Recording of TransactionsI Samir K Mahajan SOURCE DOCUMENTS

Recording of Transactions-I Samir K Mahajan

SOURCE DOCUMENTS Source documents are the evidences of business transactions which provide information about the nature of the transaction, the date, the amount and the parties involved in it. Transactions are recorded in the books of accounts when they actually take place and are duly supported by source documents. These supporting documents are the written and authentic proof of the correctness of the recorded transactions. These documents are required for audit and tax assessment. They also serve as the legal evidence in case of a dispute. The following are the most common source documents(Vouchers) • Cash Memo • Invoice or Bill • Receipt • Debit Note • Credit Note • Pay-in-slip • Cheque Bills receivable, bills payable, wage sheet/salaries pay acquaintance, correspondence etc. , also serve as the source documents. Thus, there must be a source document for each transaction recorded in the books of accounts Samir K Mahajan

SOURCE DOCUMENTS Voucher: It is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. It may be in the form of cash receipt, cash memo, invoice, bank pay-in-slip etc. Voucher is necessary to audit the accounts. Samir K Mahajan

SOURCE DOCUMENTS Cash Memo: When a trader sells goods for cash, he gives a cash memo and when he purchases goods for cash, he receives a cash memo. Details regarding the items, quantity, rate and the price are mentioned in the cash memo. Samir K Mahajan

SOURCE DOCUMENTS Receipt: Receipt is an acknowledgement for cash received. It is issued to the party paying cash. Receipts form the basis for entries in cash book. When a trader receives cash from a customer, he issues a receipt containing the date, the amount and the name of the customer. The original copy is handed over to the customer and the duplicate copy is kept for record. Samir K Mahajan

SOURCE DOCUMENTS Invoice or Bill: When a trader sells goods on credit, he prepares a sale invoice. It contains the information relating to name and address of the seller and the buyer, the date of sale and the clear description of goods with quantity and price. The original copy of the sale invoice is sent to the purchaser and its duplicate copy is kept for making records in the books of accounts. Similarly, when a trader purchases goods on credit, he receives a credit bill from the supplier of goods. Samir K Mahajan

SOURCE DOCUMENTS Cheque: A cheque is a document in writing drawn upon a specified banker to pay a specified sum to the bearer or the person named in it and payable on demand. Each cheque book has a counterfoil in which the same details in the cheque are filled. The counterfoil remains with the account holder for his future reference. The counterfoil forms the source document for entries to be made in the books of accounts. Samir K Mahajan

SOURCE DOCUMENTS Pay-in-slip: Pay-in-slip is a form available in banks and is used to deposit money into a bank account. Each pay-in-slip has a counterfoil which is returned to the depositor duly sealed and signed by the bank official. This source document relates to bank transactions. It gives details regarding date, account number, amount deposited (in cash or cheque) and name of the account holder. Samir K Mahajan

Debit Note: A debit note is prepared for purchase return and it contains the date of the goods returned, name of the supplier, details of the goods returned and reasons for returning the goods. Each debit note is serially numbered. A duplicate copy or counter foil of the debit note is retained by the buyer. On the basis of debit note, the suppliers account is debited in the books. Samir K Mahajan

Credit Note: A credit note is prepared sales return and it contains the date on which goods are returned, name of the customer, details of the goods received, amount of such goods and reasons for returning the goods. Each credit note is serially numbered. A duplicate copy of the credit note is retained for the record purpose. On the basis of credit note, the customer’s account is credited in the books. Samir K Mahajan

Books of Original Entry The books in which a transaction is recorded for the first time from a source document are called Books of Original Entry or Prime Entry or journal. The source document is required to record the transaction in the journal. This practice provides a complete record of each transaction in one place and links the debits and credits for each transaction. The process of recording transactions in journal is called journalising. Samir K Mahajan

Books of Original Entry contd. : Category q Journal /general journal/all-purpose journal q Other subsidiary books/special purpose books/special journal ü Subsidiary Books - Non-cash Transaction o o o Purchase (journal) book Sales (journal) book Purchase return book Sales return book Bills receivable books Bills payable books ü Subsidiary Books - Cash Transaction o Cash Book (Cash Book is used for recording only cash transactions i. e. , receipts and payments of cash) q Journal Proper Samir K Mahajan

