recording of transactions-i - wordpress.com · 2017-07-04 · source documents receipt: receipt is...

Recording of Transactions-I

Samir K Mahajan

SOURCE DOCUMENTS

Source documents are the evidences of business transactions which provide information about thenature of the transaction, the date, the amount and the parties involved in it. Transactions are recordedin the books of accounts when they actually take place and are duly supported by source documents.

These supporting documents are the written and authentic proof of the correctness of the recordedtransactions. These documents are required for audit and tax assessment. They also serve as the legalevidence in case of a dispute. The following are the most common source documents(Vouchers)

• Cash Memo• Invoice or Bill• Receipt• Debit Note• Credit Note• Pay-in-slip• ChequeBills receivable, bills payable, wage sheet/salaries pay acquaintance, correspondence etc., also serve asthe source documents. Thus, there must be a source document for each transaction recorded in thebooks of accounts

Samir K Mahajan

SOURCE DOCUMENTS

Voucher: It is a written document in support of a transaction. It is a proof that a particular transaction hastaken place for the value stated in the voucher. It may be in the form of cash receipt, cash memo, invoice,bank pay-in-slip etc. Voucher is necessary to audit the accounts.

Samir K Mahajan

SOURCE DOCUMENTS

Cash Memo: When a trader sells goods for cash, he gives a cash memo and when he purchases goods forcash, he receives a cash memo. Details regarding the items, quantity, rate and the price are mentioned inthe cash memo.

Samir K Mahajan

SOURCE DOCUMENTS

Receipt: Receipt is an acknowledgement for cash received. It is issued to the party paying cash. Receiptsform the basis for entries in cash book. When a trader receives cash from a customer, he issues a receiptcontaining the date, the amount and the name of the customer. The original copy is handed over to thecustomer and the duplicate copy is kept for record.

Samir K Mahajan

SOURCE DOCUMENTS

Invoice or Bill: When a trader sells goods on credit, he prepares a sale invoice. It contains theinformation relating to name and address of the seller and the buyer, the date of sale and the cleardescription of goods with quantity and price. The original copy of the sale invoice is sent to thepurchaser and its duplicate copy is kept for making records in the books of accounts. Similarly, when atrader purchases goods on credit, he receives a credit bill from the supplier of goods.

Samir K Mahajan

SOURCE DOCUMENTS

Cheque: A cheque is a document in writing drawn upon a specified banker to pay a specified sum to thebearer or the person named in it and payable on demand. Each cheque book has a counterfoil in whichthe same details in the cheque are filled. The counterfoil remains with the account holder for his futurereference. The counterfoil forms the source document for entries to be made in the books of accounts.

Samir K Mahajan

SOURCE DOCUMENTS

Pay-in-slip: Pay-in-slip is a form available in banks and is used to deposit money into a bankaccount. Each pay-in-slip has a counterfoil which is returned to the depositor duly sealed andsigned by the bank official. This source document relates to bank transactions. It gives detailsregarding date, account number, amount deposited (in cash or cheque) and name of the accountholder.

Samir K Mahajan

Debit Note: A debit note is prepared for purchase return and it contains the date of the goods returned, name ofthe supplier, details of the goods returned and reasons for returning the goods. Each debit note is seriallynumbered. A duplicate copy or counter foil of the debit note is retained by the buyer. On the basis of debit note,the suppliers account is debited in the books.

Samir K Mahajan

Credit Note: A credit note is prepared sales return and it contains the date on which goods arereturned, name of the customer, details of the goods received, amount of such goods and reasons forreturning the goods. Each credit note is serially numbered. A duplicate copy of the credit note isretained for the record purpose. On the basis of credit note, the customer’s account is credited in thebooks.

Samir K Mahajan

Books of Original Entry

The books in which a transaction is recorded for the first time from a sourcedocument are called Books of Original Entry or Prime Entry or journal. The sourcedocument is required to record the transaction in the journal.

This practice provides a complete record of each transaction in one place and linksthe debits and credits for each transaction. The process of recording transactions injournal is called journalising.

