Recording Of Transactions – I

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This page contains solutions to theoretical questions (Testing your understanding questions, Short answers and Long answers) for the chapter 3 Recording of Transactions – I. If you’re looking for solutions to numberical questions, you can find them at
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Test Your Understanding – I
1.
Double entry accounting requirs that:
(i)
All transactions that create debits to asset accounts must create credits to liability or capital accounts;
(ii)
A transaction that requires a debit to a liability account require a credit to an asset account;
(iii)
Every transaction must be recorded with equal debits equal total credits. ✔
2.
State different kinds of transactions that increase and decrease capital.
(Capital increases by net profit and fresh capital introduced, decreases by drawings and net loss)
3.
Does a debit always mean increase and credit always mean decrease?
No
4.
Which of the following answers properly classifies these commonly used accounts:
(1)
Building
(2)
Wages
(3)
Credit sales
(4)
Credit purchases
(5)
Electricity charges due but not yet paid (outstanding electricity bills)
(6)
Godown rent paid in advance (prepaid godown rent)
(7)
Sales
(8)
Fresh capital introduced
(9)
Drawings
(10)
Discount paid
Assets
Liabilities
Capital
Revenue
Expense
(i)
5,4,
3,
9,6
2,10
8,7
(ii)
1,6
4,5
8,9
7,3
2,9,10
✔
(iii)
2,10,4
4,6
8
7,5
1,3,9

Test Your Understanding – II
State the title of the accounts affected, type of account and the account to be debited and account to be credited:
₹
1.
Bhanu commenced business with cash
1,00,000
2.
Purchased goods on credit from Ramesh
40,000
3.
Sold goods for cash
30,000
4.
Paid salaries
3,000
5.
Furniture purchased for cash
10,000
6.
Borrowed from bank
50,000
7.
Sold goods to Sarita
10,000
8.
Cash paid to Ramesh on account
20,000
9.
Rent paid
1,500

Test Your Understanding – III
Choose the correct answer:
1.
The ledger folio column of journal is used to:
a.
Record the date on which amount posted to a ledger account.
b.
Record the number of ledger account to which information is posted.
c.
Record the number of amounts posted to the ledger account.
d.
Record the page number of the ledger account. ✔
2.
The journal entry to record the sale of services on credit should include:
a.
Debit to debtors and credit to capital.
b.
Debit to cash and Credit to debtors.
c.
Debit to fees income and Credit to debtors.
d.
Debit to debtors and Credit to fees income. ✔
3.
The journal entry to record purchase of equiptment for ₹ 2,00,000 cash and a balance of ₹ 8,00,000 due in 30 days include:
a.
Debit equipment for ₹ 2,00,000 and Credit cash ₹ 2,00,000
b.
Debit equipment for ₹ 10,00,000 and Credit cash ₹ 2,00,000 and creditors ₹ 8,00,000 ✔
c.
Debit equipment ₹ 2,00,000 and Credit debtors ₹ 8,00,000.
d.
Debit equipment ₹ 10,00,000 and Credit cash ₹ 10,00,000.
4.
When an entry is made in journal:
a.
Assets are listed first.
b.
Accounts to be debited listed first. ✔
c.
Accounts to be credited listed first.
d.
Accounts may be listed in any order.
5.
If a transaction is properly analysed in recorded:
a.
Only two accounts will be used to record the transaction.
b.
One account will be used to record transaction.
c.
One account balance will increase and another will decrease.
d.
Total amount debited will equals total amount credited. ✔
6.
The journal entry to record payment of monthly bill will include:
a.
Debit monthly bill and Credit capital
b.
Debit capital and Credit cash.
c.
Debit monthly bill and Credit cash. ✔
d.
Debit monthly bill and Credit creditors.
7.
Journal entry to record salaries will include:
a.
Debit salaries Credit cash. ✔
b.
Debit capital Credit cash.
c.
Debit cash Credit salary.
d.
Debit salary Credit creditors.

