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[XI – Accountancy] 20 Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4# 2nd Proof. CHAPTER-3 RECORDING OF TRANSACTIONS Learning Objectives After studying this chapter, you will be able to :  Explain how to Prepare accounting vouchers.  Apply accounting equation to explain the effect of transactions.  Record transactions using rules of debit and credit.  Record transactions in journal and other subsidiary books. Suggested Method : Discussion method, Illustration method, Problem solving method etc. ACCOUNTING EQUATION An accounting equation is based on the dual concept of accounting, according to which, every transaction has two aspects debit and credit. It hold that for every debit there is a credit of equal amount and vice versa. The total assets of the business firm are financed through the funds raised from either the outsiders or the owners. Outsiders generally consist of creditors and lenders. Thus, at any point of time, the total assets of a business are equal to its total liabilities. Liabilities to outsiders are known as liabilities but liability to the owners, in accounting parlance, is referred to as Capital. The relationship between assets, liabilities and the capital can be expressed in the form of an accounting equation as follows: Assets = Capital + Liabilities
21 [XI – Accountancy] Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4 # 2nd Proof. Assets and Liabilities are two independent variables and Capital is the dependent variable, it is the difference between assets and liabilities. A transaction may affect either both sides of the equation by the same amount or on one side of the equation only, by both increasing or decreasing it by equal amounts. The accounting equation captures the essence of the business entity concept i.e. the business entity is considered separate and distinct from the owners. The accounting equation Assets = Capital + Liabilities holds good only when we assume that the business unit is a separate entity. Analysis of Business Transactions 1. Transactions affecting both sides of the equation A. Commenced business with Cash Rs. 2,00,000. This transaction will affect the assets as the firm is receiving asset in the form of Cash and the owner of the business has invested amount, this will affect the Capital of the business. ASSETS = CAPITAL + LIABILITIES Cash Transaction 2,00,000 = 2,00,000 + 0 B. Bought goods from Rs. 25,000. This transaction will affect both assets as well as liabilities of the business. The goods and Creditors are increasing. ASSETS = CAPITAL + LIABILITIES Cash Goods Creditors Old Equation 2,00,000 = 2,00,000 + 0 Transactions 0 + 25,000 0 + 25,000 New Eq. 2,00,000 + 25,000 = 2,00,000 + 25,000 2. Transactions affecting only assets side of the equation: A. Bought goods for Cash Rs. 35,000
[XI – Accountancy] 22 Twinkle Graphics#Laxmi Printers-2013 #Accounts-3-4# 2nd Proof. This transaction will affect the Cash and Goods by Rs. 35,000. The firm is paying the money resulting in decrease of Cash. Goods are increasing. ASSETS = CAPITAL + LIABILITIES Cash Goods Creditors Old Equation 2,00,000 + 25,000 = 2,00,000 + 25,000 Transaction - 35,000 + 35,000 0 + 0 New Eq. 1,65,000 + 60,000 = 2,00,000 + 25,000 B. Bought Furniture for cash Rs. 50,000 This transaction has brought about two changes in the assets side only. One asset i.e. Cash is decreasing and other asset i.e. Furniture is increasing. ASSETS = CAPITAL + LIABILITIES Cash Goods Furniture Creditors Old Equation 1,65,000 + 60,000 = 2,00,000 + 25,000 Transaction - 50,000 + 0 + 50,000 0 + 0 New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000 3. Transactions affecting only liabilities side of the equation. A. Accepted a bill drawn by Ram for Rs. 25,000 for 3 months. This transaction will affect Creditors and Bills Payable. As one liability i.e. Creditors is decreasing and other liability i.e. Bills payable is increasing. ASSETS = CAPITAL + LIABILITIES Cash Goods Furniture Creditors + B/P Old Equation 1,15,000 + 60,000 + 50,000 = 2,00,000 + 25,000 Transaction 0 + 0 + 0 = – 2,50,000 – 25,000 + 25,000 New Eq. 1,15,000 + 60,000 + 50,000 = 2,00,000 + 0 + 25,000 4. Transaction affecting the Capital only A. Interest on Capital provided Rs. 2,000 ASSETS = CAPITAL + LIABILITIES