Chapter 3 Recording of Transactions I Solutions
Question - 11 : - Describe the events recorded in accounting systems and the importance of source documents in those systems?
Answer - 11 : -
It is beyond human capabilities to memorise each financial transaction and that is why, source documents have their own importance in accounting system. They are considered as an evidence of transactions and can be presented in the court of law. Transactions supported by evidence can be verified. Source documents also ensure that transactions recorded in the books are free from personal biases.
A few events that are supported by source document are given below.
1. Sale of goods worth Rs 200 on credit, supported by sales invoice/bill
2. Purchase of goods worth Rs 500 on credit, supported by purchase invoice/bill
3. Cash sales worth Rs 1,000, supported by cash memo
4. Cash purchase of goods worth Rs 400, supported by cash memo
5. Goods worth Rs 100 returned by customer, supported by credit note
6. Return of goods purchased on credit worth Rs 200, supported by debit note
7. Payment worth Rs 1,200 through bank, supported by cheques
8. Deposits into bank worth Rs 500, supported by pay-in slips.
Out of the above events, only those events that can be expressed in monetary terms, are recorded in the books of accounts. However, the non-monetary events are not recorded in accounts; for example, promotion of manger cannot be recorded but increment in salary can be recorded at the time when salary is paid or due.
Source document in accounting is important because of the below given reasons.
1. It provides evidence that transaction has actually occurred.
2. It provides information about the date, amount and parties involved and other details of a particular transactions.
3. It acts as an evidence in the count of law.
4. It helps in verifying the transaction during the auditing process.
Question - 12 : - Describe how debits and credits are used to analyse transactions.
Answer - 12 : -
All transactions must be measured in monetary terms for being recorded. All such transactions have a dual aspect i.e. both debit and credit. Therefore when recording transaction both the debit and credit amount should be the same. In recording of transactions debit and credit determines whether it should be placed in left or right side of the account. Amount entered on the left side is debit and is represented by notation Dr. while, credit is recorded on the right side of an account, abbreviated as Cr.
For recording transactions, accounts are classified into following types:
- Assets
- Liabilities
- Capital
- Expenses/Losses
- Revenues/Gains
Following rules are used for recording transaction to an account:
For Assets/ Expenses or Losses: Increase in Assets, Expenses or losses is debited while decrease is credited. For Liabilities/Capital/Revenues or Gains the increase is credited, while decrease is debited.
Question - 13 : - Describe how accounts are used to record information about the effects of transactions?
Answer - 13 : -
Every transaction is recorded in the original book of entry (journal) in order of their occurrence; however, if we want to know that how much we receive from our debtors or how much to pay to the creditors, it is not possible to determine at a single movement. Hence, we prepare accounts to know the position of business activities in the meantime.
There are some steps to record transactions in accounts; it can be easily understood with the help of an example.
Sold goods to Mr A worth Rs 50,000 on 12th April and received payment Rs 40,000 on 25th April. The following journal entries will be recorded:
| | Particulars | L.F. | Debit Amount Rs | Credit Amount Rs |
| Apr.12 | A's A/c | Dr. | 22 | 50,000 | |
| | | To Sales | | 18 | | 50,000 |
| | (Goods sold on credit to Mr. A) | | | | | |
| | | | | | | |
| Apr.25 | Cash A/c | Dr. | 13 | 40,000 | |
| | | To A's A/c | | 22 | | 40,000 |
| | (Cash received from Mr. A) | | | | |
Step 1− Locate the account in ledger, i.e., Mr A’s Account.
Step 2− Enter the date of transaction in the date column of the debit side of Mr A’s Account.
Step 3− In the ‘Particulars’ column of the debit side of Mr A’s Account, the name of corresponding account is to be written, i.e., ‘Sales’.
Step 4− Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr A’s Account.
Step 5− Enter the amount in the ‘Amount’ column.
Step 6− Same steps are to be followed to post entries in the credit side of Mr A’s Account.
Step 7− After entering all the transactions for a particular period, balance the account by totalling both sides and write the difference in shorter side, as ‘Balance c/d’.
Step 8− Total of account is to be written on either sides.
Question - 14 : - What is a journal? Give a specimen of journal showing at least five entries.
