Chapter 3: Recording of Transactions – I (Journal & Ledger) — Study Notes

1. Source Documents and Vouchers

Before a transaction is recorded, it must be supported by documentary evidence. - Source Documents: Cash memo, Invoice/Bill, Receipt, Pay-in-slip, Cheque, Debit Note, Credit Note. - Voucher: An accounting document prepared by the accountant based on source documents, showing which account is to be debited and which is to be credited. Types include Cash Vouchers (Debit and Credit) and Non-Cash (Transfer) Vouchers.

2. Accounting Equation Approach

An alternative way to understand debits and credits is the modern approach based on the Accounting Equation: Assets = Liabilities + Capital. Rules of Debit and Credit (Modern Approach): - Assets & Expenses: Increase $\rightarrow$ Debit (Dr.), Decrease $\rightarrow$ Credit (Cr.) - Liabilities, Capital & Revenues: Increase $\rightarrow$ Credit (Cr.), Decrease $\rightarrow$ Debit (Dr.)

3. Traditional Approach (Types of Accounts)

Accounts are broadly classified into three types: 1. Personal Accounts: Accounts of individuals, firms, companies, etc. (e.g., Ram, Tata Motors, Bank, Capital, Drawings). - Rule: Debit the Receiver, Credit the Giver. 2. Real Accounts: Accounts of tangible and intangible assets (e.g., Cash, Machinery, Goodwill). - Rule: Debit what comes in, Credit what goes out. 3. Nominal Accounts: Accounts of expenses, losses, incomes, and gains (e.g., Salary, Rent, Sales, Commission). - Rule: Debit all expenses and losses, Credit all incomes and gains.

4. The Journal (Book of Original Entry)

The Journal is the primary book of account in which transactions are recorded in chronological (date-wise) order. The process of recording in the Journal is called Journalising.

Format of Journal:

• Narration: A brief explanation of the transaction written below the entry.
• L.F. (Ledger Folio): The page number of the Ledger where the entry is posted.

Types of Journal Entries:

• Simple Entry: Involves only two accounts (one debited, one credited).
• Compound Entry: Involves more than two accounts, where either multiple accounts are debited, multiple are credited, or both.
• Opening Entry: Passed at the beginning of the financial year to bring down the balances of assets and liabilities from the previous year.

5. Discount in Accounting

• Trade Discount: A reduction given by the wholesaler to the retailer on the catalogue price. It is not recorded in the books. The purchase/sale is recorded at the net value.
• Cash Discount: Allowed to encourage prompt payment. It is recorded in the books (Discount Allowed is an expense, Discount Received is an income).

6. The Ledger (Principal Book)

A Ledger is a book containing all accounts (Assets, Liabilities, Capital, Revenues, and Expenses) where transactions recorded in the Journal are classified and summarized. The process of transferring entries from the Journal to the Ledger is called Posting.

Format of a Ledger Account:

Dr. [Account Name] Cr. | Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |

• The left side is the Debit (Dr.) side, and the right side is the Credit (Cr.) side.
• When posting a debit entry, write "To [Account Name]" on the Dr. side.
• When posting a credit entry, write "By [Account Name]" on the Cr. side.

7. Balancing of Accounts

At the end of a period, the difference between the total of the Dr. side and Cr. side is found. - If Dr. > Cr., the account has a Debit Balance (Written as By Balance c/d on the Cr. side to balance). - If Cr. > Dr., the account has a Credit Balance (Written as To Balance c/d on the Dr. side to balance). - Nominal accounts are generally not balanced; their totals are transferred to the Trading and Profit & Loss A/c.