Class 11 Accountancy Notes Chapter 3 (Recording of Transactions-I) – Financial Accounting-I Book

Alright class, let's delve into Chapter 3: Recording of Transactions-I. This chapter lays the foundation for how we systematically record the financial activities of a business. Mastering this is crucial, not just for your exams but for understanding the entire accounting process.

Chapter 3: Recording of Transactions – I: Detailed Notes

1. Business Transactions and Source Documents

• Business Transaction: An economic event involving the exchange of value (money or money's worth) between two or more parties, which changes the financial position (Assets, Liabilities, Capital) of a business entity. Examples: Purchase of goods, sale of goods, payment of salary, receipt of rent.
• Characteristics of a Business Transaction:
  • Must be measurable in monetary terms.
  • Must relate to the business entity.
  • Must result in a change in the financial position (Assets, Liabilities, Capital).
  • Must have a dual aspect (affecting at least two accounts).
  • Must be supported by evidence.
• Source Document (Voucher): The original, written evidence supporting a business transaction. It provides details like date, amount, parties involved, and nature of the transaction. These are essential for recording transactions and for auditing purposes.
  • Types of Source Documents:
    • Cash Memo: Issued by the seller to the buyer when goods are sold for cash. It's evidence of cash sales for the seller and cash purchases for the buyer.
    • Invoice or Bill: Issued by the seller to the buyer when goods are sold on credit. It contains details of goods, quantity, rate, total amount, terms of payment, etc. The original goes to the buyer, and a copy is kept by the seller.
    • Receipt: Issued by the receiver of cash to the payer, acknowledging the cash received. Details include date, amount, payer's name, and purpose.
    • Pay-in-Slip: Used to deposit cash or cheques into a bank account. The counterfoil, stamped by the bank, serves as evidence of deposit.
    • Cheque: A document instructing a bank to pay a specified sum from the drawer's account to the payee. The counterfoil or record slip of the cheque book provides evidence of payment.
    • Debit Note: Prepared by the buyer when returning goods to the seller (Purchase Return) or claiming an allowance. It indicates that the seller's account is being debited.
    • Credit Note: Prepared by the seller when goods are received back from a buyer (Sales Return) or an allowance is granted. It indicates that the buyer's account is being credited.
    • Voucher: An internal document prepared by the business itself based on source documents, authorizing the recording of a transaction. It specifies the accounts to be debited and credited. Vouchers can be Cash Vouchers (Debit/Credit) or Non-Cash/Transfer Vouchers.

2. Accounting Equation

• The foundation of the double-entry system. It signifies that the total assets of a business are always equal to the total claims (liabilities and capital) against those assets.
• Equation:
  Assets = Liabilities + Capital
  (or Assets = Equities, where Equities = Liabilities + Capital)
• Components:
  • Assets: Economic resources owned by the business that are expected to provide future economic benefits. Examples: Cash, Bank Balance, Debtors (Accounts Receivable), Stock (Inventory), Furniture, Machinery, Building, Land.
  • Liabilities: Obligations or debts owed by the business to outsiders (creditors). Examples: Creditors (Accounts Payable), Loans, Bank Overdraft, Outstanding Expenses.
  • Capital (Owner's Equity): The owner's claim on the assets of the business. It represents the amount invested by the owner(s) plus accumulated profits, minus any drawings. Capital = Assets - Liabilities.
• Effect of Transactions: Every transaction has a dual effect and affects the accounting equation in such a way that the equation always remains balanced. A transaction can:
  • Increase one asset, decrease another asset. (e.g., Purchased furniture for cash)
  • Increase an asset, increase a liability. (e.g., Purchased goods on credit)
  • Increase an asset, increase capital. (e.g., Owner introduces additional capital)
  • Decrease an asset, decrease a liability. (e.g., Paid creditors)
  • Decrease an asset, decrease capital. (e.g., Paid expenses, Drawings by owner)
  • Increase one liability, decrease another liability.
  • Increase a liability, decrease capital.
  • Decrease a liability, increase capital.

Example Analysis:

3. Rules of Debit and Credit

• The terms 'Debit' (Dr.) and 'Credit' (Cr.) indicate the side of an account where an entry is made. Debit refers to the left side, and Credit refers to the right side of an account (T-account format).

• Two Approaches:

  • a) Traditional Approach (English Approach): Accounts are classified into:

    • Personal Accounts: Accounts of persons (natural, artificial, representative).
      • Rule: Debit the Receiver, Credit the Giver.
      • Examples: Ram's A/c, Bank A/c, Capital A/c, Drawings A/c, Outstanding Salary A/c, Prepaid Rent A/c.
    • Real Accounts: Accounts of assets and properties (tangible and intangible).
      • Rule: Debit What Comes In, Credit What Goes Out.
      • Examples: Cash A/c, Furniture A/c, Machinery A/c, Goodwill A/c, Patents A/c. (Exception: Bank A/c is often treated as Personal).
    • Nominal Accounts: Accounts of expenses, losses, incomes, and gains.
      • Rule: Debit All Expenses and Losses, Credit All Incomes and Gains.
      • Examples: Salary A/c, Rent A/c, Discount Allowed A/c, Sales A/c, Commission Received A/c, Interest Received A/c.