Answer - 14 : -
Journal is derived from the French word Jour, means daily records. In this book, transactions are recorded in order of their occurrence, i.e., in chronological order from the source document. It is also termed as the book of original entry and each transaction is termed as journal entry.
| Performa of Journal In the books of..... |
| Date | | Particulars | | L.F. | Debit Amount Rs | Credit Amount Rs |
| | | | | | |
| | | | | | |
| | | | | | |
Date− Date of transaction is recorded in theorder of their occurrence.
Particulars− Details of business transactions like,name of the parties involved and the name of related accounts, are recorded.
L.F.− Page number of ledger account when entry isposted.
Debit Amount− Amount of debit account is written.
Credit Amount− Amount of credit account is written.
Recording of a JournalEntry
| | | Date |
| 1) | Started business with cash Rs 1,00,000 | April 01 |
| 2) | Open a bank account Rs 20,000 | April 03 |
| 3) | Purchase goods for cash Rs 25,000 | April 04 |
| 4) | Goods sold for cash Rs 30,000 | April 05 |
| 5) | Goods sold to Mr. X Rs 2,000 | April 06 |
| Books of Mr A |
| Journal |
| Date | Particulars | L.F. | Debit Amount Rs | Credit Amount Rs |
| April1 | Cash A/c | Dr. | | 1,00,000 | |
| | | To Capital A/c | | | | 1,00,000 |
| | (Started business with cash) | | | | | |
| | | | | | | |
| April 3 | Bank A/c | Dr. | | 20,000 | |
| | | To Cash A/c | | | | 20,000 |
| | (Bank account opened with cash) | | | | |
| | | | | | | |
| April 4 | Purchase A/c | Dr. | | 25,000 | |
| | | To Cash | | | | 25,000 |
| | (Goods purchased for cash) | | | | |
| | | | | | | |
| April 5 | Cash A/c | Dr. | | 30,000 | |
| | | To Sales A/c | | | | 30,000 |
| | (Goods sold for cash) | | | | |
| | | | | | | |
| April 6 | Mr. X's A/c | Dr. | | 2,000 | |
| | | To Sales | | | | 2,000 |
| | (Goods sold to Mr. X on credit) | | | | |
| | | | | | | |
| | Total | | 177,000 | 177,000 |
| | | | | |
| | | | | | | | |
Differentiate between source documents and vouchers.
Answer - 15 : -
| Basis of Difference | Source Documents | Vouchers |
| Meaning | It refers to the documents in writing, containing the details of events or transactions. | When source document is considered as evidence of an event or transaction, then it is called voucher. |
| Purpose | It is used for preparing accounting vouchers. | It is used for analysing the transactions. |
| Recording | It acts as a basis for preparing accounting voucher that helps in recording. | It acts as a basis for recording transactions. |
| Preparation | It is prepared at the time when an event or a transaction occurs. | It can be prepared either when an event or a transaction occurs, or later on. |
| Legality/Validity | It can be used as evidence in the court of law. | It can be used for assessing the authentication of transactions. |
| Prepared By | It is prepared by the persons who are directly involved in the transactions, or who are authorised to prepare or approve these documents. | It is prepared by the authorised persons or by the accountants. |
| Examples | Cash memo, invoice, and pay-in-slip, etc. | Cash memo, invoice, pay-in-slip (if used as evidence), debit note, credit note, cash vouchers, transfer vouchers, etc. |
Question - 16 : - Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Answer - 16 : - According to the dual-aspect concept, every transaction simultaneously, has two effects of equal amount, i.e. debit and credit. However, in any case, the equality of total assets with the total claims of business (sum of capital and liabilities) is not disturbed. This equality is algebraically represented as:
or
or, Liabilities = Asset− Capital
or, Capital = Assets −Liabilities
In any circumstance theabove equation cannot be changed. For example,
- Business started with cash Rs 1,00,000
| Cash A/c | Dr. | |
| To Capital A/c |
| Assets | = | Liabilities | + | Capital |
| Cash | | | | 1,00,000 |
| (1,00,000) | | | | |
Assets decrease, as cashis invested into the business and capital increases. Thus the equality betweenLHS and RHS remains intact.
- Goods purchased on credit Rs 20, 000
| Assets | = | Liabilities | + | Capital |
| Cash | Stock | | Creditors | | |
| | | | | | |
| 1,00,000 | 20,000 | = | 20,000 | + | 100,000 |
Assets increase as wellas liability increases, without disturbing the equality.
