Transactions:

For Assets/Expenses (Losses):

§ Increase in assets/expenses is debited.

§ Decrease in assets/expenses is credited.

o For Liabilities and Capital/Revenues (Gains):

§ Increase in liabilities/capital/revenues is credited.

§ Decrease in liabilities/capital/revenues is debited.

By following these steps and rules, one can ensure accurate and systematic recording of business transactions, leading to a well-prepared balance sheet that reflects the true financial position of the business.

Asset

(increase)

Debit

(decrease)

Credit

Liabilities

(decrease)

Debit

(increase)

Credit

Capital

(decrease)

Debit

(increase)

Credit

Expenses / Losses

(increase)

Debit

(decrease)

Credit

Revenues / Gains

(decrease)

Debit

(increase)

Credit

1. Rohit Started business with cash Rs 5,00,000

Analysis of Transaction : The transaction increases cash on one hand and increases capital on the other hand. Increases in assets are debited and increases in capital are credited. Therefore record the transaction with debit to cash and credit to rohit ‘s Capital.

Cash Account
(1) 5,00,00

Capital Account

(1) 5,00,000

(6) 10,000

2. Opened a bank account with an amount of 4,80,000

Analysis of Transaction : The Transaction increases the cash at bank on one hand and decreases cash in hand on the other hand. Increases in assets are debited and a decreases in assets are credited. There fire record the transactions with debit to bank account and credit to cash account

Cash Account
(1) 5,00 ,000	(2) 4,80,000

Bank Account
(2)4,80,000

3. Bought Furniture for Rs 60,000 and issued cheque for the same

Analysis of Transaction : This transaction increases furniture (assets) on one hand and decreases bank (assets) on the other hand by Rs 60,000 Increases in assets are debited and decreases are credited . Therefor record the transactions with debit to furniture account and credit to bank account.

Furniture Account
(1) 60,000

Bank Account
(2)4,80,000	(3) 60,000

4. Bought plant and Machinery form Ramjee lal for the business for –Rs 1,25,000 and an advance of Rs 10,000 in cash is given .

Analysis of Transaction: This transaction increases plant and machinery (assets) by Rs 1,25,000 decreases cash by Rs 10,000 and increases liabilities (M/s Ramjee lal as creditor ) by Rs 1,15,000 Increases in assets are debited whereas decreases in assets are credited . on the other hand increases in liabilities are credited. Therefore, record the transaction with debit to account and credit to cash and Ramjee Lal’s account.

Cash Account

(1) 5,00,000

(2) 4,80,000

(3) (4) 10,000

Plant and Machinery Account
(4) 1,25,000

Ramjee Lal’s Account
	(4) 1,15,000

5. Goods Purchased form Sumit Traders for 55,000

Analysis of Transaction: This transaction increases purchases (expenses) and increases liabilities (M/s Sumit Traders as creditors ) by Rs 55,000. Increases in expenses are debited and increases in liabilities are credited . Therefore record the transaction with debit to purchases account and credit to sumit traders account.

Purchases Account
(4) 55,000

Sumit Traders Account
	(5) 55,000

6. Goods costing Rs 25,000 sold to Rajani Enterprises for Rs 35,000

Analysis of Transaction: This transaction increases sales (Revenue) and increases assets (Rajani Enterprises as debtors). Increases in assets are debited and increases in revenue are credited. Therefore record the entry with credit to sales account and debit to Rajani enterprises account.

Sales Account
	(6) 35,000

Rajani Enterprises Account
	(6) 35,000

7. Paid the monthly store rent Rs 2,500 in cash

Analysis of Transaction : The Payment of rent is an expense which decreases capital thus,are recorded as debits. Credits cash to record decrease in assets.

Rent Account
(7) 2,500

Cash Account

(7) 5,00,000

(2)4,80,000

(4) 10,000

(7) 2,500

8. Paid Rs 5,000 as salary to the office employees

Analysis of transaction : The payment of salary is an expense which decreases capital thus are recorded as debits. Credit cash to record decrease in assets.

Salary Account
(8) 5,000

Cash Account

(1)5,00,000

(2) 4,80,000

(4) 10,000

(7) 2,500

(8)5,000

9. Received cheque as full payment from rajani enterprises and deposited same day into bank

Analysis of transaction : This transaction increase assets (Bank) on the one hand and decreases assets (Rajani Enterprises as debtors ) on the other hand . Increase in assets is debited whereas decrease in assets is credited. Therefore record the enter with debit to bank account and credit to rajani enterprises account.

Rajani Enterprises Account
(6) 35,000	(9) 35,000

Bank‘s Account

(2)4,80,000

(9) 35,000

(3) 60,000

Illustration I

Analyse the effect of each transaction on Assets and liabilities and show that the both sides of Accounting Equation (A = L + C) remains equal:

(i) Introduced 8,00,000 as cash and 50,000 by stock.

(ii) Purchased plant for 3,00,000 by paying 15,000 in cash and balance at a later date.

(iii) Deposited = 6,00,000 into the bank.

(iv) Purchased office furniture for 1,00,000 and made payment by cheque.

(v) Purchased goods worth 80,000 for cash and for 35,000 in credit.

(vi) Goods amounting to 45,000 was sold for 60,000 on cash basis.

(vii) Goods costing to 80,000 was sold for 1,25,000 on credit.

(viii) Cheque issued to the supplier of goods worth 35,000.

(ix) Cheque received from customer amounting to 75,000.

(x) Withdrawn by owner for personal use 25,000.

(Assets = Liabilities + Capital) remain equal:

Transaction	Assets (A)	Liabilities (L)	Capital (C)	A = L + C
(i) Introduced 8,00,000 as cash and 50,000 by stock.	Cash +8,00,000, Stock +50,000	-	Capital +8,50,000	8,50,000 = 0 + 8,50,000
(ii) Purchased plant for 3,00,000, paid 15,000 cash, balance later	Plant +3,00,000, Cash -15,000	Liabilities +2,85,000	-	11,35,000 = 2,85,000 + 8,50,000
(iii) Deposited 6,00,000 into the bank.	Cash -6,00,000, Bank +6,00,000	-	-	11,35,000 = 2,85,000 + 8,50,000
(iv) Purchased office furniture for 1,00,000, paid by cheque	Furniture +1,00,000, Bank -1,00,000	-	-	11,35,000 = 2,85,000 + 8,50,000
(v) Purchased goods worth 80,000 cash and 35,000 credit.	Stock +1,15,000, Cash -80,000	Liabilities +35,000	-	11,70,000 = 3,20,000 + 8,50,000
(vi) Goods worth 45,000 sold for 60,000 cash.	Stock -45,000, Cash +60,000	-	Capital +15,000 (profit)	11,85,000 = 3,20,000 + 8,65,000
(vii) Goods costing 80,000 sold for 1,25,000 on credit.	Stock -80,000, Debtors +1,25,000	-	Capital +45,000 (profit)	12,30,000 = 3,20,000 + 9,10,000
(viii) Cheque issued to supplier for 35,000.	Bank -35,000	Liabilities -35,000	-	11,95,000 = 2,85,000 + 9,10,000
(ix) Cheque received from customer amounting to 75,000.	Bank +75,000, Debtors -75,000	-	-	11,95,000 = 2,85,000 + 9,10,000
(x) Withdrawn by owner for personal use 25,000.	Cash -25,000	-	Capital -25,000	11,70,000 = 2,85,000 + 8,85,000

The accounting equation remains balanced for each transaction as shown by A=L+C

3.4 Books of Original Entry

Concept of Books of Original Entry:

In real accounting, transactions are not recorded directly in the accounts.
The first record of a transaction is made in the "Journal" or "Book of Original Entry."

Purpose of the Journal:

Provides a complete record of each transaction in one place.
Links the debits and credits for each transaction using the source document.

Journalising:

The process of recording transactions in the journal is called "journalising."
This step provides a detailed description of each transaction’s impact on the organization.

Posting:

After journalising, entries are transferred to individual accounts in the ledger.
This process is called "posting."

Books of Original Entry:

The journal is known as the Book of Original Entry.
The ledger is referred to as the Principal Book of entry.

Subdivision of the Journal:

Due to the volume and frequency of transactions, the journal is divided into several books of original entry:

(a) Journal Proper: For miscellaneous transactions not covered in other books.
(b) Cash Book: Records all cash receipts and payments.
(c) Other Day Books:

(i) Purchases (Journal) Book: Records credit purchases of goods.
(ii) Sales (Journal) Book: Records credit sales of goods.
(iii) Purchase Returns (Journal) Book: Records returns of goods purchased on credit.
(iv) Sale Returns (Journal) Book: Records returns of goods sold on credit.
(v) Bills Receivable (Journal) Book: Records bills receivable accepted by debtors.
(vi) Bills Payable (Journal) Book: Records bills payable issued to creditors.

Next Steps:

This chapter covers journalising and posting into the ledger.
Details on the cash book and other day books are covered in Chapter 4.

