Recording of Business Transactions
Accounting Equation
The basic equation is Assets = Capital + Liabilities. Every transaction must preserve this equality. If a business buys furniture for cash, one asset increases and another asset decreases. If goods are purchased on credit, assets increase and liabilities increase.
Rules of Debit and Credit
For modern accounting, students should reason from the nature of accounts rather than memorise isolated rules. Assets and expenses generally increase on the debit side; liabilities, capital and revenue generally increase on the credit side. Decreases have the opposite treatment.
Source Documents and Vouchers
Transactions are supported by documents such as invoices, cash memos, cheques, pay-in slips, debit notes and credit notes. Vouchers provide evidence and help establish an audit trail for entries.
Journal
The journal is a book of original entry in which transactions are recorded chronologically. A proper journal entry identifies the accounts affected, applies debit/credit rules, records the amount and includes a concise narration where required.
Simple GST Illustration
If taxable goods worth ₹10,000 are purchased and the applicable GST rate is 18%, GST is ₹1,800 and the invoice value is ₹11,800. In actual accounting questions, always follow the exact information given and distinguish input/output tax as instructed.
Explained MCQs
- Goods purchased for cash affect which two elements?
Answer: Inventory/goods increase and cash decreases.
Explanation: Both are assets, so the total asset value may remain unchanged if the purchase is recorded at the same amount. - Why is a source document important?
Answer: It provides evidence of the underlying transaction.
Explanation: Accounting entries should be supported by reliable documentary evidence.
Worked Example
Started business with cash ₹50,000: Cash +₹50,000; Capital +₹50,000. Purchased goods for cash ₹8,000: Goods +₹8,000; Cash −₹8,000. Purchased furniture on credit ₹12,000: Furniture +₹12,000; Creditor +₹12,000. After each transaction, verify that Assets = Capital + Liabilities.
Common Mistake
Do not treat every cash payment as an expense. Buying furniture for cash changes the composition of assets; it is not automatically a revenue expense.