Chapter 5: Recording of Transactions

Table of Content
 Account, Debit & Credit
 Types of Accounts
 Journal
 Ledger

Account, Debit and Credit

Account

 It is a record of all business transactions related to a particular person or item.

 It records the amount of transactions along with their effect and direction.
 It is divided into two parts and presented in a T format, where the left-hand side is known as
debit and the right-hand side is known as credit. T account represents debit and credit sides as
(Dr.) and (Cr.) respectively.
 It is debited by entering the amount on the left side of an account and is credited by entering
the amount on the right side of an account.

Debit & Credit

 Debit (Dr.): The left side of an account, representing an increase or decrease depending on the
account type. Debiting means entering an amount on the left side.

 Credit (Cr.): The right side of an account, representing an increase or decrease depending on
the account type. Crediting means entering an amount on the right side.

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Types of Accounts

(i) Traditional Approach

Traditional
Classification
of Accounts

Personal Impersonal
Accounts Accounts

Natural Artificial Representative

Personal Personal Personal Real Accounts Nominal
Accounts Accounts
Accounts Accounts

1. Personal Accounts: These accounts relate to persons such as individuals, firms, companies, etc.
These are prepared to determine the balance due to or due from persons or organizations. These
accounts can further be classified as follows:

 Natural Personal Accounts: These are the accounts of those persons who come into existence
naturally i.e., persons who are creation of God. Therefore, it includes only accounts in the
names of individuals like Maya’s Account, Rahul’s Account, Om’s Account, etc.
 Artificial Personal Accounts: These are the accounts of those institutions or corporate bodies
which are recognized as persons in business dealings which includes Company’s Account,
Society’s Account, etc.
 Representative Personal Accounts: These are the accounts that represent a certain person or
group of persons which includes accounts like Prepaid and Outstanding Rent.

2. Impersonal Accounts: All the accounts other than the Personal Accounts are termed as Impersonal
Accounts. These are further classified as follows:

 Real Accounts: Accounts that related to tangible or intangible assets of the firm, such as Land,
Building, etc. and intangible assets such as Patents and Trademarks.
 Nominal Accounts: Accounts that relate to incomes, expenses, gains and losses are known as
Nominal Accounts. It includes the accounts opened to record the particulars of salaries paid,

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 commission received, rent paid, Sales Account, etc. In case a prefix or suffix is added to a
Nominal Account, it becomes a Personal Account, e.g., Outstanding Salary, Prepaid Rent,
Interest received in Advance, etc.

Rules of Debit & Credit

Account Rule

Personal Debit the receiver, Credit the Giver

Real Debit what comes in, Credit what goes out

Nominal Debit all Expenses & Losses, Credit all Incomes & Gains

(ii) Modern Approach

Modern
Classification
of Accounts

Asset Liability Capital Revenue Expense

Accounts Accounts Accounts Accounts Account

1. Asset Accounts: The accounts that relate to the economic resources of an enterprise such as
Furniture, Machinery, Patents, etc.
2. Liability Accounts: These are the liability accounts of lenders, creditors, etc. and include Outstanding
Expenses, creditors for goods, etc.
3. Capital Accounts: These are the accounts of proprietors/partners who have invested amount in the
business which includes both Capital and Drawings Account.
4. Revenue Accounts: These are the accounts of incomes and gains that include Sales, Interests
received, Bad Debts recovered, etc.
5. Expense Account: These are the accounts of expenses and losses that include Purchases, Wages,
Depreciation, etc.

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Rules of Debit & Credit

Account Increases Decreases

Assets Debit Credit

Liabilities Credit Debit

Capital Credit Debit

Revenue Credit Debit

Expenses Debit Credit

Journal
This is the basic book of original entry. In this book, transactions are recorded in the chronological order,
as and when they take place. Afterwards, transactions from this book are posted to the respective
accounts. Each transaction is separately recorded after determining the particular account to be debited
or credited. The format of Journal is shown is figure

Date Particulars L.F Debit (Rs.) Credit(Rs.)