This structured approach helps maintain a systematic and organized record of all business transactions, ensuring accurate financial tracking and reporting.

3.4.1 Journal

Definition and Purpose:

A journal is the basic book of original entry where transactions are recorded in chronological order as they occur.
Transactions recorded in the journal are later posted to the respective ledger accounts.

Journal

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

Fig. 3.5 : Showing the format of journal

Recording Transactions:

Each transaction is recorded separately, identifying the specific accounts to be debited or credited.

Format of a Journal:

Date Column: Records the date of the transaction.
Particulars Column:

The title of the account to be debited is written on the first line with "Dr." at the end.
The title of the account to be credited is written on the second line, starting with "To".
A brief description or narration of the transaction is written below the account titles.

Ledger Folio Column: Records the page number of the ledger where the account appears; filled during the posting process, not while making the journal entry.
Debit and Credit Amount Columns:

The debit amount is recorded in the debit column against the debited account.
The credit amount is recorded in the credit column against the credited account.

Carrying Forward Balances:

As transactions are numerous, amounts are totaled at the end of each journal page and carried forward to the next page with “c/f” (carried forward).
On the next page, the totals are recorded as "b/f" (brought forward).

Types of Journal Entries:

Simple Journal Entry: Involves only two accounts (one debit and one credit).

Example: Purchasing goods on credit for ₹30,000 from M/s Govind Traders:

Debit: Purchases Account ₹30,000
Credit: Govind Traders Account ₹30,000

This entry shows that the purchases account is debited, indicating an increase in expenses.

Compound Journal Entry: Involves more than two accounts (multiple debits or credits).

Example: Office furniture purchased for ₹25,000 from Modern Furniture’s on July 4, 2017, paying ₹5,000 in cash and the balance of ₹20,000 on credit:

Debit: Furniture Account ₹25,000
Credit: Cash Account ₹5,000
Credit: Modern Furniture Account ₹20,000

This entry reflects an increase in assets (furniture), a decrease in assets (cash), and an increase in liabilities (credit).

Key Points:

The journal provides a complete and organized record of all transactions, linking the debits and credits effectively.
It serves as the foundation for maintaining accurate and reliable financial records, which are then used to post transactions to the ledger.

Understanding the journal is crucial for accurately recording business transactions and maintaining the integrity of the financial accounting process.

For Example ,Goods purchased on credit for Rs 30,000 from M/s Govind Traders on December 24,2017, involves only two accounts: (a) purchases A/c (G00ds), (b) Govind Traders A/c (creditors ). This transaction is recorded in the journal as follow:

Date

particulars

L.F

Debit amount Rs

Credit Amount Rs

2014

Dec.24

Purchases A/c

To Govind Traders A/c (purchase of goods –in –trade from Govind Traders)

30.000

30,000

Date

Particulars

L.F

Debit Amount Rs

Credit Amount Rs

2017 July 4

Office Furniture A/c To cash A/c To Modern Furnitures)

25,000

5,000 20,000

Ilustration 2.

Saroj Mart furnishes the following information :

Transactions during the month of April, 2017 are as under :

Details

01.4.2017 Business started with cash 1,50,000.

01.4.2017 Goods purchased form Manisha 36,000.

01.4.2017 Stationery purchased for cash 2,200.

02.4.2017 Open a bank account with SBI for 35,000.

02.4.2017 Goods sold to Priya for 16,000.

03.4.2017 Received a cheque of 16,000 from Priya.

05.4.2017 Sold goods to Nidhi 14,000.

08.4.2017 Nidhi pays 14,000 cash.

10.4.2017 Purchased goods for 20,000 on credit from Ritu.

14.4.2017 Insurance paid by cheque 6,000.

18.4.2017 Paid rent 2,000.

20.4.2017 Goods costing 1,500 given as charity.

24.4.2017 Purchased office furniture for 11,200.

29.4.2017 Cash withdrawn for household purposes 5000.

30.4.2017 Interest received cash 1,200.

30.4.2017 Cash sales 2,300.

30.4.2017 Commission paid 3,000 by cehque.

30.4.2017 Telephone bill paid by cheque 2,000.

30.4.2017 Payment of salaries in cash 12,000

Journal entries for Saroj Mart’s transactions during April 2017:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
01.04.2017	Cash A/c Dr.		1,50,000
	To Capital A/c			1,50,000
	(Business started with cash)
01.04.2017	Purchases A/c Dr.		36,000
	To Manisha A/c			36,000
	(Goods purchased from Manisha)
01.04.2017	Stationery A/c Dr.		2,200
	To Cash A/c			2,200
	(Stationery purchased for cash)
02.04.2017	Bank A/c Dr.		35,000
	To Cash A/c			35,000
	(Opened bank account with SBI)
02.04.2017	Priya A/c Dr.		16,000
	To Sales A/c			16,000
	(Goods sold to Priya)
03.04.2017	Bank A/c Dr.		16,000
	To Priya A/c			16,000
	(Received cheque from Priya)
05.04.2017	Nidhi A/c Dr.		14,000
	To Sales A/c			14,000
	(Goods sold to Nidhi)
08.04.2017	Cash A/c Dr.		14,000
	To Nidhi A/c			14,000
	(Received cash from Nidhi)
10.04.2017	Purchases A/c Dr.		20,000
	To Ritu A/c			20,000
	(Purchased goods on credit from Ritu)
14.04.2017	Insurance A/c Dr.		6,000
	To Bank A/c			6,000
	(Insurance paid by cheque)
18.04.2017	Rent A/c Dr.		2,000
	To Cash A/c			2,000
	(Paid rent)
20.04.2017	Charity A/c Dr.		1,500
	To Purchases A/c			1,500
	(Goods given as charity)
24.04.2017	Office Furniture A/c Dr.		11,200
	To Cash A/c			11,200
	(Purchased office furniture)
29.04.2017	Drawings A/c Dr.		5,000
	To Cash A/c			5,000
	(Cash withdrawn for personal use)
30.04.2017	Cash A/c Dr.		1,200
	To Interest Received A/c			1,200
	(Interest received in cash)
30.04.2017	Cash A/c Dr.		2,300
	To Sales A/c			2,300
	(Cash sales)
30.04.2017	Commission A/c Dr.		3,000
	To Bank A/c			3,000
	(Commission paid by cheque)
30.04.2017	Telephone Expenses A/c Dr.		2,000
	To Bank A/c			2,000
	(Telephone bill paid by cheque)
30.04.2017	Salaries A/c Dr.		12,000
	To Cash A/c			12,000
	(Paid salaries in cash)
	Total		3,49,400	3,49,400

Illustration 3

Prove that the accounting equation is satisfied in all the following transactions of Sita Ram house by preparing the analysis table. Also record the transactions in Journal.

(i) Business commenced with a capital of 6,00,000.

(ii) 4,50,000 deposited in a bank account.

(iii) 2,30,000 Plant and Machinery Purchased by paying 30,000 cash immediately.

(iv) Purchased goods worth 40,000 for cash and 45,000 on account.

(v) Paid a cheque of 2,00,000 to the supplier for Plant and Machinery.

(vi) 70,000 cash sales (of goods costing 50,000).

(vii) Withdrawn by the proprietor 35,000 cash for personal use.

(viii) Insurance paid by cheque of 2,500.

(ix) Salary of 5,500 outstanding.

(x) Furniture of 30,000 purchased in cash.

Accounting Equation Analysis Table

S.No	Transactions	Assets (Rs)	Liabilities (Rs)	Owner's Equity (Rs)	Accounting Equation
1	Business commenced with capital of Rs6,00,000	Cash + Rs6,00,000	-	Capital + Rs6,00,000	Rs6,00,000 = Rs0 + Rs6,00,000
2	Rs4,50,000 deposited in a bank account	Cash - Rs4,50,000, Bank + Rs4,50,000	-	-	Rs6,00,000 = Rs0 + Rs6,00,000
3	Plant & Machinery purchased for Rs2,30,000, Rs30,000 paid in cash	Cash - Rs30,000, Plant & Machinery + Rs2,30,000	Creditors + Rs2,00,000	-	Rs8,50,000 = Rs2,00,000 + Rs6,50,000
4	Purchased goods for Rs40,000 cash and Rs45,000 on account	Cash - Rs40,000, Inventory + Rs85,000	Creditors + Rs45,000	-	Rs8,95,000 = Rs2,45,000 + Rs6,50,000
5	Paid Rs2,00,000 to supplier for Plant & Machinery	Bank - Rs2,00,000, Creditors - Rs2,00,000	-	-	Rs6,95,000 = Rs45,000 + Rs6,50,000
6	Cash sales Rs70,000 (Cost Rs50,000)	Cash + Rs70,000, Inventory - Rs50,000	-	Profit + Rs20,000	Rs7,15,000 = Rs45,000 + Rs6,70,000
7	Withdrawn by proprietor Rs35,000 for personal use	Cash - Rs35,000	-	Drawings - Rs35,000	Rs6,80,000 = Rs45,000 + Rs6,35,000
8	Insurance paid by cheque Rs2,500	Bank - Rs2,500	-	-	Rs6,77,500 = Rs45,000 + Rs6,32,500
9	Salary Rs55,000 outstanding	-	Outstanding Salary + Rs55,000	-	Rs6,77,500 = Rs1,00,000 + Rs6,32,500
10	Furniture purchased in cash Rs30,000	Cash - Rs30,000, Furniture + Rs30,000	-	-	Rs6,77,500 = Rs1,00,000 + Rs6,32,500

