Recording of Transactions 1 – Class 11 Accountancy Chapter 3

What This Chapter Covers

Recording of Transactions I moves through four connected ideas. First, Business Transactions and Source Documents — every recorded entry must be backed by evidence like a cash memo, invoice, debit/credit note, cheque, or pay-in-slip; from these, an accountant prepares a voucher (a written analysis of which accounts to debit and credit). Second, the Accounting Equation (Assets = Liabilities + Capital) shows that every transaction affects at least two elements and keeps the equation balanced — this is the logical proof behind double-entry bookkeeping. Third, the Rules of Debit and Credit, taught in two parallel systems: the Traditional approach classifies accounts as Personal, Real, or Nominal, each with its own debit/credit rule; the Modern approach classifies accounts as Assets, Liabilities, Capital, Revenue, or Expenses and applies increase/decrease rules. Fourth, the Journal, the book of original/prime entry, where transactions are recorded chronologically in debit-credit format with a narration explaining the entry. Mastering this chapter means you can look at any transaction, identify the two accounts involved, decide correctly which one is debited and which is credited, and write a complete, exam-ready journal entry.

Key Terms You Must Know

Source Document

The original written or printed document that provides evidence of a transaction, e.g. cash memo, invoice, receipt, cheque counterfoil, debit note, credit note.

Voucher

A document prepared from the source document showing the accounting analysis of a transaction — which account is to be debited and which is to be credited.

Accounting Equation

The equation Assets = Liabilities + Capital, which must remain balanced after recording every transaction, since double-entry ensures dual effect.

Journal

The book of original entry (also called the 'book of prime entry') in which transactions are first recorded in chronological order, in debit-and-credit form, along with a narration.

Narration

A brief explanation written below each journal entry, starting with 'Being...', that describes the nature of the transaction.

Compound Journal Entry

A single journal entry that records two or more transactions of the same nature affecting more than two accounts, combined for convenience.

Rules of Debit and Credit — Two Approaches

Step-by-Step: How to Journalise a Transaction

1. Step 1: Identify the two accounts involved — Read the transaction carefully and pick out exactly which two (or more) accounts are affected. Example: 'Purchased furniture for cash ₹10,000' involves Furniture A/c and Cash A/c.
2. Step 2: Classify each account — Decide the nature of each account — Personal, Real, or Nominal (Traditional) OR Asset, Liability, Capital, Revenue, Expense (Modern). Furniture and Cash are both Real/Asset accounts.
3. Step 3: Apply the debit-credit rule — For Real accounts: Debit what comes in, Credit what goes out. Furniture comes in → Debit Furniture A/c. Cash goes out → Credit Cash A/c.
4. Step 4: Write the entry in journal format — Date | Particulars (Debit A/c ...Dr. / To Credit A/c) | L.F. | Debit Amount | Credit Amount. Furniture A/c Dr. 10,000; To Cash A/c 10,000.
5. Step 5: Add narration — Write below the entry: '(Being furniture purchased for cash)'. Always start narration with 'Being' and keep it brief but complete.
6. Step 6: Verify with the accounting equation — Check that Assets = Liabilities + Capital still holds: Furniture (+10,000) and Cash (−10,000) are both assets, so total assets stay the same — equation balances.

Fully Worked Examples

• Example 1 — Started business with cash ₹1,00,000. Step 1: Accounts involved — Cash A/c and Capital A/c. Step 2: Cash is a Real/Asset account; Capital is a Personal/Capital account. Step 3: Cash comes in → Debit Cash A/c (Asset increases → Debit). Capital is being given by proprietor → Credit Capital A/c (Capital increases → Credit). Step 4 Journal Entry: Cash A/c Dr. ₹1,00,000; To Capital A/c ₹1,00,000. Narration: (Being business started with cash). Step 5 Equation check: Assets (Cash +1,00,000) = Liabilities (0) + Capital (+1,00,000). Balanced.
• Example 2 — Purchased goods from Mohan on credit ₹20,000. Step 1: Accounts — Purchases A/c and Mohan's A/c. Step 2: Purchases is Nominal/Expense; Mohan is Personal (a creditor/liability). Step 3: Purchases is an expense increasing → Debit Purchases A/c. Mohan is the giver of goods on credit → Credit Mohan's A/c (liability increases → Credit). Step 4 Journal Entry: Purchases A/c Dr. ₹20,000; To Mohan's A/c ₹20,000. Narration: (Being goods purchased from Mohan on credit). Step 5 Equation check: Assets (Stock/Purchases effect via expense reduces Capital eventually, but immediately) Liabilities (Mohan, +20,000) increase and match the expense recorded — equation stays balanced through Capital adjustment at year end.
• Example 3 — Paid rent ₹5,000 and salary ₹8,000 by cheque on the same date (compound entry). Step 1: Accounts — Rent A/c, Salary A/c, and Bank A/c. Step 2: Rent and Salary are Nominal/Expense accounts; Bank is Real/Asset account. Step 3: Expenses increase → Debit Rent A/c and Debit Salary A/c. Bank (asset) decreases → Credit Bank A/c. Step 4 Compound Journal Entry: Rent A/c Dr. ₹5,000; Salary A/c Dr. ₹8,000; To Bank A/c ₹13,000. Narration: (Being rent and salary paid by cheque). Step 5 Equation check: Assets (Bank −13,000) = Liabilities (0) + Capital (−13,000 due to expenses reducing profit/capital). Balanced.

