Accounting

Transactions

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Analysing & Recording Transactions

e Analyzing and recording transactions is a fundamental aspect of accounting.

e It involves systematically analyzing the financial transactions of a business and recording
them in the company's books.
e This process helps to keep track of financial transactions and prepares the necessary
financial statements.

What is an Accounting Transaction?

¢ An accounting transaction is an exchange of goods, services, or money between two or

more parties.
o It is a measurable event that occurs within a business, including adjustments made for
the use of assets in business operations

Identification of Accounting Transaction:

Any business transaction is an accounting transaction if:

e There is a real exchange between two parties.

e There is an effect for this transaction on any of the elements of accounting: assets,
liabilities, and/or owner's equity.

Transaction Analysis:

e The process of analyzing a transaction to ascertain its financial impact on the company in
terms of the accounting equation is called Transaction Analysis.
e Accounting Equation: Assets = Liabilities + Owner's Capital

Double Entry System:

According to the double-entry method of accounting or bookkeeping, sums must be

entered into a minimum of two accounts for each company transaction.

The double-entry system also mandates that the sums entered as debits and credits for
every transaction must be equal.

Principles of Double Entry System:

e Every transaction has two sides.

e One account is the receiver of benefits.
¢ Another account is the giver of benefits.
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Types of Accounts

1. Personal Account:

e Personal accounts are records of transactions with people or other entities with whom
your company conducts business directly.
e These people could be real people, such as the accounts for Raj, Rajesh, Ramesh, Suresh,
etc.
e These people could also be made-up entities like corporations, partnerships, bodies
corporate, associations of people, etc. Rajesh and Suresh Trading Company, charitable
trusts, XYZ Bank Ltd., C firm Ltd., etc. are a few examples.

2. Real Account:

e These account types relate to property or assets.

e Intangible real accounts and Tangible real accounts are two further categories.
e Tangible Real Accounts include assets that have a physical existence and can be touched.
For example - Building A/c, cash A/c, stationery A/c, inventory A/c, etc.
e These assets are intangible and untouchable because they don't exist physically. They,
however, have value and can be valued in monetary terms. Goodwill, patents, copyrights,
trademarks, etc. are a few examples.

3. Nominal Accounts:

e These account types relate to profits or income and losses or expenses.

e For example rent, commission received, salary, wages, transportation, etc.

Golden Rules of Accounting

1. Debit the receiver, credit the giver:

This rule relates to all Personal Accounts.

According to this rule, we should debit the person's account who receives an asset or a
payment and credit the person's account who gives an asset or payment.
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2. Debit what comes in, credit what goes out:

This rule relates to all Real Accounts.

According to this rule, we should debit the asset which comes into the business and
credit the asset which goes out of the business.

3. Debit all expenses and losses, credit all incomes and gains:

This rule applies to all nominal accounts, such as expense and income accounts.

It indicates that when a business incurs an expense or suffers a loss, it should be debited,
and when it earns income or gains, it should be credited.

Accounting Equation

The 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

Rules of debit and credit for Accounting Equation

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For Assets:

Increase Debit
0)
Decrease Credit
)

For Capital

Increase Credit
0)
Decrease Debit
)

For Liabilities

Increase Credit
0)
Decrease Debit
)

For Expenses/Losses

Increase Debit
1
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Decrease Credit
i

For Revenues/Gains

Increase Credit
1
Decrease Debit
)

JOURNAL

e This is the basic book of the original entry.

¢ In this book, transactions are recorded in chronological order, as and when they take
place.
e The journal provides a complete record of all transactions, and it serves as a basis for
preparing the ledger and financial statements.