Journal Entries

S.No	Date	Particulars	Debit (Rs)	Credit (Rs)
1		Cash A/c Dr.	6,00,000
		To Capital A/c		6,00,000
		(Being business commenced with capital)
2		Bank A/c Dr.	4,50,000
		To Cash A/c		4,50,000
		(Being cash deposited in bank)
3		Plant & Machinery A/c Dr.	2,30,000
		To Cash A/c		30,000
		To Creditors A/c		2,00,000
		(Being plant & machinery purchased, Rs30,000 paid in cash)
4		Purchases A/c Dr.	85,000
		To Cash A/c		40,000
		To Creditors A/c		45,000
		(Being goods purchased, Rs40,000 cash and Rs45,000 on account)
5		Creditors A/c Dr.	2,00,000
		To Bank A/c		2,00,000
		(Being payment made to supplier for plant & machinery)
6		Cash A/c Dr.	70,000

		To Sales A/c		70,000
		(sold goods on Profits)
		(Being cash sales made, cost of goods Rs50,000)
7		Drawings A/c Dr.	35,000
		To Cash A/c		35,000
		(Being cash withdrawn for personal use)
8		Insurance A/c Dr.	2,500
		To Bank A/c		2,500
		(Being insurance paid by cheque)
9		Salary A/c Dr.	5,500
		To Outstanding Salary A/c		5,500
		(Being salary outstanding)
10		Furniture A/c Dr.	30,000
		To Cash A/c		30,000
		(Being furniture purchased in cash)
		Total	17,08,000	17,08,000

Analysis and Recording of Transactions

1. Purchased Furniture for Rs60,000 and Issued a Cheque

· Analysis of Transaction:

o This transaction increases furniture (an asset) by Rs60,000.

o Simultaneously, it decreases the bank balance (another asset) by Rs60,000.

o In accounting, increases in assets are debited, and decreases in assets are credited.

· Journal Entry:

o Debit the Furniture Account by Rs60,000.

o Credit the Bank Account by Rs60,000.

· Ledger Posting:

o Furniture Account:

§ Debit: Rs60,000

o Bank Account:

§ Credit: Rs60,000

2. Purchased Plant and Machinery from Ramjee Lal for Rs1,25,000 and Paid Rs10,000 in Cash as an Advance

· Analysis of Transaction:

o The transaction increases plant and machinery (an asset) by Rs1,25,000.

o It decreases cash by Rs10,000 (asset reduction).

o It also increases liabilities (M/s Ramjee Lal as creditor) by Rs1,15,000.

o Increases in assets are debited, decreases in assets are credited, and increases in liabilities are credited.

· Journal Entry:

o Debit the Plant and Machinery Account by Rs1,25,000.

o Credit the Cash Account by Rs10,000.

o Credit the Ramjee Lal Account by Rs1,15,000.

· Ledger Posting:

o Plant and Machinery Account:

§ Debit: Rs1,25,000

o Cash Account:

§ Credit: Rs10,000

o Ramjee Lal Account:

§ Credit: Rs1,15,000

3. Purchased Goods from Sumit Traders for Rs55,000

· Analysis of Transaction:

o The transaction increases purchases (an expense) by Rs55,000.

o It also increases liabilities (M/s Sumit Traders as creditors) by Rs55,000.

o Increases in expenses are debited, and increases in liabilities are credited.

· Journal Entry:

o Debit the Purchases Account by Rs55,000.

o Credit the Sumit Traders Account by Rs55,000.

· Ledger Posting:

o Purchases Account:

§ Debit: Rs55,000

o Sumit Traders Account:

§ Credit: Rs55,000

4. Sold Goods to Rajani Enterprises for Rs35,000

· Analysis of Transaction:

o This transaction increases sales revenue by Rs35,000.

o It also increases assets (Rajani Enterprises as debtors) by Rs35,000.

o Increases in assets are debited, and increases in revenue are credited.

· Journal Entry:

o Debit the Rajani Enterprises Account by Rs35,000.

o Credit the Sales Account by Rs35,000.

· Ledger Posting:

o Rajani Enterprises Account:

§ Debit: Rs35,000

o Sales Account:

§ Credit: Rs35,000

5. Paid Monthly Store Rent Rs2,500 in Cash

· Analysis of Transaction:

o The payment of rent is considered an expense, which decreases capital.

o Expenses are debited, and cash (asset) decreases, so it is credited.

· Journal Entry:

o Debit the Rent Account by Rs2,500.

o Credit the Cash Account by Rs2,500.

· Ledger Posting:

o Rent Account:

§ Debit: Rs2,500

o Cash Account:

§ Credit: Rs2,500

6. Received Rs35,000 from Rajani Enterprises and Deposited in Bank

· Analysis of Transaction:

o This transaction increases bank assets by Rs35,000.

o It decreases assets (Rajani Enterprises as debtors) by Rs35,000.

o Increases in assets are debited, and decreases in assets are credited.

· Journal Entry:

o Debit the Bank Account by Rs35,000.

o Credit the Rajani Enterprises Account by Rs35,000.

· Ledger Posting:

o Bank Account:

§ Debit: Rs35,000

o Rajani Enterprises Account:

§ Credit: Rs35,000

Key Points for Understanding Double Entry Accounting

1. Every transaction affects at least two accounts, with one account being debited and another being credited.

2. Assets:

o Increase in assets -> Debit

o Decrease in assets -> Credit

3. Liabilities:

o Increase in liabilities -> Credit

o Decrease in liabilities -> Debit

4. Capital/Equity:

o Increase in capital -> Credit

o Decrease in capital -> Debit

5. Revenue/Income:

o Increase in revenue -> Credit

o Decrease in revenue -> Debit

6. Expenses:

o Increase in expenses -> Debit

o Decrease in expenses -> Credit

Classification of Commonly Used Accounts

1. Building: Asset (Increase -> Debit)

2. Wages: Expense (Increase -> Debit)

3. Credit Sales: Revenue (Increase -> Credit)

4. Credit Purchases: Liability (Increase -> Credit)

5. Electricity Bill (Paid): Expense (Increase -> Debit)

6. Electricity Bill (Outstanding): Liability (Increase -> Credit)

7. Godown Rent (Prepaid): Asset (Increase -> Debit)

8. Sales: Revenue (Increase -> Credit)

9. Fresh Capital: Capital (Increase -> Credit)

10. Discount Paid: Expense (Increase -> Debit)

To solve the problem in table format, the transactions for Saroj Mart in April 2017 will be presented with the following columns: Date, Transaction Description, Debit, Credit, and Accounts Affected.

Here is the table format:

Date	Transaction Description	Debit (Rs)	Credit (Rs)	Accounts Affected
01-Apr-17	Purchased goods for cash	50,000		Purchases A/c, Cash A/c
03-Apr-17	Sold goods on credit to Anil Enterprises		75,000	Anil Enterprises A/c, Sales A/c
05-Apr-17	Paid rent for the month	10,000		Rent A/c, Cash A/c
10-Apr-17	Received payment from Anil Enterprises	75,000		Cash A/c, Anil Enterprises A/c
12-Apr-17	Purchased furniture on credit from Ram Traders	30,000		Furniture A/c, Ram Traders A/c
15-Apr-17	Paid salary to staff	20,000		Salary A/c, Cash A/c
18-Apr-17	Sold goods for cash		40,000	Cash A/c, Sales A/c
20-Apr-17	Paid amount to Ram Traders		30,000	Ram Traders A/c, Cash A/c
25-Apr-17	Purchased inventory on credit from Sumit Traders	60,000		Inventory A/c, Sumit Traders A/c
28-Apr-17	Withdrawn cash for personal use		5,000	Drawings A/c, Cash A/c
30-Apr-17	Paid electricity bill	7,000		Electricity A/c, Cash A/c

Explanation:

Debit (Rs): The amount that increases an asset or expense account.
Credit (Rs): The amount that decreases an asset or increases a liability, revenue, or equity account.
Accounts Affected: Lists the specific accounts involved in each transaction.

Each transaction is recorded with the respective debit and credit amounts, ensuring the double-entry accounting principle where total debits equal total credits.

Test Your Understanding –II

State the title of the accounts affected, type of account and the account to be debited and account to be credited:

· Bhanu commenced business with cash 1,00,000

· Purchased goods on credit from Ramesh 40,000

· Sold goods for cash 30,000

· Paid salaries 3,000

· Furniture purchased for cash 10,000

Here is the table format for recording the necessary journal entries for the transactions under the Goods and Services Tax (GST) regime, assuming CGST @ 5% and SGST @ 5%. All transactions are within Delhi.