YYYY

_____________ A/c ……… Dr. XXXX

DD/MM

To________________ A/c XXXX

(Being _______________________)

(Narration)

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Significance and explanation of columns in the Journal

 Date Column: In the first column the date of the transaction is entered, the year is most probably written
on the top of the column than to repeat it every day.

 Particulars Column: Here the accounting entry is written in a summarized form of debit and credit. The
names of the accounts involved in the transaction are written in the journal entry.
On the first line, the account is debited, the word “Dr.” is written at the right end of the same line of account
debited.
On the second line, the account credited is written with a prefix “To” after leaving a little space towards the
start. Immediately below the entry, a small explanation of the transaction called ‘narration’ is written. The
narration begins with the word “Being”.

 Ledger Folio No. Column (L.F.): In this column, the page number of the Ledger in which the journal entry is
posted, is recorded. This also helps is easy cross verification and reference in the future.

 Debit Amount Column: The amounts to be debited to the accounts concerned or involved are written.

 Credit Amount Column: The amounts to be credited to the accounts concerned or involved are written.

Entries in a General journal

1. Opening Entries: Opening entries are passed at the beginning of the accounting year to open the accounts
by recording the assets, liabilities, and capital appearing in the balance sheet of the previous year.

2. Closing Entries: Closing entries are passed at the end of the financial year for the closing of accounts
relating to expenses and revenues. These accounts are closed by transferring their closing balances to
the Trading and Profit & Loss Account.

3. Adjustment Entries: At the end of the financial year, we need to pass adjustments entries for
outstanding/prepaid expenses, and also accrued income/income received in advance etc. We thus pass
these entries in the journal proper. (iv) Transfer Entries: Transfer entries are passed in the general journal
to transfer an item entered in one account to another account.

4. Rectification Entries: Rectification entries are passed for correcting errors which might have committed in
the books of account.

5. Purchase of Fixed Assets: When fixed assets are purchased on credit, the entries for these purchases are
thus passed in the general journal.

6. Sale of Worn-out or Obsolete Assets: When obsolete assets are sold on credit, Same are originally
recorded in the general journal.

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Practical Example:

Question: Ananth is a trader dealing in textiles. For the following transactions, pass journal entries for
the month of January, 2018.

Jan. Rs.

Commenced business with cash 70,000

Purchased goods from X and Co. on credit 30,000

Cash deposited into bank 40,000

Bought a building from L and Co. 95,000

Cash withdrawn from bank for office use 5,000

Cash withdrawn from bank for personal use of Ananth 4,000

Towels given as charities 3,000

Shirts taken over by Ananth for personal use 12,000

Sarees distributed as free samples 3,000

Goods (table clothes) used for office use 200

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Solution:

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Ledger
After recording the business transactions in the Journal or special purpose Subsidiary Books, the next
step is to transfer the entries to the respective accounts in the Ledger. Ledger is a book where all the
transactions related to a particular account are collected at one place. The Ledger is the main or
Principal book of accounts in which all the business transactions would ultimately find their place under
various accounts in a duly classified form.

Format of Ledger Account

Dr. Name of Account Cr.

Date Particulars J.F. Amount Date Particulars J.F.* Amount
Date of Name of Page or Amount of Date of Name of the Page or Amount of
Transaction the other Reference transaction transactions other Reference transaction
Account number of account number of
The The
Subsidiary Subsidiary
Book Book

Process of posting from journal to ledger

Step 1: Locate in the ledger, the account to be debited as entered in the journal.

Step 2: Enter the date of transaction in the date column on the debit side.

Step 3: In the ‘Particulars’ column write the name of the account through which
it has been debited in the journal. For example, furniture sold for cash ` 34,000.
Now, in cash account on the debit side in the particulars column ‘Furniture’ will
be entered signifying that cash is received from the sale of furniture. In Furniture
account, in the ledger on the credit side is the particulars column, the word,
cash will be recorded. The same procedure is followed in respect of all the entries
recorded in the journal.

Step 4: Enter the page number of the journal in the folio column and in the journal
write the page number of the ledger on which a particular account appears.

