Transactions

Exchange of goods and services between two persons or parties for money or money's
worth is known as Transactions.
(a) Monetary Transactions:
The transaction which involves an exchange of money or money’s worth directly or
indirectly is called monetary transactions. Only monetary transactions are recorded in the books
of accounts.
1) Cash Transactions: A business transaction in which cash is paid or received
immediately is known as cash transaction.
e.g. i) Purchase of goods for cash at Rs. 15,000/-
ii) Payment of salary at Rs. 5,000/-
2) Credit Transactions: A credit transaction is one in which cash is not paid or received
immediately at the time of a transaction but it is paid or received at a later date.
e.g. i) Goods sold on credit to Mr. Aman at Rs. 8,000/-
ii) Sold machinery to Mr. Amar Singh on credit at Rs. 20,000/-
(b) Non-Monetary Transactions:
The transaction which does not involve an exchange of money or money’s worth directly
or indirectly are called Non-monetary transactions. An exchange of one thing against another
thing is called as Barter transactions.
1) Entry: Recording of a business transaction in the proper form or method in the
books of accounts is called an entry.
2) Narration: A brief explanation of the business transaction for which an entry is
passed is called as a narration. It is always given in a bracket below the journal
entry and it usually starts with the word "Being" or "For".
3) Goods: The term ‘goods’ refers to merchandise, commodities, articles or things in
which a trader trades. These are purchased or manufactured for the purpose of sale
and to earn profit.
e.g. i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer
like Bajaj Auto, Hero Motors.
Capital and Drawings:
a) Capital: The total amount invested into the business by the owner is called capital.
Excess of assets over the liabilities is also called as capital. The equation for this is:
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to
the owner at the time of closure of the business.
b) Drawings: The amount of cash or value of goods, assets, etc., withdrawn from the
business by the owner for personal use called as drawings.
E.g.: A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile
bills etc., from the business.
Debtors and Creditors:
a) Debtor: A person who has to pay to the business for getting goods and services on credit is
known as debtor. A debtor is a person who owes money to the business.
b) Creditor: A person to whom business has to pay for getting goods or services on credit is
known as creditor. A creditor is a person to whom business owes money.
c) Bad Debts: An irrecoverable amount from a debtor is known as "Bad Debts". It is a revenue
loss to the business.
Expenditure and Types of Expenditure
Expenditure: An amount spent by the business for any consideration received by business is called
expenditure.
i) Capital Expenditure: This expenditure is incurred to acquire fixed asset or to increase the
value of fixed asset. It gives the benefit for a long period of time and it is non-recurring in
nature.
E.g.: Purchase of Machinery, extension of building, purchase of computer etc.
ii) Revenue Expenditure: Revenue expenditure is an expenditure from which no future benefit is
expected but having immediate or short term benefit may be less than one year. It does not
increase profit earning capacity of an organization. These are normal day to day operating
expenses of a business organization and appear on the debit side of Trading A/c or Profit and
Loss A/c.
E.g.: Rent paid, Salary paid, Wages paid etc.
iii) Deferred Revenue Expenditure: An expenditure which is basically revenue in nature but
benefit of which is not exhausted within one year is called as Deferred Revenue Expenditure.
Such expenditure is written off over number of years. Such written off amount is shown on
debit side of profit and loss a/c and unwritten amount is shown on asset side of the Balance
Sheet.
E.g.: Heavy expenditure on advertising, heavy legal expenses.
Cash Discount and Trade Discount:
Discount is a concession or allowance given by the seller to purchaser.
There are two types of discounts.
i) Trade Discount: It is an allowance given on catalogue price or list price of goods. This discount
is allowed at the time of purchase/sale of goods. Value of goods purchased/sold recorded is net
value payable i.e. after deduction of amount of trade discount allowed. If goods of Rs. 1000/-
are sold at 5% trade discount, the value of goods that will be recorded will be Rs. 950/- both by
the purchaser and the seller and not Rs. 1000/-. Hence, trade discount does not appear in the
books of accounts separately.
ii) Cash Discount: It is the amount deducted from the final amount due at the time of receipt. It is
the concession given for encouraging prompt payment. It is given either for the spot payment or
for payment within a specific period. Cash discount is calculated after deducting trade discount,
since it is loss to the seller and gain to the buyer, cash discount appears in the books of accounts.
Solvent and Insolvent:
i) Solvent: If a person’s assets are more than his liabilities, or equal to his liabilities, he is called
as a solvent person. Solvent person is financially sound and is in a position to pay off all his
debts.
E.g.: A person’s total assets have been calculated to Rs. 50,00,000/- and his total debts were
Rs. 30,00,000/- since his position is sound he is able to pay off his debts therefore he is
called
Solvent.
ii) Insolvent: A person whose liabilities are more than his assets is an insolvent person. Such
person’s liabilities are more than his assets.
E.g.: A person’s total assets or property have been calculated to Rs. 20,00,000/- and his total debts
were Rs. 50,00,000/- and if he is not in a position to get any amount from any sources and if
the court is so satisfied then he will be declared as an insolvent person.
Accounting Year:
It is the period of 12 months for which accounts are maintained and closed by the proprietor.
Earlier the proprietors were following any accounting year i.e. calendar year, or financial year or any
other year as per tradition. But now for income tax purpose an accounting year starts on 1st April and
end on 31st March. At the end of accounting year, a proprietor has to prepare Trading account, Profit
and Loss account and Balance Sheet to find out the financial position of the business.