Journal Entries

Date	Particulars	Debit (Rs)	Credit (Rs)	Accounts Affected
01-Apr-17	1. Purchased goods on credit
	Purchases A/c	1,00,000		Purchases A/c
	Input CGST A/c	5,000		Input CGST A/c
	Input SGST A/c	5,000		Input SGST A/c
	To Creditors A/c		1,10,000	Creditors A/c

03-Apr-17	2. Sold goods on credit
	Debtors A/c	1,48,500		Debtors A/c
	To Sales A/c		1,35,000	Sales A/c
	To Output CGST A/c		6,750	Output CGST A/c
	To Output SGST A/c		6,750	Output SGST A/c

05-Apr-17	3. Paid for railway transport
	Freight/Transport Expenses A/c	8,000		Freight/Transport Expenses A/c
	Input CGST A/c	400		Input CGST A/c
	Input SGST A/c	400		Input SGST A/c
	To Cash/Bank A/c		8,800	Cash/Bank A/c

08-Apr-17	4. Bought computer printer
	Office Equipment A/c	10,000		Office Equipment A/c
	Input CGST A/c	500		Input CGST A/c
	Input SGST A/c	500		Input SGST A/c
	To Cash/Bank A/c		11,000	Cash/Bank A/c

10-Apr-17	5. Paid postal charges
	Postage Expenses A/c	2,000		Postage Expenses A/c
	Input CGST A/c	100		Input CGST A/c
	Input SGST A/c	100		Input SGST A/c
	To Cash/Bank A/c		2,200	Cash/Bank A/c

Explanation:

Debit (Rs): Represents the value of assets, expenses, or losses, showing the benefits received.
Credit (Rs): Represents liabilities, revenues, or capital, indicating the benefits given.
Accounts Affected: Details the accounts involved in each transaction, adhering to the principles of double-entry accounting under the GST regime.

Calculation Sheet

Particulars

CGST

SGST

IGST

Output Liability

Loss: input tax Credit

CGST

SGST

IGST

Amount Payable

36,000

7,200

27,000

36,000

7,200

36,000

1,800

28,800

NIL

3.5 The Ledger

1. Definition and Structure:

Principal Book of Accounting: The ledger is the central and most crucial book in the accounting system, serving as the repository for all accounts where transactions related to specific accounts are recorded.
Collection of Accounts: It encompasses all accounts that have been debited or credited within the journal proper and various special journals (which will be discussed in Chapter 4).
Physical Forms: A ledger can be maintained in different forms such as a bound register, cards, or loose-leaf sheets stored in a binder.
Page Allocation: Ideally, each account is allocated its own page or card within the ledger for better organization and clarity.

2. Utility of the Ledger:

Centralized Information Source: The ledger provides a consolidated view of all transactions related to a specific account, enabling users to ascertain the net balance on a given date.
Management Tool: For instance, if management needs to know the amount due from a customer or the payable amount to a supplier, such information can only be retrieved from the ledger.
Chronological vs. Classified Recording: Unlike journals where transactions are recorded in chronological order, the ledger classifies transactions by account, making it easier to retrieve specific information.
Definite Order: Accounts in the ledger are opened in a definite sequence, often corresponding to how they appear in the profit and loss account and the balance sheet.
Indexing and Coding: Larger organizations may use an index for easy reference, and each account is often assigned a unique code number for quick identification.

3. Format of an Account in the Ledger:

Title of the Account: The name of the item (e.g., "Cash Account") is written at the top of the ledger page as the title of the account.
Dr/Cr Designation:

Dr (Debit): The left side of the account, where debits are recorded.
Cr (Credit): The right side of the account, where credits are recorded.

Date Column: Transactions are recorded in the date column in chronological order, detailing the year, month, and day.
Particulars Column: This column contains a brief description of the transaction, along with a reference to the original book of entry (e.g., "Sale of Furniture").
Journal Folio Column: This records the page number from the original book of entry where the transaction is first recorded. It is filled out during the posting process.
Amount Column: This shows the numerical value of the transaction, matching the amount in the original book of entry.

4. Importance of the Ledger:

Key to Financial Information: The ledger is indispensable for organizations as it provides the foundation for financial statements by compiling data from various transactions.
Enhanced Organization: By categorizing transactions into individual accounts, the ledger simplifies the process of analyzing financial data and making informed decisions.

5. Practical Application Example:

Posting Example: When a piece of furniture is sold for cash, the cash account will be debited in the ledger, and the furniture account will be credited. The specific transaction details, date, and amount will be recorded in the respective columns, ensuring clarity and accuracy.

6. Conclusion:

Essential Record-Keeping Tool: The ledger is a vital component of the accounting process, ensuring that all financial transactions are categorized, recorded, and easily accessible for review and analysis. It forms the basis for the preparation of financial statements, making it a critical tool for any organization.

7. Test Your Understanding:

Various questions and scenarios are provided to assess comprehension, such as identifying the correct use of the ledger folio column and understanding the differences between journal entries and ledger postings.

This detailed breakdown of the ledger underscores its importance in the accounting process, highlighting its role in organizing financial data and aiding in the management of an organization's financial resources.

Dr. Cash Account Cr.

Date

Particulars

J.F

Amount

Date

Particulars

j.F.

Amount

Capital

5,00,000

Bank plant

And Machinery

4,80,000

10,000

Dr. Capital Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

cash

5,00,00

Dr. Bank Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

Cash

4,80,000

Furniture

60,000

Dr. Furniture Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

Rs.

Bank

60,000

Dr. Plant and Machinery Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F

Amount

Cash

Ramjee lal

10,000

1,15,000

Dr. Ramjee Lal’s Account Cr.

Date

Particulars

J.F.

J.F

Amount

Particulars

J.F

Amount

Plant and Machinery

1,15,000

Dr. Purchases Account Cr.

Date

Particulars

J.F.

Amount

Rs.

Date

Particulars

J.F.

Amount

Rs.

Plant and Machinery

1,15,000

Dr. Sumit Traders Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F

Amount

Rs.

Purchases

55,000

Dr. Rajani Enterprises Account Cr.

Date

Particulars

J.F.

Amount

Date

Particulars

J.F.

Amount

Sales

35,000

Dr. Sales Account Cr.

Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount Rs
					Rajani Enter prises		35,000

journal entries for M/s Mallika Fashion House and posting the entries to the ledger.

Journal Entries

Date	Particulars	Debit (Rs)	Credit (Rs)	Accounts Affected
June 05	1. Business started with cash
	Cash A/c	2,00,000		Cash A/c
	To Capital A/c		2,00,000	Capital A/c

June 08	2. Opened a bank account with Syndicate Bank
	Bank A/c (Syndicate Bank)	80,000		Bank A/c
	To Cash A/c		80,000	Cash A/c

June 12	3. Purchased goods on credit
	Purchases A/c	30,000		Purchases A/c
	To M/s Gulmohar Fashion House A/c		30,000	M/s Gulmohar Fashion House A/c

June 12	4. Purchased office machines paid by cheque
	Office Machines A/c	20,000		Office Machines A/c
	To Bank A/c (Syndicate Bank)		20,000	Bank A/c (Syndicate Bank)

June 18	5. Rent paid by cheque
	Rent A/c	5,000		Rent A/c
	To Bank A/c (Syndicate Bank)		5,000	Bank A/c (Syndicate Bank)

June 20	6. Sale of goods on credit
	M/s Mohit Bros A/c	10,000		M/s Mohit Bros A/c
	To Sales A/c		10,000	Sales A/c

June 22	7. Cash sales
	Cash A/c	15,000		Cash A/c
	To Sales A/c		15,000	Sales A/c

June 25	8. Cash paid to M/s Gulmohar Fashion House
	M/s Gulmohar Fashion House A/c	30,000		M/s Gulmohar Fashion House A/c
	To Cash A/c		30,000	Cash A/c

June 28	9. Received cheque from M/s Mohit Bros
	Bank A/c (Syndicate Bank)	10,000		Bank A/c (Syndicate Bank)
	To M/s Mohit Bros A/c		10,000	M/s Mohit Bros A/c

June 30	10. Salary paid in cash
	Salary A/c	6,000		Salary A/c
	To Cash A/c		6,000	Cash A/c

Ledger Posting

Here are the ledger postings for the relevant accounts:

Cash A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 05	Capital A/c	2,00,000
June 08	Bank A/c		80,000
June 25	M/s Gulmohar Fashion House A/c		30,000
June 22	Sales A/c	15,000
June 30	Salary A/c		6,000
	Balance c/d		99,000
	Total	2,15,000	2,15,000

Bank A/c (Syndicate Bank)

Date	Particulars	Debit (Rs)	Credit (Rs)
June 08	Cash A/c	80,000
June 12	Office Machines A/c		20,000
June 18	Rent A/c		5,000
June 28	M/s Mohit Bros A/c	10,000
	Balance c/d		65,000
	Total	90,000	90,000

Capital A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 05	Cash A/c		2,00,000

Purchases A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 12	M/s Gulmohar Fashion House A/c	30,000

M/s Gulmohar Fashion House A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 25	Cash A/c	30,000
June 12	Purchases A/c		30,000

Office Machines A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 12	Bank A/c	20,000

Rent A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 18	Bank A/c	5,000

Sales A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 20	M/s Mohit Bros A/c		10,000
June 22	Cash A/c		15,000

M/s Mohit Bros A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 20	Sales A/c	10,000
June 28	Bank A/c		10,000

Salary A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
June 30	Cash A/c	6,000

This table and ledger provide a detailed record of the transactions for M/s Mallika Fashion House for the month of June.

table format for recording the necessary journal entries for M/s Time Zone and posting the entries to the ledger.

