Chapter 3: Recording of Transactions – 1

Events that are recorded into the accounting system are those events that can be measured in monetary terms. Some examples include the installation of machinery after purchase, and payment of salaries to employees. The importance of source documents in the accounting system is as follows:

1. It provides evidence of the transaction that has taken place.

2. It acts as a backup in times of auditing and tax assessment.

3. It acts as primary legal evidence, as journal entries are based on data from source documents.

4. It protects against faulty transactions

5. It helps in resolving conflicts related to any transaction.

All transactions must be measured in monetary terms to be recorded. All such transactions have a dual aspect, i.e., both debit and credit. Therefore when recording transactions, both the debit and credit amounts should be the same. In the recording of transactions, debit and credit determine whether they should be placed on the left or right side of the account. Amount entered on the left side is debit and is represented by the notation Dr. while credit is recorded on the right side of an account, abbreviated as Cr.

For recording transactions, accounts are classified into the following types:

• Assets
• Liabilities
• Capital
• Expenses/Losses
• Revenues/Gains

The following rules are used for recording transactions to an account:

For Assets/ Expenses or Losses: Increase in Assets, Expenses or losses is debited while a decrease is credited. For Liabilities/Capital/Revenues or Gains, the increase is credited, while a decrease is debited.

All monetary transactions contain a source document, and these transactions get recorded in the journal. Thus each transaction is in one place and helps link the credit and debit transactions. This process is known as journalising. These recorded transactions get moved to individual ledgers, which is called the principal book of entry through posting. The following steps are taken while posting the accounts. Let’s understand it with an example.

The journal has an entry in the Books of Wadia Bros wherein goods worth of Rs.5000 were sold to Raheja Bros. on credit on 15-Mar-2019, and payment of Rs.5000 received from Raheja Bros on 20-Mar-2019.

The following steps are included:

• Identify this account’s page in the ledger
• If this entry is the first one on the ledger account page, the balance carried forward (balance C/F) from the previous page, if any, is brought forward (balance b/f) to this page.
• Fill in the date in the column in which sales occurred on the debit side.
• Fill details of the transaction.
• Record the page number of the journal in the JF column where the transaction occurs.
• Fill monetary value in the amount column, which is Rs.5,000.
• Enter the date on which the transaction occurred
• Enter the particulars of the transaction.
• Enter the page number on which this transaction appears in the journal.
• Enter the monetary value of the transaction in the Amount column. In this case, it is Rs.5,000
• Calculate the totals of both the debit and credit sides of the transaction.
• If this is the last transaction entry in the ledger account, compute the difference in the amounts and enter the balance c/f. This should be carried over to the next page.

A journal is the book of original entry which records transactions as they take place. Such an entry into the journal must contain a source document. Maintaining a journal ensures all transactions are recorded and in one place, and debit and credit for each transaction are linked properly. A journal consists of the following sections:

Date − Transaction date based on when the transaction has taken place.

Particulars − Details of the transaction recorded

L.F. − Page number of the ledger where entry is posted.

Debit Amount − Debited amount as per transaction.

Credit Amount − Credit amount as per transaction

As per accounting, the assets of a business always equal the sum of its capital and liabilities.

Assets = Capital + Liabilities

The accounting equation depicts the fundamental relationship that exists among the components of the balance sheet, it is also referred to as the Balance Sheet Equation. A balance sheet is a statement of liabilities, capital and assets.

At any given point in time, the resources of the business must be equal to the claims of those who have financed those resources. Resources of the business are provided by proprietors and outsiders. The claim of the proprietors is called capital, and that of the outsiders is known as liabilities.

Consider an example

Mohit started a business with a cash of Rs. 6,00,000.

Opened a bank account with an amount of Rs. 5,80,000.

Bough furniture for Rs. 60,000 and issued cheque for the same.

Bought Plant and Machinery from Ramlal for the business for Rs. 1,25,000, and an advance of Rs. 10,000 in cash is given.

The transactions upon tabulation show that the accounting equation remains the same

In a double-entry mechanism, every transaction impacts and gets recorded in two accounts. While recording the transactions in double entry, it is ensured that the total debit amount must equal the total credit amount.

The increase of an item is recorded on the left side, abbreviated as Dr and the decrease is recorded on the right side, abbreviated as Cr.

The following rules are taken into consideration when recording a transaction into an account.

For Assets or Expenses/Losses:

Increase is debited and Decrease is credited.

For Liabilities/Capital/Revenues or Gains:

Increase is credited and Decrease is debited

Let us understand this with one example

Ronit started a business with a cash of Rs. 4, 00,000

This transaction increases cash on one hand while increasing capital on the other. Therefore cash account is debited, and the capital account is credited.