Chapter 3-Recording of Transactions-1

(c) Voucher

Explanation- Business transactions are usually evidenced by 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.

(a) Transaction Voucher.

Explanation- A transaction with one debit and one credit is a simple transaction and the accounting vouchers prepared for such transaction is known as Transaction Voucher.

(b) Compound voucher

Explanation- Voucher which records a transaction that entails multiple debits/credits and one credit/debit is called compound voucher. Compound voucher may be: (a) Debit Voucher or (b) Credit Voucher.

(d) Complex transactions

Explanation- Transactions with multiple debits and multiple credits are called complex

transactions.

(a) Journal voucher

Explanation- The accounting voucher prepared for complex transaction is known as Complex Voucher/ Journal Voucher.

(d) Balance sheet

Explanation- The balance sheet is a statement of assets, liabilities and capital.

(b) Cash memos

Explanation- When the goods are purchased or sold for cash, the firm receives or gives cash memos which provide details regarding the cash transactions.

(a) Invoice

Explanation- This source documents results from credit transactions. When the business transactions relating to purchase or sale of goods are made on credit, this source of document is prepared.

(c) Sales invoice

Explanation- A sale invoice is prepared to record the details of credit sale.

(d) Receipt

Explanation- When a firm receives cash from the customer, it issues a receipt as a proof for receiving the cash.

(a) Pay-in-slip

Explanation- This source relates to the bank transactions. Pay-in-slip is a form available from a bank for depositing money in a bank account. It has a counterfoil which is returned to the depositor with signature of the cashier, as receipt.

(c) Cheque

Explanation- A cheque is a document which is in writing drawn upon a specified banker and payable on demand. The bank supplies the cheque forms.

(b) Pay To

Explanation- The name of the party to whom payment is to be made is written after the words ‘‘Pay To’’. Then the amount has to be written- both in words and figures.

(a) Debit note

Explanation- The term ‘Debit Note’ is reserved for document evidencing a debit to be raised against a party for other reasons, for example, when goods are returned to a supplier or when an additional amount is recoverable from a customer.

(d) Source voucher

Explanation- Source vouchers are the documents which come into existence when a transaction occurs. Examples of this are issue of cash-memo on sale against cash, issue of credit memo on credit sale, issue of rent receipt on receipt of rent and so on.

(b) credit vouchers

Explanation- Credit vouchers are prepared when cash is received. Cash may be received against sale of goods, sale of investments, receipts from debtors and withdraw from bank etc.

(c) narration

Explanation- Narration is a brief description of the transaction.

(a) Debit vouchers

Explanation- Debit vouchers are prepared when payments is made. Payment may be made against expenses, purchase of goods, payment to creditors, deposits into bank and drawings etc.

(c) Non-cash vouchers

Explanation-Non-cash vouchers refer to vouchers for transactions not involving cash. Examples of these are Invoice or Bills, Debit and Credit Notes etc.

(d) Debit all expenses and losses, Credit all incomes and profits

Explanation- The analysis of source document (Cash Memo) establishes the Stationery Account be debited following the rule ‘ Debit all expenses and losses, Credit all incomes and profit.

(b) Journal

Explanation- Journal is that primary book of accounts in which transactions are originally recorded in a chronological (day-to-day) order. It is called the book of original entry.

(a) Journal Entry

Explanation- An entry made in the Journal is called a ‘Journal Entry’. To record transactions in it is to journalise it.

(a) Ledger Folio

Explanation- Ledger Folio includes the number of pages in the ledger on which the account is written up are entered.

(d) Two types

Explanation- Entries in the Journal may be divided into two groups:

1. Simple Entry

2. Compound Entry

(b) Simple entry

Explanation- A Simple Entry is one in which only two accounts are affected, viz., one account to be debited and another to be credited with an equal amount.

(a) Bad debts

Explanation- When a debtor becomes bankrupt, i.e. unable to pay one’s debts same is called Bad Debts.

(c) Compound entry

Explanation- In a compound entry, there may be two or more accounts to be debited and only one to be credited or vice versa.

(b) Dr.

Explanation- In Journal, the account to be debited is written with the word ‘‘Dr.’’ written towards the end of the column.

(a) To

Explanation- The name of the account to be credited is written preceded by word ‘‘To.’’ For example-

Ajay Dr.

To Cash A/c

(d) Bad Debts recovered a/c

Explanation- Sometime insolvent debtor whose account had been earlier written off as ‘Bad Debts’ pays some amount.The amount so received is a gain to the business and is credited Bad Debts Recovered a/c.The entry of bad debts recovered is:

Cash/Bank A/c Dr.

To Bad Debts Recovered A/c

(d) Gain

Explanation- Recovery of bad debts written off last year is gain to the business; therefore, it is credited to Bad Debts Recovered Account.

(c) Discount

Explanation- A reduction in amount whether to encourage more purchases or prompt payment is called discount.

(b) Two types

Explanation- Discount may be classified into:

(i) Trade discount

(ii) Cash discount

(a) Purchases A/c

Explanation- Amount of purchases is reduced with the value of goods given away as charity. The following entry is passed:

Charity A/c Dr.

To Purchases A/c

(b) Trade discount

Explanation- Trade discount is an allowance made to a customer if he purchases goods above a certain quantity or an amount. The discount so allowed is reduced from the sale value and the sale or purchase is recorded in the books at the net value.

(d) Cash discount

Explanation- Cash discount is an allowance to encourage prompt payment of amount due. Cash discount, received or allowed is recorded separately in the books.