Test Your Understanding – IV
Fill in the blanks:
1.
Issued a cheque for ₹ 8,000 to pay rent. The account to be debited is ……………… (Rent)
2.
Collected ₹ 35,000 from debtors. The account to be credited is ………… (Debtors)
3.
Purchased office stationary for ₹ 18,000. The account to be credited is ……….. (Cash)
4.
Purchased new machine for ₹ 1,70,000 and issued cheque for the same. The account to be debited is ………… (Machine)
5.
Issued cheque for ₹ 70,000 to pay off on of the creditors. The account to be debited is ………… (Creditors)
6.
Returned damaged office stationary and received ₹ 50,000. The account to be credited is ………… (Office stationary)
7.
Provided services for ₹ 65,000 on credit. The account to be debited is ……….. (Debtors)
Test Your Understanding – V
Select Right Answer:
1.
Voucher is prepared for:
(i)
Cash received and paid
(ii)
Cash/Credit sales
(iii)
Cash/Credit purchase
(iv)
All of the above ✔
2.
Voucher is prepared from:
(i)
Documentary evidence ✔
(ii)
Journal entry
(iii)
Ledger account
(iv)
All of the above
3.
How many sides does an account have?
(i)
Two ✔
(ii)
Three
(iii)
One
(iv)
None of the above
4.
A purchase of machine for cash should be debited to:
(i)
Cash account
(ii)
Machine account ✔
(iii)
Purchase account
(iv)
None of these
5.
Which of the following is correct?
(i)
Liabilities = Assets + Capital
(ii)
Assets = Liabilities – Capital
(iii)
Capital = Assets – Liabilities ✔
(iv)
Capital = Assets + Liabilities.
6.
Cash withdrawn by the Proprietor should be credited to:
(i)
Drawings account
(ii)
Capital account
(iii)
Profit and loss account
(iv)
Cash account ✔
7.
Find the correct statement:
(i)
Credit a decrease in assets
(ii)
Credit the increase in expenses
(iii)
Debit the increase in revenue
(iv)
Credit the increase in capital ✔
8.
The book in which all accounts are maintained is known as:
(i)
Cash Book
(ii)
Journal
(iii)
Purchases Book
(iv)
Ledger ✔
9.
Recording of transaction in the Journal is called:
(i)
Casting
(ii)
Posting
(iii)
Journalising ✔
(iv)
Recording

Short Answers
1. State the three fundamental steps in the accounting process.
The three fundamental steps involved in the accounting process are:
1.
Identifying and analyzing the business transactions.
2.
Recording the business transactions.
3.
Classifying and summarizing their effect and communicating it to the interested users.
2. Why is the evidence provided by source documents important to accounting?
The evidence provided by the source document is important in accounting because
1.
The source documents mandatory as a proof of the transaction that has taken place and should be preserved until the audit of the accounts and tax assessment for the given period is completed.
2.
As the journal entries are based on these source documents, they form the primary legal evidence
3. Should a transaction be first recorded in a journal or ledger? Why?
The transaction is first recorded in the journal because this practice provides a complete record of each transaction in one place and links the debits and credits for each transaction.
4. Are debits or credits listed first in journal entries? Are debits or credits indented?
Among the debits and credits, it is the debit which is recorded into the journal first. It is worth noting that both of these are recorded first into the journal before entering into the ledger.
The debits are recorded without any margin or indent or space. However, enough margin or indent or space is left before starting the credit entry account name. Also, the Dr. symbol for the debit entry is right-aligned.
5. Why are some accounting systems called double accounting systems?
The double accounting systems are called so because the every transaction recorded has a give and take effect and is recorded in atleast two accounts on the debit and credit sides.
6. Give a specimen of an account.
The following is a sample specimen of how an account looks like.
Date
Particulars
J.F.
Amount
₹
Date
Particulars
J.F.
Amount
₹
7. Why are the rules of debit and credit same for both liability and capital?
The rules of debit and credit are the same for both liability and capital. This is because the capital is nothing but the liability of the business towards the owner. Hence the same rules of debit and credit which apply to the liability will also apply to the capital also.
8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts.
The L.F (ledger folio) is the page number on which the the transaction belonging to an account is entered into the ledger. Until we post the entry in the ledger, we do not know the page number on which this transaction is going to be recorded. For this reason, the L.F. is recorded at the time of posting the entries into the ledger as it is know only at that time.
9. What entry (debit or credit) would you make to:
a.
increase revenue (Credit)
b.
decrease in expense (Credit)
c.
record drawings (Debit)
d.
record the fresh capital introduced by the owner. (Credit)
10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
The transaction which has a decreasing effect on an asset is recorded on the credit side. On the other hand a transaction that has a decreasing effect on the liability is credited.
Long Answers
1. Describe the events recorded in accounting systems and the importance of source documents in those systems?
The primary criteria of the events that are recorded into the accounting system is that these events should be economic in nature. In other-wards these transactions should be measurable in monetary terms. Then only they will be qualified for recording into the accounting systems.
Examples include
●
purchase of machinery
●
Installation of the purchased machinery
●
Sale of finished products to the customers
●
Rendering services to the customers
●
Payment of salary to the employees
Importance of Source Documents: The source documents used in recording the transactions in the accounting systems have a significant role.
These documents project all the details that are necessary for recording the transactions. The documents like cash memo, invoice, sales bill, pay-in-slip, cheque, salary slip are the source documents. These documents also provide the evidence of the economic transaction that has taken place. These documents should be preserved and presented during the audit of the accounts. They are required during tax assessment for an accounting period.
In case any transaction need to be referred back, the source documents come handy and provide all the details of the economic transaction that has taken place. The presence of the source documents and the fact that they are required for recording the transaction will prevent anyone from providing false accounting information and they also act as witness of any economic transaction that has taken place in case any conflict need to be resolved.

