Recording Business Transactions

in Primary Books

Chapter 2

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Balance Sheet Equation and Accounts
• Expanded accounting equality could be written as: A = L + C + R - (E
+ D)

Where, A = assets; L= liabilities; C = capital; R = revenue; E = expenses;

and D = dividends
• Rearranging gives: A + E + D = L + C + R
• This transposed equality is the basic accounting equality
• Quantities on the LHS are normally referred to as ‘debit’ or ‘Dr. in
short
• Quantities on the RHS are known as ‘credit’, or ‘Cr.’ in short

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Balance Sheet Equation and Accounts

• Accounts belonging to LHS terms, namely, Assets, Expenses, and

Dividends, their basic accounting character being ‘debit’ have debit
balances
• For these accounts: Debits - Credits ≥ 0
• Similarly, in the case of accounts relating to terms on the RHS of the
equality: Liabilities, Capital, and Revenues, normally have credit
balances
• For these accounts: Credits - Debits ≥ 0
• In any case, equal to zero implies no balance

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 Chapter 2
Accounts
• Books of accounts consist of two broad sets of books:
Primary Books and Secondary Books.
• A primary Book (also called Journal) is a book of prime
(first) entry of transactions.
• Any transaction which is not recorded in primary book
does not get reflected in books of accounts.

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 Classification of Accounts
Accounts Classified

Assets Liabilities Capital Income Expense

Ex. Land, Ex. Loans, Ex. Share Ex. Sales, Ex. Salary,
Stock, Cash Creditors, Capital, Interest Rent, Power
Bills Payable Proprietor’s A/c Earned

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 Classification of Accounts
• The basic accounting equation reminds us that the accounts
can be divided into the following five broad categories:
• Assets or the resources which a firm is enjoying
• Liabilities or the obligations of the firm towards outsiders
• Capital or the amount invested by the owners, the increase in
such capital and the decreases in it.
• Income or expenses of the business affect the increase and
decrease in capital. Therefore, two more forms of account
• Incomes or the amounts earned by the business
• Expenses or the amounts expended by the business

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 Chapter 2
Asset accounts

Assets are what an enterprise owns

Land: Land owned by the enterprises

Building: The building account records

acquisition of building used by an enterprises to
carry out its operations
Equipment: a business owns many equipments as
plant and machinery, office equipment as
photocopier

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• Prepaid expenses: Sometimes a business
pays for service before they have been
received or used.
• Debtors: Business enterprises often sell
goods and services on credit so that
customers can pay after the specified period
of credit.
• Bills receivable: A bill receivable is a legal
document containing an acceptance to pay a
certain sum of money at a specified date.
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• Cash: The cash account shows receipt and
payment of cash owns. The Cash includes
coins, currency,
• Bank balances: The bank shows the bank
balances. Cheques in hand

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 Liability accounts

Bills payable: A bill payable is a legal document signifying an obligation to

pay a certain sum of money at specified date.

Creditors: The creditors account shows increase and decrease in amount

owed to outsiders.

Unearned revenue: Amount received from customers for services to be

provided.

Short term liability: Wages payable, Tax payable, Interest payable

Long term liability: These include a wide variety of debentures, loans
from banks
Secured and unsecured liabilities: Liabilities may be secured or
unsecured. Secured liabilities are backed by assets.

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 Owners’ equity accounts

• Share Capital or Owner’s Capital:

Proprietary firm and Partnership firms use an
Owner’s capital where companies have Share
capital account.
• Retained Earnings: The profit earned by a
company less dividens paid belongs to
company’s shareholders.

Dividends: Dividends are distribution of assets

that reduces the retained profits of a company.

