RECORDING OF TRANSACTIONS - Betsy Coulcbseocean.weebly.com/uploads/2/8/1/5/28152469/lesson3.pdf · RECORDING OF TRANSACTIONS Learning Objectives After studying this chapter, you will

[XI – Accountancy] 20

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CHAPTER-3

RECORDING OF TRANSACTIONS

Learning Objectives

After studying this chapter, you will be able to :

Explain how to Prepare accounting vouchers.

Apply accounting equation to explain the effect of transactions.

Record transactions using rules of debit and credit.

Record transactions in journal and other subsidiary books.

Suggested Method : Discussion method, Illustration method, Problem

solving method etc.

ACCOUNTING EQUATION

An accounting equation is based on the dual concept of accounting,

according to which, every transaction has two aspects debit and credit. It hold

that for every debit there is a credit of equal amount and vice versa.

The total assets of the business firm are financed through the funds raised

from either the outsiders or the owners. Outsiders generally consist of creditors

and lenders. Thus, at any point of time, the total assets of a business are equal

to its total liabilities.

Liabilities to outsiders are known as liabilities but liability to the owners,

in accounting parlance, is referred to as Capital. The relationship between

assets, liabilities and the capital can be expressed in the form of an accounting

equation as follows:

Assets = Capital + Liabilities

21 [XI – Accountancy]

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Assets and Liabilities are two independent variables and Capital is the

dependent variable, it is the difference between assets and liabilities.

A transaction may affect either both sides of the equation by the same

amount or on one side of the equation only, by both increasing or decreasing

it by equal amounts.

The accounting equation captures the essence of the business entity concept

i.e. the business entity is considered separate and distinct from the owners. The

accounting equation Assets = Capital + Liabilities holds good only when we

assume that the business unit is a separate entity.

Analysis of Business Transactions

1. Transactions affecting both sides of the equation

A. Commenced business with Cash Rs. 2,00,000.

This transaction will affect the assets as the firm is receiving

asset in the form of Cash and the owner of the business has

invested amount, this will affect the Capital of the business.

ASSETS = CAPITAL + LIABILITIES

Cash

Transaction 2,00,000 = 2,00,000 + 0

B. Bought goods from Rs. 25,000.

This transaction will affect both assets as well as liabilities of

the business. The goods and Creditors are increasing.


Cash Goods Creditors

Old Equation 2,00,000 = 2,00,000 + 0

Transactions 0 + 25,000 0 + 25,000

New Eq. 2,00,000 + 25,000 = 2,00,000 + 25,000

2. Transactions affecting only assets side of the equation:

A. Bought goods for Cash Rs. 35,000



This transaction will affect the Cash and Goods by Rs. 35,000.

The firm is paying the money resulting in decrease of Cash.

Goods are increasing.


Cash Goods Creditors

Old Equation 2,00,000 + 25,000 = 2,00,000 + 25,000

Transaction - 35,000 + 35,000 0 + 0

New Eq. 1,65,000 + 60,000 = 2,00,000 + 25,000

B. Bought Furniture for cash Rs. 50,000

This transaction has brought about two changes in the assets

side only. One asset i.e. Cash is decreasing and other asset i.e.

Furniture is increasing.


Cash Goods Furniture Creditors

Old Equation 1,65,000 + 60,000 = 2,00,000 + 25,000

Transaction - 50,000 + 0 + 50,000 0 + 0

New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000

3. Transactions affecting only liabilities side of the equation.

A. Accepted a bill drawn by Ram for Rs. 25,000 for 3 months.

This transaction will affect Creditors and Bills Payable. As one

liability i.e. Creditors is decreasing and other liability i.e. Bills

payable is increasing.


Cash Goods Furniture Creditors + B/P

Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000

Transaction 0 + 0 + 0 = – 2,50,000 – 25,000 + 25,000

New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

4. Transaction affecting the Capital only

A. Interest on Capital provided Rs. 2,000





Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

Transaction 0 + 0 + 0 = - 2,000

+ 2,000

New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

B. Interest on Drawings charged Rs. 1,000



Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

Transaction 0 + 0 + 0 = - 1,000

+ 1,000

New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

In the above transactions, Capital is increasing and decreasing

at the same time. It is owner’s duty to pay all the expenses and

it is the owner who takes all the profits arising out of business.

5. Transactions related to Expenses

A. Salary Paid Rs. 5,000



Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000

Transaction - 5,000 = - 5,000

New Eq. 1,10,000 + 60,000 + 50,000 = 1,95,000 + 0 + 25,000

This transaction affects cash and capital because Cash is

decreasing and Capital (Owner) is responsible to pay all the

expenses.

6. Transactions related to Income

A. Commission Received Rs. 2,000



Old Equation 1,10,000 + 60,000 + 50,000 = 1,95,000 + 0 + 25,000



Transactions + 2,000 = + 2,000

New Eq. 1,12,000 + 60,000 + 50,000 = 1,97,000 + 0 + 25,000

This transaction affects cash and capital because Cash is

increasing and Capital (Owner) is rightful for every income.

7. Transactions related to outstanding Expenses

A. Rent outstanding Rs. 5,000


Cash Goods Furniture Creditors + B/P + O/s Rent

Old Equation 1,12,000 + 60,000 + 50,000 = 1,97,000 + 0 + 25,000

Transaction = - 5,000 + 5,000

New Eq. 1,12,000 + 60,000 + 50,000 = 1,92,000 + 0 + 25,000 + 5,000

This transaction will decrease capital and a new liability

outstanding rent will be created.