Samir K Mahajan

Books of Original Entry contd.: Category

Samir K Mahajan

Journal /general journal/all-purpose journal

Other subsidiary books/special purpose books/special journal

Subsidiary Books - Non-cash Transactiono Purchase (journal) booko Sales (journal) booko Purchase return booko Sales return booko Bills receivable bookso Bills payable books

Subsidiary Books - Cash Transactiono Cash Book (Cash Book is used for recording only cash transactions i.e., receipts and payments

of cash)

Journal Proper

Books of Principal Entry

Samir K Mahajan

After the debits and credits for each transaction are entered in the journal, theyare transferred to the individual accounts called ledger account. The process oftransferring journal entry to individual accounts is called posting. The ledgeraccount as the Principal Book of entry.

Journal is one of the books of original entry in which transactions are originally recorded in a chronological (day-to-day) order according to the principles of Double Entry System. I other words, Journal is a date-wise record of all the transactions with details of the accounts debited and credited and the amount of each transaction.

Journal

JOURNAL

Date Particular L.F. Debit Amount (Rs)

Credit Amount (Rs)

Note: L.F. is ledger folio . All entries from the journal are later posted into the ledger accounts. The page number or folionumber of the Ledger, where the posting has been made from the Journal is recorded in the L.F column of the Journal. Tillsuch time, this column remains blank.

Samir K Mahajan

JOURNAL : EXPLANATION

1. Date :In the first column, the date of the transaction is entered. The year and the month is written only once, till theychange. The sequence of the dates and months should be strictly maintained.

2. Particulars :Each transaction affects two accounts, out of which one account is debited and the other account iscredited. The name of the account to be debited is written first, very near to the line of particulars column and theword Dr. is also written at the end of the particulars column. In the second line, the name of the account to be creditedis written, starts with the word ‘To’, a few space away from the margin in the particulars column to the make it distinctfrom the debit account.

3. Narration :After each entry, a brief explanation of the transaction together with necessary details is given in theparticularscolumn with in brackets called narration. The words ‘For’ or ‘Being’ are used before starting to write downnarration. Now, it is not necessary to use the word ‘For’ or ‘Being’.

4. Ledger Folio (L.F):All entries from the journal are later posted into the ledger accounts. The page number or folionumber of the Ledger, where the posting has been made from the Journal is recorded in the L.F column of the Journal.Till such time, this column remains blank.

5. Debit Amount :In this column, the amount of the account being debited is written.

6. Credit Amount :In this column, the amount of the account being credited is written.

Samir K Mahajan

STEPS IN JOURNALISING (Accounting Equation Approach)

Step 1 Determine the two accounts which are involved in the transaction.Step 2 Classify the above five accounts under asset, capital, liabilities, expenses/loss and income/gain.Step 3 Find out the rules of debit and credit for the above two accounts.Step 4 Identify which account is to be debited and which account is to be credited.

Step 5 Record the date of transaction in the date column. The year and month is written once, till they change. Thesequence of the dates and months should be strictly maintained.

Step 6 Enter the name of the account to be debited in the particulars column very close to the left hand side of theparticulars column followed by the abbreviation Dr. in the same line. Against this, the amount to be debited is writtenin the debit amount column in the same line.

Step 7 Write the name of the account to be credited in the second line starts with the word ‘To’ a few space away from themargin in the particulars column. Against this, the amount to be credited is written in the credit amount column in the sameline.

Step 8 Write the narration within brackets in the next line in the particulars column.Step 9 Draw a line across the entire particulars column to separate one journal entry from the other.

Samir K Mahajan

JOURNAL: ILLUSTRATION (Accounting Equation Approach)

Example 1: January 1, 2013 – Saravanan started business with Rs. 1,00,000.

Step 1 Determine the two accounts involved in

transaction

Cash

account

Capital

account

Step 2 Classify the accounts assets, expenses, loss and

liabilities, income/revenue and profit

Asset

account

Liability

account

Step 3 Find out rules of debit and credit Debit as

asset

increases

Credit as

liability

increases

Step 4 Identify which account to be debited and which

account to be credited

Cash a/c is to

be debited

Capital a/c is

to be

credited

Analysis of Transaction

Samir K Mahajan

Journal: Illustration contd.