Format of journal
Format of Journal Entries
Journal entries in the books of XYZ Ltd,
(Dr) (Cr)
. Ledger
Date Particulars ~ [Amount Rs. |Amount Rs.
Folio
1131.1 — Dr,
To Credit Afc
(Being )

e The first column in a journal is the Date on which the transaction took place.
e In the Particulars column, the account title to be debited is written on the first line
beginning from the left-hand corner, and the word ‘Dr’ is written at the end of the
column.
e The account title to be credited is written on the second line leaving a sufficient margin
on the left side with the prefix To".
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o Below the account titles, a brief description of the transaction is given which is called
Narration.
e The column relating to Ledger Folio records the page number of the ledger book on
which the relevant account appears.
e The Debit amount column records the amount against the account to be debited and
similarly, the Credit Amount column records the amount against the account to be
credited.

Example:

Goods purchased on credit for Rs. 30,000 from M/s Govind Traders on December 24,
2017, involve only two accounts:

(a) Purchases A/c (Goods),

(b) Govind Traders A/c (Creditors).

This transaction is recorded in the journal as follows :

JOURNAL
Date Particulars L.F. [Debit Amount Credit
4 Amount
T
Purchases A/c Dr. 30,000

2014

Dec. 24 To Govind Traders A/c 30,000

(Purchase of goods- in-trade

from Govind Traders)

LEDGER

e The ledger is the principal book of the accounting system.

e It contains different accounts where transactions relating to that account are recorded.
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o Aledger is the collection of all the accounts, debited or credited, in the journal proper
and various special journals.
e The net result of all transactions in respect of a particular account on a given date can be
ascertained only from the ledger.

Format of a ledger
Name of the Account

Date Particulars JF. | Amount | Date Particulars [JF | Amount

Difference between Journal & Ledger

Basis Journal Ledger
1. Recording As and when transactions take [In ledger, entries may be posted either
place entries are made in journal. |on the same day or at the end of a
specified period such as weekly or
fortnightly especially when subsidiary
books are maintained.
2. Stage of recording | Recording in the journal is the first | Recording in the ledger is the second
stage stage, which is done on the basis of
entries made in the journal.

3. Order of recording | Entriesare madeinthechronological | Entries are made accountwise.

order, i.e, datewise in the order of
occurrence.
4. Process The process of recording in journal | The process of recording in the ledger
is called journalising is called posting.
5. Facilitating Amount from the journal does not | Ledger balances serve as the basis for
preparation of trial | serve as the basis for preparing trial | preparing trial balance.
balance balance.
6. Basis of entries Entries in the journal are made on | Posting is done in ledger on the basis
the basis of source documents. of journal entries.
7. Net position Net position of an account cannot | Net position of an account can be
be ascertained from journal. ascertained from ledger account.

TRIAL BALANCE

SUBJECT | Accountancy 70of9

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A trial balance is a statement showing the balances, or a total of debits and credits, of all
the accounts in the ledger with a view to verifying the arithmetical accuracy of posting
into the ledger accounts.
The task of preparing the statements is simplified because the accountant can take the
balances of all accounts from the trial balance instead of going through the whole ledger.

Steps to prepare Trial Balance

. Ascertain the balances of each account in the ledger.

=

. List each account and place its balance in the debit or credit column.
WN

. Compute the total of debit balances column.

. Compute the total of the credit balances column.
. Verify that the sum of the debit balances equals the sum of the credit balances. If they do
Uu

not tally, it indicates that there are some errors

Format of Trial balance

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Account Title LF. | Debit | Credit

Balance | Balance T
Capital v
Land and Buildings
NY

Plant and Machinery

Equipment
Furniture and Fixtures
I

NN
Cash in Hand
Cash at Bank
Debtors
SN

Bills Receivable
Stock of Raw Materials
Stock of Finished Goods
I

Purchases
CEE ICRC NE NCE NN

Carriage inwards
Carriage Qutwards
A

Sales v
Sales Return
<

Purchases Return v
Interest Paid v
Commission/Discount
Received v
Salaries v
00

Long Term Loan

ESENENEN
oo

Bills Payable
0

Creditors
Advances from Customers
Drawings v
ee

Total XXX XXX

SUBJECT | Accountancy 9of9