Recording of Transactions

         Recording of the Transactions

The recording of the transactions in the books of account is the first

stage in the accounting process. An external event that affects assets,

liabilities or capital is called a 'transaction' The documents on the basis

of which entries are recorded in the books of account are known as

source documents e.g., vouchers, invoices, bills, cash memos, receipts etc.

These documents provide information about the nature of 

transaction and the amount involved in it.

BOOK-KEEPING

Book keeping is defined as the science and art of systematically and

correctly recording of all transactions which involve the transfer of

money or money's worth. The systematic book-keeping enables us to

find out accurately the result of business transactions during a particular period. It shows the financial position of business firm at any time clearly and correctly. Now-a-days, much of the book-keeping function time is performed by machines.

 

S.no Book keeping Accountancy

1 It is an art of systematically and

correctly recording of all transact-

ions which involves the transfer

of money or money's worth in

the books of original entry.

It is a science to examine and checks

up the accuracy of the recorded

transactions.

2. The records under book-keeping

are not meant for outside parties.

Accountancy gives required information to all the related outside parties.

3. Supporting documents called

vouchers are prepared for the

records made under book-keeping.

The records under book-keeping are

the basis for accounting information.

4.

Book-keeping work is often done

by junior staff, whose responsibility

is much less.

Accounting work is done by senior

accountant whose responsibility is

much greater in the organisation.

5.

 Records under book-keeping do not

show results of business transactions.

The profit or loss of a business or its

financial position is not revealed

by book-keeping.

In accounting results of a business

are fully made available. In accounting all those details are prepared by

which one can ascertain its profit

and true financial position.

6.

It is concerned with totally and

balancing of various accounts in

the ledger.

It helps in the preparation of trial

balance and checking the arithmetical

accuracy of accounts.

Double Entry Book-keeping System

The double entry book-keeping system is based on the principle that

every transaction has two-fold aspect, a giving aspect and a receiving

aspect, Both the aspects must be recorded in the books of the both

parties. There must be two entries in each set of books, one recording

the giving aspect and the other the receiving aspect. The entry of the

transaction is recorded in account book in the light of its two-fold

aspect. So, each account is divided into two parts i.e.

1. Left hand side known as 'debit side' and is denoted by Dr'.

2. Right hand side known as 'credit side' and is denoted by Cr.

Principle In double entry book-keeping the basic principles are

1. The receiver is debited with the monetary value of whatever he

receives.

2The giver is credited with the monetary value of whatever he

gives.

3. Every debit requires a credit and vice versa.

Example M/s Radhika Medical Hall sells 15 bottles of  M/s Durga Medical hall ₹ 1500 M/s Durga Medical Hall pays 1500 in cash immediately. Hence M/s Radhika Medical Hall cash box

receives 1500 and his stock of goods is reduced by 15 bottles. But at

the same time M/s Durga Medical Hall cash box has given ₹ 1500 and

its stock of goods is increased by 15 bottles of expectorant. The entries

necessary to record this transaction in each party's book are as under:-

In the books of M/s Radhika Medical Hall

1. Debit cash account (i.e. receiving account) with ₹ 71500

2. Credit goods account (i.e. giving account) with ₹ 1500

In the books of M/s Durga Medical Hall

1. Credit cash account (i.e. giving account) with ₹ 1500

2. Debit goods account (i.e. receiving account) with ₹ 1500.

Advantages of Double Entry Book-Keeping

1. It is a scientific method of maintaining the books of account.

2. It helps in recording both the aspects of every transaction.

3. It is easy to find out the assets and liabilities, income and

expenditure, purchase and sale etc. for a particular period.

4. It helps in ascertaining the arithmetical accuracy of the books of

account by means of trial balance.

5. It is easy to find out the net profit or loss earned by an

enterprise

6. It is easy to make comparison between the previous and current

year's sale and purchase, opening and closing stock, as well as

income and expenditure.

7. The exact state of affair of business can be easily verified by

preparing the balance sheet.

8. It helps in locating the errors in the ledger.

TYPES OF ACCOUNTS

An account is a formal record of all transactions relating to changes

in a particular item. Through it, transactions of similar nature are

brought together at one place in a book called Ledger'.