JOURNAL: ILLUSTRATION (Accounting Equation Approach)


Credit Amount (Rs)

2013

January 1 Cash A/C Dr

To Capital A/C

( The amount invested in the business)

12

45

100000

100000

Samir K Mahajan

CASH AND CREDIT TRANSACTIONS

On 8 May 2014 purchased goods for Rs 18000 On 10 May 2014 purchased stationaries from Saha Enterprise for Rs 10000 On 11 May 2014 sold goods to Rajababu for Rs. 1500 on cash On 11 May 2014 sold goods to Himjhuri for Rs 2800 on credit

Samir K Mahajan

Journal


Credit Amount (Rs)

8 May Purchase A/C Dr

To Cash A/C

(Purchased goods on cash)

18000

18000

10 May Stationaries A/C Dr To Saha Enterproises

( Purchased goods from Saha Enterprise on

credit )

10000

10000

11 May Cash A/c Dr

To Sales A/C (Sold goods to Rajajababu for Cash)

1500

1500

11 May Himjhuri A/C Dr To Sales A/C

( Sold goods to Himjhuri on credit)

2800

2800

Samir K Mahajan

BANK TRANSACTIONS

Bank transactions that occur often in the business concerns are cash paid into bank, chequesand bills received from customers paid into bank for collection, payment of cheques forexpenses and cheques issued to suppliers or creditors. When a cheque is received treat it ascash. When a cheque is received and immediately deposited in bank, treat it as bank balance.

Journalise the followings:

January 18, 2004 – Opened a current account with Indian Overseas Bank Rs.10,000 Feb 3, 2004 – Rent paid by cheque Rs. 5,000. March 5, 2004 – Received cheque from Elavarasan Rs.20,000. March 15, 2004 – Cheque received from Santhosh Rs.30,000 and immediately banked.

Samir K Mahajan


Credit Amount (Rs)

2014January 18

Bank A/C Dr

To Cash A/C

(opened a current account in Indian Overseas

Bank)

10000

10000

Feb 3 Rent A/C Dr To Bank A/C

(Paid rent by cheque no. )

5000

5000

March 5 Cash A/c Dr

To Elavarasan A/C (Cheque received but not paid into bank)

20,000

20,000

March 15 Bank A/C Dr To Santhosh A/C

(Cheque received and immediately banked)

30,000

30,000

Samir K Mahajan

BANK TRANSACTIONS contd.

Journal

carried forward (c/f) from or balance brought down (b/d) from : past to present

brought forward (b/f) to or balance carried down (c/d) to : present to future

Samir K Mahajan

Example 1: Journalise the following transactions:

On 1 April 2014, Mr Mohan brings in Rs 1000000 as his capital On 2 April 2014, Mr Mohan purchases land for Rs. 350000 for cash On 30 April 2014, paid Rs. 150000 on completion of building constructed by contractor On May 3 2014 purchased furniture foe Rs. 400000 On 8 May 2014 purchased stock for Rs 180000 On 10 May 2014 deposited bank account in the name of the business for 150000 On 11 May Purchased goods form Bright and Co. on credit for Rs 30000

Samir K Mahajan


Credit Amount (Rs)

2014April 1

Cash A/C Dr To Capital A/C (Amount invested in business by Mohan)

1000000 1000000

April 2 Land A/C Dr To Cash A/C (land Purchased for cash)

350000350000

April 30 Building A/C Dr To Cash A/C (Paid to contractor for completion of building)

150000150000

May 3 Furniture A/C Dr To Cash A/C (Furniture Purchased for cash )

400000400000

Balance c/d (Or b/f) 1900000 1900000

JournalExample 1 contd.

Samir K Mahajan

Balance c/f (or b/d) 1900000 1900000

8 May Purchase A/C Dr To Cash A/C (goods purchased in cash)

180000 180000

10 May Bank A/C Dr To Cash A/C (Cash deposited in newly opened bank account )

230000230000

11 May Purchased A/C Dr To Bright and Co. A/C (Goods purchased on credit from Bright and Co)

30000 30000

Total 2340000 2340000

Journal

Example 1 contd.

