Unit 2, Recording of Transactions

A. Introduction

Accounting records are made for transactions only. This unit is related with recording of those business transactions. It includes the preparation of   Journal, ledger and sub-division of journal. This unit also gives the knowledge of the different basic accounting terminologies.

B. Objectives

The objective of the unit is to help the student to understand the ways of recording and posting the transactions. After studying this unit, the students would be able to:

(i) Define the different accounting terminologies. (ii) Know various rules for debit and credit.

(iii) Make entries in the journal. (iv) Understand the meaning, importance's and objectives of ledger.

(v) Learn posting technique in ledger. (vi) Illustrate and balancing ledger.

(vii) Describe the concept of different subsidiary books.

(viii) Prepare various subsidiary books and posting them into ledgers.

C. Specification of Conduct Area of the Unit.

The total teaching hours allocated for this unit as per syllabus is 18 hours. The total hours can be sub-divided in the following way. However, the teacher can arrange the sub-division of hours as per his/her convenient.

Serial Number	Areas of Units	Teaching Hours
2.1	Basic terminologies	1
2.2	Rules of debit and credit	2
2.3	Books of original entry	2
2.4	Ledger account	6
2.5	Subsidiary books and its types	6
Total		18

2.1. Books of Original Entry

2.1.1. Meaning of Journal

Journal is the book of prime or original entry, in which all financial transactions of business are systematically recorded according to their date of occurrence and is maintained with a view to help to prepare the subsequent book of records known as ledger. A transaction is recorded for the first time in this book and hence, it is also known as "Books of Original Entry

Journal Entries

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
	Debit Account Credit Account Narration

1.      Date: Date of financial transaction in chronological order.

2.      Particulars:  Name of account to be debited and credited along with a brief description of transaction which is called ‘Narration’.

§  Name of the account to be debited is written in first line. The word ‘Dr’ is written after the account name.

§  Name of the account to be credited preceded by the word ‘To’ is written leaving a few spaces away in the next line.

§  A brief explanation about the transaction known as narration is parenthesized by the bracket starting with ‘For’ or ‘Being’ in third line.

3.      Ledger Folio (LF): Page number of ledger book in which the particular account is located (or where the entries are posted).

4.      Debit Amount (Rs.): Amount to be debited against the Dr. Account

5.      Credit Amount (Rs.): Amount to be credited against the Cr. Account

2.1.2. Meaning and Steps in Journalizing

Journalizing is a process o systematic recording of financial transaction in the book of prime or original entry in a chronological order. The following steps are taken while journalizing in the journal book:

1.      To identify the two aspect of the transactions.

2.      To identify the appropriate account for the two aspects of the transaction.

3.      To debit and credit account relevant to the transaction by using rules of debit and credit.

4.      To write the entry in the journal in chronological order such an entry is called Journal Entry.

Note: At the end of each page the total debit and credit are mad which must be equal each other. The total was carried forward to the next page. For this, carried forward or C/F is written in particular column at the end of each page. The same should be brought in next page and brought forward or B/F is written at the beginning of the next page.

@.Journalising is a process of recording of transactions in Journal. The various steps in Journalising are given below:

Step 1:	Ascertain what accounts are involved in a transaction.
Step 2:	Identifying what types of accounts are involved.
Step 3:	Think about the rule of debit and credit applicable for each of the     accounts involved and ascertain which account is to be debited and which is to be credited.
Step 4:	Record the date of transaction in the 'date' column and write the name of account to be debited and credited in the particular column along with their related amounts.
Step 5:	Write brief description of transaction within bracket in the next line in the particular column

2.2. Rules for Journalizing / Rules for Debit and Credit

Under the double entry system, every financial transaction of business has a double effects i.e. each transaction involves at least two accounts. One aspect of financial transaction is debited in an account and other credited in other account. The debiting and crediting of account are done on the basis of certain rules. These rules are called rules of journalizing i.e. debit and credit. The following two approaches can be applied as the rule for debit and credit.

1.      On the basis of types of account.

2.      On the basis of accounting equation (i.e. change in Assets, capital and Liabilities)

2.2.1. On the Basis of Types of Account:

This approach is also known as ‘English Approach’ or ‘Traditional Approach’. Under this approach, an account is classified into three types i.e. personal account, real account and nominal account.  For each of these types of accounts, there are three separate rules of debiting and crediting the financial transaction.

	Types of Account
			Ã		Ä
Types F	1.      Personal Account					2.      Impersonal Account
	ê				Ã	Ä
			2.1	Real Account	2.2	Nominal Account
				ê		ê
Rules F	Dr. Receiver			Dr. What Comes In		Dr. All Expenses & Losses
	Cr. Giver			Cr. What Goes Out		Cr. All Income & Gain

1.       Personal Account:

Personal account is the record of a person. A person may be a natural person [Ram, Sita, Rajan,Rupa etc. like us], artificial person or legal person [Lincoln College, Nepal Bank Limited, Golchha Organization etc.-firms ,institution] and representative person [Debtors, Creditors, Capital etc.]. It can be receiver of benefits or giver of benefit. The rule of debiting and crediting the account of person is as follows:

F   Debit the receiver of benefits and, Credit the giver of benefits

2.      Real Account:

 Real account is a record of an asset. It can either come in the business through its purchase or goes out from the business through its sale. The rule of debiting and crediting the real account is as follows:

F   Debit what comes in and, Credit what goes out

3.      Nominal Account:  

Nominal accounts are also known as fictitious account. Nominal account is a record of expense or losses and income or gain. An expense or loss is the sacrifices of benefit in exchange for services used and income or gain is the benefit earned in exchange of services render. The rule of debiting and crediting the nominal account is as follows:

F   Debit all expenses and losses and, Credit all income and gain.