There are three types of accounts

1.Personal accounts

2. Real accounts

3. Nominal accounts. 

Personal accounts It deals with the individual person, firm, company 

and institution e.g. an account of Mr. Din Dyal, M/s Dev Medical

Hall, Glaxo (India) Ltd. and Delhi University. The person or firm which

supplies the goods to the business is a creditor and entries are made on

credit side of his account. Similarly a person or firm which receives the

money or goods from business becomes a debtor and the transaction is

made on debit side of his account.

Real accounts These accounts are maintained to deal with trans-

actions related to building, cash, furniture, land, machinery, stock etc. A

separate account is maintained for each item. When an item is purchased or received the transaction is recorded on the debit side.

Nominal accounts These accounts are generally called fictitious

accounts. These accounts are maintained to deal with discounts, insurance, rent, wages, salaries, cost of stationery items, interest, commission, amount spent on advertisement, profits or incomes of business etc. A separate account is maintained for each type of expenditure. The entries of expenses or losses are made on debit side while the entries of profits or gains are made on credit side.

To summarise, it can be said that there are three types of accounts

i.e. personal accounts, real accounts and nominal accounts. There are

three rules to made entries in the books of account.

S. No. Name of the account Debit Credit 

1 Personal The receiver The giver

2 Real What comes in What goes out

3 Nominal All losses and expenses All gains and income

BOOKS OF ORIGINAL ENTRY

These are the books for account in which a transaction is recorded

far the first time from a source document. Later on, the transactions

from these books are transferred to the ledger. The following are the

main books of original entry:-

1. Journal

2. Cash book

(a) Simple cash book.

(b) Two columnar cash book.

(c) Three columnar cash book.

d) Petty cash book.

3. Other day books

(a) Purchases book

(b) Sales book

(c) Purchases returns book

(d) Sales returns book

JOURNAL

This is the basic book of original entry. In this book, transactions are

recorded as and when they take place. The transactions from this book

are posted in the ledger. The journal provides a chronological record of

all transactions with details of the accounts debited and credited and the amount of each transaction. The following is a format of journal for

recording the transactions:

Format of journal

Date (1) Particulars (2) L.F (3) Debit (4) Credit (5)

Column (1) The date of transaction is entered. The year and month is

also written in this column.

Column (2) A brief explanation of the transaction called 'narration' is

given in the particulars column. It is necessary to write

narration below each transaction. After narration a horizontal

 line is drawn to separate one entry from another.

Column (3) The page number of the ledger is given when a transaction

is posted to the ledger. Till that time this column remains

blank.

Column (4) The amount to be debited to the account is written close to

the line in the particulars column. The word Dr is

written in front of debit entry.

Column (5) The amount to be credited to the account is written a few

spaces away from the margin. The word To' is written

before the credit entry. There is no need to write Cr in

front of credit entry.

It is necessary to make total of amount entered in debit and credit

columns. The total will be carried forward to the next page and so on,

up to the last page. The last page gives the final total.

Rules of Journalising

In double entry book-keeping system, two accounts are affected

during accounting. One account is debited and other is credited. The

following are some of the simple rules which are required to be fol-

lowed, while deciding the entry of transaction to be made on debit side

or on credit side in the journal.

4. Goods: Goods means all those items which any businessman

Buy it in order to gain profit on its sale. The goods account is divided

to Tour categories for the purpose of making its entry into a journal.

(a) Purchase account : When any goods are purchased, then debit

entry is made in the purchase account. Purchase account is

always debited.

(b) Sales account: When any goods are sold, then credit entry is

made in the sales account.

(c) Purchases return account : If any purchased goods are returned,

then it is called returns outward. The purchases return account

is always credited.

(d) Sales return account: If sold goods are received back, it is

called returns inward. Sales return account is always debited.

5. Capital account: The owner of business is always considered

to be separate from his business. So the money he invested to start his

business is recorded in the journal on credit side of his capital account

and on debit side in the cash account.

6. Drawings account : When a businessman withdraws money

from his business for personal use, then the amount is debited in the

drawings account and credited in cash account.

7. Trade discount: Trade discount means a deduction of certain

percentage from the quoted price. No journal entry is done because it is deducted from the cash memo or invoice. For example, the following

entry will be made in the journal if the goods worth ₹ 4000 are

purchased at a trade discount of 5% for cash.

Purchase A/c Dr 38,000

To cash Alc 38,000

(Goods purchased in cash worth

₹40,000 at a trade discount of 5%)

8. Cash discount: It is an allowance which is made by receiver of

cash to the payer for the payment made before the due date. The cash

discount is received or allowed when the payment is made and received.

