NCERT Solution (Part - 1) - Recording of Transactions-I | Accountancy Class 11 - Commerce PDF Download

Quick Recap

An Accounting equation is based on the dual concept of accounting, according to which, every transaction has two aspects namely Debit and Credit. It means that every transaction in accounting effect both Debit (DR.) and Credit (Cr.) sides equally. The total assets of the business firm are financed through the funds raised from either the outsiders (which consists generally of Creditors and lenders) or the Owners (which is called Capital).

Let’s have a look at the NCERT solutions in this chapter.

Page No 87

Q1: State the three fundamental steps in the accounting process.

Answer: The fundamental steps in the accounting process are diagrammatically presented below.

Three fundamental steps in accounting are:

1. Identifying and analyzing the business transactions.
2. Recording of the business transactions.
3. Classifying and summarising their effect and communicating the same to the interested users of business information.

Q2: Why is the evidence provided by source documents important to accounting?

Answer: The evidence provided by the source document is important in the following manners:

1. It serves as tangible proof of the occurrence of a transaction.
2. It offers significant and pertinent details regarding the date, amount, parties involved, and other relevant information related to a specific transaction.
3. It functions as legal evidence in a court of law, supporting the validity and authenticity of the transaction.
4. It aids in the verification of transactions during the auditing process, ensuring accuracy and reliability.

Q3: Should a transaction be first recorded in a journal or ledger? Why?

Answer: The initial step in recording a transaction is to enter it in a journal, which contains comprehensive information about the transaction within a single entry. Additionally, the journal serves as a foundation for transferring the transactions to their corresponding accounts in the ledger. Transactions are chronologically recorded in the journal, following the order of their occurrence and utilizing source documents as references. The journal is commonly referred to as the 'book of original entry' since transactions are initially documented in books using source documents. The process of recording transactions in the journal and subsequently transferring them to the ledger is illustrated in the provided flow chart.

Q4: Are debits or credits listed first in journal entries? Are debits or credits indented?

Answer: According to the principles of the double-entry system, the journal format includes two columns for the 'Amount' field: 'Debit Amount' and 'Credit Amount'. The recording method in a journal differs from regular recording practices. A journal entry is documented in a specific journal format where the 'Debit Amount' column is positioned before the 'Credit Amount' column. Credits are indented, which means that there is a space left before writing any word. The journal entry follows its own terminology. When journalizing, the debited account is written first in the 'Particulars' column of the journal format, and the credited account is written on the next line with some space, known as indentation.

Q5: Why are some accounting systems called double accounting systems 

Answer: Certain accounting systems are referred to as double accounting systems because they operate on the principle of duality, wherein each transaction has two aspects. This means that every transaction has a dual effect, impacting two accounts simultaneously. One account is debited while the other account is credited. This system is founded on the concept that for every receiver, there must be a giver.

Q6: Give a specimen of an account.
Answer:
_____________  Account

Q7: Why are the rules of debit and credit same for both liability and capital?

Answer: 

• Businesses acquire funds from both internal and external sources.
• According to the business entity concept, the total amount borrowed from external sources and the capital invested by the owner are considered as liabilities of the business.
• The business entity concept treats the business and its owner as separate entities.
• The owner's capital is considered a liability because it needs to be repaid to the owner if the business is closed.
• When liabilities are incurred, they are credited in the accounting records.
• Similarly, when fresh capital is introduced or net profit increases, the owner's capital is credited.
• Conversely, when liabilities are paid, they are debited to reflect a reduction in liability.
• Drawings from capital and net losses also reduce the owner's capital, resulting in a debit entry.
• Therefore, the rules of debit and credit apply similarly to both liabilities and capital.

Q8: What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?

Answer: The J.F. number is a unique identifier entered in the ledger when posting entries to their respective accounts. Its purpose is to verify that all transactions have been accurately posted to their respective accounts. The J.F. number is assigned during the posting process and is not recorded when the transactions are initially recorded.

The purpose of entering J.F. number in the ledger is because of the below given benefits.

1. The J.F. number serves the purpose of facilitating the identification and retrieval of account entries in the journal book. It allows for easy locating of the corresponding journal entry and subsidiary book within the journal book.
2. The J.F. number in accounts serves as a means of verifying whether the recording in the books of original entry has been properly posted or not.

