Recording of Transactions - I

• Business Transactions

  • Meaning: Economic activity that changes financial position
  • Characteristics:
    • Measured in money
    • Dual aspect (Two-fold effect)
    • Supported by source documents

• Accounting Equation

  • Core Formula: Assets = Liabilities + Capital
  • Basis: Dual Aspect Concept
  • Effects of Transactions:
    • Increase/Decrease in Assets
    • Increase/Decrease in Liabilities or Capital
    • No net effect on the equation balance

• Rules of Debit and Credit

  • Traditional Approach (English System)
    • Personal Accounts: Debit the receiver, Credit the giver
    • Real Accounts: Debit what comes in, Credit what goes out
    • Nominal Accounts: Debit all expenses/losses, Credit all incomes/gains
  • Modern Approach (American System)
    • Assets: Increase = Debit, Decrease = Credit
    • Liabilities: Increase = Credit, Decrease = Debit
    • Capital: Increase = Credit, Decrease = Debit
    • Expenses: Increase = Debit, Decrease = Credit
    • Revenues: Increase = Credit, Decrease = Debit

• Source Documents & Vouchers

  • Source Documents (Evidence)
    • Cash Memo
    • Invoice / Bill
    • Receipt
    • Pay-in-Slip
    • Cheque
  • Accounting Vouchers
    • Cash Vouchers (Debit & Credit Vouchers)
    • Non-Cash Vouchers (Transfer Vouchers)

• Books of Original Entry (Journal)

  • Meaning: Book of prime entry
  • Format:
    • Date
    • Particulars (with Ledger Folio)
    • Debit Amount
    • Credit Amount
  • Types of Journal Entries
    • Simple Entry
    • Compound Entry