2. Describe how debits and credits are used to analyse transactions.
The accounting involves recording of the economic transactions that can be measured in monetary terms. Every one of these transactions have a give and take aspect. So, when recording these transactions the total amount debited and the total amount credited should be the same. In accounting the debit and credit indicated whether the transaction that has taken place should be recorded on the left side or right side of the account. To enter amount on the left side of an account is to debit(often abbreviated as Dr.) the account and to enter the amount on the right side of an account is to credit(often abbreviated as Cr. the account.
For recording the transactions, all the accounts are primarily classified into the following five categories.
1.
Assets
2.
Liabilities
3.
Capital
4.
Expenses/Losses
5.
Revenues/Gains
The following rules are taken into consideration when recording a transaction into an account.
●
Assets or Expenses/Losses:
i.
Increase is debited
ii
Decrease is credited.
●
Liabilities/Capital/Revenues or Gains:
i.
Increase is credited
ii.
Decrease is debited
3. Describe how accounts are used to record information about the effects of transactions?
Each of the monetary transactions is accompanied by a source document. Each of these transactions is first recorded into the journal or book of original entry. Thus each complete transaction is in one place and it helps to link the credit or debit transactions. The entire process is called journalising.
At regular intervals of time, all the transactions entered into the journal are transferred to individual ledger accounts, also known as principal book of entry, through posting. The following steps are while posting the accounts. For the sake of understanding let’s consider a sample journal entry with a single transaction and transfer this transaction into the ledger account. The journal has an entry where in the the finished goods worth of Rs.17,000 are sold to Mohit Bros. on credit on 23-Feb-2017 and a cheque is received from Mohit Bros on 28-Feb-2017
Date
Particulars
J.F.
Amount
₹
Date
Particulars
J.F.
Amount
₹
2017 Feb 23
Sales
23
17,000
2017 Feb 28
Bank
25
17,000
1.
Identify this account’s page in the ledger
2.
If this entry is the first one on the ledger account page, the balance carried forward (balance c/f) from the previous page, if any, is brought forward (balance b/f) to this page.
3.
On the debit side, the date on which sale occurred will be filled in the date column. In this case it is sales.
4.
On the debit side, the particulars of transaction will be filled in.
5.
On the debit side, the page number of the journal on which this transaction appears in the journal is recorded in the J.F. column.
6.
On the debit side, enter the monetary value in the amount column. In this case it is Rs.17,000
7.
On the credit side, enter the date on which the transaction (receipt of cheque from Anil Bros) occurred
8.
On the credit side, enter the particulars of the transaction. In this case it is Bank.
9.
On the credit side, enter the page number on which this transaction appears in the journal.
10.
On the credit side, enter the monetary value of the transaction in the Amount column. In this case it is Rs.17,000
11.
Calculate the totals on both debit and credit side of the transaction.
12.
If this is the last transaction entry in the ledger account, compute the difference in the amounts and enter the balance c/f. This should be carried over to the next page.

4. What is a journal? Give a specimen of journal showing at least five entries.
A journal is the book or original entry which is used to record economic transactions when they occur. An entry into the journal should be accompanied by the corresponding source document. Maintenance of journal ensures that all the transactions are available in one place and the debit and credits for each of the transaction are linked appropriately. Journalising ensures gives an account of a complete and useful description of the economic event’s impact on the organisation.
Depending on the number and commonality of the transactions taking place in an organization, the journal is subdivided into a number of books of original entry as follows:
a.
Journal Proper
b.
Cash book
c.
Other daybooks:
i.
Purchases (journal) book
ii.
Sales (journal) book
iii.
Purchase Returns (journal) book
iv.
Sale Returns (journal) book
v.
Bills Receivable (journal) book
vi.
Bills Payable (journal) book
The journal contains 5 columns which are required to be filled as follows:
1.
The first column in the journal is Date on which the transaction took place.
2.
The next column in the journal is Particulars column. In this column,
i.
the account to be debited is written on the first line beginning from the left hand corner.
ii.
the word ‘Dr.’ is written at the end of the column.
iii.
The next line starts with a prefix ‘To’ leaving sufficient margin on the left side followed by the account title to be credited.
iv.
A brief description of the transaction is provided in the next line. This is called narration

v.

