NCERT Solutions for Class 11 Accountancy Chapter 3 Recording of Transactions 1

Question 1: State the three fundamental steps in the accounting process.

Answer: The three fundamental steps in the process of accounting are:

• Collection of data – The first step requires the collection of the data in the form of collecting data of financial transactions in a particular month in the form of all the vouchers and the bills.

• Processing of data – After the process of identification of the transactions is complete, the process of accounting requires the due recording of these very transactions in the book of accounts. Hence the accountants are expected to journalize these transactions, classify them into the respective ledger accounts, and to summarise them through Trial Balance.

• Reporting – After when all the accounts are tallied, the trial balance of the financial statements is prepared. A financial statement is the Profit and loss account and Balance sheet. These reports are made available to users. Once the financial statement for a period is reported it is said to be the completion of the cycle. A new accounting cycle begins thereafter. Previous year closing balances become the opening balance for the current cycle.

Question 2: Why is the evidence provided by the source document important to accounting? 

Answer: The evidence provided by the source document is important because the source document is the initial document that contains the details of the transactions that have taken place in the business. Thus the source document is important for any organisation as:

• It confirms the transactions that have taken place in the organisation.

• It provides valid evidence of the transaction in the cases when the dispute may likely arise and the matters are taken to court.

• It contains all the relevant details of the transactions such as the date of the transaction, the amount involved in the transaction, parties involved in the transaction, particulars of the transaction, etc.

• It acts as a check during the process of auditing.

Question 3: Should a transaction be first recorded in a journal or ledger? Why? 

Answer: All the transactions should be recorded in the journal first and then in the ledger. Journal entries of all the transactions have to be passed as and when they occur in chronological order in the course of the business and for this very reason the journal book is also referred to as a day book. Journal is also referred to as the book of the original entry as it encompasses all the details of the transactions such as the date of the transactions, the parties involved, and the amount of the transactions which is directly made from the source documents. The postings in the ledger account are made after when the entries are made in the journal book. Journal is the first book in which the transactions are recorded from the source documents Journal gives complete details about a transaction.

Question 4: Are debits or credits listed first in journal entries? Are debits or credits indented?

Answer: Accounting follows the double entry system as in which there are two sides namely,Debit‟ and „Credit‟. In the journal entries, the column of „Debit Amount‟ comes prior to the column of Credit Amount‟. Thus the side which is indented and posted lately is the credit side.

The format of the journal entry is as follows:

Question 5: Why are some accounting systems called double accounting systems?

Answer: The double accounting system refers to the system of accounting in which the transaction is recorded in the two sides of the account, namely Debit and Credit. Under the double entry system of accounting, the effect made on the one side of the account is made in simultaneous manner to the other side of the account. This is hence the widely recognized system of accounting which systematically records the transactions and gives the actual financial position of the business. The other method of accounting is the single entry system in which the transactions are recorded in the single side of the account only.

Question 6: Give a specimen of an account.

Account

Question 7: Why are the rules of debit and credit the same for both liability and capital? 

Answer: As per the business entity concept, a business is considered to be a legal entity that has its existence which is apart from the existence of the owner. Any business has a number of sources to fund itself which can be both internal as well as external. The amount invested by the owner of the business is known as capital which is hence regarded to be the internal source of the business fund. Thus the amount invested by the owner of the business is a liability for the business as it is liable to repay the invested amount back in the case when the business is about to close. In a similar manner, the amount withdrawn by the owner of the business and the net loss incurred by the business is debited from the capital as it reduces the liability of the business. Hence, the treatment given to the creditor of the business is the same treatment given to the owner of the business, and hence rules of the debit and credit are the same for both liability and capital.

Question 8: 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 Journal Folio numbers are used as a reference to denote the page numbers of the journal entry book in which the particular transactions are recorded. This hence allows the users to directly take the reference of the transaction in the journal entry book from the ledger account. This hence allows the users to track the information correspondingly and verify the details of the transactions correspondingly from the book of journal entries. 