Q9: What entry (debit or credit) would you make to:
(a) increase revenue 
(b) decrease in expense, 
(c) record drawings 
(d) record the fresh capital introduced by the owner.

Answer:
1. Increase in revenue
Increase in revenue is credited as it increases the capital. Capital has credit balance and if capital increases, then it is credited.
2. Decrease in expense
Decrease in expense is credited as all expenses have debit balance. If expense decreases, then it is credited.
3. Record drawings
Capital has credit balance; if the capital increases, then it is credited. If capital decreases, then it is debited. Drawings are debited as they decrease the capital.
4. Record of fresh capital introduced by the owner- credit
Capital has credit balance, if capital increases, then it is credited. The introduction of fresh capital increases the balance of capital, and so, it is credited.

Q10: If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?

Answer: When a transaction causes a decrease in an asset, it is recorded as a credit because assets normally have a debit balance. For instance, when furniture is sold, the furniture account is credited as it represents a reduction in the asset. Conversely, when a transaction leads to a decrease in a liability, it is recorded as a debit because liabilities typically have a credit balance. For example, when payment is made to creditors, the creditors account is debited as it signifies a decrease in the liability.

Long answers:

Q1: Describe the events recorded in accounting systems and the importance of
source documents in those systems?

Answer: Due to the limitations of human memory, it is not feasible to remember every financial transaction accurately. Therefore, source documents play a crucial role in the accounting system. They serve as evidence of transactions and can be presented as proof in a legal context. By relying on source documents, transactions can be verified and authenticated. Additionally, the use of source documents helps ensure that the recording of transactions in the books is objective and unbiased, free from personal influences.
A few events that are supported by source document are given below.
1. Sale of goods worth Rs 200 on credit, supported by sales invoice/bill
2. Purchase of goods worth Rs 500 on credit, supported by purchase invoice/bill
3. Cash sales worth Rs 1,000, supported by cash memo
4. Cash purchase of goods worth Rs 400, supported by cash memo

5. Goods worth Rs 100 returned by customer, supported by credit note
6. Return of goods purchased on credit worth Rs 200, supported by debit note
7. Payment worth Rs 1,200 through bank, supported by cheques
8. Deposits into bank worth Rs 500, supported by pay-in slips.
Out of the above events, only those events that can be expressed in monetary terms,
are recorded in the books of accounts. However, the non-monetary events
are not recorded in accounts; for example, promotion of manger cannot be recorded
but increment in salary can be recorded at the time when salary is paid or due.
Source document in accounting is important because of the below given reasons.
1. It provides evidence that transaction has actually occurred.
2. It provides information about the date, amount and parties involved and other details of a particular transactions.
3. It acts as an evidence in the count of law.
4. It helps in verifying the transaction during the auditing process.

Q2: Describe how debits and credits are used to analyse transactions.

Answer: The term "debit" is derived from the Italian word "debito," which originated from the Latin word "debeo," meaning "owed to the proprietor." On the other hand, the term "credit" is derived from the Italian word "credito," which comes from the Latin word "credo," signifying belief or "owed by the proprietor."
The dual aspect concept states that all business transactions recorded in the books of accounts have two aspects: debit and credit. This concept can be better illustrated with an example: purchasing goods worth Rs 500 in cash. This transaction simultaneously affects two accounts with the same amount. Since cash is exchanged for goods, the cash balance in the business decreases by Rs 500, resulting in a credit to the cash account. At the same time, the value of goods increases by Rs 500, leading to a debit in the purchases account. Debit and credit are determined based on the nature of the accounts involved, such as assets, expenses, income, liabilities, and capital. There are five types of accounts.
1. Assets- These include all properties or legal rights owned by a firm for its operations, such as cash in hand, plant and machinery, bank, land, building, etc. All assets have debit
balance. If assets increase, they are debited and if assets decrease, they are credited.
For example, furniture purchased and payment made by cheque. The journal entry is:

Here, furniture and bank balance, both are assets to the firm. As furniture is purchased,
so furniture account will increase, and will be debited. On the other hand, payment of
furniture is being made by cheque that reduces the bank balance of the business, so
bank account will be credited.

