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NCERT Class 11 Accountancy Chapter 3 Recording of Transactions – I
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Recording of Transactions – I
Chapter: 3
| PART – I |
| Short Answers |
1. State the three fundamental steps in the accounting process.
Ans: Following are the fundamental steps in the accounting process:
(i) Recording Transactions: Recording transaction is a basic accounting process, with a few steps involved. This process of analysing transactions and recording their effects directly in the accounts is helpful as a learning exercise. However, real accounting systems do not record transactions directly in the accounts.
(ii) Posting to Ledger: Ledger posting means nothing but transferring debit and credit items from journal entries into their respective accounts. In order to do this, we must first ensure that every single item contains a separate account.
(iii) Preparing Financial Statements: To prepare the financial statements, a company will look at the adjusted trial balance for account information. From this information, the company will begin constructing each of the statements, beginning with the income statement. Income statements will include all revenue and expense accounts.
2. Why is the evidence provided by source documents important to accounting?
Ans: Business transactions are usually evidenced by an appropriate documents such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the transactions is called the Source Document or a Voucher. At times, there may be no documentary for certain items as in case of petty expenses. In such case voucher may be prepared showing the necessary details and got approved by appropriate authority within the firm. All such documents (vouchers) are arranged in chronological order and are serially numbered and kept in a separate file. All recording in books of account is done on the basis of vouch.
3. Should a transaction be first recorded in a journal or ledger? Why?
Ans: A transaction should be recorded first in a journal because journal provides complete details of a transaction in one entry. Further, a journal forms the basis for posting the transactions into their respective accounts into ledger The journal serves as the first place where transactions are recorded.The journal is the first step of the accounting cycle because all transactions are analysed and recorded as journal entries. The ledger is an extension of the journal where journal entries are marked by the company and its general ledger account based on which of the financial statements the company has prepared.
4. Are debits or credits listed first in journal entries? Are debits or credits indented?
Ans: In journal entries, debits are typically listed first. Debits are often indented in the journal to distinguish them from credits. Debits listed first in journal entries. Credits indented in the journal entries, it means the account title to be credited is written on the second line leaving sufficient margin on the left side with a prefix “To”.
Debits: Represent entries on the left side of the ledger.
Credits: Represent entries on the right side of the ledger.
5. Why are some accounting systems called double accounting systems?
Ans: Some accounting systems are called “double accounting systems” because under this system there are two aspects of every transaction, i.e., every transaction has dual effect. because they follow the principle of recording each financial transaction in two places: once as a debit and once as a credit. This system ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced after every transaction. Here are the key reasons and principles behind the double-entry accounting system:
6. Give a specimen of an account.
Ans: Specimen of an account.
| Date | Particulars | JF | Amt.(Rs) | Date | Particulars | JF | Amt.(Rs) |
| 31Dec24 | Balance c/d | 5,00,000 | 1Jan24 | Cash a/c | 5,00,000 | ||
| 5,00,000 | 5,00,000 |
7. Why are the rules of debit and credit same for both liability and capital?
Ans: The rules of debit and credit are the same for both liabilities and capital because both are components of the right side of the accounting equation .Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity). The equation reads as follows:
A = L + C Where, A = Assets L = Liabilities C = Capital
8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts.
Ans: JF stands for Journal Folio. This number is entered at the time of posting the journal transaction in the ledger so that at the time of auditing, the records of ledger posting can be easily verified from the journal book. The purpose of “posting” journal entries is provide a chronological record of all economic events affecting the firm. reflect the information in journal entries in ledger accounts. ensure that debits equal credits in the trial balance. ensure that all accounts are up to date prior to preparing financial statements.
9. What entry (debit or credit) would you make to:
(i) increase revenue.
(ii) decrease in expense.
(iii) record drawings.
(iv) record the fresh capital introduced by the owner.
Ans: (i) Increase revenue: Increase in revenue (income statement account).
(ii) Decrease in expense: Debit: Increase in expense (income statement account.)
Credit: Decrease in expense (income statement account.)
(iii) Record drawings: Debit (income statement account. )
(iv) Record the fresh capital introduced by the owner: Credit (income statement account. )
10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
Ans: In accounting, the general rule is:
(i) Decrease in an Asset: Recorded as a credit.