Question 9: What entry (debit or credit) would you make to: 

(a) increase revenue 

(b) decrease in expenses, 

(c) record drawings 

(d) record the fresh capital introduced by the owner. 

Answer: 

(a) Increase in Revenue: For this case, Income / Gain should be credited as it increases the revenue of the business making the rise in the amount of the capital. 

(b) Decrease in expense: The expenses are usually debited in the books of account. But in this case the expenses are decreasing implying that reverse treatment should be given and hence the expenses have to be credited.

(c) Record drawings: Drawings refer to the withdrawal of a certain amount from the amount capital which thereby reduces the amount of the capital. Hence this should be debited in the books of accounts.

(d) Record the fresh capital introduced: Whenever the fresh capital is reduced in the business it must be credited as it increases the liability of the business by giving the rise of the capital in the business. 

Question 10: 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: The purchase of the asset is recorded as the debit in the books of account and hence the effects which cause the decrease in the value of the asset will be credited in the books of account. For example, the sale of the asset of the business causes a decrease in the value of the asset and hence such a sale will be credited. The decrease in the liabilities of the business is debited in the books of accounts as the liabilities are recorded on the credit side of the book. For example, the drawings made by the owner of the business decrease the liability of the capital invested by the organisation and hence such transactions will be shown on the debit side. 

Question 11: Describe the events recorded in the accounting system and the importance of source documents in those systems.

Answer: Any business goes through a large number of voluminous transactions on a day-to-day basis and hence is not possible for anyone to remember the details of the transactions. Thus the accounting system allows the organisation to record the transactions and keep track of them. These transactions are made based on the source documents which are used as support documents to account and record the transactions.

Only the monetary events are recorded in the books of accounts with the help of supporting documents. These transactions include:

• Credit sales are recorded using invoices.

• Purchases are recorded using a bill/invoice.

• Cash Sale recorded using Cash memo.

• Bank deposits made and recorded using bank pay-in-slips

• Expenses paid through the bank supported by cheques.

• Purchase returns and Sales returns are recorded using debit notes and credit notes respectively.

The importance of the source document in accounting is as follows:

• It confirms the occurrence of the transactions which have taken place.

• It is valid evidence which can be presented during court proceedings in case of any kind of disputes related to the transaction.

• It contains the necessary details of the transactions such as the parties involved, the amount involved, the date of the transaction, particulars of the transaction, etc.

• It acts as a check during the process of auditing.

Question 12: Describe how debits and credits are used to analyse transactions.

 Answer: As per the dual concept of accounting all the re coded transactions in the books of accounts have two aspects – debit and credit. With the effect on the aspect of the transaction, there is a simultaneous and corresponding effect on the other side of the account. An example of such a transaction is as follows:

A business sells goods worth Rs. 500 on the 1st April 2018. Thus the books of account will debit the cash received from such transaction and credit the sales simultaneously in this transaction. In this example, there is the sale of the goods that the business deals with cash coming into the business. There are three kinds of accounts in accountancy which are:

• Personal accounts – These are the accounts that deal with persons. The rule of the personal account is that the receiver must be debited and the giver must be credited. Example: Bank A/c represents a bank, an organisation. The capital account represents the proprietor‟s account, Saradha A/c represents a person's account etc.  

• Real Account - These are accounts that deal with assets of a material nature. The rule for the real account is to Debit what comes in and credit what goes out. Example: Furniture A/c, Machinery, Goodwill A/c etc.  

• Nominal accounts - These are the accounts that deal with all kinds of expenses/ incomes. The rule of accounting for the real account is: Debit is all the expenses/ losses and all income/gains should be credited. Example: Salary A/c, Telephone charges A/c, Interest earned etc.

Question 13: Describe how accounts are used to record information about the effects of transactions. 

