Recording of Transactions – I
1. Introduction to Recording of Transactions
- Recording of transactions is the fundamental process in accounting where all financial transactions are systematically documented.
- Ensures accuracy, completeness, and reliability of financial information.
2. Source Documents
- Source documents are the original records that contain details of business transactions.
- Common source documents include invoices, receipts, bills, vouchers, and bank statements.
- These documents serve as evidence for the authenticity of transactions.
3. Types of Accounts
- Personal Accounts: Related to individuals, firms, and companies. Examples: Debtors, Creditors.
- Rule: Debit the receiver, Credit the giver.
- Real Accounts: Related to assets and properties. Examples: Land, Building, Cash.
- Rule: Debit what comes in, Credit what goes out.
- Nominal Accounts: Related to expenses, losses, incomes, and gains. Examples: Salary, Rent, Commission.
- Rule: Debit all expenses and losses, Credit all incomes and gains.
4. Accounting Equation
- The accounting equation forms the foundation of double-entry bookkeeping.
- Formula: Assets = Liabilities + Owner’s Equity
- Ensures that every transaction affects at least two accounts, keeping the equation balanced.
5. Double-Entry System
- A system of bookkeeping where each transaction is recorded in two accounts – one debit and one credit.
- Ensures accuracy and helps in detecting errors easily.
6. Journal
- A journal is the first place where transactions are recorded in chronological order.
- It is also known as the book of original entry.
- Journal entries include:
- Date of the transaction.
- Accounts affected.
- Amounts debited and credited.
- A brief description of the transaction.
7. Journal Entries
- The format of a journal entry:
- Date: The date on which the transaction occurred.
- Particulars: The accounts involved in the transaction.
- Debit Amount: The amount debited.
- Credit Amount: The amount credited.
- Narration: A brief description of the transaction.
8. Ledger
- A ledger is a book where all the journal entries are classified and posted account-wise.
- It is also known as the book of secondary entry.
- Ledger accounts help in summarizing all the transactions related to a particular account.
9. Posting
- The process of transferring journal entries to the respective ledger accounts.
- Ensures that all financial information is organized and easily accessible.
10. Balancing the Ledger
- The process of totaling the debit and credit sides of a ledger account and determining the balance.
- If the debit side is greater, it shows a debit balance; if the credit side is greater, it shows a credit balance.
11. Trial Balance
- A statement prepared to check the arithmetic accuracy of the ledger accounts.
- Lists all the ledger accounts and their balances.
- The total of debit balances should equal the total of credit balances.
12. Rectification of Errors
- Identifying and correcting errors in the books of accounts.
- Types of errors include:
- Errors of omission: Transactions not recorded.
- Errors of commission: Transactions recorded incorrectly.
- Compensating errors: Errors that cancel each other out.
- Errors of principle: Transactions recorded against accounting principles.
- Errors can be rectified by passing appropriate journal entries.
13. Subsidiary Books
- Books of original entry used to record specific types of transactions.
- Examples include:
- Cash Book: Records all cash receipts and payments.
- Purchases Book: Records all credit purchases.
- Sales Book: Records all credit sales.
- Purchase Returns Book: Records returns of goods purchased on credit.
- Sales Returns Book: Records returns of goods sold on credit.
By understanding and applying these concepts, students will be able to accurately record and manage financial transactions, laying a strong foundation for advanced accounting practices.