8. Transactions related to accrued Income

A. Accrued interest Rs. 1,000

ASSETS =CAPITAL + LIABILITIES

Cash Goods Furniture Accrued Creditors + B/P + O/s Rent

Interest

Old Equation 1,12,000 + 60,000 + 50,000 = 1,92,000 + 0 + 25,000 + 5,000

Transaction + 1,000 = + 1,000

New Eq. 1,12,000 + 60,000 + 50,000 + 1,000 = 1,93,000 + 0 + 25,000 + 5,000

This transaction will increase assets in the form of Accrued

interest and Capital.

Illustration: 1

Prepare the Accounting Equation on the basis of the following

1. Ram started business with cash Rs. 2,00,000, stock Rs. 5,00,000,

Machine Rs. 8,00,000 and Furniture Rs. 4,00,000.

2. He sold Goods costing Rs. 2,00,000 at a profit of 20% on cost and

received half the payment in Cash and a Bill for Rs. 50,000 out of the

remaining balance.



3. He purchased goods for Rs. 50,000 from Ravi on credit.

4. He depreciate Machine @ 10% p.a. and Furniture @ 20% p.a.

5. He paid Salary Rs. 20,000 and Rent Rs. 25,000 but Rent Rs. 5,000 still

remain unpaid.

6. He paid Insurance Rs. 15,000 @ Rs. 1,000 p.m.

7. He withdrew Rs. 1,00,000 for purchasing Motor Cycle for his personal

use.

8. He paid to Ravi Rs. 19,000 in full settlement against the payment of

Rs. 20,000.

9. He received Rs. 50,000 as Security Deposit from his tenant.

10. He charge interest on Drawing @ 10% p.a.



Solu

tion

Tra

nsa

ctio

ns

Cash

sto

ckA

sset

sF

urn

iture

Deb

tors

B/r

Pre

-=

Ca

pit

al

Lia

bil

itie

s

mach

iner

ypa

id

Cre

di-

O/s

scu-

tors

rent

rity

dep

.

1.

Ram

sta

rted

busi

nes

s2,0

0,0

00

+5,0

0,0

00

+8,0

0,0

00

+400

,000

=19,0

0,0

00

wit

h c

ash R

s.2,0

0,0

00,

Goods

Rs.

5,0

0,0

00

Mac

hin

e R

s.800,0

00 &

Furn

iture

Rs.

4,0

0,0

00

2.

Sold

Goods

cost

ing

1,2

0,0

00

-2,0

0,0

00

+70,0

00

+50,0

00

=40,0

00

Rs.

2,0

0,0

00 a

t a

pro

fit

of

20%

on c

ost

and

rece

ived

hal

f th

e

pay

men

t in

cas

h &

a

bil

l fo

r R

s. 5

0,0

00 o

ut

of

the

rem

ainin

g

New

Equia

tion

3,2

0,0

00

+ 3

,00,0

00

+8,0

0,0

00

+4,0

0,0

00

+7,0

0,0

0+

50

000

=19,4

0,0

00

3.

Purc

has

ed g

oods

from

+50,0

00

=50,0

00

Rav

i fo

r R

s, 5

0,0

00 o

n

cred

it

New

Equat

ion

3,2

0,0

00

+3,5

0,0

00

+8,0

0,0

00

+4,0

0,0

00

+70,0

00

+50,0

00

=19,4

0,0

00+

50000

4.

Dep

reci

ate

Mac

hin

e-8

0,0

00

-80,0

00

=-1

60000

@ 1

0%

p.a

furn

tiure

@ 2

0%

p.a

New

E

quat

ion

3,2

0,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

=17,8

0,0

00

+50,0

00



5.

Pai

d s

alar

y R

s. 5

0,0

00

-50,0

00

=-5

0,0

000

& r

ent

Rs.

25,0

00 a

nd

-25,0

00

-30,0

00

+5,0

00

rent

Rs.

5,0

00 s

till

rem

ain u

npai

d.

New

Equat

ion

2,4

5,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

=17,0

0,0

00

+50,0

00

+5,0

00

6.

Pai

d i

nsu

rance

-15,0

00

-3,0

00

=-1

2,0

00

Rs.

15,0

00

@ R

s. 1

,000 p

.m.

New

Equat

ion

2,3

0,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

+3,0

00

=16,8

8,0

00

+5,0

000

+5,0

00

7.

wit

hdre

w R

s.1,0

0,0

00

Purc

has

ing m

oto

r cy

cle-

1,0

0,0

00

=-1

,00,0

00

for

his

per

osn

al u

se.

New

Equat

ion

1,3

0,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

+3,0

00

=15,8

8,0

00

+50,0

00

+5,0

00

8.

Pai

d t

o R

avi

Rs.

19,0

00

in f

ull

set

tlem

ent

of

-19,0

00

=+

1,0

00

-20,0

00

Rs.

20,0

00

New

Equat

ion

1,1

1,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

+3,0

00

=15,8

9,0

00

+30,0

00

+5,0

00

9.

Rec

eived

Rs.