- Goods purchased with cash 25000
| Assets | = | Liabilities | + | Capital |
| Cash | Stock | = | | | |
| 1,00,000 | 20,000 | | 20,000 | + | 1,00,000 |
| (25,000) | 25,000 | | | | |
As goods are purchasedfor cash, so cash balance reduces by Rs 25,000, but on the other hand, stockbalance increases by Rs 25,000. Thus the total balance of LHS remains equal tothe total claims.
Explain the double entry mechanism with an illustrative example.
Answer - 17 : -
Double entry system is based on the dual aspect concept. It means every transaction has two-sided effects, i.e., every debit has its credit.
This system is explained by Luca Pacioli in his book Summade Arithmetica Geometria Proportioni et Proportionalita, 1494. He said if one is receiver, then the other should be the giver.
In double entry system, accounts are classified as shown below.
- Personal Accounts: It includes individual persons, firms, companies, and other institutions, such as Mr. A, M/s ABC & Co. etc.
Rule of double entrysystem for personal accounts:
- Debit the receiver.
- Credit the giver.
For example:
- Cash paid to Mr. A.
- Cash received from Mr. X
- Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.
- Real Account− It includes all types of assets.
- Tangible assets that can be seen and touched; for example, machinery, building, etc.
- Intangible assets that cannot be seen and touched; for example, goodwill, patent, etc.
Rule of double entrysystem for real accounts:
- Debit what comes in.
- Credit what goes out.
For example:
Furniture purchased forcash
| Furniture A/c | Dr. | |
| To Cash A/c |
- Nominal Account: It includes all expenses, losses, incomes and gains.
Rule of double entrysystem for nominal accounts:
- Debit all losses and expenses.
- Credit all gains and incomes.
For example:
- Rent paid
- Commission received.
| Cash A/c | Dr. | |
| To Commission A/c |
Prepare accounting equation on the basis of the following:
(a) Harsha started business with cash Rs 2,00,000
(b) Purchased goods from Naman for cash Rs 40,000
(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000
(d) Bought furniture on credit Rs 7,000
Answer - 18 : -
| S.No. | Explanation | Assets | = | Liabilities | + | Capital |
| Cash | + | Stock | + | Debtors | + | Furniture | Creditors | | |
| (a) | Increase in cash | 2,00,000 | | | | | | | = | | | |
| | Increase in capital | | | | | | | | | | | 2,00,000 |
| | | 2,00,000 | | | | | | | = | NIL | + | 2,00,000 |
| (b) | Increase in stock | | | 40,000 | | | | | | | | |
| | Decrease in cash | (40,000) | | | | | | | | | | |
| | | 1,60,000 | + | 40,000 | | | | | = | NIL | + | 2,00,000 |
| (c) | Increase in debtors | | | | | 12,000 | | | | | | |
| | Decrease in stock | | | (10,000) | | | | | | | | |
| | Profit | | | | | | | | | | | 2,000 |
| | | 1,60,000 | + | 30,000 | + | 12,000 | | | = | NIL | | 2,02,000 |
| (d) | Increase in furniture | | | | | | | 7,000 | | | | |
| | Increase in creditors | | | | | | | | | 7,000 | | |
| | | 1,60,000 | + | 30,000 | + | 12,000 | + | 7,000 | = | 7,000 | + | 2,02,000 |
| | | | | | | | | | | | | |
Question - 19 : - Prepareaccounting equation from the following:
| | | Rs |
| (a) | Kunal started business with cash | 2,50,000 |
| (b) | He purchased furniture for cash | 35,000 |
| (c) | He paid commission | 2,000 |
| (d) | He purchases goods on credit | 40,000 |
| (e) | He sold goods (costing Rs 20,000) for cash | 26,000 |
Answer - 19 : -
| S.No. | Explanation | Assets | | Liabilities | + | Capital |
