RECORDING TRANSACTIONS THROUGH DEBITS AND CREDITS

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1 RECORDING TRANSACTIONS THROUGH DEBITS AND CREDITS The process of recording the transaction in the books of accounts is called book keeping. The process ends with the preparation of financial statements as follows: Transactions Ledgers Trial Balance Financial Statements and ising is the book of original entry. Transactions are recorded in a chronological order. Table 4.8 shows the format of journal Table 4.8 Date: Date of transaction Details of the financial items LF: Ledger folio (shows the corresponding ledger number) Debit amount and Credit amount Steps required for recording the transactions are as follows Read the transaction Identify the two (debit and credit) financial items affected by the transactions Use the above debit and credit rule discussed in the previous section. Example A and B started AB ltd. A contributed cash Rs. 100,000 as capital. Cash (Real ): Cash is coming into the business: Debit Cash Capital (Representative Personal ): The owners are giving the money: Credit the Capital Cash 100,000 Capital 100,000 Increase in cash Increase in Capital 11

2 2. Took 10% loan from IDBI: Rs Cash (Real ): Cash is coming into the business: Debit Cash Bank (Personal ): Bank the giver. Credit the Bank Cash 100,000 Bank Loan 100,000 Increase in cash Increase in Bank Loan 3. Purchased machinery costing Rs for cash. Cash (Real ): Cash is going out of the business: Credit Cash Machinery (Rea ): Machinery is coming into the business: Debit the Capital Machinery 20,000 Cash 20,000 Increase in machinery Decrease in cash 4. Purchase furniture on credit from X ltd for Rs It is a credit transaction Mr. X (Personal ): Mr. X extended loan: Credit M. X Furniture (Real): Machinery is coming into the business: Debit the Furniture Furniture 30,000 X 30,000 Increase in Furniture Increase in loan (X) 12

3 5. Purchased land for cash Rs It is a cash transaction Cash (Real ): Cash is going out of the business: Credit Cash Land (Real): Land is coming into the business: Debit the Land Land 50,000 Increase in Land Decrease in Cash 6. Purchased goods worth of Rs for cash. It is a cash transaction Cash (Real ): Cash is going out of the business: Credit Cash Goods (Real): Goods is coming into the business: Debit the Goods (stock) Goods 50,000 Increase in goods Decrease in Cash 7. Purchased goods worth of Rs on credit from Y Ltd. It is a credit transaction Y (personal ): Y extended credit: Credit Y Goods (Real): Goods is coming into the business: Debit the Goods Goods 50,000 Y 50,000 Increase in goods Increase in creditors (Y) 8. Sold all goods for Rs on credit to Mr. Z It is a credit transaction Z (Personal ): Z receives goods and owes money to the business: Debit Z 13

4 Goods (Real): Goods is going out of the business: Credit the Goods (stock) Z 160,000 Goods Increase in debtors(z) Decrease in goods 9. Sold all goods for Rs for cash It is a cash transaction Cash (Real ): Cash is coming into the business: Debit Cash Goods (Real): Goods is going out of the business: Credit Debit the Goods (stock) Cash 150,000 Goods Increase in Cash Decrease in Goods The above process is called journalizing the transactions. Ledger Posting After recording all transactions, it is necessary to post the same to ledger accounts. Ledger accounts show all information relating to a particular account at one place. So Cash will show all transactions (receipts and payments) relating to cash. The process of transferring the financial items from to Leger is called Posting. 14

5 Example 4.4 Purchase of land for Rs. 50,000 Debit Credit Land 50,000 Land To Cash 50, 000 Cash To Goods 80,000 By Let us see another transaction Sold goods for cash: Rs Debit Credit Cash 80,000 Goods 80,000 Goods By Cash 80,000 15

6 Balancing of Ledger s After posting all transactions to the respective ledger accounts, it is necessary to balance the ledger accounts periodically (daily, monthly, quarterly, half-yearly and yearly). Steps required to balance a ledger account are as follows; Total the debit side Total the credit side Find the difference Put the difference on the lesser side If the debit side is greater than the credit side, it is called Debit Balance If the credit side is greater than the debit side, it is called Credit Balance Example 4.5 ABC ltd had following transactions: Started business with capital: Rs. 100,000 Purchased machine for cash: 50,000 Purchased shares for cash: 25,000 Sold goods for cash:: 50,000 Expenses paid: 10,000 Cash Capital 100,000 Machinery 50,000 Sales shares 25,000 Expenses 10,000 Balance carried forward 65,000 Total 150,000 Total 150,000 Cash 25,000 Cash 10,000 Shares Balance carried forward 25,000 Expenses Transfer to Income Statement 10,000 16

7 Capital Balance carried forward 100,000 By Cash 100,000 Sales Transfer to Income Statement 50,000 By Machine Balance carried forward 50,000 General Rules of Balancing of Ledger s: Personal s: There can Debit Balance or Credit Balance or no Balance Real s: There be Debit Balance or No balance Nominal s: There will be No Balance as the entire amount will be transferred to the income statement. 17

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