Journal Entries

Date	Particulars	Debit (Rs)	Credit (Rs)	Accounts Affected
Dec. 01	1. Business started with cash
	Cash A/c	1,20,000		Cash A/c
	To Capital A/c		1,20,000	Capital A/c

Dec. 02	2. Opened a bank account with ICICI
	Bank A/c (ICICI)	4,00,000		Bank A/c
	To Cash A/c		4,00,000	Cash A/c

Dec. 04	3. Goods purchased for cash
	Purchases A/c	12,000		Purchases A/c
	To Cash A/c		12,000	Cash A/c

Dec. 10	4. Paid cartage
	Cartage A/c	500		Cartage A/c
	To Cash A/c		500	Cash A/c

Dec. 12	5. Goods sold on credit to M/s Lara India
	M/s Lara India A/c	25,000		M/s Lara India A/c
	To Sales A/c		25,000	Sales A/c

Dec. 14	6. Cash received from M/s Lara India
	Cash A/c	10,000		Cash A/c
	To M/s Lara India A/c		10,000	M/s Lara India A/c

Dec. 16	7. Goods returned from M/s Lara India
	Sales Return A/c	3,000		Sales Return A/c
	To M/s Lara India A/c		3,000	M/s Lara India A/c

Dec. 18	8. Paid trade expenses
	Trade Expenses A/c	700		Trade Expenses A/c
	To Cash A/c		700	Cash A/c

Dec. 19	9. Goods purchased on credit from M/s Taranum
	Purchases A/c	32,000		Purchases A/c
	To M/s Taranum A/c		32,000	M/s Taranum A/c

Dec. 20	10. Cheque received from M/s Lara India
	Bank A/c (ICICI)	11,500		Bank A/c (ICICI)
	To M/s Lara India A/c		11,500	M/s Lara India A/c

Dec. 22	11. Goods returned to M/s Taranum
	M/s Taranum A/c	1,500		M/s Taranum A/c
	To Purchase Return A/c		1,500	Purchase Return A/c

Dec. 24	12. Paid for stationery
	Stationery A/c	1,200		Stationery A/c
	To Cash A/c		1,200	Cash A/c

Dec. 26	13. Cheque given to M/s Taranum
	M/s Taranum A/c	20,000		M/s Taranum A/c
	To Bank A/c (ICICI)		20,000	Bank A/c (ICICI)

Dec. 28	14. Paid rent by cheque
	Rent A/c	4,000		Rent A/c
	To Bank A/c (ICICI)		4,000	Bank A/c (ICICI)

Dec. 29	15. Drew cash for personal use
	Drawings A/c	10,000		Drawings A/c
	To Cash A/c		10,000	Cash A/c

Dec. 30	16. Cash sales
	Cash A/c	12,000		Cash A/c
	To Sales A/c		12,000	Sales A/c

Dec. 31	17. Goods sold to M/s Rupak Traders
	M/s Rupak Traders A/c	11,000		M/s Rupak Traders A/c
	To Sales A/c		11,000	Sales A/c

Ledger Posting

Here are the ledger postings for the relevant accounts:

Cash A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
Dec. 01	Capital A/c	1,20,000
Dec. 02	Bank A/c		4,00,000
Dec. 04	Purchases A/c		12,000
Dec. 10	Cartage A/c		500
Dec. 14	M/s Lara India A/c	10,000
Dec. 18	Trade Expenses A/c		700
Dec. 24	Stationery A/c		1,200
Dec. 29	Drawings A/c		10,000
Dec. 30	Sales A/c	12,000
	Balance c/d		1,13,600
	Total	1,42,000	5,37,000

Bank A/c (ICICI)

Date	Particulars	Debit (Rs)	Credit (Rs)
Dec. 02	Cash A/c	4,00,000
Dec. 20	M/s Lara India A/c	11,500
Dec. 26	M/s Taranum A/c		20,000
Dec. 28	Rent A/c		4,000
	Balance c/d		3,87,500
	Total	4,11,500	4,11,500

Capital A/c

Date	Particulars	Debit (Rs)	Credit (Rs)
Dec. 01	Cash A/c		1,20,000

Purchases A/c

| Date | Particulars | Debit (Rs) | Credit (Rs) | |------------|----------------------------------|-----------|

Questions

State the three fundamental steps in the accounting process?

The three fundamental steps in the accounting process are:

1. Identifying Transactions: This step involves recognizing and recording all business transactions and financial events that have economic significance to the organization.

2. Recording Transactions: Once identified, these transactions are systematically recorded in the accounting books, primarily in journals, using the double-entry bookkeeping method.

3. Communicating Information: The recorded information is summarized into financial statements, such as the balance sheet, income statement, and cash flow statement, and then communicated to stakeholders for decision-making.

Why is the evidence provided by source by source documents important to accounting?

Bottom of FormThe evidence provided by source documents is crucial to accounting for several reasons:

1. Accuracy and Verification: Source documents, such as invoices, receipts, bank statements, and contracts, provide tangible proof of transactions. They ensure that the recorded transactions are accurate and based on actual events.

2. Audit Trail: Source documents create a reliable audit trail that can be followed to verify the authenticity of transactions. This is essential for internal controls and external audits.

3. Compliance and Legal Requirements: Maintaining source documents is often required by law and regulatory bodies. They provide evidence that the company is in compliance with financial reporting standards and tax regulations.

4. Transparency and Accountability: By retaining source documents, organizations demonstrate transparency and accountability in their financial reporting. This helps build trust with stakeholders, including investors, creditors, and regulatory agencies.

5. Support for Decision-Making: Accurate and reliable source documents provide the foundation for financial statements, which are critical for making informed business decisions.

In summary, source documents are the foundation of accurate, verifiable, and legally compliant financial records, making them indispensable in the accounting process.

Should a transaction be first recorded in a journal or ledger? Why?

A transaction should first be recorded in a journal before it is recorded in a ledger. Here's why:

1. Chronological Order: The journal records transactions in chronological order, providing a complete and organized record of all financial events as they occur. This makes it easier to track and reference specific transactions.

2. Initial Recording: The journal serves as the first point of entry for transactions, where each transaction is recorded with details such as the date, accounts involved, amounts, and a brief description. This detailed entry helps ensure that all aspects of the transaction are captured accurately.

3. Double-Entry System: In the journal, each transaction is recorded using the double-entry bookkeeping method, which involves debiting one account and crediting another. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.

4. Error Checking: By recording transactions in the journal first, accountants can review and verify the accuracy of each entry before it is posted to the ledger. This helps minimize errors in the ledger.

After transactions are recorded in the journal, they are then posted to the respective accounts in the ledger, where the information is organized by account type (e.g., assets, liabilities, equity, revenue, expenses). The ledger provides a consolidated view of all transactions affecting each account, which is essential for preparing financial statements.

Are debits or credits listed first in journal entries? Are debits or or credits indented?

In journal entries:

1. Debits are listed first.

2. Credits are listed second and are typically indented to the right.

This format clearly distinguishes the debit and credit sides of the transaction, making the entry easier to read and understand.

Here's an example:

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Date Account Title Debit Credit

2024-08-26 Cash 1,000

Sales Revenue 1,000

In this example, the "Cash" account is debited and listed first, without indentation. The "Sales Revenue" account is credited and listed second, with indentation to the right.

Why are some accounting systems called double accounting systems?

Some accounting systems are called double-entry accounting systems because they require that every financial transaction is recorded in two accounts: one as a debit and the other as a credit. This method ensures that the accounting equation (Assets = Liabilities + Equity) always stays balanced.

Key Features of Double-Entry Accounting:

1. Two-Sided Entries: Every transaction affects at least two accounts—one account is debited, and another is credited. For example, if a company purchases equipment with cash, the Equipment account is debited (increased), and the Cash account is credited (decreased).

2. Balancing Equation: The total debits must always equal the total credits for each transaction. This balance is crucial for maintaining accurate financial records and ensuring that the financial statements reflect the true financial position of the company.

3. Error Detection: The double-entry system provides a built-in method for detecting errors. If the debits and credits don't balance, it's an indication that there may be a mistake in the entries.

