Chapter 3 — Recording of Transactions — I

Chapter 3, Recording of Transactions — I, covers source documents, preparation of accounting vouchers, the accounting equation (A = L + C), rules of debit and credit for five account types, journalising in the book of original entry, and posting entries to the ledger.

A source document is a document that provides evidence of a business transaction. Examples include cash memos, invoices, sales bills, pay-in-slips, cheques, and salary slips. All recording in books of account is done on the basis of these vouchers.

Accounting vouchers include transaction vouchers (one debit and one credit), compound vouchers — either debit vouchers or credit vouchers (multiple debits with one credit, or one debit with multiple credits) — and journal or complex vouchers (multiple debits and multiple credits).

The accounting equation states that Assets = Liabilities + Capital (A = L + C). It is also called the Balance Sheet Equation because it depicts the fundamental relationship among the components of the balance sheet and remains balanced after every transaction.

For assets and expenses or losses, an increase is debited and a decrease is credited. For liabilities, capital, and revenues or gains, an increase is credited and a decrease is debited.

When only two accounts are involved in recording a transaction, it is called a simple journal entry. When the number of accounts to be debited or credited is more than one, the entry is called a compound journal entry.

The journal is the basic book of original entry in which transactions are recorded in chronological order as and when they take place. The process of recording transactions in the journal is called journalising.

A narration is a brief description of the transaction written below the account titles in the particulars column of the journal. It explains the nature of the transaction recorded, and a line drawn after it marks the end of that journal entry.

The journal is the book of first entry where transactions are recorded chronologically; the ledger is the book of second entry where transactions are classified account-wise. Recording in the journal is called journalising; transferring entries from the journal to the ledger is called posting.

Permanent accounts — assets, liabilities, and capital — are balanced and carried forward to the next accounting period and appear in the balance sheet. Temporary accounts — revenues and expenses — are closed at the end of the accounting period by transferring them to the trading and profit and loss account.

The Ledger Folio (L.F.) column in the journal records the page number of the ledger account on which a particular account appears. This column is filled up at the time of posting, not at the time of making the journal entry.

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