Common Mistakes Students Make

• Writing 'To' before the debit account instead of only before the credit account — 'To' is used only with the credit-side account name in the journal format.
• Mixing Traditional and Modern rules within the same answer — CBSE examiners deduct marks for inconsistent classification logic, even if the final entry is correct.
• Forgetting narration — every journal entry loses marks in board exams if the 'Being...' explanation is missing.
• Treating 'Goods' transactions incorrectly — remember Purchases A/c and Sales A/c are used for trading goods, not the general term 'Goods A/c', unless specifically using that convention for returns.
• Confusing outstanding/prepaid expense treatment — outstanding expense is a liability (credit), prepaid expense is an asset (debit), and mixing these up breaks the accounting equation.
• Not distinguishing Capital and Drawings — Capital increases owner's equity (credit), Drawings reduce it (debit) and are NOT an expense account.

Board Exam Strategy for Journal Entries

In CBSE board papers, journal entry questions (usually 6–8 marks) are scored line-by-line: 1 mark for correct account names, 1 mark for correct debit/credit side, and marks for narration. Always write the date column, use 'Dr.' after the debited account, indent the credited account with 'To', and write amounts in the correct debit/credit columns even if the question doesn't explicitly ask for a ledger format. When unsure about classification, use the Modern approach (Asset/Liability/Capital/Revenue/Expense) since it maps directly to the accounting equation and reduces confusion with Personal accounts involving banks or proprietors. Practice at least 15 mixed transactions covering cash, credit, discount, and depreciation entries before your exam.

Practice Questions with Solutions

• Q: Journalise the following transaction: Sold goods to Ramesh for ₹15,000 on credit.
  A: Step 1: Identify accounts — Ramesh's A/c and Sales A/c.
  Step 2: Classify — Ramesh is a Personal account (debtor/receiver); Sales is a Nominal/Revenue account.
  Step 3: Apply rule — Ramesh is the receiver of goods → Debit Ramesh's A/c. Sales is income increasing → Credit Sales A/c.
  Step 4: Entry — Ramesh's A/c Dr. ₹15,000; To Sales A/c ₹15,000.
  Final answer: Ramesh's A/c Dr. 15,000; To Sales A/c 15,000 (Being goods sold to Ramesh on credit).

• Q: Journalise: Paid ₹2,000 cash as commission to an agent.
  A: Step 1: Accounts involved — Commission A/c and Cash A/c.
  Step 2: Commission paid is a Nominal/Expense account; Cash is Real/Asset account.
  Step 3: Expense increasing → Debit Commission A/c. Cash (asset) decreasing → Credit Cash A/c.
  Step 4: Entry — Commission A/c Dr. ₹2,000; To Cash A/c ₹2,000.
  Final answer: Commission A/c Dr. 2,000; To Cash A/c 2,000 (Being commission paid in cash).

• Q: Show the effect of the transaction 'Purchased machinery for ₹50,000, paid ₹20,000 by cheque and the balance is payable after 2 months' on the accounting equation.
  A: Step 1: Machinery (Asset) increases by ₹50,000.
  Step 2: Bank (Asset) decreases by ₹20,000 (part payment by cheque).
  Step 3: Creditors for machinery (Liability) increases by ₹30,000 (balance payable).
  Step 4: Check equation — Assets: Machinery +50,000, Bank −20,000, Net Assets change = +30,000. Liabilities: +30,000. Capital: no change.
  Final answer: Assets increase by ₹30,000 (net) and Liabilities increase by ₹30,000 — equation remains balanced (Assets = Liabilities + Capital).

• Q: Journalise: Withdrew ₹3,000 from bank for personal use of the proprietor.
  A: Step 1: Accounts involved — Drawings A/c and Bank A/c.
  Step 2: Drawings reduces owner's capital (Capital account, treated separately, debit side); Bank is a Real/Asset account.
  Step 3: Drawings increase → Debit Drawings A/c. Bank (asset) decreases → Credit Bank A/c.
  Step 4: Entry — Drawings A/c Dr. ₹3,000; To Bank A/c ₹3,000.
  Final answer: Drawings A/c Dr. 3,000; To Bank A/c 3,000 (Being cash withdrawn from bank for personal use).

• Q: Journalise the compound transaction: Received ₹9,500 in full settlement of ₹10,000 due from Suresh.
  A: Step 1: Accounts involved — Cash A/c, Discount Allowed A/c, and Suresh's A/c.
  Step 2: Cash is Real/Asset; Discount Allowed is Nominal/Expense; Suresh's A/c is Personal (debtor being settled).
  Step 3: Cash comes in → Debit Cash A/c ₹9,500. Discount allowed is a loss/expense → Debit Discount Allowed A/c ₹500. Suresh (the giver, being settled/removed as debtor) → Credit Suresh's A/c ₹10,000.
  Step 4: Entry — Cash A/c Dr. 9,500; Discount Allowed A/c Dr. 500; To Suresh's A/c 10,000.
  Final answer: Cash A/c Dr. 9,500; Discount Allowed A/c Dr. 500; To Suresh's A/c 10,000 (Being cash received from Suresh in full settlement).

Frequently Asked Questions