50,0

00

+50,0

00

=+

5,0

00

as s

ecuri

ty d

eposi

t

from

ten

ant

New

Equat

ion

1,6

1,0

00

+3,5

0,0

00

+7,2

0,0

00

3,2

0,0

00

+70,0

00

+50,0

00

+3,0

00

=15,8

9,0

00

+30,0

00

+5,0

00

+50,0

00

10

.in

tere

st o

n d

raw

ing

=-1

0,0

00

@ 1

0%

p.a

=+

10,0

00

New

Equat

ion

1,6

1,0

00

+3,5

0,0

00

+7,2

0,0

00

+3,2

0,0

00

+70,0

00

+50,0

00

+3,0

00

=15,8

9,0

00

+30,0

00

+5,0

00

+5,0

000



Every business transaction affects two or more accounts. An account is a

summarised record of transactions at one place relating to a particular head.

An account is divided into two parts i.e. debit and credit. Debit refers to the

left side of an account and credit refers to the right side of an account.

Traditional Approach

Under this approach, all ledger accounts are mainly classified into two

categories:

A. Personal accounts : It includes all those accounts which are related to

any person i.e. individuals, firms, companies, Banks etc. This can further

be classified into three categories:

1. Natural persons : All accounts of human beings/persons are

included such as Ram’s A/c, Shyam’s A/c etc.

2. Artificial persons : This includes all accounts related to

organizations which are treated as persons in the eyes of law

and having all the legal rights as a natural person have such as

buying/selling assets in its name, suing and be sued etc. Some

of the examples are Reliance Industries Ltd., Punjab National

Bank etc.

3. Representative persons : In this category, accounts which

represents some persons are included e.g. Capital a/c

(representing Owner),

Outstanding salary (representing the employee to whom salary

is due) etc.

B. Impersonal accounts: All ledger accounts which are not related to

persons are included in this category. This can be classified as:

1. Real accounts: Under this category, mainly assets (excluding

debtors) are included. These assets can be tangible (which can

be touched, seen and measured such as furniture, cash, stock

etc.) and intangible (which can’t be seen, touched or measured

but still have monetary value such as patents, trademark etc.)



2. Nominal accounts : In this category all accounts which are

related to income/gain and expenses/losses are included e.g.

Salary paid, Commission received etc.

RULES OF DEBIT/CREDIT UNDER TRADITIONAL APPROACH

Classification of Accounts Rules of Dr/Cr

1. Natural Persons

2. Artificial Persons Dr The Receiver

Personal 3. Representative Persons Cr The Giver

Impersonal

Real 1. Tangible Dr What comes in

2. Intangible Cr What goes out

Nominal 1. Expenses/Losses Dr Exp/Losses

2. Income/Gains Cr Income/Gains

Illustration 2 : Analyse the following transactions by using the

“TRADITIONAL APPROACH”

2013 Amount (in Rs.)

Jan 1 Prateek started business with cash 1,00,000

Jan 5 Bought goods for Cash 20,000

Jan 7 Bought goods from Pravesh 10,000

Jan 10 Sold goods for Cash 5,000

Jan 12 Sold goods to Vikas 12,000

Jan 15 Paid Salary 5,000

Jan 20 Received Commission 2,000



Solution : Analysis of Transactions

S.. Transaction Accounts Nature of Changes Debit Credit

No Affected Accounts (Rs.) (Rs.)

1. Commenced Business Cash Real Comes in 1,00,000

Capital Personal Giver 1,00,000

2. Purchased goods Purchase Nominal Expenses 20,000

Cash Real Goes out 20,000

3. Bought goods on Purchases Nominal Expenses 10,000

credit Pravesh Personal Giver 10,000

4. Sold goods for Cash Cash Real Comes in 5,000

Sales Nominal Income 5,000

5. Sold goods on Credit Vikas Personal Receiver 12,000

Sales Nominal Income 12,000

6. Paid Salary Salary Nominal Expenses 5,000

Cash Real Goes Out 5,000

7. Received Commission Cash Real Comes in 2,000

Commission Nominal Income 2,000

RULES OF DEBIT/CREDIT UNDER MODERN APPROACH

Assets Expenses Capital/Liabilities/Revenue

Dr. Cr. Dr. Cr.

Increase Decrease Decrease Increase

Illustration 3: Analyse the transactions given in Illustration 1 by using the

“MODERN APPROACH”

Solution:

S.. Transaction Accounts Nature of Changes Debit Credit

No Affected Accounts (Rs.) (Rs.)

1. Commenced Business Cash Asset Increase 1,00,000

Capital Capital Increase 1,00,000

2. Purchased goods Purchase Expenses Increase 20,000

Cash Asset Decrease 20,000

3. Bought goods on Purchases Expenses Increase 10,000

credit Pravesh Liabilities Increase 10,000

4. Sold goods for Cash Cash Asset Increase 5,000

Sales Income Increase 5,000



5. Sold goods on Credit Vikas Asset Increase 12,000

Sales Income Increase 12,000

6. Paid Salary Salary Expenses Increase 5,000

Cash Assets Decrease 5,000

7. Received Commission Cash Assets Increase 2,000

Commission Income Increase 2,000

SOURCE DOCUMENTS

A written document which provides evidence of the transactions is called

the Source Documents. Source document is the first evidence of a transaction

which takes place. Cash Memo, Invoice, Pay in Slip, Cheques are some

important Source Documents.

