Big picture
Every transaction must be recorded before it can be classified or summarised. The record starts with a source document (bill, receipt, cheque counterfoil), which supports a voucher, which is then entered in the journal, the book of original entry.
Two ideas power every entry. The accounting equation (Assets = Liabilities + Capital) always stays in balance, because every transaction has two equal effects. The rules of debit and credit tell you which account to debit and which to credit. Master these and the rest of accountancy follows.
Learning goals
Explain source documents and accounting vouchers.
Explain the accounting equation and show the effect of transactions on it.
Apply the modern (accounting equation) and traditional rules of debit and credit.
Record transactions in the journal, including GST, special cases and compound entries.
Core ideas
1. Source documents and vouchers
Source documents are the written evidence of transactions: cash memos (cash sales and purchases), invoices or bills (credit sales and purchases), receipts (cash received), pay-in-slips (cash or cheques deposited in a bank), cheques, and debit and credit notes (returns).
An accounting voucher is prepared from source documents and records the accounts to be debited and credited. Types include cash vouchers (debit vouchers for payments, credit vouchers for receipts), transfer vouchers (non-cash transactions), and compound vouchers (more than one debit or credit).
2. The accounting equation
Because of the dual aspect concept, every transaction affects at least two items, and the equation always holds:
Assets = Liabilities + Capital
Revenue increases capital (profit belongs to the owner); expenses and drawings decrease it.
Worked example. Show the effect of each transaction on the accounting equation.
Asha starts a business with cash ₹1,00,000.
Buys furniture for cash ₹20,000.
Buys goods on credit from Mohan ₹30,000.
Sells goods costing ₹10,000 for cash ₹15,000.
Pays rent ₹2,000.
Withdraws cash ₹3,000 for personal use.
No. | Cash | Stock | Furniture | = | Creditors | Capital |
|---|---|---|---|---|---|---|
1 | +1,00,000 | +1,00,000 | ||||
Balance | 1,00,000 | 0 | 0 | 0 | 1,00,000 | |
2 | −20,000 | +20,000 | ||||
Balance | 80,000 | 0 | 20,000 | 0 | 1,00,000 | |
3 | +30,000 | +30,000 | ||||
Balance | 80,000 | 30,000 | 20,000 | 30,000 | 1,00,000 | |
4 | +15,000 | −10,000 | +5,000 (profit) | |||
Balance | 95,000 | 20,000 | 20,000 | 30,000 | 1,05,000 | |
5 | −2,000 | −2,000 (expense) | ||||
Balance | 93,000 | 20,000 | 20,000 | 30,000 | 1,03,000 | |
6 | −3,000 | −3,000 (drawings) | ||||
Final | 90,000 | 20,000 | 20,000 | 30,000 | 1,00,000 |
Assets = 90,000 + 20,000 + 20,000 = ₹1,30,000. Liabilities + Capital = 30,000 + 1,00,000 = ₹1,30,000. The equation balances after every transaction.
3. Rules of debit and credit
Modern approach (accounting equation approach). Accounts are classified into five types.
Type of account | Increase | Decrease |
|---|---|---|
Assets | Debit | Credit |
Expenses and losses | Debit | Credit |
Liabilities | Credit | Debit |
Capital | Credit | Debit |
Revenues and gains | Credit | Debit |
Drawings reduce capital, so drawings are debited.
Traditional approach.
Type of account | Includes | Rule |
|---|---|---|
Personal | Persons, firms, companies, and representative personal accounts (outstanding salary, prepaid rent) | Debit the receiver, credit the giver |
Real | Assets: cash, furniture, machinery, goodwill | Debit what comes in, credit what goes out |
Nominal | Expenses, losses, incomes, gains | Debit all expenses and losses, credit all incomes and gains |
Both approaches always give the same entry.
4. The journal
The journal records transactions in chronological order. Each record is a journal entry, with columns for date, particulars, ledger folio (L.F.), debit amount and credit amount, and a short narration explaining the transaction.
A simple entry has one debit and one credit.
A compound entry has more than one debit or credit (for example, a payment with a discount).
An opening entry brings forward the previous year's balances of assets, liabilities and capital: Assets A/cs Dr, To Liabilities A/cs, To Capital A/c.
5. Journal entries for common transactions
Transaction | Debit | Credit |
|---|---|---|
Started business with cash ₹1,00,000 | Cash A/c 1,00,000 | Capital A/c 1,00,000 |
Bought goods for cash ₹15,000 | Purchases A/c 15,000 | Cash A/c 15,000 |
Bought goods on credit from Mohan ₹30,000 | Purchases A/c 30,000 | Mohan 30,000 |
Sold goods to Rita on credit ₹25,000 | Rita 25,000 | Sales A/c 25,000 |
Rita returned goods worth ₹2,000 | Sales Return A/c 2,000 | Rita 2,000 |
Bought furniture for office by cheque ₹20,000 | Furniture A/c 20,000 | Bank A/c 20,000 |
Paid salaries ₹12,000 | Salaries A/c 12,000 | Cash A/c 12,000 |
Deposited cash in bank ₹10,000 | Bank A/c 10,000 | Cash A/c 10,000 |
Owner withdrew cash for personal use ₹3,000 | Drawings A/c 3,000 | Cash A/c 3,000 |
Special cases involving goods
When goods leave the business for a reason other than sale, they are credited to Purchases Account at cost, because they were never sold.