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 Revenue and Expenses
• Revenue increase equity and expenses
decreases it. When revenue exceed
expenses, the business earns NET PROFIT.
When expenses exceed revenues, the
business incures NET LOSS.
• Drawings: The owner of proprietorship or
partnership business may withdraw cash or
other assets from the business. A
withdrawal results in a decrease in both
assets and equity.
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 Double entry Book keeping

Double entry book keeping is a system of

accounting that recognises a transaction or
event from two angles, i.e. Debit and
Credit. As per this system , if any one
account is debit there must be another
account which is credit by equal amount.
Therefore , at every point of time the sum of
debits is equal to the sum of credits.
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 Chapter 2

The Double Entry System

The T account

Debit is left side of T account

Credit is right side of T account

Debits = Credits

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 Ground Rules for Recording in
Primary Books
 Recollect the accounting equation:
• A(Asset)= L(Liabilities)+ E(Equity)
 Ground Rules:
• Increase in assets and decrease in liabilities and equity:
Debit.
• Decrease in assets and increase in liabilities and equity:
Credit.
• Expenses and losses: Debit
• Income and gains: Credit

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 The Accounting Equation Revisited
The equation,
Assets = Liabilities + Equity

can be rewritten as
Assets = Liabilities + Capital + Revenues
– Expenses – Dividends-Drawings

which can be rewritten as

Assets + Expenses + Dividends+ Drawings =
Liabilities + Capital + Revenues

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 Rules for Debit and Credit

Accounting Equation

Assets = Liabilities + Shareholders Equity

Or
Assets = Liabilities + (Contributed Capital + Retained
Earnings – Dividends + Revenue – Expenses )

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 Debit and Credit Rules

Assets, Liabilities,
Effect Expenses Equity,
Revenues

Debit Credit

Credit Debit

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 Accounting Process
 The Journalising
Chronological record
General journal and special journals
Ledger posting and balancing
Account wise synthesis of primary records and determination of
accumulated balance
Trial Balance
arranging the ledger account with debit and credit balances
Final Accounts
This phase is meant for finalisation of accounts by way of
measurement of profit and loss for an accounting period and
assets and liability at the end of accounting period

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 Steps in Formation of Accounting
Records

Identify Analyze and Recording

Transaction Classify the in Journal
Transaction

Transfer Ledger
Entries Posting

Financial Adjustment Preparing

Statements Entries Worksheet
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Application of Ground Rules
ABC Ltd bought an equipment for Rs. 500,000 in cash.

• There are two elements: Equipment (Asset)

• Cash (Asset).
• One asset (Equipment) increases ↑ and the other asset
(Cash) decreases ↓.

• Applying ground rules:

• Equipment Debit Rs.500,000
• Cash Credit Rs. 500,000
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ABC Ltd. purchased raw materials for immediate
consumption worth Rs. 200,000 paying 50% in cash and
balance payable after one month.
• Three elements: Purchase of raw materials (Expenses)
Cash (Asset)
Payables to suppliers (Liability)
• Expenses are incurred ↑, cash (Asset) depletes ↓, and
Suppliers’ Credit (Liabilities) increases ↓.
• Applying ground rules:
• Purchases Debit Rs. 200,000
• Cash Credit Rs. 100,000
• Creditors Credit Rs. 100,000
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Mr. A invested Rs. 50,000 in ABC Ltd and
received 5000 shares of Rs. 10 each
• There are two elements: Cash (Assets)
Equity
• One asset (Cash) increases ↑ and the other
Equity increases ↓.

• Applying ground rules:

• Cash Debit Rs.50,000
• Equity Credit Rs. 50,000
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Cash sales of Rs. 100,000
• Two elements- Cash (Asset)
Sales (Income)
• Cash (Asset) increases ↑ and Sales (Income) increases
↓.
• Applying ground rules:
• Cash Debit Rs. 100,000
• Sales Credit Rs. 100,000

