Recording of Transactions I Class 11 Notes

A business transaction is any event that changes the assets, liabilities, capital, revenue or expenses of the business. Cash is not necessary: a credit purchase of machinery is a transaction even though no cash moves, and the only test is whether the accounting equation is affected.The source document is the original evidence of the transaction — a bill, a receipt, a cash memo, a bank statement, a debit note, a credit note or a payslip. It is the authority for the entry, and the accountant must see it before recording anything.

• Cash memo: issued when cash or goods are received, showing the party, the amount and the period for which payment is made.
• Bill: a document of indebtedness, used when a sale or purchase is on credit.
• Debit note: issued by the seller to reduce the amount of a bill or invoice already issued.
• Credit note: issued by the seller to increase the amount of a bill or invoice already issued.
• Receipt: acknowledges payment received in full or part.
• Pay-in-slip: the deposit slip accompanying cash or cheque into the bank.

The equation of a business is the statement of its financial position at every moment. The two sides are always equal because every transaction has two aspects: it affects the assets and the capital on one side, and the accounting equation cannot be disturbed, only rearranged.

• Transposition of an equation within the equation: a transaction affecting two assets, such as cash received from the debtor, changes the structure but not the total.
• Change of one asset into another: the value moves, the total of assets is unchanged.
• Change of one liability into another: a creditor is settled partly by cash and partly by issuing a bill, so total liabilities are unchanged.
• Increase of an asset and a capital: the owner introduces capital, or a revenue item is earned.
• Increase of an asset and a liability: a liability is incurred to buy an asset, for example purchasing machinery on credit.
• Increase of an expense and a decrease of an asset: an expense is paid in cash.
• Increase of an asset and a decrease of a liability: a debtor pays what was owed.

The debit and credit rules are the two aspects of every transaction restated in a fixed form. They are not arbitrary: the debit side of every account is the left-hand side of that account, and the debit of a real account is always an asset.

• Real account (assets): debit what comes in, credit what goes out — the rule is debit the receiver, credit the giver.
• Personal account (persons): debit the receiver of value, credit the giver of value. The debit balance of a personal account is the amount that person owes.
• Nominal account (expenses, incomes, profits and losses): debit all expenses and losses, credit all incomes and gains — the rule is debit what goes in, credit what comes in, the reverse of the real account.
• The golden rule: put every credit of one account into the debit of another.

The journal is the book of original entry, where every transaction is recorded chronologically, once, in debit and credit form, with a narration explaining the purpose. Recording only the essential details of a transaction rather than every part of it is called narrating, and a journal entry is not complete without it.

• Date, followed by particulars, followed by folio (the ledger page number).
• The account to be debited is written on the first line with the amount in the debit column and a folio against it.
• The account to be credited is written on the second line with the amount in the credit column and a folio against it.
• A short narration in brackets follows the credit line, after a 'Being' connective.
• The amount is written in the first money column and the total is written under both columns and underlined twice.
• The balance of cash and bank is shown below the balance line with the date.

Nearly every journal entry in this chapter is one of six patterns. Learn them as pairs of accounts and the analysis becomes routine, because the only work left is finding the amount and naming the narration.

• Cash A/c Dr, To Capital — the owner introduces cash into the business. Effect: an asset and capital both increase.
• Cash A/c Dr, To Sales — cash is received for goods sold. Effect: an asset increases, revenue increases.
• Cash A/c Dr, To Debtors — a debtor settles the amount owed. Effect: one asset replaces another, so the total is unchanged.
• Bank A/c Dr, To Cash A/c — cash is deposited into the bank. Effect: a transposition within assets, which is why the cash book records it in one entry across two columns.
• Purchases A/c Dr, To Creditors — goods are bought on credit. Effect: an expense and a liability both increase.
• Drawings A/c Dr, To Cash A/c — the owner withdraws cash for personal use. Effect: capital falls, no expense arises.

The ledger is the principal book of account, containing all accounts in alphabetical order, with columns for particulars, folio, amount and a running balance. The journal gives the full story of each transaction; the ledger collects all entries for one account together, which is what makes a balance possible.

• Posting rule: for each journal entry, the amount is entered in the appropriate account with the journal folio in the folio column, on the same line as the particular.
• Amounts on the debit and credit sides are posted on the same date line; a line is ruled on both sides when the two postings fall on different dates.
• Posting from the sales, purchases and returns books is made daily, with the particulars column showing the invoice or bill number, and the debit and credit are posted to their respective accounts.
• Balance of an account: for an asset or expense, a debit balance; for a liability, income or capital, a credit balance. The balance is entered on the last line and the account is ruled off.