Samir K Mahajan

Example 2: Journalise the following transactions:

On 1 April 2014, Gaurav started business by investing Rs 40,00,000 On 1 April 2014, Deposited Rs 3,00,000 in the bank account in the name of the business On 3 April 2014, purchased furniture for Rs. 48, 000 payment made by cheque On 8 April 2014, purchased goods costing Rs. 76, 000 against payment made by cheque On 10 April 2014, purchased goods from Honest Trader on account for Rs 56, 000 On 12 April 2014 , sold goods to M/S Hira lal for Rs. 18, 000 (costing Rs. 14, 200) on credit. On 15 April 2014, paid to Honest Traders Rs. 36,0000 by cheque On 18 April 2014, Goods sold for Rs. 23,800 (costing Rs.19000) on cash On 22 April 2014, Received cheque for 18, 0000 from Hira Lal On 26 April 2014, paid the balance amount (rs. 20000) to M/S Traders by cheque

Samir K Mahajan


Credit Amount (Rs)

2014April 1

Cash A/C Dr To Capital A/C (Capital invested in business by Gaurav )

Rs 400000 Rs 400000

1 Bank A/C Dr To Cash A/C (cash deposited in newly opened bank account)

3000003000000

3 Furniture A/C Dr To Bank A/C (Furniture purchased and payment made by cheque )

48000480000

8 Purchase A/C Dr To Bank A/C ( goods purchased on payment of cheque )

76,00076,0000

Balance b/d 824000 824000

Journal

Example 2 contd.

Samir K Mahajan

Balance c/d10 Purchase A/C Dr

To Honest Traders A/C ( Goods purchased on credit for Honest Traders)

S 56,000 56,000

12 Hira Lal A/C Dr To Sales A/C (sold goods to Hira Lal on credit )

18000 18000

15 M/S Honest Trader A/C Dr To Bank A/C (Cheque given to Honest Trader )

3600036000

18 Cash A/C Dr To Sales A/C (Goods purchased on credit from Bright and co)

23000 23000

Balance b/d 957000 957000

Journal

Example 2 contd.

Samir K Mahajan

Balance c/d 957000 957000

22 Cash A/C Dr To Hira Lal A/C ( Received cheque from Hira Lal )

18,000

18,000

26 M/S Honest Trader A/C Dr To Bank A/C (Cheque given to Honest Trader )

2000020000

Total 995000 995000

Journal

Example 2 contd.

Samir K Mahajan

CAPITAL AND DRAWINGS

All transactions of the business have to be analysed from the business point of view and not fromthe proprietor’s point of view. The amount with which a trader starts the business is known asCapital. The proprietor may withdraw certain amounts from the business to meet personal expenseor goods for personal use. It is called Drawings

Samir K Mahajan

CAPITAL AND DRAWINGS contd.

1. If cash is withdrawn,

Drawing A/C DrTo Cash A/C

2. If balance is withdrawn from bank

Drawing A/C DrTo Bank A/C

3. If goods are used for personal use

Drawing A/C DrTo Purchase A/C

Samir K Mahajan

CAPITAL AND DRAWINGS contd.Example: January 31, 2004 – Saravanan withdrew for personal use Rs. 20,000.


Credit Amount (Rs)

2004Jun 1

Drawing A/C Dr

To Cash A/C

(The amount withdrawn for personal use)

20,000

20,000

Journal

Samir K Mahajan

COMPOUND JOURNAL ENTRY

When two or more transactions of similar nature take place on the same date, such transactions canbe entered in the journal by means of a combined journal entry is called Compound Journal Entry.The only precaution is that the total debits should be equal to total credits

Samir K Mahajan


Credit Amount (Rs)

2004Jun 1

Cash A/C Dr

To Anju’s Captal A/C

To Manju’s Capital AC

(The amount invested by Anju & Manju)

1,20,000

50,00070,000


Example 1: June 1, 2004 – Anju contributed capital Rs. 50,000Manju contributed capital Rs. 70,000

Journal

Samir K Mahajan


Credit Amount (Rs)

2004July 1

Cash A/C Dr

Furniture A/c Dr

Stock A/c Dr

To Ajay’s Capital A/C

To Vijay’s Capital AC

(Capital introduced by Ajai & Vijay)

1,40,000

20,00070,000

110,000120,000


Example 2 : July 1, 2004 – Ajay contributed capital – Cash Rs. 90,000 and Furniture Rs. 20,000Vijay contributed capital – Cash Rs. 50,000 and Stock Rs. 70,000

Journal

Samir K Mahajan


Credit Amount (Rs)

2003July 13

Cash A/C Dr

Discount A/C Dr

To Shanti A/C

(Shanti Settled her account

24,700300

25,000

July 14 Thenmozhi A/C Dr Cash A/C

Discount Received A/C

(Settled Thenmozhi’s account )

15000

14,500500


Example 3 :July 13, 2003 – Received cash Rs.24,700 from Shanthi in full settlement of her account of Rs.25,000.