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Repayment of Loan of Rs. 150,000
• The two elements are: Loan (Liability)
and
• Cash (Asset)
• Loan (Liability) has decreased ↑ and Cash (Asset)
has also decreased ↓.
• Applying ground rules:
• Loan Debit Rs. 150,000
• Cash Credit Rs. 150,000
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Sold goods worth Rs. 10,00,000 on credit.
• The two elements : sales (income)
receivables from customer
(Asset).
• Income (sales) increases ↓ and Asset (Debtors) also
increases ↑.
• Applying ground rules:
• Debtors Debit Rs. 10,00,000
• Sales Credit Rs. 10,00,000

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 Continuing with Example previous one,the customer has
paid Rs. 9,90,000 in full and final settlement of her dues.
• The elements : receivables from customer (Asset)
cash (Asset)
discount allowed (expense)
• One asset (receivables from customer) decreases ↓, another
asset (cash) increases ↑ and an expense (discount allowed)
has been incurred ↑.
• Applying ground rules:
• Cash Debit Rs. 9,90,000
• Discount Allowed Debit Rs. 10,000
• Debtors Credit Rs. 10,00,000

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 Analyse the following transaction
• Ms. Usha invests cash in business
• Furniture purchased
• Purchased merchandise on credit from Ms. Asha
• Purchased merchandise in cash
• Paid wages
• Paid Carriage
• Took loan from bank
• Made sales on credit to Ms. Vandna
• Made cash sale
• Paid cash to Ms. Asha
• Collected cash from Ms. Vandna
• Deposited cash into bank
• Withdrew cash from personal use
• Paid interest on loan
• Paid instalment of bank loan
• Paid advance to supplier
• Received advance from customer
• Withdrew money from bank

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 Purchases Day Profit &
Book Loss A/c

s es
c ha
ur tu rn Purchases
tP Re
di
Return Book
s
e se
Cr rch
a
P u
les Sales Day
Sa Ledger Trial
Credit Book
Accounts Balance
Transactions
and Events Sales R
Ca eturn
sh,
Ba Sales Return
nk Book
&D
isc
ou n
Ot t Balance
he Cash Book Sheet
rs

Journal Proper

Other End of
Rectification of
Bank Accounting Period
Error
Reconciliation Adjustments

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Two steps in Journalisation

• First Step:
Understanding transaction and events
Observing dual effect
Identification of Debit and credit
• Step Two
Recording date
Recording accounts
Giving reference to evidence of occurrence
Mentioning account of transaction or events
Narrating the transaction

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 Types of Journal

There are following types of journal books:

• Purchases Day Book
It records credit purchase of raw materials, and traded
goods
• Sales Day Book
It records credit sale of goods.
• Return Outward (also called Purchases Return) Book
It records goods returned to the supplier (s) of raw
materials and traded goods.
• Return Inward (also called Sales Return) Book
It records goods returned by customers.
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Types of Journal

• Cash Book
It records all cash (and bank) transactions: receipts and
payments.
• Journal Proper
It records all residual transactions i.e., transactions which
do not find place in any of the other journal books.

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Secondary Books

 Secondary books record transactions in a classified

manner to derive meaningful information.
 It is ‘secondary’ because transactions are re-
recorded in these books from the Primary Books.
 A secondary book is also called a ‘Ledger’.
 When an entry from the Journal is re-recorded in
Ledger, it is called “posting”.

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Types of Secondary Books
Secondary Books

General Ledger Subsidiary Ledger

Debtors Ledger Creditors Ledger

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 Account Format
An account in the ledger has the following format:

Dr. Ledger Account Cr.