(a) Invoice (Bill) : An invoice is prepared by Seller at the time of sale of

goods on credit. It contains details such as the goods sold, the party to

whom goods are sold, sales amount, date etc.

(b) Cash Memo : It is prepared by the Seller at the time of Sale of goods

on Cash. It contains details such as goods sold, quantity, amount

received, date etc.

(c) Pay-in-Slip : It is used to deposit cash or cheque into bank. It has a

counterfoil which is returned to the depositor with the Signature of the

authorized person.

(d) Cheque : A cheque is a order in writing, drawn upon a specified

banker and payable on demand.

VOUCHER

A voucher is a document evidencing a business transaction. Recording in

books of accounts are done on the basis of voucher.

Classification of Accounting Vouchers

Vouchers Further classification Purpose

Debit Vouchers To show Cash Payment

Cash Vouchers

Credit Vouchers To show Cash Receipt

Non Cash Voucher Transfer Voucher To show Transactions not

involving cash



Debit Voucher

This voucher is prepared for all the cash payments made by the business

e.g. Payment of Salary, Purchase of Goods and Services, Payment made to any

Creditor etc.

Format of Debit Voucher

M/s Pratibha Furnitures

180, Nai Sarak, Delhi

Voucher No. ................... Date ....................

DEBIT ............................................................................ Amount

........................................................................................ (In Rs.)

...........................................................................

Total

Signature Signature

Manager Accountant

Credit Voucher

This voucher is prepared by the business in case of cash receipt from any

source such as Sale of goods for Cash, Payment received from any of Debtors,

Income received etc.

Format of Credit Voucher



Voucher No. ................... Date....................

DEBIT ................................................................................................. Amount

............................................................................................................. (In Rs.)

............................................................................................................

Total

Signature Signature

Manager Accountant

Transfer Voucher/Non-Cash Voucher

This type of vouchers are prepared in those transactions which do not

involve Cash. Such as Credit Sales, Credit Purchases, Bad Debts, Depreciation

charged etc.



Format of Transfer Voucher



Voucher No. ................... Date ....................

DEBIT ..................................................................................... Amount

.................................................................................................

.............................................................................................. Total

CREDIT ............................................................................... Amount

...............................................................................................

.............................................................................................Total

Signature Signature

Manager Accountant

JOURNAL

The first book in which the transactions of a business unit are recorded

is called Journal. Here, business transactions are recorded in chronological

order i.e. in the order in which they occur. Each record in a journal is called

an entry. As a journal is the first book in which entries are recorded, it is also

known as a book of original entry.

A Journal is divided by vertical lines into five columns i.e. (a) Date (b)

particulars (c) Ledger folio* (d) Amount (Debit) (e) Amount (credit)

Journal

Date Particulars * L.F. Dr Amount Cr Amount

(a) (b) (c) (d) (3)

* Ledger Folio (L.F.) : When the Debits and Credits are posted in the

ledger accounts, the page number of the ledger in which these accounts are

appearing are mentioned in this column.

TYPES OF ENTRIES

(1) Simple Entry : It is that entry in which only two accounts are affected

i.e. one account is debited and another account is credited with an equal

amount.



Example : Purchase of goods worth Rs. 5,000 from Ramesh by the business

firm.

The simple entry is.

Journal

Date Particulars L.F. Debit. Credit

Amount Amount

Purchases A/C Dr 5000

To Ramesh’s A/c 5000

(Being goods Purchased from

Ramesh on Credit)

(2) Compound Entry : It is that entry in which more than two accounts

are involved. Compound Entries can further be classified into single compound

entry and double compound entry.

In Single Compound Entry Several accounts are to be debited and only

one account is to be credited or only one account is to be debited and several

accounts are to be credited.

Example : A business firm pays rent Rs. 2,000, salaries Rs. 1,500, freight

Rs. 500 on 1 Jan. 2013, the single compound entry is

Journal


Amount Amount

2013 Rent A/c Dr. 2,000

Jan, 1 Salaries A/c Dr. 1,500

Freight A/c Dr. 500

To Cash A/c 4,000

(Being Expenses paid in cash)

In Double Compound Entry, several accounts are to be debited which

are accompanied by several credit accounts.

Example : A firm receives cash Rs. 20,000 and cheque Rs, 10,000 in

return of sale of goods for Rs. 25,000 and furniture Rs. 5,000.



Journal


Amount Amount

Cash A/c Dr. 20,000

Bank A/c Dr. 10,000

To Sales A/c 25,000

To Furniture A/c 5,000

(Being payment received for

sale of goods & furniture.)

(3) Opening Entry : The entry passed to record the closing balances of

the previous year is called opening entry. While passing an opening entry, all

assets accounts are debited and all liabilities accounts are credited.

Example : The various balances of xyz ltd on 1st April 2013 were as

follows Debt Balance : Cash Rs. 20,000 furniture Rs. 50,000 Building Rs.

1,00,000 & Debtors Rs. 30,000 Credit Balance : Creditors Rs. 50,000, Bank

loan Rs. 25,000.