July 14, 2003 – Paid cash to Thenmozhi Rs.14,500, in full settlement of her account of Rs.15,000.

Journal

Samir K Mahajan

Journal Proper

Journal proper or Journal Residual is used for making the original record of such transactionswhich do not find place in special journals. The usual entries that are put through this journal isexplained below.

Opening Entries : Opening entries are used at the beginning of the financial year to openthe books by recording the assets, liabilities and capital appearing in the balance sheet ofthe previous year.

Samir K Mahajan

Journal Proper contd.

Closing Entries or Transfer entries: Closing entries are recorded at the end of the accounting yearfor closing accounts relating to expenses and revenues which are not balanced at the time ofbalancing.

Drawing account is transferred to capital account at the end of the accounting year.

Accounts relating to operation of business such as Sales, Purchases, Opening Stock, Income, Gainsand Expenses, etc. and drawing are closed at the end of the year and their Total/balances aretransferred to Trading and Profit and Loss account by recording the journal entries.

Samir K Mahajan


Adjusting Entries: In order to update ledger account on accrual basis, such entries are madeat the end of the accounting period.

Such as Rent outstanding, Prepaid insurance, Depreciation and Commission received inadvance. These are needed at the time of preparing the final accounts.

Rectifying Entries: Rectifying entries are passed for rectifying errors which might have committed in the book of accounts.

To rectify errors in recording transactions in the books of original entry and their posting to ledger accounts, this journal is used.

Samir K Mahajan


Other entries: recording of the following transaction is done in the journal proper :

a. At the time of a dishonour of a cheque the entry for cancellation for discount received or discount allowedearlier.

b. Endorsement, renewal and dishonour of bill of exchange which cannot be recorded through billsbook.

c. Credit purchases and credit sale of assets which cannot be recorded through purchases or salesbook Other adjustments like interest on capital and loan, bad debts, reserves etc

d. Goods withdrawn by the owner for personal use.e. Goods distributed as samples for sales promotion.f. Endorsement and dishonour of bills of exchange.g. Transaction in respect of consignment and joint venture, etc.h. Loss of goods by fire/theft/spoilage

Samir K Mahajan

OPENING ENTRYOpening Entry is an entry which is passed in the beginning of each current year to record the closing balanceof assets and liabilities of the previous year. In this entry asset accounts are debited and liabilities and capitalaccount are credited. If capital is not given in the question, it will be found out by deducting total of liabilitiesfrom total of assets.

Example: The following balances appeared in the books of Malarkodi as on 1st January 2004 – Cash Rs. 7,000, Bank Rs.70,000, Stock Rs.80,000, Furniture Rs.10,000, Computer Rs.50,000, Debtors Rs.33,000 and Creditors Rs.90,000.

Journal Date Particular L.F. Debit Amount (Rs)

Credit Amount (Rs)

2004January 1

Cash A/C Dr Bank A/C Dr Stock A/C Dr Furniture A/C DrComputer A/C DrDebtors A/C DrTo Creditors A/CTo Capital A/C (balancing figure) (Assets and liabilities Brought Forward)

7,0007,0000

80,000

10,000

50,000

33,000

90,000

160,000

Samir K Mahajan

OPENING ENTRY contd.

Example: The following balances appeared in the books of Malarkodi as on 1st January 2004 – Cash Rs. 7,000, Bank Rs.70,000, Stock Rs.80,000, Furniture Rs.10,000, Computer Rs.50,000, Debtors Rs.33,000 and Creditors Rs.90,000.

Journal


Credit Amount (Rs)

2004January 1

Cash A/C Dr Bank A/C Dr Stock A/C Dr Furniture A/C DrComputer A/C DrDebtors A/C DrTo Creditors A/CTo Capital A/C (balancing figure) (Assets and liabilities Brought Forward)

7,0007,0000

80,000

10,000

50,000

33,000

90,000

160,000

Samir K Mahajan

Closing ENTRY or transfer Entry

Closing entries are recorded at the end of the accounting year for closing accounts relating to purchase, sales, purchase returns, sales return, stock, and other account concerning expenses, losses, income, gains, and revenues. These accounts are closed by transferring the balances to the Trading, Profit and Loss Account.

