This chapter introduces the mechanics of recording financial transactions — from source documents through the Journal (Books of Original Entry) to the Ledger (Book of Final Entry). Understanding this chapter is essential because it forms the backbone of the entire accounting system.
Source Documents
Every accounting entry must be supported by a source document — a written proof of the transaction.
| Document | Used for |
|---|---|
| Cash Memo | Cash purchases and sales |
| Invoice / Bill | Credit purchases and sales |
| Receipt | Cash received |
| Debit Note | Returns outward (purchase returns) |
| Credit Note | Returns inward (sales returns) |
| Pay-in Slip | Cash/cheque deposited in bank |
| Cheque | Payment from bank account |
The Accounting Equation
The foundation of all recording is the Dual Aspect Concept and the accounting equation:
Assets = Liabilities + Capital
Every transaction affects at least two items in this equation in such a way that the equation always remains balanced.
Show the effect of the following transactions on the accounting equation:
- Started business with cash Rs 5,00,000
- Bought goods (stock) on credit Rs 80,000
- Sold goods for cash Rs 40,000 (cost Rs 25,000)
| Transaction | Assets | Liabilities | Capital |
|---|---|---|---|
| (a) Cash +5,00,000 | +5,00,000 | — | +5,00,000 |
| (b) Stock +80,000; Creditors +80,000 | +80,000 | +80,000 | — |
| (c) Cash +40,000; Stock -25,000 | +15,000 | — | +15,000 (profit) |
The equation balances after each transaction.
Rules of Debit and Credit
Accounts are classified into five types, each with its own debit/credit rule:
- Traditional (British) Approach:
- Personal Account: Debit the receiver; Credit the giver.
- Real Account: Debit what comes in; Credit what goes out.
- Nominal Account: Debit all expenses and losses; Credit all incomes and gains.
Modern Approach:
| Account Type | Debit (Dr) when | Credit (Cr) when |
|---|---|---|
| Asset | Increases | Decreases |
| Liability | Decreases | Increases |
| Capital | Decreases | Increases |
| Revenue/Income | Decreases | Increases |
| Expense/Loss | Increases | Decreases |
The Journal
The Journal (also called the Day Book or Book of Original Entry) is where transactions are first recorded in chronological order using the double-entry system.
Format of a Journal Entry:
Date | Particulars | L.F. | Dr (Rs) | Cr (Rs)
Each entry has: Date, Account Debited (Dr), Account Credited (Cr), and a narration (brief description).
Record the following in the Journal:
1. Ramesh started business with cash Rs 2,00,000. · Entry · : Cash A/c Dr 2,00,000 / To Capital A/c 2,00,000 · (Being business commenced with cash) ·
Purchased goods for cash Rs 30,000. · Entry · : Purchases A/c Dr 30,000 / To Cash A/c 30,000 · (Being goods purchased for cash) ·
Sold goods on credit to Suresh Rs 15,000. · Entry · : Suresh A/c Dr 15,000 / To Sales A/c 15,000 · (Being goods sold on credit to Suresh) ·
Paid rent Rs 5,000 by cheque. · Entry · : Rent A/c Dr 5,000 / To Bank A/c 5,000 · (Being rent paid by cheque) ·
Goods returned by Suresh Rs 2,000. · Entry · : Sales Returns A/c Dr 2,000 / To Suresh A/c 2,000 · (Being goods returned by Suresh) ·
Compound Journal Entry — Paid salaries Rs 20,000 and electricity Rs 3,000 from bank. · Entry · : Salaries A/c Dr 20,000 / Electricity A/c Dr 3,000 / To Bank A/c 23,000 · (Being salaries and electricity paid by cheque) · A compound entry combines two or more debits or credits in a single entry.
The Ledger
After journal entries are made, they are posted to the Ledger — a book containing individual accounts for each item. The ledger gives the balance of each account (e.g., total cash, total debtors).
Format: Each ledger account is a T-account with Dr side on the left and Cr side on the right.
- Balancing a Ledger Account: At the end of the period, total both sides. The difference is the balance:
- Dr total > Cr total → Debit Balance (assets, expenses)
- Cr total > Dr total → Credit Balance (liabilities, incomes, capital)
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Common mistakes
- Writing the narration incorrectly or forgetting the narration altogether.
- Debiting an income account or crediting an expense account (reversed entries).
- Confusing Purchases A/c with the asset account for a specific item bought.
- Not balancing the accounting equation before and after each transaction.
Summary
Recording begins with source documents, uses debit/credit rules, and is entered first in the Journal (Book of Original Entry) in chronological order. Journal entries are then posted to the Ledger (Book of Final Entry) where individual account balances are maintained. The Dual Aspect Concept ensures every entry has equal debit and credit totals.