4. Comprehensive Financial Picture: By using double-entry accounting, businesses can generate accurate financial statements, such as the balance sheet and income statement, which provide a complete picture of the company's financial health.

In summary, double-entry accounting is called so because it records both the increase and decrease in accounts for every transaction, maintaining the balance and integrity of financial records.

Give a specimen of an account?

A specimen of an account is typically a template or example that demonstrates how to prepare and present financial information. Below is a basic example of a specimen of an account for a small business, focusing on the Profit and Loss Account (also known as an Income Statement):

ABC Enterprises

Profit and Loss Account

For the year ended 31st December 2024

Particulars	Amount (Rs)	Particulars	Amount (Rs)
To Opening Stock	15,000	By Sales	150,000
To Purchases	60,000	By Closing Stock	10,000
To Wages	20,000
To Gross Profit c/d	65,000
Total	160,000	Total	160,000

To Rent and Utilities	5,000	By Gross Profit b/d	65,000
To Salaries	15,000
To Depreciation	3,000
To Miscellaneous Expenses	7,000
To Net Profit c/d	35,000
Total	65,000	Total	65,000

Notes:

Opening Stock: The inventory value at the beginning of the period.
Purchases: The total amount spent on goods to be sold.
Wages: Payments to employees.
Gross Profit: Sales minus the cost of goods sold (COGS).
Rent and Utilities: Cost related to the use of premises and utilities.
Salaries: Payments made to the staff.
Depreciation: The reduction in value of assets over time.
Miscellaneous Expenses: Other minor expenses.
Net Profit: The profit after deducting all expenses from the gross profit.

This is a simplified version; real accounts might include more detailed line items depending on the complexity of the business.

Why are the rules of debit and credit same for both liability and capital?

The rules of debit and credit are the same for both liabilities and capital because they are both on the right side of the accounting equation:

Assets=Liabilities+Capital\text{Assets} = \text{Liabilities} + \text{Capital}Assets=Liabilities+Capital

Understanding the Accounting Equation:

Assets: What the business owns (left side of the equation).
Liabilities: What the business owes to others (right side of the equation).
Capital (Equity): The owner’s claim on the assets of the business, which is also on the right side of the equation.

The Rules of Debit and Credit:

1. Debit (Dr): An entry on the left side of a ledger account.

2. Credit (Cr): An entry on the right side of a ledger account.

Application to Liabilities and Capital:

Increase in Liabilities or Capital: Credited (since they are on the right side of the accounting equation).
Decrease in Liabilities or Capital: Debited.

Why the Same Rules Apply:

1. Liabilities and Capital both represent claims against the company’s assets. Creditors and owners have claims on the company's assets, and any increase in these claims results in a credit entry.

2. Both affect the company’s financing sources. Liabilities are borrowed funds, while capital represents funds invested by the owner. Since both represent funds the business uses to finance its assets, they follow the same rules of debit and credit.

In summary, liabilities and capital are treated similarly because they both represent obligations that need to be settled by the business and hence increase on the credit side and decrease on the debit side.

What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?

The purpose of posting Journal Folio (J.F.) numbers in the journal at the time entries are posted to the accounts is to maintain an organized and systematic record-keeping process in accounting. The J.F. number serves as a cross-reference between the journal and the ledger. Here’s why it is important:

1. Cross-Referencing:

J.F. number links the journal entry to its corresponding entry in the ledger. This makes it easier to trace back any entry from the ledger to the original journal entry and vice versa. This cross-referencing ensures that every transaction recorded in the journal has been properly posted to the appropriate ledger accounts.

2. Verification and Audit Trail:

During audits or internal reviews, the J.F. numbers help auditors and accountants verify that each journal entry has been correctly posted to the ledger. This ensures the accuracy and completeness of the accounts.

3. Prevention of Errors:

By entering the J.F. number in both the journal and the ledger, it reduces the chances of double posting or missing out on posting a journal entry. If a J.F. number is not recorded, it indicates that the transaction hasn’t been posted to the ledger yet.

4. Efficiency in Record-Keeping:

It makes the process of checking and updating the books more efficient. If any discrepancy arises, the J.F. number allows quick location of the original entry in the journal, making it easier to resolve issues.

5. Tracking Posting Process:

For businesses with high transaction volumes, J.F. numbers help in tracking which entries have been posted to the ledger and which have not. This helps maintain the flow of accounting work, especially in large organizations.

Example:

Suppose you have a journal entry with the J.F. number "101". When posting this entry to the ledger, you would write "101" in the J.F. column of the ledger, and in the journal, you would write the ledger page number in the respective column. This way, you can easily find the related entry in both books.

In summary, the J.F. number ensures that the accounting records are accurate, traceable, and easily verifiable, thereby supporting the overall integrity of the financial reporting process.

What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawing (d) record the fresh capital introduced by the owner

the accounting treatment for each scenario:

(a) Increase Revenue:

Credit

Revenue accounts are increased by crediting them. In double-entry bookkeeping, revenues increase equity, so they are credited when earned.
Entry Example: If you earn revenue of Rs1,000, you would record:

Debit: Accounts Receivable or Cash Rs1,000
Credit: Revenue Rs1,000

(b) Decrease in Expense:

Credit

Expense accounts are normally debited when they increase. To decrease an expense, you would credit the expense account.
Entry Example: If you reduce an expense by Rs200, you would record:

Debit: Accounts Payable or Cash Rs200 (if you're reversing a previous expense)
Credit: Expense Account Rs200

(c) Record Drawing:

Debit

Drawings (withdrawals by the owner) reduce the owner's equity. Therefore, you debit the Drawings account.
Entry Example: If the owner withdraws Rs500, you would record:

Debit: Drawings Rs500
Credit: Cash or Bank Rs500

(d) Record the Fresh Capital Introduced by the Owner:

Credit

Fresh capital introduced increases the owner's equity, so you credit the Capital account.
Entry Example: If the owner introduces Rs5,000 as new capital, you would record:

Debit: Cash or Bank Rs5,000
Credit: Capital Rs5,000

Summary:

Increase Revenue: Credit
Decrease in Expense: Credit
Record Drawing: Debit
Record Fresh Capital: Credit

These entries follow the basic rules of debit and credit, ensuring accurate financial records.

If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability is the decrease recorded as a debit or as a credit?

The treatment of decreases in assets and liabilities in accounting is based on the fundamental rules of debit and credit:

1. Decrease in an Asset:

Credit
Assets are increased by debits and decreased by credits. Therefore, if a transaction results in a decrease in an asset, the decrease is recorded as a credit.
Example: If a company sells a piece of equipment worth Rs2,000, the equipment account (an asset) would be credited.

Entry Example:

Debit: Cash or Accounts Receivable (if sold on credit) Rs2,000
Credit: Equipment Rs2,000

2. Decrease in a Liability:

Debit
Liabilities are increased by credits and decreased by debits. Therefore, if a transaction results in a decrease in a liability, the decrease is recorded as a debit.
Example: If a company pays off a Rs1,000 loan, the loan account (a liability) would be debited.

Entry Example:

Debit: Loan Payable Rs1,000
Credit: Cash or Bank Rs1,000

Summary:

Decrease in an Asset: Credit
Decrease in a Liability: Debit

These rules ensure that the accounting equation remains balanced, reflecting the correct financial position of the entity.

Long answers

Describe the events recorded in accounting systems and the importance of source documents in those systems?

Events Recorded in Accounting Systems

Accounting systems are designed to record and track financial transactions that affect a business’s financial position. The key events recorded in accounting systems include:

1. Revenue Generation:

o Sales of Goods or Services: When a company sells products or services, the revenue from these sales is recorded. This can include cash sales, credit sales, and interest income.

o Interest Earned: Income earned from investments or lending activities.

2. Expense Incurred:

o Purchase of Goods or Services: When a company buys inventory, supplies, or services needed for operations, the cost is recorded as an expense.

o Operating Expenses: Expenses related to the day-to-day operations, such as rent, utilities, salaries, and depreciation.

3. Asset Acquisition and Disposal:

o Purchase of Fixed Assets: When a company buys long-term assets like machinery, equipment, or vehicles, the transaction is recorded as an asset acquisition.

o Sale or Disposal of Assets: When an asset is sold or discarded, the transaction is recorded, and any resulting gain or loss is recognized.

4. Liability Recognition and Payment:

o Borrowing Funds: When a company takes out a loan or issues bonds, the liability is recorded.

o Repayment of Debts: Payments made to reduce liabilities, such as loan repayments or paying off accounts payable, are recorded.

5. Equity Transactions:

o Owner’s Equity Contributions: Any capital introduced by the owner or investors is recorded as an increase in equity.

o Withdrawals (Drawings): When the owner takes out money or assets from the business, this is recorded as a reduction in equity.

o Issuance of Shares: When a company issues new shares, it increases equity.

o Dividends Paid: When dividends are distributed to shareholders, the payment is recorded as a reduction in retained earnings.

