Recording Of Business Transactions - I Class 11 Notes Accountancy Chapter 3 - CBSE

Chapter : 3

What Are Recording Of Business Transactions – I ?

Accounting Equation

Accounting Equation is a mathematical expression which shows that the assets of a firm are equal to the sum of its liabilities and the capital contributed by the owner.

Mathematical Expression of Accounting Equation

  • Assets = Liabilities or Claims of Outsiders + Capital or Owner's Equity
  • Capital - Assets = Liabilities
  • Liabilities = Assets - Capital

Types of Transactions Affecting Accounting Equation

A business transaction may result in any of the following manner :

  • Increase in one Asset and Decrease in other Asset.
  • Increase in an Asset and simultaneously increase in a Liability.
  • Increase in Asset and Increase in Capital or Owner's Equity.
  • Decrease in an Asset and simultaneously Decrease in a Liability.
  • Decrease in an Asset and simultaneously Decrease in Capital.
  • Increase in one Liability and Decrease in other Liability.

Effect of Various Transactions on the Accounting Equation

No. Transaction Assests Liabilities & Capital
1. Capital
(i) ₹50,000 brought in by owner Cash ↑ by ₹50,000 Capital ↑ by ₹50,000
(ii) Started business with cash of ₹20,000, furniture of ₹30,000, Goods of ₹40,000 and creditors of ₹10,000 Cash ↑ by ₹20,000 Creditors ↑ by ₹10,000
Furniture ↑ by ₹30,000 Stock ↓ by ₹40,000 Capital ↑ by ₹80,000
2. Drawings
(i) Cash withdraw ₹4,000 Cash ↓ by ₹4,000 Capital ↓ by ₹4,000
(ii) Purchased refrigerator of ₹12,000 for personal use Cash ↓ by ₹12,000 Capital ↓ by ₹12,000
(iii) Goods of ₹1,000 (sale price ₹1200) used for personal use. Stock ↓by ₹1,000 Capital ↓ by ₹1,000
3. Purchase of Goods
(i) Cash purchase of ₹6,000 Stock ↑ by ₹6,000
Cash ↓ by ₹6,000
(ii) Credit purchase of ₹5,000 Stock ↑ by ₹5,000 Creditors ↑ by ₹5,000
No. Transaction Assests Liabilities & Capital
4. Sale of Goods
(i) Cash sale of ₹9,000 Cash ↑ by ₹9,000 -
Stock ↓ by ₹9,000 -
(ii) Credit sale of ₹4,000 Debtors ↑ by ₹4,000 -
Stock ↓ by ₹4,000
(iii) Goods costing ₹400 sold at profit ₹100 in cash Cash ↑ by ₹500 Capital ↑ by ₹100
Stock ↓ by ₹400
(iv) Goods costing ₹700 sold at profit ₹200 on credit Debtors ↑ by ₹900 Capital ↑ by ₹200
Stock ↓ by ₹700
5. Discount Allowed
Received ₹800 from debtors in Allowed full settlement of ₹900 Cash ↑ by ₹800 Capital ↓ by ₹100
Debtors ↓ by ₹900
6. Discount Received
Paid ₹12,000 to creditors in full settlement of ₹13,500 Cash ↓ by ₹12,000 Creditors ↓ by ₹13,500 Capital ↑ by ₹1,500
7. Purchase of Fixed Assets
Furniture purchased of ₹9,000 in cash Furniture ↑ by ₹9,000 Cash ↓ by ₹9,000
8. Depreciation
Depreciate furniture by ₹1,000 Furniture ↓ by ₹1,000 Capital ↓ by ₹1,000
9. Charity
Goods of ₹600 given as charity (Sale Price ₹800) Stock ↓ by ₹600 Capital ↓ by ₹600
10. Loss by Fire
Goods of ₹400 lost by fire (sale price ₹450) Stock ↓ by ₹400 Capital ↓ by ₹400

Journal

Journal is a Book of Original or Primary Entry in which the business transactions are recorded in chronological order, i.e, as and when they take place. Journal is a Book of Original Entry as all the transactions are recorded first of all, as and when they take place. Journal Entries are of two types:

  • Simple Journal Entry: If a Journal Entry involves two accounts, i.e. one debit and one credit account, then it is termed as Simple Journal Entry.
  • Compound Journal Entry: If a Journal Entry involves more than two accounts, i.e. when one or more accounts are debited and one or more accounts are credited or vice versa, then it is termed as Compound Journal Entry.

Advantages Of A Journal

  • Journal reduces the possibility of committing error.
  • Provides an Explanation of the transaction.
  • Provides Chronological record of Transactions.
  • Facilitates Ledger Posting.

Steps In Journalising

Step 1: Recognise the accounts involved in the transaction.

Step 2: Recognise the nature of accounts involved in the transaction.

Step 3: Ascertain the account to be debited and credited.

Step 4: Ascertain the amount by which accounts are to be debited and credited.

Step 5: Write the date of the transaction in the Date column.

Step 6: In the Particulars column, write the name of the accounts to be debited and credited.

Step 7: Draw ruling of a Journal and record the transaction.

Rules Of Journal Entries

Journal entries are the first step in the accounting process and are used to record financial transactions in a company's books. To maintain consistency and accuracy, certain rules, known as "Rules of Journal Entries" or
"Golden Rules of Accounting," are followed. These rules are based on the accounting equation and ensure that each transaction is properly recorded. The three fundamental rules of journal entries are:

  • Personal Accounts: Debit (Dr.) the receiver, Credit (Cr.) the giver.
  • Real Accounts: Debit (Dr.) what comes in, Credit (Cr.) what goes out.
  • Nominal Accounts: Debit (Dr.) all expenses and losses, Credit (Cr.) all incomes and gains.