  • b) Modern Approach (American Approach / Accounting Equation Approach): Accounts are classified based on the elements of the accounting equation:

    • Asset Accounts: Increase is Debited (+Dr.), Decrease is Credited (-Cr.).
    • Liability Accounts: Increase is Credited (+Cr.), Decrease is Debited (-Dr.).
    • Capital Account: Increase is Credited (+Cr.), Decrease is Debited (-Dr.).
    • Revenue/Income Accounts: Increase is Credited (+Cr.), Decrease is Debited (-Dr.).
    • Expense/Loss Accounts: Increase is Debited (+Dr.), Decrease is Credited (-Cr.).

  Summary of Modern Rules:

  Account Type	To Increase	To Decrease	Normal Balance
  Assets	Debit (Dr.)	Credit (Cr.)	Debit
  Expenses/Losses	Debit (Dr.)	Credit (Cr.)	Debit
  Liabilities	Credit (Cr.)	Debit (Dr.)	Credit
  Capital	Credit (Cr.)	Debit (Dr.)	Credit
  Revenue/Income	Credit (Cr.)	Debit (Dr.)	Credit

  (Note: Drawings are a reduction of Capital, hence Debited when increased).

4. Books of Original Entry - The Journal

• Journal: The primary book where transactions are first recorded chronologically (in order of date) using the rules of debit and credit. Also called the 'Book of Prime Entry' or 'Book of Original Entry'.

• Journalising: The process of recording transactions in the Journal.

• Journal Entry: The record of a single transaction in the Journal.

• Functions/Advantages of Journal:

  • Provides a chronological record of all transactions.
  • Reduces the possibility of errors as both aspects (Dr. and Cr.) are recorded together.
  • Provides a complete description (narration) of each transaction.
  • Helps in locating errors if the trial balance does not agree.
  • Forms the basis for posting entries into the Ledger.

• Format of a Journal:

  Date	Particulars	L.F.	Debit Amount (₹)	Credit Amount (₹)
  (Year)	Name of Account to be Debited................ Dr.      To Name of Account to be Credited      (Narration: Brief explanation of the transaction)		XXXX
  (Month Day)				XXXX

  • Date: Records the date of the transaction.
  • Particulars: Records the accounts debited and credited, followed by a narration. The account debited is written first, followed by 'Dr.'. The account credited is written on the next line, preceded by 'To'.
  • L.F. (Ledger Folio): Records the page number of the Ledger where the respective account is posted. Filled during posting.
  • Debit Amount: Amount debited.
  • Credit Amount: Amount credited. (Total Debit = Total Credit for each entry).

• Compound Journal Entry: A journal entry involving more than two accounts (i.e., multiple debits and/or multiple credits), but the total debit must equal the total credit. Example: Paying salary and rent together by cash.

• Opening Entry: A journal entry passed at the beginning of a new accounting year to record the closing balances of assets, liabilities, and capital from the previous year's balance sheet. All asset accounts are debited, and all liability and capital accounts are credited.

5. The Ledger

• Ledger: The principal or main book of accounts where transactions recorded in the Journal (or subsidiary books) are transferred (posted) to their respective accounts. It contains all accounts (Asset, Liability, Capital, Revenue, Expense) of the business.

• An account is a summarised record of transactions relating to a particular person, asset, liability, expense, or income.

• Utility/Advantages of Ledger:

  • Provides a complete record of transactions related to each specific account.
  • Helps in ascertaining the net effect (balance) of transactions on each account.
  • Facilitates the preparation of the Trial Balance.
  • Provides necessary information for preparing financial statements (Trading A/c, P&L A/c, Balance Sheet).

• Format of a Ledger Account (T-Format):

  Dr.                                                                        Name of Account                                                                        Cr.

  Date	Particulars	J.F.	Amount (₹)	Date	Particulars	J.F.	Amount (₹)

  • Left Side: Debit (Dr.) Side
  • Right Side: Credit (Cr.) Side
  • Date: Date of transaction.
  • Particulars: Name of the other account affected in the journal entry. If posting a debit entry to Cash A/c, the particulars column will show the name of the account credited in the journal entry (e.g., 'To Sales A/c'). If posting a credit entry, it shows the name of the account debited (e.g., 'By Purchases A/c').
  • J.F. (Journal Folio): Page number of the Journal from where the entry is posted.
  • Amount: The amount of the transaction.

• Posting: The process of transferring entries from the Journal to the respective accounts in the Ledger.

  • Locate the account to be debited in the Ledger. Enter the date, particulars (name of the credited account preceded by 'To'), J.F., and amount on the debit side.
  • Locate the account to be credited in the Ledger. Enter the date, particulars (name of the debited account preceded by 'By'), J.F., and amount on the credit side.

• Balancing of Accounts: The process of finding the difference between the total debits and total credits of an account at the end of an accounting period.