Trading Concern and Not for Profit Concerns.

i) Trading Concern: A business concern established with an object of earning profit by selling
goods is known as Trading concern. It is also called as commercial organization or profit making
organization.
ii) Not for Profit Concern: It is an organization not established for making profit but for rendering
services to the society. An organization may be formed for promoting a useful object like art,
science, sports, culture, charity, profession etc.
e.g. Schools, Hospitals, Sports Club etc.
Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business which
contributes to its superior earning capacity over a normal return on investment. It may arise from such
attributes as favourable locations, the ability and skill of its employees and management, quality of its
products and services, customer satisfaction etc.
Goodwill is the reputation of business expressed in terms of money.
Goodwill is an intangible asset
Profit or Loss
a) Profit: When the selling price of goods is more than the cost price it is a profit. Profit increases
the capital of the business.
e.g. If goods are sold for Rs. 50,000/- and all expenses during the period amounted to
Rs. 30,000/- then the profit is Rs. 20,000/-
b) Loss: When cost price of goods is more than its selling price it is a loss. Loss decreases the
capital of business
e.g. If goods are sold for Rs. 50,000/- and all expenses during the period amounted to
Rs. 60,000/, then the loss will be Rs. 10,000/-
c) Income: It is revenue arising as a result of business transactions. It is the amount receivable or
realised from services provided and earnings from interest, dividend, commission, etc.
d) Revenue: It is income that a business has from its normal business activities usually from the
sale of goods and services to customer.

Assets, Liabilities, Net Worth:

i) Assets: Any physical thing or right owned that has a monetary value is called as an asset. The
ownership of the Asset must be with business unit. E.g. Land, Goodwill, Patents, Computers
etc.
ii) Types of Assets:
a) Fixed Assets/Non-current Assets: The assets which give long term benefit to the business
are known as fixed assets e.g. Land and Building, Plant & Machinery, Goodwill etc. These
assets may be tangible or intangible.
b) Current Assets: Assets which are held in the business for the operating year and can be
converted into cash very easily are called as current assets. e.g. Debtors, Bills Receivable
Cash in Hand, Cash at Bank, Stock etc.
c) Fictitious Assets: These assets are not represented by tangible possession or property.
They are imaginary assets but do not have any realisable value. e.g. Deferred revenue
expense like advertisement paid for 4 years.

iii) Liabilities: Amount payable by the business to others is known as liability. It is a debt or amount
due from the business to others for the benefit received by the business unit. e.g. Loan taken,
Creditors, Bank Overdraft, Outstanding Expenses etc.

iv) Types of Liabilities:

a) Fixed Liabilities: One of the major source of funds in the business is fixed liabilities. It
may be in the form of capital, secured loans, long term loans from banks and from
financial institutions etc.
b) Current Liabilities: Short term liabilities payable within a year are called current
liabilities. Current liabilities arise in the regular current operations of the business. These
liabilities are not normally secured. E.g. Creditors, Bills Payable etc.
v) Net worth or Owners Equity or Capital:
The amount or funds provided by the proprietor in the business is called as “Capital” as well as
the excess of assets over liabilities of the business is also known as “Capital” or “Net Worth”.
Net worth includes Capital and Reserves. Capital can be in the form of cash or in kind.