Example: Salaries paid Rs.15,000. Give the closing entry as on Dec. 31, 2003.

The entries are based upon Trial Balance and can be summarised as under.

1. For closing items appearing in the debit side of Trading A/C

2. Trading A/C Dr To Opening Stock A/CTo Purchase A/CTo Sales Return A/CTo Direct expenses A/C (individual by name)

Samir K Mahajan

Closing ENTRYcontd.

2. For closing items appearing in the credit side of Trading A/C

Sales Return A/C DrPurchase Return A/C DrClosing A/C Dr To Trading A/C

3. For transfer to Gross Profit to Profit and Loss A/c

Trading A/C Dr To profit and loss A/C

Samir K Mahajan

Closing ENTRYcontd.

4. For transfer to Gross loss to Profit and Loss A/c

Profit and loss A/C Dr To Trading A/C

5. For closing items (indirect expenses and losses) appearing in the debit side of Profit and loss A/C

Profit and Loss A/C DrTo Indirect Expenses and Loss A/C (Individual Expenses A/C name)

Samir K Mahajan

Closing ENTRYcontd.

6. For transfer to income and gains

Individual and gains A/C Dr To profit and loss A/C

7. For transfer net income

Profit and loss A/C Dr To Capital A/C (in case of proprietorship and partnership)

0r to Profit and Loss Appropriation A/C (in case of company)

Samir K Mahajan

Closing ENTRYcontd.

7. For transfer net loss Capital A/C Or Profit and Loss Appropriation A/C Dr

o Profit and loss A/C

Samir K Mahajan

Adjusting EntriesTo arrive at a correct figure of profits and loss, certain accounts require some adjustments. Entriesfor making such adjustments are called as adjusting entries. These are needed at the time ofpreparing the final accounts.

Example: Provide depreciation on furniture Rs.1,00,000 @ 10% per annum. Give adjustment entry as on Dec. 31, 2003.


Credit Amount (Rs)

2003Dec. 31,

Depreciation A/C Dr.

To Furniture A/c(depreciation of furniture written off)

10000

1,0000

Samir K Mahajan

Journal

TRANSFER ENTRIES

Transfer entries are passed in the journal proper for transferring an item entered in one account to another account.

Example : When the proprietor takes goods Rs.5,000 for personal use. Give transfer entry on Dec. 31, 2003.


Credit Amount (Rs)

2003Dec. 31,

Drawings A/c Dr.

To Purchase A/c(goods for withdrawn personal use )

5,000

5000

Journal

Samir K Mahajan

RECTIFYING ENTRIES

Rectifying entries are passed for rectifying errors which might have committed in the bookof accounts.

Example : Purchase of furniture for Rs.10,000 was debited to Purchases Account. Passrectifying entry on Dec. 31, 2003.


Credit Amount (Rs)

2003Dec. 31,

Furniture A/c Dr

To Purchase A/c(Wrong debit to purchases account rectified)

10000

10000

Journal

Samir K Mahajan

BAD DEBTS

When the goods are sold to a customer on credit and if the amount becomes irrecoverable due to his insolvency or forsome other reason, the amount not recovered is called bad debts. For recording it, the bad debts account is debitedbecause the unrealised amount is a loss to the business and the customer’saccount is credited.

Example: Jamuna who owed us Rs.10,000 is declared insolvent and 25 paise in a rupee is received from her on 15th July, 2003.


Credit Amount (Rs)

2003Dec. 31,

Cash A/c Dr Bad debt A/c DrTo Jamuna A/C (25 paise in a rupee received on Jamuna’sinsolvency)

2,5007,500

10000

Journal

Samir K Mahajan

BAD DEBTS RECOVERED

Some times, it so happens that the bad debts previously written off are subsequently recovered. In such case, cash accountis debited and bad debts recovered account is credited because the amount so received is a gain to the business

Example: Received cash for a Bad debt written off last year Rs.7,500 on 18th January, 2004


Credit Amount (Rs)

200418 January

Cash A/c Dr To Bad debt recovered A/c (Bad debts recovered)

7,5007,500

Journal

Samir K Mahajan

recording of transactions-i - wordpress.com · 2017-07-04 · source documents receipt: receipt is...

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