2. Expense- It is made to run business smoothly and to carry day to day business activites. All expenses have debit balance. If an expense is incurred, it must be debited.
For example, rent paid. The journal entry is:

Here, rent is an expense. All expenses have debit balance. Hence, rent is debited. On
the other hand, as rent is paid in cash that reduces the cash balances, so cash account
is credited.

3. Liability- Liability is an obligation of business. Increase in liability is credited and decrease in liability is debited.
For example, loan taken from bank. The journal entry is:

Here, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan
from bank has been credited because it increases the liabilities.

4. Income- Income means profit earned during an accounting period from any source. Income also means excess of revenue over its cost during an accounting period. Income has credit balance because it increases the balance of capital.
For example, rent received from tenant. The journal entry is:

Here, rent is an income; hence, rent account has been credited and cash has been debited, as rent received increases the cash balances.

5. Capital- Capital is the amount invested by the proprietor in the business. Capital has credit balance. Increase in capital is credited and decrease in capital is debited
For example, additional capital introduced by owner. The journal entry is:

As additional capital is introduced, so the amount of capital will increase, i.e. why, capital account is credited. On the other hand, as capital is introduced in form of cash, so the cash balances decrease, i.e. why, cash account is debited.

Q3: Describe how accounts are used to record information about the effects of transactions? 

Answer: Accounts are fundamental components of the double-entry accounting system, which is used to record the effects of transactions in a systematic and organized manner. Here's how accounts are used to record information about the effects of transactions:

1. Identification of Accounts: Each account represents a specific aspect of a business's financial activities, such as assets, liabilities, equity, revenue, and expenses. Examples of accounts include Cash, Accounts Receivable, Accounts Payable, Sales Revenue, Rent Expense, etc.

2. Recording Transactions: When a business transaction occurs, it impacts at least two accounts. One account is debited, and another account is credited, with the total debits always equaling the total credits. This is known as the double-entry system. For example, when a company sells goods for cash, the Cash account is debited (increased), and the Sales Revenue account is credited (increased).

3. Debits and Credits: Debits and credits are used to record changes in accounts. The rules for debits and credits depend on the type of account. For example, assets and expenses increase with debits and decrease with credits, while liabilities, equity, and revenue increase with credits and decrease with debits.

4. T-Accounts or Ledger Entries: Transactions are recorded using T-accounts or ledger entries. Each account has its own T-account or ledger, where debits are recorded on the left side and credits on the right side. The balance of an account is determined by the algebraic sum of its debits and credits.

5. Posting to the General Ledger: After transactions are recorded in T-accounts, the information is then transferred to the general ledger, which contains a complete record of all accounts used by the business. This helps in summarizing and organizing the financial information.

6. Preparation of Financial Statements: The information recorded in accounts is used to prepare financial statements such as the income statement, balance sheet, and cash flow statement. These statements provide valuable insights into the financial performance and position of the business.

Q4: What is a journal? Give a specimen of journal showing at least five entries 

Answer: A journal, in accounting, is a chronological record of all financial transactions of a business. It serves as the first step in the accounting cycle, where transactions are initially recorded before being posted to individual accounts in the general ledger. Here's a specimen of a journal showing at least five entries: 

In this specimen journal:

1. On January 1, cash is received from sales, so Cash is debited (increased) by $1,500.
2. On January 5, office supplies are purchased on credit, so Office Supplies are debited (increased) by $300, and Accounts Payable is credited (increased) by $300.
3. On January 10, rent is paid, so Rent Expense is debited (increased) by $800, and Cash is credited (decreased) by $800.
4. On January 15, goods are sold on credit to XYZ Company, so Accounts Receivable is debited (increased) by $2,000, and Sales Revenue is credited (increased) by $2,000.
5. On January 20, payment is received from XYZ Company, so Cash is debited (increased) by $2,000, and Accounts Receivable is credited (decreased) by $2,000.

This journal records the transactions in chronological order, providing a clear trail of the business's financial activities.

Q5: Differentiate between source documents and vouchers. 