Journal

Date Particulars L.F. Dr. Balance Cr. Balance

2013

Apr. 1 Cash A/c Dr. 20,000

Furniture A/c Dr. 50,000

Building A/c Dr. 1,00,000

Debtors A/c Dr. 30,000

To creditors A/c 50,000

To Bank loan A/c 25,000

To Capital A/c 1,25,000

(Being recording of the

opening balances of assets,

Liabilities and capital)

Illustration 4 : Pass necessary Journal entries relating to Mr. Jitender

Bhati for the month of January 2013.



2013

Jan. 1 Started business with Rs. 20,000 and furniture Rs. 4,000

Jan. 1 Bought shop fitting Rs. 4,000 and a car Rs. 6,000 and payment made

in cash.

Jan. 2 Paid into Bank Rs. 8,000

Jan. 3 Paid rent Rs. 2,000 by cheque.

Jan.10 Purchased on credit goods for Rs. 5,000 from Mr. Khatana.

Jan.10 Cash Sales Rs. 10,000

Jan.12 Paid wages Rs. 500 and insurance Rs. 200 by cash.

Jan.15 Paid Rs. 5,000 to Mr. Khatana by cheque

Solution : In the books of Mr. Jitendra Bhati.

Journal

Date Particulars L.F. Dr. Balance Cr. Balance

2013

Jan 1 Cash A/c Dr. 20,000

Furniture A/c Dr. 4,000

To capital A/c 24,000

(Being business started with

cash and furniture).

Jan 1 Furniture & fittings A/c Dr. 4,000

Car A/c Dr. 6,000

To Cash A/c 10,000

(Being purchase of fitting & Car)

Jan. 2 Bank A/c Dr. 8,000

To cash A/c 8,000

(Being cash paid into Bank)

Jan. 3 Rent A/c Dr. 2,000

To Bank A/c 2,000

(Being rent paid by cheque)



Jan. 10 Purchase A/c Dr. 5,000

To Mr. Khatana 5,000

(Being goods purchased on

Credit from Mr. Khatana)

Jan. 10 Cash A/c Dr. 10,000

To sales A/c 10,000

(Being goods sold for cash)

Jan. 12 wages A/c Dr. 500

Insurance A/c Dr. 200

To cash A/C 700

(Being wages & insurance paid

by cash)

Jan. 15 Mr. Khatana A/c Dr. 5,000

To Bank A/c 5,000

(Being payment mode to

Mr. Khatana by Bank)

Grand Total 64700 64700

Special Transaction related to Goods

1. Withdrawal of goods by owner for personal use.

Drawings A/c Dr.

To Purchases A/c

2. Goods given as charity

Charity A/c Dr.

To Purchases A/c

3. Goods distributed as free samples

Advertisement A/c Dr.

To Purchases A/c

4. Goods lost by fire/flood/theft etc.

Loss by fire/theft A/c Dr.

To Purchase A/c

Note : Purchases A/c is credited in the above entries because the goods are

going out of our business on cost and it is not a sale hence, deducted from the

purchases A/c.



Transaction Related Banks

1. Cash deposited into the bank

Bank A/c Dr.

To Cash A/c

2. Cash withdrawn for office use.

Cash A/c Dr

To Bank A/c

3. When cheque is received from customer and deposited into bank

same day.

Bank A/c Dr

To Customer’s personal A/c

4. When cheque is received from customer and not deposited into

bank same day.

Cash A/c Dr

To Customer’s personal A/c

5. When above cheque (Point 4) is deposited later into bank

Bank A/c Dr

To Cash A/c

6. When payment is made through cheque

Personal A/c Dr

To Bank A/c

7. When expense is paid through cheque.

Expense A/c Dr

To Bank A/c

8. When interest is allowed by the bank.

Bank A/c Dr

To Interest A/c

9. When Bank charges for the services provided.

Bank Charges A/c Dr

To Bank A/c



Some Special Entries

1. Bad Debts (when customer is declared insolvent and amount is

irrecoverable from him)

Case A/c Dr. (If partial amount is recovered)

Bad Debts A/c Dr. (The irrecoverable part)

To Personal A/c (the due amount)

2. Bad debts recovered earlier written off as bad debts.

Cash A/c Dr.

To Bad debts recovered A/c

3. Outstanding Expenses (expenses due but not paid yet).

Expenses A/c Dr.

To Outstanding Expenses A/c

4. Prepaid Expenses (Expenses not due but paid in advance).

Prepaid expenses A/c Dr.

To Expenses A/c

5. Accrued income (income due but not received yet.)

Accrued Income A/c Dr.

To Income A/c

6. Unearned Income (Income not due but received in advance).

Income A/c Dr.

To Unearned Income A/c

7. Depreciation provided on fixed assets.

Depreciation A/a Dr.

To Related Asset’s A/c

8. Interest on Capital provided.

Interest on capital A/c Dr.

To Capital A/c

9. Interested on Drawings charged.

Drawings A/c

To interest on Drawings A/c



Entries related to central sales Tax (CST)

(a) Central sales Tax (CST) collected on sales

Cash A/c Dr.

To Sales A/c

To Central sales Tax A/c

(b) When Central sales tax is deposited in Govt. A/c

Central sales Tax A/c Dr.

To Cash A/c

Journal Entries related to VAT (value added Tax).

(a) When VAT is paid on purchases.

Purchases A/c Dr.

VAT (Paid) A/c Dr.

To Cash A/c

(b) When VAT is collected at the time of sales.

Cash A/c Dr.

To sales A/c

To VAt (collected) A/c

(c) When VAT is paid to the Government.

VAT (collected) A/c Dr.

To Vat (paid) A/c

To Cash A/c

BOOKS OF ORIGINAL ENTRY/SPECIAL PURPOSE BOOKS

As size the business grows and number of transactions increase, it becomes

necessary for the business to divide the recording work. The books maintained

are illustrated below:

Transactions Further classification Subsidiary Books Maintained

Cash & Bank Related Only Cash Transactions Simple Cash Book

Transactions Cash & Bank Transactions Double Column Cash book

Cash payment of small amount Petty Cash Book



Transaction Other Credit Sale Sales Book

than Cash & Bank Credit Purchases Purchases Book

Sales Returns Sales returns Book

Purchases Returns Purchases Returns Book

Any other transaction Journal Proper

Advantages of Maintaining Subsidiary Books

Division of work

Leads to Specialization

Easy to maintain Ledger

Check on frauds

Easy to fix responsibility

Quick availability of Required information.

Cash Book

Cash book shows all the transaction related to cash receipt and payments.

Cash book serves two purpose. First, all the cash transactions are recorded first

time in cash book it becomes Book or original entry. Second, there is no need

to prepare Cash a/c in ledger it also play the role of Principal Book.

Simple Cash Book

All the cash receipts are shown in left hand side i.e. Debit side and all

the cash payments are shown in right hand side i.e. Credit Side.

Points to Remember

• Cash in hand/opening balanced of cash is shown in Dr. side of the Cash

book as “To Balance b/d”

• Only transaction of cash receipts and payments are recorded in this

book.

• This book never shows a credit balance because one can’t pay more

than the cash one have.



Illustrations 5 :

2013 Rs. 2013 Rs.

Jan. 1 Cash in Hand 12,000 Jan. 5 Received from Ram 3,000

Jan. 7 Paid rent 300 Jan. 8 Sold goods 3,000

Jan. 10 Paid to Shyam 7,000 Jan. 15 Purchased goods

from Mohan 5,000

Jan. 27 Purchased furniture 2,000 Jan. 31 Paid Salaries 1,000

In the Books of.....

Cash Book

Dr. Receipts Payment Cr.

Date Particulars L.F Rs. Date Particulars L.F. Rs.

2013 2013

Jan. 1 To Balance b/d 12,000 Jan.. 7 By Rent A/c 300

Jan. 5 To Ram 3,000 Jan. 10 By Shyam 7,000

Jan. 8 To Sales A/c 3,000 Jan. 27 By Furniture A/c 2,000

Jan. 31 By Salaries A/c 1,000

Jan. 31 By Balance c/d 7,700

18,000 18,000

Feb. 1 To Balance b/d 7,700

Notes : One can draw the following conclusions:

1. In a Simple Cash Book only cash receipts and cash payments are

recorded. Credit transaction are not recorded. Purchases from Mohan

of Rs. 5,000 on 15th Jan is a credit purchase hence, is not recorded in

the Cash Book.

2. The debit side is always bigger than the credit side since the payments

can never exceed the available cash. This is true even for daily balances.

3. It is like an ordinary account.

CASH BOOK WITH DISCOUNT COLUMN

Where cash discounts are allowed and received respectively, additional

columns are provided on the debit side for discount allowed and on the credit



side for discount received. The discount columns in the cash book are not

parts of the cash book but are memoranda (provisional) columns because

discount account is a nominal account while cash account is a real account. On

balancing the cash book, the discount columns are singly totalled but not

balanced.

Illustration 6 : Enter the following transactions in the cash book with discount

column for the month of April 2013.

1. Cash in hand Rs 50,000

11. Cash Sales Rs 25,000

12. Goods sold to Aryan on credit for Rs. 20,000

13. Purchased goods from Khushi on credit for Rs. 30,000.

14. Purchased stationary for Rs. 1,000 in cash.

25. Received from Aryan Rs. 19,500 in full settlement.

26. Paid to Khushi Rs. 29,000 as full & final payment.

27. Deposited into bank Rs. 5,000.

30. Paid to Vishal, on old creditor Rs. 9,800 and received discount of Rs. 200.

Solution :

Dr. Cash Book with Discount Columns Cr.

Date Particulars V. L.F Dis- Amt. Date Particulars V. L.F. Dis Amt.

No. count No. count

2013 2013

Apr.1 To Balance b/d 50,000 Apr.14 By stationary A/c 1,000

Apr.11 To Sales A/c 25,000 Apr.26 By Khushi A/c 1,000 29,000

Apr.25 To Aryan A/c 500 19,500 Apr.27 By Bank A/c 5,000

Apr.30 By Vishal A/c 200 9,800

Apr.30 By Bal c/d 49,700

500 94,500 1200 94,500



CASH BOOK WITH DISCOUNT AND BANK COLUMN

In this case the Cash Book is ruled with there amount columns on either

side of the cash book, namely, “Discount, cash and Bank”. Cash columns in

such a case will record actual cash received in the debit side and payments in

the credit side. Cheques received should be entered on the debit side of the

bank column on the assumption that cheques received are immediately deposited

with the bank. The payments by cheques should be entered on the credit side

in bank column and also when cash is withdrawn from the bank.

IMPORTANT ENTRIES

(1) Contra Entries : These entries affect cash and bank columns both at

the same time. To indicate contra entry “C” is mentioned in the L.F column

of the cash Book. Following two cases result in Contra entries.

(a) Depositing cash into Bank Rs. 1,000 It will increase bank balance, so

bank column is debited and cash balance will decrease, so cash column

is credited.

Cash Book (Extract)

Date Particulars V. L.F. Dis- Cash Bank Date Particular V.. L.F Dis- Cash Bank

No. count No. count

To cash A/c C 1,000 By Bank A/c C 1,000

(b) Withdrawn from Bank for office use Rs. 1,000. It will increase cash

balance, so cash column is debited and bank balance will decrease, so

bank column is credited.

Cash Book (Extract)

Date Particulars V. L.F. Dis- Cash Bank Date Particular V.. L.F Dis- Cash Bank

No. count No. count

To Bank A/c C 1,000 By Cash A/c C 1,000

(2) Entries relating to cheques :

(a) When any payment is made by cheque :

It will reduce the bank balance and thus bank column will be credited.



(b) When any payment is received in the form of cheque and no information

about its deposit into bank is given.

In this case it is assumed that the cheque is deposited into bank on the

same day, when it is received & so bank A/c will be debited.

(c) When any payment is received in the form of cheque and it is deposited

into bank on some other day i.e. when two dates, one for the receipt

of cheque and the other for deposit,

In this case cheque received is treated as cash received and so cash

A/c will be debited. When cheque is paid or entries are made in which

bank A/c is debited while the cash A/c is credited

Illustration 7 : Record the following transactions in the cash book with cash,

Bank and discount columns.

2013

Jan.1 Cash balance Rs. 10,000 & Bank balance Rs. 7,000.

Jan.2 Cash received from sale of furniture Rs. 8,000 and paid into Bank

Rs. 5,000.

Jan. 5 Paid to Mr. Kasana by Cheque Rs. 2,000, who allowed discount of

Rs. 50.

Jan.10 Received cheque from Mr. Nagar for Rs. 2,400 and allowed him

discount of Rs. 100.

Jan.15 Paid wages by cash Rs. 500 and salaries by cheque Rs. 1,000.

Jan.20 Deposited Mr. Nagar Cheque into Bank.

Jan.22 Dawn from Bank for office use Rs. 2,000.

Jan.25 withdraw cash Rs. 1,000 and from bank Rs. 500 for personal use.

Jan.30 Received cheque from Mr. Lohiya for Rs. 2,500 and paid into Bank



Solu

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A/c

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A/c

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Petty Cash Book

Business has to incur small expenses which are repetitive in nature. To

save the time and efforts of head cashier, business appoints a petty cashier. He

is entrusted with the duty of paying these expenses.

Imprest System of Petty Cash Book

Under this system, Head cashier gives a fixed amount to petty cashier for

a definite period. At the end of given period, Head cashier reimburses the

amount actually spent by the petty cashier resulting the same amount with

petty cashier which he had in the beginning of the period. This can be illustrated

as under.

Gives Rs. 1,000 for a week Rs. 1,000 for a weak

Spent Rs. 900 for small expense

Balance left Rs. 100Reimburses Rs. 900

1.

2.

Balance for next weekRs. 1,000 (100 + 900)

Header Cashier Petty Cashier

Advantage of Petty Cash Book

Saving of time and efforts of Head cashier

Control on Petty expenses.

Less chances of fraud.

Illustrations 8 : Prepare a Petty Cash book on the imprest system from the

following transactions

2013 Amt. (Rs.)

Jan. 1 Received from Head cashier 500

Jan. 2 Bought stationary 50



Jan. 3 Paid for registered post 30

Jan. 4 Bought Pen/Pencils for office use 80

Jan. 4 Paid for Telegram 60

Jan. 5 Paid for refreshment 50

Jan. 6 Bought postal stamps 30

Solutions

Petty Cash Book

Dr. Cr. Analysis of Payments

Receipts Date Particulars V.No. Total Stationary Postage Sundries

Payments

2013

500 Jan. 1 To Cash

Jan. 2 By Stationary 50 50

Jan. 3 By Postage 30 30

Jan. 4 By Stationery 80 80

Jan. 4 By Telegram 60 60

Jan. 5 By Refreshment 50 50

Jan. 6 By Postage 30 30

500 Total 300 130 120 50

Jan. 7 By Bal c/d 200

500

200 Jan. 8 To Bal b/d

300 Jan. 8 To Cash

Note :

V.N. stands for Voucher number,

The petty cashier can prepare different columns in “Analysis of

Payments” as per his requirement depending upon the number of

transactions.



SPECIAL PURPOSE SUBSIDIARY BOOKS

Purchases Books

In this book, only those transactions are recorded which are related to

credit purchases of goods in which the business deals in. Recording is made

on the basis of Bills/ Invoices issued by the Suppliers.

Transactions not in purchases Book

Purchases of goods for cash.

Purchases of Assets meant for long term, not for resale.

Illustration : Enter the following transaction in the Purchase Book of M/s

Ramesh Stationers.

2013

Aug.1 Brought from Agarwal Book House (Invoice No. 205)

25 Dozen Pencils @ Rs. 30 per dozen

20 Dozen Ball pens @ Rs. 10 per pen

Trade discount@ 10%

Aug.5 Brought furniture of Rs. 20,000 on credit from M/s Interior

Decor (Invoice No. 109)

Aug.8 Shivani Bros. sold to us (Invoice No. 626)

30 Registers @ 50 each

50 Note Books @ Rs. 20 each

Aug.17 Brought from Tushar stationers : (Cash Memo No. 101)

300 Refills @ Rs. 5 each

10 Ink pads @ Rs. 50 each

Solution :



In the books of M/s Ramesh Stationers

PURCHASES BOOK

Date Particulars Inv.No. L.F. Details Amount (Rs.)

2013

Aug. 1 Agarwal Book House 205

25 Dozen Pencils @ Rs. 30 per dozen 750

20 Dozen ball Pens @ Rs. 10 per pen 2400

3150

Less : Trade Discount @ 10% 315 2835

Aug.8 Shivani Bros.

30 Resisters @ Rs. 50 each 626 1500

50 Note Books @ Rs. 20 each 1000 2500

Aug.31 Purchases A/c Dr. 5335

1. Transaction of Aug. 5 is related to credit purchases of furniture i.e. an

Asset.

2. On Aug. 17, goods bought for cash, Hence both the transaction are not

recorded in Purchases Book.

Sales Books/Sales Journal

In this book, transactions for credit sales of goods are recorded. The

source documents for this book is duplicate copy of invoice/bills issued to the

customers.

Transactions not recorded in Sales Book

Sales of goods for cash

Sales of Assets.

Illustration : from the following transactions, Prepare a Sales Book of Alvin

Furnitures.

2013

Jul.7 Sold to Anil furniture house (Invoice No. 107)

200 Tables @ Rs.150 each



100 Chairs @ Rs.100 each

Trade discount @ 10%

Jul.8 Sold Air Conditioner to Ram Rs. 12,000

Jul.20 Sold to Rama Furnitures (Cash Memo no. 3001)

10 Beds @ Rs. 2,500 each

Jul.29 Sold to Jitesh Woods (Invoice No. 506)

10 Dressing tables @ Rs. 1,700 each

5 tables @ Rs. 500 each

Trade Discount @ 10%

Solution :

In the books of M/s Alvin furnitures

Sales Book

Date Particulars Inv.No. L.F. Details Amount (Rs.)

2013

Jul. 7 Anil Furniture House 107

200 Tables @ Rs. 150 each 30,000

100 Chairs @ Rs. 100 each 10,000

40,000

Less : Trade Discount @ 10% 4,000 36,000

Jul.29 Jitesh Woods 506

10 Dressing tables @ Rs.1,700 each 17,000

5 tables @ Rs 500 each 2,500

Trade discount @ 10% 19,500 17,550

1,950

Jul.31 Sales A/c Cr. 53,500

Note :

Transaction of July15 is related to sale of asset,

Sale of Rama Furniture is made for cash, hence not recorded in Sales

Book.



PURCHASES RETURNS/RETURNS OUTWARD BOOK

This book includes only those transactions which are related to returns of

goods bought on credit. The goods may be returned due to various reasons

such as goods bought being defective, supply of inferior quality goods etc.

Entries in this book are made on the basis of Debit Note. A Debit note

contains the name of the supplier to whom good are returned, details of goods

returned

Illustration 11 : Enter the following transactions in the Purchases Returns

Book of Ramesh Stationary House:

2013

Aug.5 Returned to Agarwal Book House (Debit Note No. 105)

5 Dozen Pencils @ Rs. 30 per Dozen

Trade Discount @ 10%

Aug.10Returned to Shivani Bros. (Debit Note No. 106)

5 Resisters @ Rs. 50 each.

Solution :

In the books of M/s Ramesh Stationers

Purchases return Book

Date Name of the supplier Debit Note. L.F. Detail Amount (Rs.)

2013

Aug.5 Agarwal Book House 105

5 Dozen @ Rs. 30 each 150

Less : Trade Discount @ 10% 15 135

Aug.10 Shivani Bros. 106

5 Resisters @ Rs. 50 each 250

Aug.31 Purchases Returns A/c Cr. 385

Note : Trade discount will be deducted if it was allowed a the time of purchase

of goods.

Sales Returns Book

This book includes all the returns by customers of credit sales of goods.

The Credit Note is used for recording entries in this book. The credit note

contains the details of customers and goods returned.



Illustration 12 : From the following transactions, prepare Sales Returns Book

of Modern Furnitures for the month of July 2013:

2013

Jul.9 Returned by Anil furniture house (Credit Note No.209)

5 Table @ Rs. 150 each

10 Chairs @ Rs. 100 each


Jul.30 Returned by Jitesh Woods (Credit Note No.210)

1 Dressing tables @ Rs. 1700 each


Solution :

In the of M/s Modern furnitures

Sales Returns Book

Date Name of the Customers Cr. Note L.F. Details Amount (Rs.)

2013

Jul.9 Anil Furniture House 209

5 Tables @ Rs. 150 each 750

10 Chairs @ Rs.100 each 1,000

1,750

Less : Trade discount @ 10% 175 1,575

Jul.29 Jitesh Woods 210

1 Dressing tables @ Rs. 1700 each 1,700

Less : Trade Discount @ 10% 170 1,530

Jul.31 Sales Returns A/c Dr. 3,105