Net worth = Owner’s Equity = Capital

OR
Owner’s Equity (Capital)= Total Equity(Assets) – Creditors Equity(Liabilities)
 e.g. a) If the Capital of the business is 4,00,000 and Creditors 2,00,000 then
Total Equity(Assets) = Liabilities + Capital
6,00,000 = 2,00,000 + 4,00,000

b) It total assets are 1,50,000 and outside liabilities are 50,000 the Creditors Equity
(liabilities)
Creditors Equity (liabilities) = Assets – Capital
50,000 = 1,50,000 - 1,00,000

c) If total assets of the business are 5,00,000 and Outside liabilities are 2,00,000 the
Owner’s Equity(Capital)
Owner’s Equity (Capital) = Assets - Liabilities
3,00,000 = 5,00,000 – 2,00,000

Contingent Liabilities:
A liability which may arise in future depends on happening or non-happening of certain event is
called as contingent liability. As it is not confirmed or perfect liability, it does not affect the financial
position of the business and therefore, it is not shown on the liability side of the Balance Sheet. But it
is shown by way of foot note to Balance Sheet simply as information.
e.g. A worker makes a claim for compensation of 5,000/- against the business and the decision is
pending in the court. It may be a future liability for business on happening of an event i.e. “Court
Verdict”
 s.
2.4 Classification of Accounts: -
Meaning of Account:
An account is a summarized record of transactions relating to a particular person, asset, liability,
particular head of expense or income recorded at one place. In day to day business activity large
number of business transactions takes place. It affects the several accounts. At the end of certain
period of time, it is necessary for the businessman to balance the accounts to find out the information.
like total capital, total liabilities and assets, total incomes and expenses etc. of the business.
Definition of Account:
“An account is summarized record of transactions affecting one person, one kind of property or one
class of gain or loss.” – G.R. Batliboi
“An account is a ledger record in a summarized form of all the transactions that have taken place with
the particular person or thing specified.” – Carter
Classification of
Accounts

Personal Impersonal
Accounts Accounts

Natural Representative Real Nominal

Personal Personal Personal Account Accounts
Account Account Account
1. Sunita's A/c 1. Pune Municipal 1. Outstanding
2. Ashok's A/c Corporation A/c Expenses A/c Tangible Intangible
2. Radhika Sports
Real Real
3. Suha's A/c 2. Prepaid Ex-
Account Account
Club A/c penses A/c
1. Computer A/c 1. Goodwill A/c
3. Bank of India A/c 3. Income re-
2. Cash A/c 2. Patent A/c
ceived in Ad-
vance A/c 3. Machinery A/c 3. Copyrights A/c

Expenses Income
and Losses and Gains
1. Stationary A/c 1. Interest Re-
2. Purchase A/c ceived A/c
2. Discount Re-
3. Advertisement A/c
ceived A/c
3. Sales A/c
2.5 Golden Rules of Debit and Credit (Traditional Approach):

Golden Rules of Debit and Credit for different Accounts

Personal Accounts Real Accounts Nominal Accounts

Debit the receiver Debit what comes in Debit all expenses
Credit the giver Credit what goes out and losses
Credit all incomes
and gains
I) From the following transactions find out
1) Two aspects 2) Two accounts 3) Classify the accounts
1) Commenced business with Cash Rs. 20,000.
2) Purchased goods on credit from Ajay Rs. 10,000.
3) Cash Sales Rs. 7,000.
4) Received commission Rs. 500.
5) Paid Rent Rs. 800.
Solution:
1) Two Aspects
Sr. No. Aspect I Aspect II
1) Cash comes in Proprietor is giver
2) Purchases is an expenditure Ajay is giver
3) Cash comes in Sales is an income
4) Cash comes in Commission received is an income
5) Rent is an expenses Cash goes out

2) Two Aspects and Two Accounts.