A line is drawn below the narration indicating that the end of the recording for a specific journal entry.
vi.
The next column is with the heading L.F standing for ledger folio. This is the page number of the ledger on which the account is maintained. This is entered at the time of posting and not at the time of journalizing.
vii.
The debit amount column records the amount against the account to be debited.
viii.
The credit amount column records the amount against the account to be credited.
ix.
At the end of the page the amount columns (debit amount and credit amount) are totalled and carried forward (c/f) to the next page
x
On the next page these amounts are recorded as brought forward (b/f) balances.
A specimen of the journal entry from Saroj Mart’s journal is as follows:
Date
Details
01.5.2016
Business started with cash ₹ 1,50,000
01.5.2016
Goods purchased from Manisha for ₹ 36,000
01.5.2016
Stationary purchased for cash for ₹ 2,200
02.5.2016
Opened a bank account with SBI for ₹ 35,000
02.5.2016
Goods sold to Saygin for ₹ 16,000
03.5.2016
Received a cheque of ₹ 16,000 from Saygin
Books of Saroj Mart Journal
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2016
May.01
Cash A/c
Dr.
1,50,000
To Capital A/c
1,50,000
(Being business started with cash)
May.01
Purchases A/c
Dr.
36,000
To Manisha A/c
36,000
(Being goods purchased on credit)
May.01
Stationery A/c
Dr.
2,200
To Cash A/c
2,200
(Being stationery purchased for cash)
May.02
Bank A/c
Dr.
35,000
To Cash A/c
35,000
(Being bank account opened with SBI)
May.02
Saygin A/c
Dr.
16,000
To Sales A/c
16,000
(Being goods sold to Saygin on credit)
May.03
Bank A/c
Dr.
16,000
To Saygin A/c
16,000
(Being cheque received from Saygin)
Total c/f
2,55,200
2,55,200

5. Differentiate between source documents and vouchers.
The following are the differences between source documents and vouchers.
Basis
Source Document
Voucher
1. Definition
The document that contains the details of the monetary event or transaction.
A vourcher is also a source document that acts as an evidence for the monetary event or transaction.
2. Time of Preparation
Source documents are prepared at the same time when the event or transaction takes place.
Vouchers are prepared either at the same time when the even or transaction takes place, or afterwards.
3. Preparing person
Source documents are prepared by the person who is carrying out the trasaction or the person who has authority to prepare or approve.
Vouchers are prepared by the accountants or the persons who has the authority.
4. Purpose
Source documents serve the purpose of preparing accounting vouchers.
Vouchers serve the purpose of analyzing the economic transactions
5. Recording
It serves as the base document using which the accounting vouchers are prepared, which in-turn are used for recording the transactions.
It serves as the base document using which the transactions are recorded.
6. Legal purpose / validity
Source documents can act as a legal evidence for the even or transactions that has taken place.
The vouchers are used for validating the the authenticity of the events or transactions.
7. Example documents
●
Cash memo
●
Cheque
●
Invoice
●
Pay-In-Slip
●
Salary-Slip
●
Sales-Bill
●
Cash Memo
●
Cash Voucher
●
Credit Note
●
Debit Note
●
Invoice
●
Pay-In-Slip
●
Transfer-Voucher

6. Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
The accounting equation states that the assets of a business are always equal to the sum of its liabilities and capital (owner’s equity). It can be stated as
A = L + C
Where
A = Assets
L = Liability
C = Capital (Owner’s equity)
This can also be represented in the following forms. It lets us to determine the missing derivative, if two other derivatives are present.
A – L = C
OR
A – C = L
As the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also referred to as the Balance Sheet Equation. A the name implies, the balance sheet is a statement of assets, liabilities and capital.
At any point of time resources of the business entity must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called as capital and that of the outsiders is known as liabilities.
The asset side of the balance sheet is the list of assets, which the business entity owns. The liabilities side of the balance sheet is the list of owner’s claims and outsider’s claims i.e., what the business entity owes.
Consider the following transaction.
This can be best explained through the following example. Consider the 5 transactions that have taken place in the following accounting scenario.
i.
Rohit started a business with a cash of ₹ 5,00,000.
Analysis of Transaction: The transaction increases cash on one hand and increases capital on the other hand.
ii.
Opened a bank account with an amount of ₹ 4,80,000.
Analysis of Transaction: The transaction increases the cash at bank on one hand and decreases cash in hand on the other hand.
iii.
Bought furniture for ₹ 60,000 and issued cheque for the same.
Analysis of Transaction: This transaction increases furniture (assets) on one hand and decreases bank (assets) on the other hand by ₹ 60,000.
iv.
Bought Plant and Machinery from Ramjee lal for the business for ₹ 1,25,000 and an advance of ₹ 10,000 in cash is given.