Step 5: Enter the relevant amount in the amount column on the debit side.
It may be noted that the same procedure is followed for making the entry on the
credit side of that account to be credited. An account is opened only once in the
ledger and all entries relating to a particular account is posted on the debit or credit side, as the case may be.

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Closing and Balancing of Account

Normally after every month or whenever a businessman is interested in knowing the position of various A/c,
the accounts are balanced. Various steps for these purposes are:

1. Debit and Credit sides of each A/c are totaled.

2. The difference between the two sides is inserted on the side which is shorter so as to make their totals
equal.
3. The words ‘Balance c/d’ i.e., the balance carried down and written against the amount of difference.
4. In the next period, the balance is brought down on the other side by writing the words ‘Balance b/d’.
5. If the Debit side exceeds the Credit Side, the difference is a Debit Balance whereas.
6. If the Credit side exceeds the Debit side, the difference is a Credit Balance.

Important

 Debit Balance of a Personal A/c means the person is a Debtor of the firm whereas Credit Balance of a
Personal A/c indicates that the person is a Creditor of the firm.
 Real A/cs (which include Cash and all other Assets A/cs) will usually show Debit Balances.
 Nominal A/cs (A/cs of Income and Expenses) are transferred to Trading and profit and Loss A/c of the firm
at the end of the Accounting Period.
 Debit Balance of any A/c means an Asset or an Expense whereas Credit Balance means a liability, Capital or
revenue.

Practical Example:

Question: On 1st April, 2018, Mohit started business with a capital of 50,000. He made the following
transactions. Prepare Ledger accounts.

2018 ₹
April 03 Purchased goods from Rita on credit for 20,000
April 04 Cash paid to Rita 10,000
April 06 Goods sold to Rohit 25,000
April 08 Received cash from Rohit 20,000
April 12 Goods purchased from Rita 12,000
April 18 Cash paid to Rita 20,000
April 25 Goods sold to Rohit 10,000
April 30 Received cash from Rohit 6,000

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 Solution:
Cash Account (Assets A/C)
Dr. Cr.
J.F. Amount Amount
Date Particulars Date Particulars J.F.
122 (Rs) (Rs)
2018 2018
Apr.01 To,Capital A/c 50,000 Apr.04 By,Rita 10,000
Apr.08 To,Rohit 20,000 Apr.18 By,Rita 20,000
Apr.30 To,Rohit 6,000 Apr.30 By,Balance c/d 46,000

76,000 76,000
May.01 To,Balance b/d 46,000

Capital Account (Liabilities a/c)

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
Apr.30 To,Balance c/d 50,000 Apr.01 By,Cash A/c 50,000

50,000 50,000
May.01 By,Balance b/d 50,000

Purchases Account (Expenses a/c)

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
Apr.03 To,Rita 20,000 Apr.30 By,Balance c/d 32,000
Apr.12 To,Rita 12,000

32,000 32,000
May.01 To,Balance b/d 32,000

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 Rita’s a/c (Creditors=Liabilities)
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
Apr.04 To,Cash A/c 10,000 Apr.03 By,Purchases A/c 20,000
Apr.18 To,Cash A/c 20,000 Apr.12 By,Purchases A/c 12,000
Apr.30 To,Balance c/d 2,000
([Link].)

32,000 32,000
May.01 By,Balance b/d 2,000

Rohit’s a/c ( Debtors = Assets)

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
Apr.06 To,Sales A/c 25,000 Apr.08 By,Cash A/c 20,000
Apr.25 To,Sales A/c 10,000 Apr.30 By,Cash A/c 6,000
Apr.30 By,Balance c/d 9,000

35,000 35,000
May.01 To,Balance b/d 9,000

Sales Account (Income)

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
(Rs) (Rs)
2018 2018
Apr.30 To,Balance c/d 35,000 Apr.06 [Link]’s a/c 25,000
Apr.25 By,Rohit’s a/c 10,000

35,000 35,000
May.01 By,Balance b/d 35,000

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