6. Adjusting Entries:

o Depreciation: Periodic allocation of the cost of fixed assets over their useful lives.

o Accruals and Prepayments: Adjusting entries to record expenses and revenues in the correct accounting period.

7. Closing Entries:

o At the end of the accounting period, temporary accounts like revenues and expenses are closed to retain earnings to prepare for the next period.

Importance of Source Documents in Accounting Systems

Source documents are the original records that contain the details of a business transaction. They are crucial for several reasons:

1. Evidence of Transactions:

o Source documents provide proof that a transaction has occurred. They include invoices, receipts, bank statements, contracts, and checks, which serve as tangible evidence that can be reviewed, audited, or referenced in case of disputes.

2. Accuracy and Reliability:

o They ensure that the information recorded in the accounting system is accurate and reliable. Without source documents, the risk of errors, fraud, or omissions in the financial records increases significantly.

3. Audit Trail:

o Source documents create an audit trail, allowing auditors and internal reviewers to trace transactions from the accounting records back to the original documentation. This traceability is essential for verifying the legitimacy of the transactions and ensuring compliance with accounting standards and regulations.

4. Legal and Tax Compliance:

o Many regulatory bodies and tax authorities require businesses to maintain source documents as part of their compliance obligations. These documents must be retained for a specific period and can be requested during audits or tax reviews.

5. Financial Control:

o Source documents are a key component of internal controls. They help prevent unauthorized transactions, ensure that all transactions are recorded, and support the separation of duties within the organization.

6. Supporting Decision-Making:

o Accurate records supported by source documents enable management to make informed decisions based on reliable financial data. This can include budgeting, forecasting, and strategic planning.

In summary, source documents are vital for the integrity, accuracy, and reliability of accounting systems, providing the foundation upon which financial records are built and maintained.

Describe how debits and credits are used to analyse transactions?

Debits and credits are the fundamental tools used in accounting to analyze transactions. They help ensure that the accounting equation (Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity) remains balanced. Understanding how to use debits and credits correctly is essential for recording and analyzing financial transactions.

1. Understanding Debits and Credits:

Debit (Dr): Refers to the left side of a ledger account.
Credit (Cr): Refers to the right side of a ledger account.
In any given transaction, the total amount of debits must equal the total amount of credits, maintaining the balance of the accounting equation.

2. Impact on Different Types of Accounts:

Different types of accounts are affected by debits and credits in specific ways:

Assets:

Debit: Increases an asset.
Credit: Decreases an asset.
Example: Purchasing equipment for cash:

Debit: Equipment (increases asset)
Credit: Cash (decreases asset)

Liabilities:

Debit: Decreases a liability.
Credit: Increases a liability.
Example: Borrowing money from the bank:

Debit: Cash (increases asset)
Credit: Loan Payable (increases liability)

Equity (Capital/Owner’s Equity):

Debit: Decreases equity.
Credit: Increases equity.
Example: Owner contributes additional capital:

Debit: Cash (increases asset)
Credit: Owner's Capital (increases equity)

Revenues:

Debit: Decreases revenue.
Credit: Increases revenue.
Example: Making a sale:

Debit: Accounts Receivable or Cash (increases asset)
Credit: Sales Revenue (increases revenue)

Expenses:

Debit: Increases an expense.
Credit: Decreases an expense.
Example: Paying for utilities:

Debit: Utilities Expense (increases expense)
Credit: Cash (decreases asset)

3. Steps in Analyzing a Transaction:

To analyze a transaction using debits and credits, follow these steps:

Step 1: Identify the Accounts Involved: Determine which accounts are affected by the transaction. For example, in a cash sale, the accounts involved might be "Cash" and "Sales Revenue."
Step 2: Determine the Type of Accounts: Identify whether the accounts are assets, liabilities, equity, revenue, or expense accounts.
Step 3: Apply the Rules of Debit and Credit: Based on the type of accounts, determine whether to debit or credit each account:

Increase in Assets: Debit
Decrease in Assets: Credit
Increase in Liabilities: Credit
Decrease in Liabilities: Debit
Increase in Equity: Credit
Decrease in Equity: Debit
Increase in Revenue: Credit
Increase in Expense: Debit

Step 4: Record the Transaction: Enter the debit and credit amounts in the respective accounts in the ledger.
Step 5: Ensure the Accounting Equation Remains Balanced: After recording, check that the total debits equal total credits, ensuring that the accounting equation is balanced.

4. Example of Transaction Analysis:

Transaction: A company receives Rs5,000 in cash for services rendered.

Accounts Involved:

Cash (Asset)
Service Revenue (Revenue)

Analysis:

Cash increases (Asset): Debit Rs5,000
Revenue increases (Revenue): Credit Rs5,000

Journal Entry:

Debit: Cash Rs5,000
Credit: Service Revenue Rs5,000

5. Importance of Debits and Credits in Analysis:

Accuracy: Ensures that transactions are recorded accurately, reflecting the true financial position of the business.
Consistency: Maintains consistency in financial reporting by following standardized rules.
Auditability: Provides a clear audit trail, making it easier to review and verify financial records.
Financial Statement Preparation: Accurate analysis using debits and credits is crucial for preparing reliable financial statements.

In summary, debits and credits are the building blocks of accounting. They are used to analyze transactions by determining which accounts are affected, applying the appropriate debit or credit, and ensuring the accounting equation remains balanced. This systematic approach helps in maintaining accurate and reliable financial records.

Describe how accounts are used to record information about the effects of transactions?

Accounts are fundamental tools in accounting used to record, classify, and summarize the financial transactions of a business. Each account tracks a specific type of asset, liability, equity, revenue, or expense. Here's how accounts are used to record information about the effects of transactions:

1. What is an Account?

Definition: An account is a record in the general ledger that tracks the financial activities and balances for a specific category, such as cash, accounts receivable, sales, or expenses.
Structure: Accounts are typically structured with a title (e.g., "Cash," "Accounts Payable") and two sides:

Debit (Dr): The left side, used to record increases in assets and expenses or decreases in liabilities, equity, and revenue.
Credit (Cr): The right side, used to record increases in liabilities, equity, and revenue or decreases in assets and expenses.

2. Types of Accounts:

Asset Accounts: Track the resources owned by a business (e.g., Cash, Accounts Receivable, Inventory).
Liability Accounts: Track what the business owes to others (e.g., Accounts Payable, Loans Payable).
Equity Accounts: Track the owner’s interest in the business (e.g., Owner’s Capital, Retained Earnings).
Revenue Accounts: Track the income earned from business operations (e.g., Sales Revenue, Service Revenue).
Expense Accounts: Track the costs incurred by the business (e.g., Rent Expense, Utilities Expense).

3. How Transactions Affect Accounts:

When a transaction occurs, it affects at least two accounts (this is the essence of double-entry accounting). Each account is adjusted by either a debit or a credit based on the nature of the transaction.
Example 1: If a business purchases inventory for cash:

Inventory (Asset) Increases: Debit the Inventory account.
Cash (Asset) Decreases: Credit the Cash account.

Example 2: If a business earns revenue from a sale:

Cash or Accounts Receivable (Asset) Increases: Debit the Cash or Accounts Receivable account.
Sales Revenue (Revenue) Increases: Credit the Sales Revenue account.

4. Recording Transactions in Accounts:

Journal Entries:

Transactions are first recorded in the journal through journal entries. A journal entry includes the date, accounts involved, amounts to be debited and credited, and a brief description of the transaction.
Example Journal Entry:

Date: August 26, 2024
Debit: Cash Rs1,000
Credit: Service Revenue Rs1,000
Description: Received cash for services rendered.

Posting to Ledger:

After the journal entry is made, the information is posted to the corresponding accounts in the general ledger. Each account in the ledger reflects the cumulative effect of all transactions that have affected it.
The ledger shows the current balance of each account, which is essential for preparing financial statements.

5. T-Accounts for Visualization:

A T-account is a simple visual tool used to represent an account, with debits on the left side and credits on the right side.
Example T-Account for Cash:

Cash Account
Debit (Dr)
Aug 1 - Rs1,000
Aug 5 - Rs500

Balance: Rs1,200

This T-account shows the cash transactions on specific dates and the resulting balance.

6. Balancing Accounts:

Trial Balance: After posting transactions to the ledger, a trial balance is prepared to ensure that total debits equal total credits across all accounts.
If the trial balance is accurate, it suggests that the accounts have been recorded correctly, which is crucial for preparing accurate financial statements.

7. Closing Accounts:

At the end of an accounting period, temporary accounts like revenues and expenses are closed to retained earnings to reset their balances for the next period.
Closing Entry Example:

Revenue Account: Debit the revenue account to bring its balance to zero.
Retained Earnings: Credit retained earnings (or owner's capital) to reflect the increase from net income.

8. Financial Statement Preparation:

The balances in the ledger accounts are used to prepare financial statements:

Balance Sheet: Uses the balances from asset, liability, and equity accounts.
Income Statement: Uses the balances from revenue and expense accounts.
Statement of Cash Flows: Tracks cash movements using the cash account.