Sr. No. Two aspects Two accounts
1 Cash comes in. Cash A/c -------------
Business Proprietor is giver ------------- Capital A/c
2 Purchases is an expense. Purchases A/c -----------
Ajay is giver ------------- Ajay A/c
3 Cash comes in. Cash A/c -----------
Sales is an income ------------- Sales A/c
4 Cash comes in. Cash A/c ---------------
Commission is an income ------------- Commission A/c
5 Rent is an expense. Rent A/c ---------
Cash goes out ------------- Cash A/c
12) Goods distributed as Free sample: Distribution of goods as a free sample is an advertisement.
So amount of goods distributed as a free sample is to be debited to Profit and Loss account
under the head of Advertisement (if any).
i) Goods distributed as free sample A/c Dr.
To Trading/Purchases A/c
(Being amount of goods distributed as free sample transferred to trading A/c)
ii) Advertisement A/c .............. Dr.
To Goods distributed as a free sample A/c
(Being amount of goods distributed as a free sample transferred to Advertisement A/c)
13) Interest on Capital:
i) Interest on Capital A/c ............................... Dr.
To Capital A/c
(Being interest on capital provided)
ii) Profit and Loss A/c ............. Dr.
To Interest on Capital A/c
(Being interest on capital transferred to capital A/c)

14) Interest on Drawings:

i) Capital A/c ................................................. Dr.
To Interest on Drawings A/c
(Being interest on Drawings charged)
ii) Interest on Drawing A/c ...... Dr.
To Profit and Loss, A/c
(Being interest on Drawings transferred to Capital A/c)
ADJUSTEMENTS:

Name of Adjustment Journal Entries Two Effects

1) Closing Stock Closing Stock A/c ........... Dr 1) Credit side of Trading A/c
To Trading A/c 2) Shown on Assets side of Balance
Sheet
2) Depreciation 1) Depreciation A/c ........ Dr 1) Debit side of Profit & Loss A/c
To Asset A/c
2) Profit & Loss A/c ....... Dr 2) Deducted from particular Assets on
To Depreciation A/c assets side of Balance sheet
3) Outstanding or Expenses A/c ................... Dr 1) Add to particular expenses on
Unpaid Expenses To Outstanding expenses A/c Trading or Profit and Loss A/c
2) Shown on Liability side of Balance
Sheet.
4) Prepaid Expenses Prepaid Expenses A/c ...... Dr 1) Less from that particular expenses
To Expenses A/c on Trading or Profit & Loss A/c
2) Shown on Assets side of Balance
sheet
5) Accrued Income/ Accrued Income A/c……Dr 1) Add to particular income on credit
Outstanding Income To Income A/c side of Profit & Loss A/c
2) Shown on Assets side of Balance
sheet.
6) Pre-received Income A/c ...................... Dr 1) Less from particular income on
Income To Pre-received Income /c credit side of Profit & Loss A/c
2) Shown on Liabilities side of
Balance sheet
1) Bad debts A/c ............. Dr 1) Debit side of Profit & Loss A/c
To Debtors A/c (New R.D.D + Bad debts)
2) Profit & Loss A/c ....... Dr 2) Deducted from Sundry debtors on
To Bad debts A/c assets side.
8) R.D.D (Reserve for Profit & Loss A/c ............. Dr 1) Debit side of Profit & Loss A/c
doubtful debts) To R.D.D. A/c 2) Deducted from Sundry debtors on
assets side.
9) Provision for Profit & Loss A/c. ............ Dr 1) Debit side of Profit & Loss A/c
Discount on Debtors To Provision for discount 2) Deducted from Sundry debtors on
on debtors A/c Assets Side of Balance Sheet.

10) Provision for Provision for discount on 1) Credit side of Profit & Loss A/c
Discount on creditors A/c. ................... Dr 2) Deducted from Sundry creditors on
Creditors To Profit & Loss A/c liabilities side of Balance sheet

11) Goods taken by 1) Drawings A/c. ............ Dr 1) Credit side of Trading or deducted
proprietor for To Trading A/c or from purchases A/c
personal use Purchases A/c
2) Proprietor's Capital A/c..Dr. 2) Deducted from capital on ……
To Drawing A/c Liability side

l2) Goods distributed as 1) Goods distributed as free 1) Credit side of Trading or deducted
free sample sample A/c. ................ Dr from purchases A/c
To Trading A/c or
Purchases A/c 2) Debited to Profit & Loss A/c
2) Advertisement A/c. Dr.
To Goods distributed as
free sample A/c
(To Purchases A/c)
13) Interest on Capital Profit & Loss A/c. .......... Dr 1) Debit side of Profit & Loss A/c
To Capital A/c 2) Add to Capital, Liability side of
Balance sheet.
14) Interest on Capital A/c. .................... Dr 1) Credit side of Profit & Loss A/c
Drawings To Profit & Loss A/c 2) Add to Drawings/Less from Capital.
Journal /Ledger/Trial balance