Transaction | Debit | Credit |
|---|---|---|
Owner took goods costing ₹2,000 for personal use | Drawings A/c 2,000 | Purchases A/c 2,000 |
Goods costing ₹1,000 distributed as free samples | Advertisement A/c 1,000 | Purchases A/c 1,000 |
Goods costing ₹1,500 given as charity | Charity A/c 1,500 | Purchases A/c 1,500 |
Goods costing ₹5,000 lost by fire; insurance company admitted a claim of ₹3,000 | Loss by Fire A/c 2,000 and Insurance Claim A/c 3,000 | Purchases A/c 5,000 |
Discounts and bad debts
Transaction | Debit | Credit |
|---|---|---|
Paid Mohan ₹9,800 in full settlement of ₹10,000 | Mohan 10,000 | Cash A/c 9,800 and Discount Received A/c 200 |
Received ₹4,900 from Rita in full settlement of ₹5,000 | Cash A/c 4,900 and Discount Allowed A/c 100 | Rita 5,000 |
Kiran, who owed ₹3,000, became insolvent and paid only 60% | Cash A/c 1,800 and Bad Debts A/c 1,200 | Kiran 3,000 |
Trade discount is not recorded. Example: goods with a list price of ₹40,000 are sold to Amit at a 10% trade discount. Entry: Amit Dr ₹36,000, To Sales A/c ₹36,000.
Entries with GST
Transaction | Debit | Credit |
|---|---|---|
Bought goods within the state from Ravi for ₹20,000 plus CGST 6% and SGST 6% | Purchases A/c 20,000, Input CGST A/c 1,200, Input SGST A/c 1,200 | Ravi 22,400 |
Sold goods to a buyer in another state for ₹30,000 plus IGST 12% | Buyer 33,600 | Sales A/c 30,000 and Output IGST A/c 3,600 |
6. A short practice set
Journalise for Neha's business:
Date | Transaction | Entry |
|---|---|---|
1 April | Started business with cash ₹2,00,000 and machinery ₹1,00,000 | Cash A/c Dr 2,00,000, Machinery A/c Dr 1,00,000, To Capital A/c 3,00,000 |
3 April | Opened a bank account with ₹80,000 | Bank A/c Dr 80,000, To Cash A/c 80,000 |
5 April | Bought goods from Sunil ₹50,000 | Purchases A/c Dr 50,000, To Sunil 50,000 |
10 April | Sold goods to Arun ₹40,000 | Arun Dr 40,000, To Sales A/c 40,000 |
15 April | Paid Sunil by cheque ₹49,000 in full settlement | Sunil Dr 50,000, To Bank A/c 49,000, To Discount Received A/c 1,000 |
20 April | Received rent for a sublet portion ₹6,000 | Cash A/c Dr 6,000, To Rent Received A/c 6,000 |
25 April | Took goods for personal use ₹1,500 | Drawings A/c Dr 1,500, To Purchases A/c 1,500 |
30 April | Paid wages ₹4,000 | Wages A/c Dr 4,000, To Cash A/c 4,000 |
A reliable problem-solving routine
Identify the two (or more) accounts affected.
Classify each account: asset, liability, capital, expense or revenue (or personal, real, nominal).
Decide whether each account increases or decreases.
Apply the rule to decide debit and credit; check that total debits equal total credits.
For goods not sold, credit Purchases at cost; for discounts, record only cash discount; for GST, use input accounts on purchases and output accounts on sales.
Connections that matter
Theory base: the dual aspect concept is the basis of the equation and double entry.
Special purpose books and ledger: journal entries are posted to the ledger, and repetitive transactions go into subsidiary books.
Trial balance: checks that total debits equal total credits.
Common mistakes
Debiting Sales or crediting Goods for goods withdrawn. Credit Purchases at cost.
Recording trade discount. Record only the net amount.
Crediting Capital for drawings. Drawings are debited.
Debiting Purchases for furniture bought for office use. Debit Furniture.
Forgetting the discount in a full-settlement payment, so the entry doesn't balance.
Revision checklist
I can name source documents and types of vouchers.
I can show the effect of transactions on the accounting equation.
I can apply both the modern and traditional rules of debit and credit.
I can journalise common transactions, special cases with goods, discounts, bad debts and GST.
I can write compound and opening entries.