Summary:

Accounts are essential for recording the effects of transactions. They allow businesses to systematically track and manage their financial activities, ensuring accurate and reliable financial reporting. By using debits and credits to analyze and record transactions in the accounts, businesses maintain a clear and consistent record of their financial health.

What is a journal? Give a specimen of journal showing at least five entries.

A journal is the primary book of accounting, also known as the "book of original entry." It is where all business transactions are initially recorded in chronological order before being posted to the general ledger. Each entry in the journal includes the date of the transaction, the accounts affected, the amounts debited and credited, and a brief description of the transaction.

Key Features of a Journal:

Chronological Record: Transactions are recorded as they occur.
Double-Entry System: Every transaction affects at least two accounts, with equal debits and credits.
Narration: Each entry includes a brief explanation of the transaction.
Journal Entry Format: Each entry includes the date, debit and credit accounts, amounts, and a description.

Specimen of a Journal with Five Entries:

Date	Particulars	L.F.	Debit (Rs)	Credit (Rs)
2024-08-01	Cash A/C		10,000
	To Capital A/C			10,000
	(Being capital introduced by the owner)
----------	-----------------------------------	----------	---------------	----------------
2024-08-03	Inventory A/C		5,000
	To Cash A/C			5,000
	(Being inventory purchased for cash)
----------	-----------------------------------	----------	---------------	----------------
2024-08-05	Accounts Receivable A/C		7,000
	To Sales Revenue A/C			7,000
	(Being goods sold on credit)
----------	-----------------------------------	----------	---------------	----------------
2024-08-07	Rent Expense A/C		2,000
	To Cash A/C			2,000
	(Being rent paid for the month)
----------	-----------------------------------	----------	---------------	----------------
2024-08-10	Utilities Expense A/C		1,500
	To Accounts Payable A/C			1,500
	(Being utilities expense incurred, not yet paid)

Explanation of the Journal Entries:

1. August 1, 2024:

o Debit: Cash Rs10,000 (Cash increases as the owner introduces capital)

o Credit: Capital Rs10,000 (Owner's equity increases)

o Narration: Being capital introduced by the owner.

2. August 3, 2024:

o Debit: Inventory Rs5,000 (Inventory increases as it is purchased)

o Credit: Cash Rs5,000 (Cash decreases as it is used to purchase inventory)

o Narration: Being inventory purchased for cash.

3. August 5, 2024:

o Debit: Accounts Receivable Rs7,000 (Receivable increases as goods are sold on credit)

o Credit: Sales Revenue Rs7,000 (Revenue increases)

o Narration: Being goods sold on credit.

4. August 7, 2024:

o Debit: Rent Expense Rs2,000 (Expense increases as rent is paid)

o Credit: Cash Rs2,000 (Cash decreases as rent is paid)

o Narration: Being rent paid for the month.

5. August 10, 2024:

o Debit: Utilities Expense Rs1,500 (Expense increases as utilities are used)

o Credit: Accounts Payable Rs1,500 (Liability increases as payment is yet to be made)

o Narration: Being utilities expense incurred, not yet paid.

This journal records the initial transactions in a company’s financial system, ensuring that the accounting equation remains balanced and accurate for further reporting and analysis.

Accounting equation remains intact under all circumstances justify the statement with the help of an example.

Top of Form

Bottom of Form

Justification of the Accounting Equation:

The accounting equation is the foundation of double-entry accounting and states that:

Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity

This equation must remain balanced after every transaction, ensuring that the financial position of a business is accurately represented. The equation holds true because every transaction has a dual effect on the accounts involved, which ensures that the total assets always equal the sum of liabilities and equity.

Example to Illustrate the Accounting Equation:

Let's consider a series of transactions for a fictional business, "ABC Traders," and observe how the accounting equation remains intact:

1. Initial Capital Investment

Transaction: The owner invests Rs50,000 in the business.
Effect:

Asset (Cash) increases by Rs50,000
Equity (Owner's Capital) increases by Rs50,000

Accounting Equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity Rs50,000=Rs0+Rs50,000Rs50,000 = Rs0 + Rs50,000Rs50,000=Rs0+Rs50,000

The equation remains balanced.

2. Purchase of Inventory for Cash

Transaction: ABC Traders purchases inventory worth Rs20,000 for cash.
Effect:

Asset (Inventory) increases by Rs20,000
Asset (Cash) decreases by Rs20,000

Accounting Equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity Rs50,000=Rs0+Rs50,000(before the transaction)Rs50,000 = Rs0 + Rs50,000 \quad \text{(before the transaction)}Rs50,000=Rs0+Rs50,000(before the transaction) Rs50,000−Rs20,000(Cash)+Rs20,000(Inventory)=Rs0+Rs50,000Rs50,000 - Rs20,000 (\text{Cash}) + Rs20,000 (\text{Inventory}) = Rs0 + Rs50,000Rs50,000−Rs20,000(Cash)+Rs20,000(Inventory)=Rs0+Rs50,000

The equation remains balanced as total assets still equal Rs50,000.

3. Sale of Goods on Credit

Transaction: ABC Traders sells inventory worth Rs10,000 on credit (cost of inventory sold is Rs6,000).
Effect:

Asset (Accounts Receivable) increases by Rs10,000
Asset (Inventory) decreases by Rs6,000
Equity (Revenue) increases by Rs10,000
Equity (Cost of Goods Sold) decreases by Rs6,000

Accounting Equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity Rs50,000=Rs0+Rs50,000(before the transaction)Rs50,000 = Rs0 + Rs50,000 \quad \text{(before the transaction)}Rs50,000=Rs0+Rs50,000(before the transaction) Rs50,000+Rs10,000(Accounts Receivable)−Rs6,000(Inventory)=Rs0+(Rs50,000+Rs10,000(Revenue)−Rs6,000(Cost of Goods Sold))Rs50,000 + Rs10,000 (\text{Accounts Receivable}) - Rs6,000 (\text{Inventory}) = Rs0 + (Rs50,000 + Rs10,000 (\text{Revenue}) - Rs6,000 (\text{Cost of Goods Sold}))Rs50,000+Rs10,000(Accounts Receivable)−Rs6,000(Inventory)=Rs0+(Rs50,000+Rs10,000(Revenue)−Rs6,000(Cost of Goods Sold)) Rs54,000=Rs54,000Rs54,000 = Rs54,000Rs54,000=Rs54,000

The equation remains balanced with total assets of Rs54,000 and equity also being Rs54,000.

4. Payment of Rent

Transaction: ABC Traders pays Rs5,000 for rent.
Effect:

Asset (Cash) decreases by Rs5,000
Equity (Rent Expense) decreases by Rs5,000

Accounting Equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity Rs54,000=Rs0+Rs54,000(before the transaction)Rs54,000 = Rs0 + Rs54,000 \quad \text{(before the transaction)}Rs54,000=Rs0+Rs54,000(before the transaction) Rs54,000−Rs5,000(Cash)=Rs0+(Rs54,000−Rs5,000(Rent Expense))Rs54,000 - Rs5,000 (\text{Cash}) = Rs0 + (Rs54,000 - Rs5,000 (\text{Rent Expense}))Rs54,000−Rs5,000(Cash)=Rs0+(Rs54,000−Rs5,000(Rent Expense)) Rs49,000=Rs49,000Rs49,000 = Rs49,000Rs49,000=Rs49,000

The equation remains balanced after paying rent.

5. Loan Taken from the Bank

Transaction: ABC Traders takes a loan of Rs30,000 from the bank.
Effect:

Asset (Cash) increases by Rs30,000
Liability (Loan Payable) increases by Rs30,000

Accounting Equation: Assets=Liabilities+Equity\text{Assets} = \text{Liabilities} + \text{Equity}Assets=Liabilities+Equity Rs49,000=Rs0+Rs49,000(before the transaction)Rs49,000 = Rs0 + Rs49,000 \quad \text{(before the transaction)}Rs49,000=Rs0+Rs49,000(before the transaction) Rs49,000+Rs30,000(Cash)=Rs30,000(Loan Payable)+Rs49,000Rs49,000 + Rs30,000 (\text{Cash}) = Rs30,000 (\text{Loan Payable}) + Rs49,000Rs49,000+Rs30,000(Cash)=Rs30,000(Loan Payable)+Rs49,000 Rs79,000=Rs79,000Rs79,000 = Rs79,000Rs79,000=Rs79,000

The equation remains balanced with total assets of Rs79,000 and the sum of liabilities and equity also being Rs79,000.

Conclusion:

In each of the above examples, no matter the nature of the transaction, the accounting equation remains balanced. This balance is fundamental to ensuring that the financial statements derived from these accounts accurately reflect the financial position of the business. The integrity of the accounting equation guarantees that all financial records are accurate and reliable, which is crucial for decision-making and financial reporting.

Plus One

Thursday 29 August 2024

Recording of Transactions - I

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