This fact must be recorded at the same place where cash transaction is

recorded. For example, a businessman buys goods for ₹ 4,500 and

settles his account at a cash discount of 2%.

Purchase A/c Dr 4,500

To cash A/c 4,410

To discount A/c 90

(Goods purchased for 4500 and

cash paid less cash discount of 2%)

Illustration (1)

Enter the following transactions in the general journal of M/s Rachna Medical Hall for the month of August 2015:

2015

July 1 Mr shiv Kumar started his business with a capital 10,00,000.00

2  bought furniture for cash from M/s modern furniture 25,000.00

3 Purchase good for cash 35,000.00

4 purchase goods from Neeraj on credit credit 30,000.00

5 sold goods to Hans Raj on credit 18,000.00

6 goods sold 15,600.00

7 cash sales to Din dyal 8,300.00

8 goods sold for cash 24,700.00

9 cash paid to jeevan 6,200.00

10 paid trade expenses 125.00

11 receive interest from Mohit 12,400.00

12 deposited cash into Bank 750.00

13 paid rent 6450.00

14 paid insurance premium 7,650.00

15 withdrawal of cash for personal expenses by Shiv Kumar 12000.00

16 paid to meet misc. expenses 2,250.00

17 national ID of cash in business by Shiv Kumar 36,000.00

31 paid salary to staff 2400.00

Solution table

General journal of M/s Rachna medical hall

 

 

Opening Journal Entry

After the closing of the previous financial year, every firm starts new

books of accounts for the current financial year. The entries which are

made to start the new books are known as opening entries. Debit the

opening balances of assets, and credit the opening balances of liabilities

including capital.

Illustration (2) Mr Neeraj Sharma, a retail pharmacist, has following assets and liabilities on 1st April, 2015.

Assets: Cash ₹ 19000, Stock in trade ₹ 50,000, Furniture ₹ 14500,

Due from Rakesh ₹ 5000, Due from Gupta ₹4000

Liabilities Amount due to Ravi ₹ 12,000 and Surinder ₹ 4,600,

Loan from bank 15,000

 

Compound Entries

If two or more than two business transactions are concerned with the

same account and of the same date, then it is considered as compound

entry and recorded in the journal as one entry. For example, on 31st

December 2014, 7 64,000 is paid as salary and 8,000 as rent, and then

the entries made in the journal will be as under.

Salary Ac Dr 64,000

Rent A/c   Dr 8,000

To Cash A/c 72,000

Illustration (3) Enter the following entries in the journal of

M/s Jeevan Medical Hall for the month of January 2015.

 

CASH BOOK

Cash book is used to keep a record of all transactions related to cash

receipts and cash payments. This serves the purpose of both journal as

well as ledger account. Cash book is also a book of original entry,

because the transactions are recorded from the source documents for the first time. When a cash book is maintained, transactions of cash are not recorded in the journal. In big organisations such as banks, there are separate cash books for cash receipts and cash payments.

Types of Cash Books

There are three types of cash books:-

1. Single column cash book or simple cash book.

2. Two columnar cash book.

3. Three columnar cash book.

4. Petty cash book.

1. Single column cash book : 

A cash book which contains only

one column of amount is called a single column or simple cash book. A

cash account is divided into two sections by central vertical line. The

 The debit entries are made on left hand side and credit entries are made on right hand side. The abbreviation Dr and 'Cr' are written at the top left and right hand corner respectively. The word To' is written before debit entries and word By' is written before credit entries. The format and entries in a single column cash book are illustrated below.

Illustration (4) Make the entries of following transactions in the

single column cash-book of M/s Ganpati Medical Hall and balance it.

 

2. Two columnar cash book :

 There is great importance of dis-

count in cash transactions. If a businessman receives or allows cash

discount, then two columnar cash-book is needed to record it. In this

type of cash book, the following two columns are provided on each side

of the cash book:

(a) The first column is for discount, which is a nominal account.

(b) The second column is for cash, which is a real account.

Each item of discount allowed is recorded to the credit side of the

concerned personal account while each item of discount received is

posted to the debit of respective personal accounts.

The total of the discount columns on each side are done without

balancing. The total of the discount column on the debit side is debited

to the Discount Account and the total of the discount column on the

credit side is credited to the Discount Account.