(c) Advertisement expense

Explanation- To increase sales sometimes goods are distributed as free samples. It is a part of advertisement expenses hence; it is debited to advertisement account and deducted from purchases.

(d) Drawings

Explanation- It is treated as decrease in purchase and not increase in sales as no profit is earned on such goods.

(b) Trade discount

Explanation- Trading account is not recorded in the ledger accounts.

(c) Purchases A/c

Explanation- When the goods are withdrawn by proprietor for personal use. Following journal entry is passed-

Drawings A/c ......Dr.

To Purchases A/c

(d) Cash discount

Explanation- Cash discount is not deducted from the invoice.

(b) Current assets

Explanation- Prepaid expenses are the expenses paid in advance.

(b) Loss by fire accident A/c

Explanation- Goods destroyed by fire or accident etc. is recorded by debiting the loss to the account titled ‘Loss by Fire Accident Account.’ It is an Expense Account. A loss by Fire Account is debited because loss represents an increase in expense and Purchase Account is credited because it will decrease the purchase.

(d) Trade discount

Explanation- The amount of the trade discount is deducted from the invoice.

Repeated question

(c) Sales tax

Explanation- At the time of sale, sales tax is also collected from the customers. Sales tax so collected must be deposited in government account on the due date. Sales tax collected is a liability and therefore, should be credited in a separate account.

(c) Sundry Expenses A/c

Explanation- Businessman often has to pay petty expenses, such as for refreshment, postage, conveyance etc. It is not desirable to record such expenses in a separate account of each expenses. These expenses are generally debited in one account, i.e., Sundry Expenses Account.

(d) Assets - Capital

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims who are not owners are called ‘‘Liabilities.’’

(d) Outstanding expenses

Explanation- For example, Wages for the year ending 31^st March, 2002 are Rs. 8,000. Out of this wages Rs.1000 for the month of March, 2002 have been paid in April 2002. Since, Rs.1000 as on 31^st March, 2002 is yet to be paid it should be recorded in the books by passing the following journal entry:

Wages A/c ......Dr. 1,000

To Outstanding Wages A/c 1,000

(b) Assets - Liabilities

Explanation- Capital is also known as Owner’s Equity, proprietorship and net worth. Owner’s Equity means owner’s claim against the assets of the business. It will always be equal to assets less liabilities.

Repeated question

(c) Prepaid expenses

Explanation- Normally payment of certain expenses like Insurance, Rent of Shop etc, are paid in advance. Such expenses are termed as advance or prepaid expenses.
 

(d) Depreciation

Explanation- Due to continuous use of fixed assets, value of these assets keeps on decreasing every year. This diminution is called the depreciation.

(a) Loss

Explanation- Interest on capital is loss for business. Therefore, interest account is debited and capital account is credited by the amount.

(c) Depreciation

Explanation- Depreciation is a fall in the value of assets and this is a trading loss.

(b) Gain to the business

Explanation- In case, interest is charged on drawings, it is a gain for the business. For this, drawings account will be debited interest on drawings account will be credited.

(d) Journal

Explanation- The possibility of errors is reduced in Journal as the amounts to be debited and credited are written side by side and the two can be compared to see that they are equal.

(a) Journal

Explanation- Transactions are entered in the journal in the chronological order i.e. the order in which they occur.

(b) Ledger

Explanation- Ledger is the most important book of account. It is the principal book of account which contains all the ledger accounts.

(c) Real Account

Explanation- The real accounts show the values of properties and also the value of stock.

(d) Stock and prepaid expenses

Explanation- Assets other than fixed assets are current assets.Current assets are those assets which can be converted into cash within a period of one year.

(d) Nominal account

Explanation- Nominal accounts reflect the sources of income and also the amount spent on various items.

(b) Long-term loans

Explanation- Long-term loans are the examples of fixed liabilities which are repaid after long period of time.

(a) Debit side

Explanation- The left-hand side of ledger is known as the debit side.

(b) Balancing of account.

Explanation- For example, if total of credit side is more than the debit side of any account the difference of amount will be recorded as Balance c/d on debit side and vice versa.

(d) Trial Balance

Explanation- It is prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides.

(c) Trial balance

Explanation- The Trial Balance enables one to establish whether the posting and other accounting processes have been carried out without committing arithmetical errors.

(a) The balance method

Explanation- In this method, only the debit or credit balances are entered separately in two columns.

(b) Gross Trial Balance

Explanation- In this, the total of each side is entered respectively.

(d) Trial Balance

Explanation- Financial statements are normally prepared on the basis of the Trial balance.

(c) Assets

Explanation- The equation says that the assets of a business are always equal to the claims of owners and the outsiders.

(c) Balance Method

Explanation- The other name of Net Trial Balance is Balance Method. This is commonly used method of preparing Trial Balance.

(a) Two types

Explanation- The systems of recording transactions in the books of accounts are generally classified into two types, viz. Double Entry system and Single Entry system.

(c) Posting

Explanation- The process of transferring each entry from journal to ledger is called Posting.

(b) Journal Folio

Explanation- It records the page number of the original book of entry on which relevant transaction is recorded. This column is filled up at the time of posting.

(d) Balance brought down

Explanation- Assets will show a debit balance. Such accounts will be opened and the relevant amounts written on the debit side as ‘‘To Balance brought down.’’

(a) Balance carried down

Explanation- It is used for closing the ledger balance.