Books of Principal Entry After the debits and credits for each transaction are entered in the journal, they are transferred to the individual accounts called ledger account. The process of transferring journal entry to individual accounts is called posting. The ledger account as the Principal Book of entry. Samir K Mahajan

JOURNAL Journal is one of the books of original entry in which transactions are originally recorded in a chronological (day-to-day) order according to the principles of Double Entry System. I other words, Journal is a date-wise record of all the transactions with details of the accounts debited and credited and the amount of each transaction. Journal Date Particular L. F. Debit Amount (Rs) Credit Amount (Rs) Note: L. F. is ledger folio. All entries from the journal are later posted into the ledger accounts. The page number or folio number of the Ledger, where the posting has been made from the Journal is recorded in the L. F column of the Journal. Till such time, this column remains blank. Samir K Mahajan

JOURNAL : EXPLANATION 1. Date : In the first column, the date of the transaction is entered. The year and the month is written only once, till they change. The sequence of the dates and months should be strictly maintained. 2. Particulars : Each transaction affects two accounts, out of which one account is debited and the other account is credited. The name of the account to be debited is written first, very near to the line of particulars column and the word Dr. is also written at the end of the particulars column. In the second line, the name of the account to be credited is written, starts with the word ‘To’, a few space away from the margin in the particulars column to the make it distinct from the debit account. 3. Narration : After each entry, a brief explanation of the transaction together with necessary details is given in the particularscolumn with in brackets called narration. The words ‘For’ or ‘Being’ are used before starting to write down narration. Now, it is not necessary to use the word ‘For’ or ‘Being’. 4. Ledger Folio (L. F): All entries from the journal are later posted into the ledger accounts. The page number or folio number of the Ledger, where the posting has been made from the Journal is recorded in the L. F column of the Journal. Till such time, this column remains blank. 5. Debit Amount : In this column, the amount of the account being debited is written. 6. Credit Amount : In this column, the amount of the account being credited is written. Samir K Mahajan

STEPS IN JOURNALISING (Accounting Equation Approach) Step 1 Determine the two accounts which are involved in the transaction. Step 2 Classify the above five accounts under asset, capital, liabilities, expenses/loss and income/gain. Step 3 Find out the rules of debit and credit for the above two accounts. Step 4 Identify which account is to be debited and which account is to be credited. Step 5 Record the date of transaction in the date column. The year and month is written once, till they change. The sequence of the dates and months should be strictly maintained. Step 6 Enter the name of the account to be debited in the particulars column very close to the left hand side of the particulars column followed by the abbreviation Dr. in the same line. Against this, the amount to be debited is written in the debit amount column in the same line. Step 7 Write the name of the account to be credited in the second line starts with the word ‘To’ a few space away from the margin in the particulars column. Against this, the amount to be credited is written in the credit amount column in the same line. Step 8 Write the narration within brackets in the next line in the particulars column. Step 9 Draw a line across the entire particulars column to separate one journal entry from the other. Samir K Mahajan

JOURNAL: ILLUSTRATION (Accounting Equation Approach) Example 1: January 1, 2013 – Saravanan started business with Rs. 1, 000. Analysis of Transaction Step 1 Step 2 Step 3 Step 4 Determine the two accounts involved in transaction Classify the accounts assets, expenses, loss and liabilities, income/revenue and profit Find out rules of debit and credit Identify which account to be debited and which account to be credited Cash account Capital account Asset Liability account Debit as Credit as asset liability increases Cash a/c is to Capital a/c is be debited to be credited Samir K Mahajan

Journal: Illustration contd. JOURNAL: ILLUSTRATION (Accounting Equation Approach) Date Particular 2013 January 1 L. F. Cash A/C To Capital A/C Dr 12 45 Debit Credit Amount (Rs) 100000 ( The amount invested in the business) Samir K Mahajan

CASH AND CREDIT TRANSACTIONS ü ü On 8 May 2014 purchased goods for Rs 18000 On 10 May 2014 purchased stationaries from Saha Enterprise for Rs 10000 On 11 May 2014 sold goods to Rajababu for Rs. 1500 on cash On 11 May 2014 sold goods to Himjhuri for Rs 2800 on credit Samir K Mahajan