Date Particulars JF Amount Date Particulars JF Amount

Where,
Dr. stands for Debit and Cr. Stands for Credit
JF stands for Journal Folio
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Postings in the Ledger
• A ledger is a book of accounts.
• In Primary Books the financial elements (i.e., account
heads) of each transaction are identified and
appropriately recorded.
• To post an entry from Journal to Ledger, follow these
steps:
• Identify the account heads;
• Observe which account (s) is debited and which is credited;
• Trace the concerned accounts in the Ledger;
• Post the entry to the debit side of the account (which is debited)
and credit side of another account (which is credited)

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Examples
Example 1: Sold goods worth Rs. 10,00,000
on credit on 6th March’08.
• Applying ground rules, the journal entry
was:
• Debtors Debit Rs. 10,00,000
• Sales Credit Rs. 10,00,000
• there are two account heads in the above
entry- Debtors and Sales.
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 D r. D e b to rs A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . T o , S a le s ? 1 0 ,0 0 ,0 0 0
2006 A /C

D r. S a le s A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . B y , D e b to rs A /C ? 1 0 ,0 0 ,0 0 0
2006
A/C stands for Account.
Notice that the entry is posted on the debit side of Debtors
Account and simultaneously on the credit side of Sales Account.
JF refers to the page number of the journal where the particular
transaction is recorded.
Use of ‘To’ (on the debit side) and ‘By’ (on the credit side) is
customary.
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Examples
• Continuing with Example 1,the customer has paid Rs.
9,90,000 in full and final settlement of her dues on 3rd
April’08.
• Applying ground rules, the journal entry was:
• Cash Debit Rs. 9,90,000
• Discount Allowed Debit Rs. 10,000
• Debtors Credit Rs. 10,00,000

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D r. D e b to rs A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . T o , S a le s ? 1 0 ,0 0 ,0 0 0 3 .4 . B y , C a s h A /C ? 9 ,9 0 ,0 0 0
2006 A /C 2006 B y , D is c o u n t
1 0 ,0 0 0
A llo w e d A /C

D r. C ash A ccoun t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
3 .4 . T o , D e b to rs ? 9 ,9 0 ,0 0 0
2006 A /C

D r. D is c o u n t A llo w e d A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
3 .4 . T o , D e b to rs ? 1 0 ,0 0 0
2006 A /C

The Debtors Account has records of both the entries . Note that the
Debtors Account now has no balance left.
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 Balancing of Ledger
• Balancing is the determination of
accumulated total of ledger accounts at a
given point of time. It is either total of
debits for a given time over total of credits
or total credits of a given time over total
debits.

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 Closing (or balancing) a Ledger
Account
D r. D e b to rs A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
6 .3 . T o , S a le s ? 1 0 ,0 0 ,0 0 0 3 .4 . B y, C a s h A /C ? 9 ,9 0 ,0 0 0
2006 A /C 2006 B y , D is c o u n t
1 0 ,0 0 0
A llo w e d A /C
TO TA L 1 0 ,0 0 ,0 0 0 TO TA L 1 0 ,0 0 ,0 0 0
D r. C ash A ccount C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
3 .4 . T o , D e b to rs ? 9 ,9 0 ,0 0 0 B y , B a la n c e c /d ? 9 ,9 0 ,0 0 0
2006 A /C
TO TA L 9 ,9 0 ,0 0 0 TO TA L 9 ,9 0 ,0 0 0

D r. D is c o u n t A llo w e d A c c o u n t C r.
D a te P a r tic u la r s JF Am ount D a te P a r tic u la r s JF Am ount
3 .4 . T o , D e b to rs ? 1 0 ,0 0 0 B y , B a la n c e c /d ? 1 0 ,0 0 0
2006 A /C
TO TA L 1 0 ,0 0 0 TO TA L 1 0 ,0 0 0

A ledger account has to be closed (balanced) at the end of the accounting

period.
Balance c/d refers to balance carried down to the next period. In the next
accounting period, the same account will start with the opening balance
brought down (b/d) from the previous period. 42
 Trial Balance

Debits = Credits

Trial balance is not an accounting record

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 Purpose of Trial Balance
• To check the airthmetic accuracy of ledger
balances
• To finalise the Accounts easily
• To ensure that Balance sheet will tally

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 Advantage of Trial Balance
• This helps to detect error
• Helps to identify income, expenses, assets
and liability
• It is basis of preparation of Final Accounts

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