(ii) Decrease in a Liability: Recorded as a debit.
(i) Decrease in an Asset: Any decrease in assets is a source of funding and so represents a cash inflow: Decreases in accounts receivable imply that cash has been collected. Decreases in inventories imply that they were sold.
(ii) Decrease in a Liability: Decrease in Liability, decrease in Asset: Transaction of payment to a creditor decreases liability (creditor) and also reduces asset (cash or bank).or Loan from bank repaid decreases the asset (Cash/Bank) and decrease the liability (Loan from Bank) simultaneously.
| Long Answers |
1. Describe the events recorded in accounting systems and the importance of source documents in those systems?
Ans: A company must record in its accounting records any economic event that impacts the company’s finances. Recording in accounting refers to tracking a business’ finances using various data sources that gauge different financial factors. All recording in books of account is done on the basis of vouchers. Vouchers are the source documents, upon which accounting records are based. Without documentary evidence, we cannot record any transaction actually these vouchers provide a sound and systematic base for accounting.
Importance of Source Documents in Accounting Systems:
(i) Documentation and Evidence: Source documents, such as invoices, receipts, purchase orders, contracts, bank statements, and legal agreements, provide evidence that transactions have occurred.
(ii) Compliance and Auditing: Compliance audit is an assessment as to whether the provisions of the applicable laws, rules and regulations made there under and various orders and instructions issued by the competent authority are being complied with.
(iii) Internal Control: Internal controls are policies and procedures implemented by an organisation to ensure their financial reports are reliable, operations are efficient, and activities are compliant with applicable laws and regulations
(iv) Decision-Making: Decision making is the process of making choices by identifying a decision, gathering information, and assessing alternative resolutions. Using a step-by-step decision-making process can help you make more deliberate, thoughtful decisions by organising relevant information and defining alternatives
2. Describe how debits and credits are used to analyse transactions.
Ans: They must be equal to keep a company’s books in balance. Debits increase the value of asset, expense and loss accounts. Credits increase the value of liability, equity, revenue and gain accounts. Debit and credit balances are used to prepare a company’s income statement, balance sheet and other financial documents. Debit and credits are accounting entries used to monitor money going out of or coming into the business. Debit and credit form the backbone of the double-entry system, where every transaction comprises two parts – for every debit transaction, there is a corresponding credit of an equal amount.
Four steps are used in analysing a transaction:
(i) Determine what accounts will be affected.
(ii) Determine whether to increase or decrease the account.
(iii) Determine whether the increase/decrease needs to be a debit or a credit.
(iv) Make sure debits equal credits.
3. Describe how accounts are used to record information about the effects of transactions?
Ans: All accounts are divided into five categories for the purposes of recording the transactions:
(a) Asset.
(b) Liability.
(c) Capital.
(d) Expenses/Losses. and
(e) Revenues/Gains.
Two fundamental rules are followed to record the changes in these accounts:
(1) For recording changes in Assets/Expenses (Losses):
(i) “Increase in asset is debited, and decrease in asset is credited.”
(ii) “Increase in expenses/losses is debited, and decrease in expenses/ losses is credited.”
(2) For recording changes in Liabilities and Capital/Revenues (Gains):
(i) “Increase in liabilities is credited and decrease in liabilities is debited.”
(ii) “Increase in capital is credited and decrease in capital is debited.”
(iii) “Increase in revenue/gain is credited and decrease in revenue/gain is debited.” The rules applicable to the different kinds of accounts have been summarised in the following chart:
| (Increase) + Debit | Asset | (Decrease) -Credit |
| (Decrease) -Debit | Capital | (Increase) +Credit |
| (Decrease) + Debit | Revenues/Gains | (Increase) – Credit |
| (Decrease) -Debit | Liabilities | (Increase) +Credit |
| (Increase) + Debit | Expenses/Losses | (Decrease) -Credit |
4. What is a journal? Give a specimen of journal showing at least five entries.
Ans: In the preceding pages, you learnt about debits and credits and observed how transactions affect accounts. This process of analysing transactions and recording their effects directly in the accounts is helpful as a learning exercise. However, real accounting systems do not record transactions directly in the accounts. The book in which the transaction is recorded for the first time is called journal or book of original entry. The source document, as discussed earlier, 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. After the debits and credits for each transaction are entered in the journal, they are transferred to the individual accounts. The process of recording transactions in journal is called journalising.