| Cash | + | Furniture | + | Stock | | | = | Creditors | | |
| (a) | Increase in cash | 2,50,000 | | | | | | | | | | |
| | Increase in capital | | | | | | | | | | | 2,50,000 |
| | | 2,50,000 | | | | | | | = | NIL | + | 2,50,000 |
| (b) | Increase in furniture | | | 35,000 | | | | | | | | |
| | Decrease in cash | (35,000) | | | | | | | | | | |
| | | 2,15,000 | + | 35,000 | | | | | = | NIL | + | 2,50,000 |
| (c) | Decrease in capital (Expense) | | | | | | | | | | | (2,000) |
| | Decrease in cash | (2,000) | | | | | | | | | | |
| | | 2,13,000 | + | 35,000 | | | | | = | NIL | + | 2,48,000 |
| (d) | Increase in stock | | | | | 40,000 | | | | | | |
| | Increase in creditors | | | | | | | | | 40,000 | | |
| | | 2,13,000 | + | 35,000 | + | 40,000 | | | = | 40,000 | + | 2,48,000 |
| (e) | Increase in cash | 26,000 | | | | | | | | | | |
| | Decrease in stock | | | | | (20,000) | | | | | | |
| | Increase in capital (Profit) | | | | | | | | | | | 6,000 |
| | | 2,39,000 | + | 35,000 | + | 20,000 | | | = | 40,000 | + | 2,54,000 |
| | | | | | | | | | | | | |
Question - 20 : - Mohit has the following transactions, prepare accounting equation:
| | | Rs |
| (a) | Business started with cash | 1,75,000 |
| (b) | Purchased goods from Rohit | 50,000 |
| (c) | Sales goods on credit to Manish (Costing Rs 17,500) | 20,000 |
| (d) | Purchased furniture for office use | 10,000 |
| (e) | Cash paid to Rohit in full settlement | 48,500 |
| (f) | Cash received from Manish | 20,000 |
| (g) | Rent paid | 1,000 |
| (h) | Cash withdrew for personal use | 3,000 |
Answer - 20 : -
| S.No. | Explanation | Assets | | Liabilities | + | Capital |
| Cash | + | Stock | + | Debtors | | Furniture | = | Creditors | | |
| (a) | Increase in cash | 1,75,000 | | | | | | | | | | |
| | Increase in capital | | | | | | | | | | | 1,75,000 |
| | | 1,75,000 | | | | | | | = | NIL | + | 1,75,000 |
| (b) | Increase in stock | | | 50,000 | | | | | | | | |
| | Increase in creditors (Rohit) | | | | | | | | = | 50,000 | + | 1,75,000 |
| | | 1,75,000 | + | 50,000 | | | | | = | 50,000 | + | 1,75,000 |
| (c) | Increase in debtors (Manish) | | | | | 20,000 | | | | | | |
| | Decrease in stock | | | (17,500) | | | | | | | | |
| | Increase in capital (Profit) | | | | | | | | | | | 2,500 |
| | | 1,75,000 | + | 32,500 | + | 20,000 | | | = | 50,000 | + | 1,77,500 |
| (d) | Increase in furniture | | | | | | | 10,000 | | | | |
| | Decrease in cash | (10,000) | | | | | | | | | | |
| | | 1,65,000 | + | 32,500 | + | 20,000 | + | 10,000 | = | 50,000 | + | 1,77,500 |
| (e) | Decrease in creditors (Rohit) | | | | | | | | | (50,000) | | |
| | Decrease in dash | (48,500) | | | | | | | | | | |
| | Increase in capital (Discount received) | | | | | | | | | | | 1,500 |
| | | 1,16,500 | + | 32,500 | + | 20,000 | + | 10,000 | = | NIL | + | 1,79,000 |
| (f) | Increase in cash | 20,000 | | | | | | | | | | |
| | Decrease in debtors (Manish) | | | | | (20,000) | | | | | | |
| | | 1,36,500 | + | 32,500 | + | NIL | + | 10,000 | = | NIL | + | 1,79,000 |
| (g) | Decrease in capital (Expense) | | | | | | | | | | | (1,000) |
| | Decrease in cash | 1,000 | | | | | | | | | | |
| | | 1,35,500 | + | 32,500 | + | NIL | + | 10,000 | = | NIL | + | 1,78,000 |
| (h) | Decrease in capital (Drawings) | | | | | | | | | | | (3,000) |
| | Decrease in cash | (3,000) | | | | | | | | | | |
| | | 1,32,500 | + | 32,500 | + | NIL | + | 10,000 | = | NIL | + | 1,75,000 |
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