Journal Date Particular 8 May Purchase A/C To Cash A/C L. F. Dr Debit Credit Amount (Rs) 18000 (Purchased goods on cash) 10 May 11 May Stationaries A/C Dr To Saha Enterproises ( Purchased goods from Saha Enterprise on credit ) Cash A/c Dr To Sales A/C (Sold goods to Rajajababu for Cash) Himjhuri A/C Dr To Sales A/C ( Sold goods to Himjhuri on credit) 10000 1500 2800 Samir K Mahajan

BANK TRANSACTIONS Bank transactions that occur often in the business concerns are cash paid into bank, cheques and bills received from customers paid into bank for collection, payment of cheques for expenses and cheques issued to suppliers or creditors. When a cheque is received treat it as cash. When a cheque is received and immediately deposited in bank, treat it as bank balance. Journalise the followings: ü January 18, 2004 – Opened a current account with Indian Overseas Bank Rs. 10, 000 ü Feb 3, 2004 – Rent paid by cheque Rs. 5, 000. ü March 5, 2004 – Received cheque from Elavarasan Rs. 20, 000. ü March 15, 2004 – Cheque received from Santhosh Rs. 30, 000 and immediately banked. Samir K Mahajan

BANK TRANSACTIONS contd. Journal Date Particular 2014 January 18 Feb 3 March 5 March 15 Bank A/C To Cash A/C L. F. Dr (opened a current account in Indian Overseas Bank) Rent A/C Dr To Bank A/C (Paid rent by cheque no. ) Cash A/c Dr To Elavarasan A/C (Cheque received but not paid into bank) Bank A/C Dr To Santhosh A/C (Cheque received and immediately banked) Debit Credit Amount (Rs) 10000 5000 20, 000 30, 000 Samir K Mahajan

carried forward (c/f) from or balance brought down (b/d) from : past to present brought forward (b/f) to or balance carried down (c/d) to : present to future Samir K Mahajan

Example 1: Journalise the following transactions: ü ü ü ü On 1 April 2014, Mr Mohan brings in Rs 1000000 as his capital On 2 April 2014, Mr Mohan purchases land for Rs. 350000 for cash On 30 April 2014, paid Rs. 150000 on completion of building constructed by contractor On May 3 2014 purchased furniture foe Rs. 400000 On 8 May 2014 purchased stock for Rs 180000 On 10 May 2014 deposited bank account in the name of the business for 150000 On 11 May Purchased goods form Bright and Co. on credit for Rs 30000 Samir K Mahajan

Example 1 contd. Date 2014 April 1 April 2 April 30 May 3 Journal Particular Cash A/C Dr To Capital A/C (Amount invested in business by Mohan) Land A/C Dr To Cash A/C (land Purchased for cash) Building A/C Dr To Cash A/C (Paid to contractor for completion of building) Furniture A/C Dr To Cash A/C (Furniture Purchased for cash ) Balance c/d (Or b/f) L. F. Debit Credit Amount (Rs) 1000000 350000 150000 400000 1900000 Samir K Mahajan

Example 1 contd. Journal Balance c/f (or b/d) 8 May 10 May 11 May 1900000 Purchase A/C Dr To Cash A/C (goods purchased in cash) 180000 Bank A/C Dr To Cash A/C (Cash deposited in newly opened bank account ) 230000 Purchased A/C Dr To Bright and Co. A/C (Goods purchased on credit from Bright and Co) 30000 Total 2340000 1900000 180000 230000 2340000 Samir K Mahajan

Example 2: Journalise the following transactions: ü ü ü ü ü On 1 April 2014, Gaurav started business by investing Rs 40, 000 On 1 April 2014, Deposited Rs 3, 000 in the bank account in the name of the business On 3 April 2014, purchased furniture for Rs. 48, 000 payment made by cheque On 8 April 2014, purchased goods costing Rs. 76, 000 against payment made by cheque On 10 April 2014, purchased goods from Honest Trader on account for Rs 56, 000 On 12 April 2014 , sold goods to M/S Hira lal for Rs. 18, 000 (costing Rs. 14, 200) on credit. On 15 April 2014, paid to Honest Traders Rs. 36, 0000 by cheque On 18 April 2014, Goods sold for Rs. 23, 800 (costing Rs. 19000) on cash On 22 April 2014, Received cheque for 18, 0000 from Hira Lal On 26 April 2014, paid the balance amount (rs. 20000) to M/S Traders by cheque Samir K Mahajan