| Date | Particulars | L.F. | Debit Amount | CreditAmount |
| Cash A/c Dr. To Capital A/c (Business started with cash) | __ | __ | ||
| Bank A/c Dr. To Cash A/c (Opened bank account with State Bank of India) | __ | __ | ||
| Furniture A/c Dr. To Bank A/c (Purchased furniture and made payment through bank) | __ | __ | ||
| Purchases A/c Dr. To M/s Sumit Traders A/c (Goods bought on credit) | __ | __ | ||
| Rajani Enterprises A/c Dr. To Sales A/c (Goods sold on profit) | __ | __ | ||
| Total | __ | __ |
5. Differentiate between source documents and vouchers.
Ans: Difference between source documents and vouchers given below:
| Source documents | Vouchers | |
| Meaning | Business transactions are usually evidenced by an appropriate documents such as Cash memo, Invoice, Sales bill, Pay-in-slip, Cheque, Salary slip, etc. A document which provides evidence of the transactions is called the Source Document or. | A voucher is a document that shows the details of a transaction for any goods that have been purchased or any service that has been rendered. |
| Purpose | Source documents are used for preparing accounting vouchers | It is used by audit team for verifying the business transaction |
| Example | Examples of source documents are invoices, receipts, deposit slips, checks, travel documents, timecards, orders, credit memos, etc | Examples of vouchers are a bill, invoice, receipt, salary and wages sheet, pay-in-slip counterfoil, cheque book counterfoil, or trust deed. |
6. Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.
Ans: Since, the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also called the Balance Sheet Equation. As the name suggests, the balance sheet is a statement of assets, liabilities and capital. At any point of time resources of the business entity must be equal to the claims of those who have financed these resources. The proprietors and outsiders provide the resources of the business. The claim of the proprietors is called capital and that of the outsides is known as liabilities. Each element of the equation is the part of balance sheet, which states the financial position of the business on a particular date. When we analyse the transactions, we actually try to know that how balance sheet of a business entity gets affected.
Asset side of the balance sheet is the list of assets, which the business entity owns. The liabilities side of the balance sheet is the list of owner’s claims and outsider’s claims, i.e., what the business entity owes. The equality of the assets side and the liabilities side of the balance sheet is an undeniable fact and this justifies the name of accounting equation as balance sheet equation also.
For example, Rohit started business with a capital of ` 5,00,000. From the accounting point of view, the resources of this business entity is in the form of cash, i.e., ` 5,00,000. Sources of this business entity is the contribution by Rohit (Proprietor) ` 5,00,000 as Capital.
7. Explain the double entry mechanism with an illustrative example.
Ans: In the double-entry accounting system, transactions are recorded in terms of debits and credits. Since a debit in one account offsets a credit in another, the sum of all debits must equal the sum of all credits.
Example: Purchase of Inventory for Cash
Let’s say a company, XYZ Corp, purchases inventory worth rs.1,0000 in cash.
(i) Identify Accounts Affected:
Inventory (Asset account)
Cash (Asset account)
(ii) Transaction Analysis:
The company increases its inventory, which is an asset, by Rs.1,0000.
Simultaneously, it reduces its cash asset by Rs. 1,0000 to pay for the inventory.
(iii) Recording the Transaction:
Debit Inventory account by Rs.1,0000 (increase in asset).
Credit Cash account by Rs.1,0000(decrease in asset).
(iv) Impact on Accounting Equation:
Before the transaction: Assets = Liabilities + Equity
After the transaction:
Assets increase by Rs.10,000 (Inventory) and decrease by Rs.10,000 (Cash).
No change in Liabilities or Equity for this transaction.
(v) Verification of Double Entry:
The total debits (Rs1,0000 for Inventory) must equal the total credits (Rs.1,000 for Cash), ensuring the equation remains balanced.