Analysis of Transaction: This transaction increases the plant and machinery (assets) by ₹ 1,25,000, decreases cash by ₹ 10,000 and increases liabilities (M/s Ramjee Lal as creditor) by ₹ 1,15,000.

When all these transactions are tabulated into the balance sheet it shows that the accounting equation remains intact under all circumstances.
(Figures in rupees)
Transaction No
Assets
=
Liabilities
Capital
Total
Cash
Bank
Furniture
Plant and Machinery
Total
i. Rohit started business with a cash of ₹ 5,00,000
5,00,000
=
5,00,000
5,00,000
–
–
–
5,00,000
=
–
5,00,000
5,00,000
ii. Opened a bank account with an amount of ₹ 4,80,000
(4,80,000)
4,80,000
20,000
4,80,000
–
–
5,00,000
=
–
5,00,000
5,00,000
iii. Bought furniture for ₹ 60,000 and paid through cheque
(60,000)
60,000
20,000
4,20,000
60,000
–
5,00,000
=
–
5,00,000
5,00,000
iv. Bought plant and Machinery from Ramjee lal for ₹ 1,25,000 and gave an advance of ₹ 10,000 in cash
(10,000)
1,25,000
5,00,000
1,15,000
10,000
4,20,000
60,000
1,25,000
6,15,000
=
1,15,000
5,00,000
6,15,100
Total
6,15,100
=
6,15,000

7. Explain the double entry mechanism with an illustrative example.
In double entry mechanism, every transaction affects and recorded in two accounts. While recording the transactions in double entry, it is ensured that the total amount debited equals to the total amount credited. Due to this due entry aspect, a simple account appears in the form of the English alphabet T and hence is also known as T-account. In this format the increase and decrease of an item are recorded on left and right sides. In the T-account the left side is known as debit(abbreviated as Dr.) and the right side is known as credit(abbreviated as Cr.). Thus the double entry ensures the final position of an item at the end of the accounting period.
The following rules are taken into consideration when recording a transaction into an account.
●
Assets or Expenses/Losses:
i.
Increase is debited
ii.
Decrease is credited.
●
Liabilties/Capital/Revenues or Gains:
i.
Increase is credited
ii.
Decrease is debited
The following example explains it better.
1.
Rohit started a business with a cash of ₹ 5,00,000.
Analysis of Transaction: The transaction increases cash on one hand and increases capital on the other hand. The increase in assets is credited and increase in capital is credited. Therefore we have to record this transaction with debit to cash account and credit to Rohit’s capital.
Cash Account
Capital Account
2.
Opened a bank account with an amount of ₹ 4,80,000.
Analysis of Transaction: The transaction increases the cash at bank on one hand and decreases cash in hand on the other hand. Increase in asset is debited and a decrease in asset is credited. Therefore, we have to record this transaction with debit to bank account and credit to cash account.
Cash Account
Bank Account
3.
Bough furniture for ₹ 60,000 and issued cheque for the same.
Analysis of Transaction: This transaction increases furniture (assets) on one hand and decreases bank (assets) on the other hand by ₹ 60,000. Increase in assets is debited and a decrease in an asset is credited. Therefore, we have to record this transaction with debit to furniture account and credit to bank account.
Furniture Account
Bank Account
3.
Bought Plant and Machinery from Ramjee lal for the business for ₹ 1,25,000 and an advance of ₹ 10,000 in cash is given.
Analysis of Transaction: This transaction increases the plant and machinery (assets) by ₹ 1,25,000, decreases cash by ₹ 10,000 and increases liabilities (M/s Ramjee Lal as creditor) by ₹ 1,15,000. An increase in asset is debited and a decrease in an asset is credite. Therefore, we have to record this transaction with debit to Plant and machinery account and credit to cash and Ramjee Lal’s account
Cash Account
Plant and Machinery Account
Ramjee Lal’s Account