The cash columns are recorded in the same way as in the simple cash

The balance of the cash columns is ascertained in the same

manner as the balancing of simple cash book.

 

The format and entries in the two columnar cash book are illustrated as:

Illustration (5) Enter the following transactions in the two columnar cash book of M/s Swastik Medical Hall and balance it.

3. Three columnar cash book : 

It is a popular form of cash book.

In this type of cash book, the following three columns are provided on

each side of the cash book.

(a) The first column is for discount, which is a nominal account.

(b) The second column is for cash, which is a real account.

©The third column is for bank, which is a personal account.

The following procedure is adopted while posting a transaction in the

three columnar cash-book:-

1 When amount is received in cash, it is recorded in the debit side

in the cash column and the discount allowed to the party concerned in this connection is recorded in the discount column of

debit side.

2 All cash payments are to be recorded in the credit side in the

cash column and the discount received from the party concerned

in this respect shall be recorded in the credit side of discount

column.

3 When cash is received and then sent to bank for deposit, then in

the debit side, bank account is debited and cash account is credited in the credit side. Similarly when cash is withdrawn from the bank for office use, the cash account is debited, in the debit side and bank account is credited in the credit side. Such entries are called 'contra entries' and letter 'C' is recorded in the ledger folio column.

4 When a cheque is received from the customer, it should be en-

tered in the bank column straightaway because cheques will have

to be sent to the bank. In case the cheque is received but the

same has been sent to the bank for deposit on a later date, then it

is presumed that it is kept in the cash bOx and treated as cash.

5.When a cheque is endorsed to a person, then the entry will be

just like of cash payment.

6.When crossed cheque is received, it is recorded in the debit side

in the bank column, but when bearer or other cheque is received,

it is recorded in the debit side in the cash column.

7. When bank charges any commission or collection charges for

service rendered with due intimation, the customer should enter

this item in the credit side of the cash column. In case, if these

changes are made by the bank without any intimation, then these

items should be recorded in the credit side in the bank column.

The format and entries in a three columnar cash book are illustrated below:

Illustration (6) Enter the following transactions in the three columnar cash book of M/s Gunjan Medical Hall and balance it.

2015

 

 

 

4. Petty cash book:

 In every business organisation, a large number

of small payments, such as, for conveyance (bus, taxi), stationery, post-

age, telegrams, cartage and other miscellaneous expenses are made.

all these payments are handled by the cashier and are recorded in cash

book, the procedure is found to be very cumbersome. The cashier will

be unnecessarily over-burdened and a big cash book will be required to

maintain all accounts. To avoid this, a petty cashier is appointed, who

makes all small payments and records them in his cash book which is

called the petty cash book.

The petty cashier works on the imprest system i.e. definite sum

(say Rs 5000), known as imprest money, is given to the petty cashier to make small payments out of it. When he has spent a major, portion of his imprest money (say Rs 4920/-) he gets reimbursement of the amount spent from the main cashier, so that he will have full imprest amount again. The reimbursement may be made to the petty cashier on weekly, fortnightly or monthly basis depending on the frequency of payment's made.

The format and entries in the petty cash book are illustrated below.

Illustration (7) The petty cashier is paid Rs 5000 as imprest money

on Ist May 2009. He made payments for the following expenses during

the month. Record these transactions in the petty cash book.

 

Advantages of Petty Cash Book

1. It saves labour because by preparing petty cash book, all petty

expenses are neither recorded in the cash book nor in the ledger.

2. It saves time of head cashier as the petty expenses are recorded

in the petty cash book.

columns of petty cash book.

vouchers of all petty expensees.

3. It is very simple to record all the petty expenses in various

4. There are less chances of fraud as it is essential to keep the

OTHER DAY BOOKS

In big firms, there are large number of transactions of similar type.

In order to maintain a proper record of all such transactions, the firm

maintains special journals for this purpose known as 'day books'. The

following day books are commonly used:

1. Purchases journal

2. Sales journal

3. Purchases return journal

4. Sales return journal

1. Purchases journal It is also called 'Invoice book and is used for recording purchase of goods on credit.The cash purchases are not

recorded in it. Instead of that cash purchases are recorded in the cash-book

Other purchases such as purchase of office equipment, furniture,

building (i.e. assets) are recorded in general journal if purchased on

credit or in cash book if purchased for cash.