  • Total both the debit and credit sides.
  • Find the difference.
  • Write the difference on the side with the lower total, writing 'To Balance c/d' (carried down) if on the credit side, or 'By Balance c/d' if on the debit side. This makes the totals of both sides equal.
  • The closing balance (c/d) becomes the opening balance (b/d - brought down) for the next period on the opposite side.
  • Asset and Expense accounts usually have Debit balances. Liability, Capital, and Revenue accounts usually have Credit balances.
  • Nominal accounts (Expenses, Incomes) are usually closed at the end of the year by transferring their balances to the Trading and Profit & Loss Account, so they don't typically have opening/closing balances carried forward to the next year in the same way asset/liability accounts do.

This systematic process of using source documents, applying debit/credit rules, journalising, and posting ensures that financial information is recorded accurately and completely, forming the basis for financial reporting.

Multiple Choice Questions (MCQs)

1. Which of the following documents is prepared by the seller when goods are sold on credit?
   a) Cash Memo
   b) Credit Note
   c) Invoice/Bill
   d) Debit Note

2. The fundamental accounting equation is:
   a) Assets = Liabilities - Capital
   b) Assets = Capital - Liabilities
   c) Assets = Liabilities + Capital
   d) Capital = Assets + Liabilities

3. According to the modern approach, an increase in an Asset account is recorded by:
   a) Crediting the account
   b) Debiting the account
   c) No entry required
   d) Debiting the Capital account

4. Rent paid to the landlord should be debited to:
   a) Landlord's Account
   b) Cash Account
   c) Rent Account
   d) Capital Account

5. The process of recording transactions in the Journal is called:
   a) Posting
   b) Balancing
   c) Journalising
   d) Summarising

6. Which of the following accounts typically has a credit balance?
   a) Machinery Account
   b) Cash Account
   c) Creditors Account
   d) Salary Account

7. A brief explanation written below each journal entry is called:
   a) Folio
   b) Posting
   c) Narration
   d) Balancing

8. Purchase of machinery for cash will result in:
   a) Increase in Machinery, Increase in Cash
   b) Increase in Machinery, Decrease in Cash
   c) Decrease in Machinery, Increase in Cash
   d) Decrease in Machinery, Decrease in Cash

9. The Ledger Folio (L.F.) column in the Journal is used to record:
   a) The page number of the source document
   b) The page number of the Ledger account where posting is done
   c) The total amount of the transaction
   d) The date of posting

10. Goods returned by a customer should be credited to:
    a) Sales Account
    b) Customer's Account
    c) Sales Return Account
    d) Purchases Return Account

Answer Key for MCQs:

1. c) Invoice/Bill
2. c) Assets = Liabilities + Capital
3. b) Debiting the account
4. c) Rent Account (It's an expense)
5. c) Journalising
6. c) Creditors Account (It's a liability)
7. c) Narration
8. b) Increase in Machinery, Decrease in Cash
9. b) The page number of the Ledger account where posting is done
10. c) Sales Return Account (As per traditional view focusing on the nature of return. Alternatively, debiting Sales Return A/c and crediting Customer's A/c is the full entry. The question asks what is credited due to the return itself, which is the Sales Return A/c representing reduction in revenue/inward movement of goods previously sold). Self-correction: More accurately, the Customer's account is credited to reduce their debt, and Sales Return account is debited. Let me rephrase the question or answer. Rephrasing the answer based on the typical journal entry: The journal entry is Sales Return A/c Dr. To Customer's A/c. So, the Customer's Account is credited. Let's stick to the most direct impact account type. Sales Return is like a negative revenue/expense. Let's reconsider. Goods returned by a customer means Sales Return. The entry is Sales Return A/c Dr. To Customer's A/c. Which account is credited? The Customer's Account. Let's change the answer. Revised Answer for 10: b) Customer's Account. However, sometimes questions are framed asking about the nominal account effect. Sales Return A/c represents the return itself. Let's re-evaluate the options and typical exam question style. Often, they ask which nominal account is affected. Sales Return is the nominal account here (representing reduction/contra-revenue). Let's provide the most common interpretation for MCQs which often test the identification of the specific account type related to the event. Sales Return A/c is specifically opened for this. Let's revert to (c) with this clarification in mind.* Final Answer for 10: c) Sales Return Account (This account records the value of goods returned by customers). The full entry debits Sales Return and credits the Customer. The question asks what should be credited, which is ambiguous. If it means 'what account represents the inflow of returned goods/reduction in sales value', it's Sales Return (though it's debited). If it means 'which account receives the credit entry in the journal', it's the Customer's A/c. Given the options, Sales Return A/c is the specific account type created for this event, often treated as a contra-revenue account. Let's assume the question implies identifying the specific account representing the event type.* Let's re-check NCERT's approach. NCERT Chapter 3 focuses on basic entries. The entry for Sales Return is Sales Return A/c Dr. To Debtor's/Customer's A/c. So, the Customer's account is credited. Option (b) is technically correct for the credit side of the entry. Option (c) names the account type representing the transaction event itself (Sales Return), which is debited. This is a potentially confusing MCQ. Let's choose the most direct answer based on the journal entry credit side. Final Final Answer for 10: b) Customer's Account.

Make sure you understand the 'why' behind each rule and entry. Practice analysing transactions and passing journal entries regularly. Good luck with your preparation!