Answer: The journal entry gives a clear picture of particular transactions but it is difficult to assess information about any particular account when there is a chain of transactions related to it. Hence in such a case, the ledger accounts become important as they maintain systematic accounts in tabular format which helps the user to determine the details of the transaction for the particular account. This can be better understood with an example.

01.01.17- Credit Sale is made to Ram for Rs.10000 05.01.17- Goods worth Rs.2000 is returned from Ram 08.01.17- Cheque received Rs.5000 on account from Ram 10.01.17- Cash received Rs.1000 on account from Ram Now this is posted in Journal on various dates. A clear picture can be seen only when the entries are posted in the ledger account of Ram. The balance amount receivable from Ram is clearly shown in the ledger below.

Ram Account

 Question 14: What is a journal? Give a specimen of a journal showing at least five entries.

Answer: Journal is derived from the French word “Jour”, the meaning of which is “daily records”. Journal thus records the day-to-day transactions of the business chronologically and hence is also called the “Day Book”. The format of the journal is given below. 

The format of the journal is shown below:

Date: The date of the transaction in which the transaction has occurred so that journal could be made and maintained in a chronological manner from the source document. Particulars: The accounts which have to be debited/ credited.  

Journal Entries in the Books of Gita:

Question 15: Differentiate between source documents and vouchers. 

Answer:

Question 16: The accounting equation remains intact under all circumstances. Justify the Statement with the help of the example.

Answer: The double-entry accounting system states that for every debit there is an equal amount of credit. However, there is unlikely to be the equality of the total assets with the total claims of the  business and the accounting equation will persist to be Assets  = Liabilities Capital. Hence this equation will remain intact under all the circumstances. The examples for the same are as follows: 

1. Mr. A started a business with cash Rs.100000 

 Assets = Liabilities Capital 

Cash increases by 100000  

And Capital 100000 

100000 = 0+100000 

2. Purchased goods on credit for Rs.30000 

Assets (Inventory) =30000 

Creditors = 30000 

Assets = Liabilities +Capital 

30000= 30000+0

Question 17: Explain the double-entry mechanism with an illustrative example. 

Answer:

As per the double entry system of accounting, every transaction has two aspects: debit and credit. Hence the double-entry accounting system states that for every debit there is an equal amount of credit. Thus the ledger account always shows the debit on one side and the credit on the other side to abide by the dual aspect concept.

The three golden rules of accounting must be known in passing an entry: 

1. Personal Account- Debit the receiver Credit the giver 

2. Real Account - Debit what comes in Credit what goes out 

3. Nominal accounts- Debit the expenses/ losses Credit the income / gain 

Illustrative example: 

Mr. Shyam commenced business with Cash Rs. 200000 and building Rs.150000.

 Analysis: 

In the above transaction in-hand Cash comes in Rs. 200000 and building comes in Rs. 150000. On the other hand liability to be paid to the proprietor i.e. Capital increase is Rs. 350000.

Journal Entry in the books of Shyam

Question 18: Prepare an accounting equation based on the following:

(a) Harsha started the business with cash of Rs 2,00,000

(b) Purchased goods from Naman for cash Rs 40,000

(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000 

(d) Bought furniture on credit Rs 7,000 

Answer:

Accounting Equation: Assets = Capital + Liabilities

The solution is as follows:

Question 19: Prepare an accounting equation from the following: Rs

(a) Kunal started the business with cash of 2,50,000 

(b) He purchased furniture for cash 

(c) He paid a commission 

(d) He purchases goods on credit 

(e) He sold goods (costing Rs 20,000) for cash 35,000 2,000 40,000 26,000

Question 20: Mohit has the following transactions, prepare accounting equation: 

Question 21: Rohit has the following transactions:

Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital. 

Answer:

Question 22: Use accounting equation to show the effect of the following transactions of M/s Royal Traders:

Answer:

Question 23: Show the accounting equation on the basis of the following transaction: 

Answer: