Chapter 2: Recording of Business Transactions
Source Documents and Vouchers
Transactions are recorded based on source documents (e.g., cash memo, invoice, receipt, debit note, credit note). These are the first written proof of a business transaction. From source documents, accounting vouchers are prepared, which then serve as the basis for recording in the books of accounts.
Accounting Equation and Rules of Debit and Credit
The entire system of double-entry accounting is based on the Accounting Equation: \[ \text{Assets} = \text{Liabilities} + \text{Capital} \]
Rules of Debit and Credit
According to the modern approach (American Approach):
- Assets & Expenses/Losses: An increase is debited, a decrease is credited.
- Liabilities, Capital, & Revenue/Gains: An increase is credited, a decrease is debited.
Books of Original Entry: The Journal
A Journal is a primary book where transactions are first recorded in chronological order.
Format of a Journal
Special Purpose Books
For businesses with large volumes of transactions, the Journal is subdivided into Special Purpose Books (or Subsidiary Books):
- Cash Book: For recording cash and bank transactions. It can be a Simple Cash Book, Two-Column Cash Book (with discount or bank column), or Petty Cash Book.
- Purchases Book: For credit purchases of goods.
- Sales Book: For credit sales of goods.
- Purchases Return Book: For goods returned to suppliers.
- Sales Return Book: For goods returned by customers.
- Journal Proper: For transactions not recorded elsewhere (e.g., depreciation, outstanding expenses, credit purchase of assets).
The Ledger
A Ledger is the principal book of accounts where all similar transactions are brought together in individual accounts (e.g., Cash Account, Sales Account).
- Posting: The process of transferring entries from the Journal/Subsidiary Books to the Ledger.
- Balancing: At the end of an accounting period, both sides of an account are totaled, and the difference is called the “balance” (debit balance if debit side > credit side).
Competency-Based Questions
Q1. Amit returns goods worth ₹5,000 to the supplier, MS Traders, because they were defective. Which subsidiary book will be used to record this transaction and what will be the corresponding source document?
Solution: The transaction will be recorded in the Purchases Return Book (or Return Outward Book). The source document prepared by Amit will be a Debit Note, indicating that MS Traders’ account has been debited in the books.
Q2. An entrepreneur starts a small business and purchases furniture for ₹20,000 by cheque, and goods for ₹10,000 on credit from XYZ Suppliers. How will you apply the rules of debit and credit to these transactions?
Solution:
- Transaction 1 (Furniture by Cheque): Furniture (Asset) increases, so it’s Debited. Bank (Asset) decreases, so it’s Credited.
- Transaction 2 (Goods on Credit): Purchases (Expense) increases, so it’s Debited. XYZ Suppliers (Creditor/Liability) increases, so it’s Credited.
Q3. A business receives a cheque of ₹9,500 from a customer, Rohan, in full settlement of his account of ₹10,000. Under which columns of the Cash Book will this be recorded, assuming the cheque is deposited on the same day?
Solution: The cheque is deposited immediately. The receipt side (Debit side) of a Two-Column Cash Book (Cash/Bank and Discount) will be used. ₹9,500 is recorded in the Bank column, and ₹500 is recorded in the Discount Allowed (or depending on the column structure, handled via Journal Proper if using only Bank column, but typical CBSE format allows a discount column).
Q4. A firm uses an imprest system of petty cash. The imprest amount is ₹5,000. The petty cashier has spent ₹3,200 on various small expenses during the month. How much reimbursement will the petty cashier receive at the end of the month?
Solution: According to the Imprest System, the petty cashier is reimbursed the exact amount spent to restore the imprest balance. Reimbursement = ₹3,200.