Example 2 contd. Journal Date Particular 2014 April 1 Cash A/C Dr To Capital A/C (Capital invested in business by Gaurav ) L. F. Debit Credit Amount (Rs) Rs 400000 1 Bank A/C Dr To Cash A/C (cash deposited in newly opened bank account) 3 Furniture A/C Dr To Bank A/C (Furniture purchased and payment made by cheque ) 48000 Purchase A/C Dr To Bank A/C ( goods purchased on payment of cheque ) 76, 000 Balance b/d 824000 8 3000000 480000 76, 0000 824000 Samir K Mahajan

Example 2 contd. Journal 10 12 15 18 Balance c/d Purchase A/C Dr To Honest Traders A/C ( Goods purchased on credit for Honest Traders) S 56, 000 Hira Lal A/C Dr To Sales A/C (sold goods to Hira Lal on credit ) 18000 M/S Honest Trader A/C Dr To Bank A/C (Cheque given to Honest Trader ) 36000 Cash A/C Dr To Sales A/C (Goods purchased on credit from Bright and co) 23000 Balance b/d 957000 56, 000 18000 36000 23000 957000 Samir K Mahajan

Example 2 contd. Journal 22 26 Balance c/d 957000 Cash A/C Dr To Hira Lal A/C ( Received cheque from Hira Lal ) 18, 000 M/S Honest Trader A/C Dr To Bank A/C (Cheque given to Honest Trader ) 20000 Total 957000 18, 000 995000 20000 995000 Samir K Mahajan

CAPITAL AND DRAWINGS All transactions of the business have to be analysed from the business point of view and not from the proprietor’s point of view. The amount with which a trader starts the business is known as Capital. The proprietor may withdraw certain amounts from the business to meet personal expense or goods for personal use. It is called Drawings Samir K Mahajan

CAPITAL AND DRAWINGS contd. 1. If cash is withdrawn, Drawing A/C Dr To Cash A/C 2. If balance is withdrawn from bank Drawing A/C Dr To Bank A/C 3. If goods are used for personal use Drawing A/C Dr To Purchase A/C Samir K Mahajan

CAPITAL AND DRAWINGS contd. Example: January 31, 2004 – Saravanan withdrew for personal use Rs. 20, 000. Journal Date Particular 2004 Jun 1 Drawing A/C To Cash A/C L. F. Dr Debit Credit Amount (Rs) 20, 000 (The amount withdrawn for personal use) Samir K Mahajan

COMPOUND JOURNAL ENTRY When two or more transactions of similar nature take place on the same date, such transactions can be entered in the journal by means of a combined journal entry is called Compound Journal Entry. The only precaution is that the total debits should be equal to total credits Samir K Mahajan

COMPOUND JOURNAL ENTRY Example 1: June 1, 2004 – Anju contributed capital Rs. 50, 000 Manju contributed capital Rs. 70, 000 Journal Date Particular 2004 Jun 1 Cash A/C L. F. Dr To Anju’s Captal A/C To Manju’s Capital AC Debit Credit Amount (Rs) 1, 20, 000 50, 000 70, 000 (The amount invested by Anju & Manju) Samir K Mahajan

COMPOUND JOURNAL ENTRY Example 2 : July 1, 2004 – Ajay contributed capital – Cash Rs. 90, 000 and Furniture Rs. 20, 000 Vijay contributed capital – Cash Rs. 50, 000 and Stock Rs. 70, 000 Journal Date Particular 2004 July 1 Cash A/C Furniture A/c Stock A/c L. F. Dr Dr Dr To Ajay’s Capital A/C To Vijay’s Capital AC Debit Credit Amount (Rs) 1, 40, 000 20, 000 70, 000 110, 000 120, 000 (Capital introduced by Ajai & Vijay) Samir K Mahajan

COMPOUND JOURNAL ENTRY Example 3 : July 13, 2003 – Received cash Rs. 24, 700 from Shanthi in full settlement of her account of Rs. 25, 000. July 14, 2003 – Paid cash to Thenmozhi Rs. 14, 500, in full settlement of her account of Rs. 15, 000. Journal Date 2003 July 13 Particular Cash A/C Discount A/C L. F. Dr Dr Debit Credit Amount (Rs) 24, 700 300 25, 000 To Shanti A/C July 14 (Shanti Settled her account Thenmozhi A/C Dr Cash A/C Discount Received A/C (Settled Thenmozhi’s account ) 15000 14, 500 Samir K Mahajan

Journal Proper Journal proper or Journal Residual is used for making the original record of such transactions which do not find place in special journals. The usual entries that are put through this journal is explained below. q Opening Entries : Opening entries are used at the beginning of the financial year to open the books by recording the assets, liabilities and capital appearing in the balance sheet of the previous year. Samir K Mahajan

Journal Proper contd. q Closing Entries or Transfer entries: Closing entries are recorded at the end of the accounting year for closing accounts relating to expenses and revenues which are not balanced at the time of balancing. ü Drawing account is transferred to capital account at the end of the accounting year. ü Accounts relating to operation of business such as Sales, Purchases, Opening Stock, Income, Gains and Expenses, etc. and drawing are closed at the end of the year and their Total/balances are transferred to Trading and Profit and Loss account by recording the journal entries. Samir K Mahajan

Journal Proper contd. q Adjusting Entries: In order to update ledger account on accrual basis, such entries are made at the end of the accounting period. ü Such as Rent outstanding, Prepaid insurance, Depreciation and Commission received in advance. These are needed at the time of preparing the final accounts. q Rectifying Entries: Rectifying entries are passed for rectifying errors which might have committed in the book of accounts. ü To rectify errors in recording transactions in the books of original entry and their posting to ledger accounts, this journal is used. Samir K Mahajan

Journal Proper contd. q Other entries: recording of the following transaction is done in the journal proper : a. At the time of a dishonour of a cheque the entry for cancellation for discount received or discount allowed earlier. b. Endorsement, renewal and dishonour of bill of exchange which cannot be recorded through bills book. c. Credit purchases and credit sale of assets which cannot be recorded through purchases or sales book Other adjustments like interest on capital and loan, bad debts, reserves etc d. e. f. g. h. Goods withdrawn by the owner for personal use. Goods distributed as samples for sales promotion. Endorsement and dishonour of bills of exchange. Transaction in respect of consignment and joint venture, etc. Loss of goods by fire/theft/spoilage Samir K Mahajan

OPENING ENTRY Opening Entry is an entry which is passed in the beginning of each current year to record the closing balance of assets and liabilities of the previous year. In this entry asset accounts are debited and liabilities and capital account are credited. If capital is not given in the question, it will be found out by deducting total of liabilities from total of assets. Example: The following balances appeared in the books of Malarkodi as on 1 st January 2004 – Cash Rs. 7, 000, Bank Rs. 70, 000, Stock Rs. 80, 000, Furniture Rs. 10, 000, Computer Rs. 50, 000, Debtors Rs. 33, 000 and Creditors Rs. 90, 000. Date Particular Journal 2004 January 1 Cash A/C Dr Bank A/C Dr Stock A/C Dr Furniture A/C Dr Computer A/C Dr Debtors A/C Dr To Creditors A/C To Capital A/C (balancing figure) (Assets and liabilities Brought Forward) L. F. Debit Credit Amount (Rs) 7, 0000 80, 000 10, 000 50, 000 33, 000 90, 000 160, 000 Samir K Mahajan

OPENING ENTRY contd. Example: The following balances appeared in the books of Malarkodi as on 1 st January 2004 – Cash Rs. 7, 000, Bank Rs. 70, 000, Stock Rs. 80, 000, Furniture Rs. 10, 000, Computer Rs. 50, 000, Debtors Rs. 33, 000 and Creditors Rs. 90, 000. Journal Date 2004 January 1 Particular Cash A/C Dr Bank A/C Dr Stock A/C Dr Furniture A/C Dr Computer A/C Dr Debtors A/C Dr To Creditors A/C To Capital A/C (balancing figure) (Assets and liabilities Brought Forward) L. F. Debit Credit Amount (Rs) 7, 0000 80, 000 10, 000 50, 000 33, 000 90, 000 160, 000 Samir K Mahajan