Answer: Source documents and vouchers are both important components of the accounting process, but they serve different purposes and have distinct characteristics:

1. Source Documents:

   • Source documents are the original records that provide evidence of a transaction.
   • They are created at the time a transaction occurs and contain detailed information about the transaction, such as the date, description, amount, and parties involved.
   • Examples of source documents include invoices, receipts, purchase orders, sales orders, bank statements, contracts, and time cards.
   • Source documents serve as the foundation for recording transactions in the accounting system. They provide the necessary information for preparing journal entries and supporting documentation for financial transactions.
2. Vouchers:
   • Vouchers are documents used internally within a company to authorize and record financial transactions.
   • They are often generated based on information from source documents and are used as supporting evidence for recording entries in the accounting system.
   • Vouchers serve as an approval mechanism, indicating that a transaction has been authorized and verified before it is recorded in the books.
   • Unlike source documents, vouchers may not always directly correspond to external transactions; they can also represent internal transactions, adjustments, or transfers.
   • Common types of vouchers include payment vouchers, receipt vouchers, journal vouchers, and expense vouchers.
   • Vouchers typically contain details such as the date, account codes, description of the transaction, amount, and approval signatures.

Q6: Accounting equation remains intact under all circumstances. Justify the statement with the help of an example. 

Answer: The accounting equation, which states that Assets = Liabilities + Equity, represents the fundamental relationship between a company's assets, liabilities, and equity. This equation must remain in balance at all times to ensure the accuracy of a company's financial records. Let's justify this statement with an example:

Suppose a company, ABC Corporation, starts its operations with the following financial information:

- Assets: $50,000

- Liabilities: $20,000

- Equity: $30,000

According to the accounting equation, the balance would be:

Assets = Liabilities + Equity

$50,000 = $20,000 + $30,000 

$50,000 = $50,000 

Now, let's consider two typical transactions:

1. ABC Corporation purchases equipment for $10,000 in cash.

   - This transaction affects the accounting equation as follows:

     - Assets increase by $10,000 (due to the addition of equipment)

     - Cash decreases by $10,000 (due to the cash payment)

After the transaction, the new balance would be:

Assets = Liabilities + Equity

$60,000 = $20,000 + $40,000 

$60,000 = $60,000 

The equation remains balanced.

2. ABC Corporation borrows $5,000 from a bank.

   - This transaction affects the accounting equation as follows:

     - Assets increase by $5,000 (due to the increase in cash)

     - Liabilities increase by $5,000 (due to the loan)

After this transaction, the new balance would be:

Assets = Liabilities + Equity

$65,000 = $25,000 + $40,000

$65,000 = $65,000 

Again, the equation remains balanced.

In both scenarios, the accounting equation remains intact, demonstrating that the total value of assets always equals the total value of liabilities and equity. This balance ensures that the company's financial records accurately reflect its financial position at any given time.

Answer: The double-entry accounting system is a fundamental principle in accounting that requires every transaction to be recorded with at least two entries, with each entry affecting two or more accounts. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced. Let's illustrate the double-entry mechanism with an example:

Suppose a business, ABC Corp., starts its operations with the following financial information:

• Cash: $10,000
• Equipment: $5,000
• Owner's Equity: $15,000

Now, let's consider a transaction where ABC Corp. purchases additional equipment for $3,000 in cash.

1. Identify Accounts Affected:

   • Cash account
   • Equipment account

2. Analyze the Transaction:

   • Cash decreases due to the payment for equipment.
   • Equipment increases because of the acquisition.

3. Apply the Double-Entry Rule:

   • The Cash account will be credited (decreased) by $3,000.
   • The Equipment account will be debited (increased) by $3,000.

4. Record the Entries:

5. Verify the Impact on the Accounting Equation:
   • Before the transaction: Assets = Liabilities + Equity
     • $10,000 + $5,000 = $15,000 (Cash + Equipment = Owner's Equity)
   • After the transaction: Assets = Liabilities + Equity
     • $7,000(Cash) + $8,000(Equipment)=$15,000  (Owner's Equity remains the same)

By following the double-entry mechanism, each transaction is recorded accurately, ensuring that the accounting equation remains balanced. In this example, the decrease in cash is offset by the increase in equipment, preserving the equilibrium of the equation.