Closing ENTRY or transfer Entry Closing entries are recorded at the end of the accounting year for closing accounts relating to purchase, sales, purchase returns, sales return, stock, and other account concerning expenses, losses, income, gains, and revenues. These accounts are closed by transferring the balances to the Trading, Profit and Loss Account. Example: Salaries paid Rs. 15, 000. Give the closing entry as on Dec. 31, 2003. The entries are based upon Trial Balance and can be summarised as under. 1. For closing items appearing in the debit side of Trading A/C 2. Trading A/C Dr To Opening Stock A/C To Purchase A/C To Sales Return A/C To Direct expenses A/C (individual by name) Samir K Mahajan

Closing ENTRY contd. 2. For closing items appearing in the credit side of Trading A/C Sales Return A/C Dr Purchase Return A/C Dr Closing A/C Dr To Trading A/C 3. For transfer to Gross Profit to Profit and Loss A/c Trading A/C Dr To profit and loss A/C Samir K Mahajan

Closing ENTRY contd. 4. For transfer to Gross loss to Profit and Loss A/c Profit and loss A/C Dr To Trading A/C 5. For closing items (indirect expenses and losses) appearing in the debit side of Profit and loss A/C Profit and Loss A/C Dr To Indirect Expenses and Loss A/C (Individual Expenses A/C name) Samir K Mahajan

Closing ENTRY contd. 6. For transfer to income and gains Individual and gains A/C Dr To profit and loss A/C 7. For transfer net income Profit and loss A/C Dr To Capital A/C (in case of proprietorship and partnership) 0 r to Profit and Loss Appropriation A/C (in case of company) Samir K Mahajan

Closing ENTRY contd. 7. For transfer net loss Capital A/C Or Profit and Loss Appropriation A/C Dr o Profit and loss A/C Samir K Mahajan

Adjusting Entries To arrive at a correct figure of profits and loss, certain accounts require some adjustments. Entries for making such adjustments are called as adjusting entries. These are needed at the time of preparing the final accounts. Example: Provide depreciation on furniture Rs. 1, 000 @ 10% per annum. Give adjustment entry as on Dec. 31, 2003. Journal Date 2003 Dec. 31, Particular Depreciation A/C Dr. To Furniture A/c (depreciation of furniture written off) L. F. Debit Credit Amount (Rs) 10000 1, 0000 Samir K Mahajan

TRANSFER ENTRIES Transfer entries are passed in the journal proper for transferring an item entered in one account to another account. Example : When the proprietor takes goods Rs. 5, 000 for personal use. Give transfer entry on Dec. 31, 2003. Journal Date 2003 Dec. 31, Particular Drawings A/c Dr. To Purchase A/c (goods for withdrawn personal use ) L. F. Debit Credit Amount (Rs) 5, 000 5000 Samir K Mahajan

RECTIFYING ENTRIES Rectifying entries are passed for rectifying errors which might have committed in the book of accounts. Example : Purchase of furniture for Rs. 10, 000 was debited to Purchases Account. Pass rectifying entry on Dec. 31, 2003. Journal Date 2003 Dec. 31, Particular Furniture A/c Dr To Purchase A/c (Wrong debit to purchases account rectified) L. F. Debit Credit Amount (Rs) 10000 Samir K Mahajan

BAD DEBTS When the goods are sold to a customer on credit and if the amount becomes irrecoverable due to his insolvency or for some other reason, the amount not recovered is called bad debts. For recording it, the bad debts account is debited because the unrealised amount is a loss to the business and the customer’s account is credited. Example: Jamuna who owed us Rs. 10, 000 is declared insolvent and 25 paise in a rupee is received from her on 15 th July, 2003. Journal Date 2003 Dec. 31, Particular L. F. Debit Credit Amount (Rs) Cash A/c Dr 2, 500 Bad debt A/c Dr 7, 500 To Jamuna A/C 10000 (25 paise in a rupee received on Jamuna’s insolvency) Samir K Mahajan

BAD DEBTS RECOVERED Some times, it so happens that the bad debts previously written off are subsequently recovered. In such case, cash account is debited and bad debts recovered account is credited because the amount so received is a gain to the business Example: Received cash for a Bad debt written off last year Rs. 7, 500 on 18 th January, 2004 Journal Date 2004 18 January Particular L. F. Debit Credit Amount (Rs) Cash A/c Dr 7, 500 To Bad debt recovered A/c 7, 500 (Bad debts recovered) Samir K Mahajan