CBSE Class 11 Accountancy Chapter 3 Notes: Recording of Transactions I

Chapter Overview

Recording of Transactions I is the third and one of the most important chapters of CBSE Class 11 Accountancy. This is where you learn the practical core of the subject — how to record business transactions in the books of accounts. The chapter covers source documents, accounting vouchers, rules of debit and credit, and the journal. Mastering journal entries is absolutely essential because every subsequent chapter (ledger, trial balance, financial statements) depends on correctly recorded journal entries. This chapter carries significant weight in the exam, both theory (source documents, voucher types, debit-credit rules) and practical (journal entries).

Source Documents

Meaning

A source document is a written document that provides evidence that a business transaction has taken place. It is the starting point of the accounting process. No entry should be recorded in the books of accounts without a proper source document. Source documents serve as legal evidence and are the basis for preparing accounting vouchers.

Importance of Source Documents

• Provide evidence that a transaction has occurred.
• Serve as the basis for recording entries in the books.
• Act as legal proof in case of disputes.
• Help in audit and verification by auditors.
• Enable detection and prevention of fraud.
• Support the computation of tax liability.

Types of Source Documents

1. Invoice (Bill)

An invoice is a document prepared by the seller when goods are sold on credit. It contains details like the name of the buyer, description of goods, quantity, rate, total amount, and terms of payment. The original copy goes to the buyer, and the duplicate is retained by the seller.

• Sales Invoice: Prepared by the seller — evidence of credit sales for the seller.
• Purchase Invoice: The same invoice received by the buyer — evidence of credit purchases for the buyer.

2. Receipt

A receipt is a document issued when cash is received. It is an acknowledgement of payment received. It contains the date, amount received, name of the payer, and the reason for payment. The original is given to the payer, and the duplicate is kept by the receiver.

3. Cheque

A cheque is a written order by the account holder directing the bank to pay a specified sum to the person named in the cheque. It is used for making payments without handling cash. Types of cheques:

• Bearer Cheque: Payable to whoever presents it.
• Order Cheque: Payable only to the person named in the cheque.
• Crossed Cheque: Cannot be encashed at the counter; must be deposited in a bank account.

4. Debit Note

A debit note is a document sent by the buyer to the seller when goods are returned (purchase return) or when the buyer is to be charged an additional amount. It informs the seller that the buyer's account has been debited in the seller's books. It is also called a purchase return note.

5. Credit Note

A credit note is a document sent by the seller to the buyer when goods are returned by the buyer (sales return) or when the seller allows a reduction. It informs the buyer that the seller's account has been credited in the buyer's books. It is also called a sales return note.

6. Cash Memo

A cash memo is a document prepared by the seller when goods are sold for cash. It is similar to an invoice but is used for cash transactions. It serves as proof of cash purchase for the buyer and cash sale for the seller.

7. Pay-in-Slip

A pay-in-slip is a form used when depositing cash or cheques into a bank account. It contains the account number, name of the account holder, amount deposited, and date. The bank stamps and returns the counterfoil as proof of deposit.

8. Voucher (as Source Document)

While a voucher is technically an accounting document prepared on the basis of source documents, in small businesses, the source document itself may serve as a voucher after being stamped and authorised.

Accounting Vouchers

Meaning

An accounting voucher is a written document that authorises the recording of a transaction in the books of accounts. It is prepared on the basis of source documents. Every voucher must be authorised (signed) by a competent person before the transaction is recorded.

Contents of an Accounting Voucher

A standard voucher contains the following information:

• Name of the issuing organisation
• Voucher number (serial)
• Date of the transaction
• Account(s) to be debited and credited
• Amount (in figures and words)
• Narration (brief description of the transaction)
• Signature of the person preparing the voucher
• Signature of the authorising person
• Supporting source document reference

Types of Accounting Vouchers

1. Debit Voucher

Prepared when a payment is made (cash goes out). It supports entries where the cash account is credited. Examples: payment of rent, payment to creditors, purchase of goods for cash.

2. Credit Voucher

Prepared when cash is received (cash comes in). It supports entries where the cash account is debited. Examples: receipt from debtors, cash sales, interest received.

3. Transfer Voucher (Journal Voucher)

Prepared for transactions that do not involve cash (non-cash or transfer transactions). Examples: credit purchase of goods, credit sale of goods, depreciation, provision for doubtful debts.

4. Compound Voucher

Prepared when a transaction involves more than one debit or more than one credit (but total debits equal total credits). Examples: salary paid by cheque with TDS deducted, purchase of machinery with installation charges.

Preparation of Vouchers

The process of preparing a voucher involves:

1. Receive the source document (invoice, receipt, cheque, etc.). 2. Verify the source document — check date, amount, signature, and authenticity. 3. Record the transaction details in the voucher. 4. Determine which account(s) to debit and which to credit. 5. Write the narration. 6. Get the voucher authorised by the competent person. 7. Record the transaction in the journal on the basis of the authorised voucher. 8. File the voucher and the supporting source document for future reference.

Rules of Debit and Credit

The double-entry system requires that every transaction affects at least two accounts — one is debited and another is credited by an equal amount. But how do you decide which account to debit and which to credit? The rules depend on the type of account.

Classification of Accounts

All accounts fall into three categories:

1. Personal Accounts

Accounts relating to persons (natural or artificial). Examples: Ram's Account, ABC Company Account, Bank Account, Capital Account, Drawings Account.

Rule: Debit the receiver, Credit the giver.

• When a person receives something from the business, his account is debited.
• When a person gives something to the business, his account is credited.

Examples:

• Ram pays Rs 5,000 to the business → Cash A/c Dr., Ram A/c Cr. (Ram is the giver, so his account is credited)
• Business pays Rs 3,000 to Shyam → Shyam A/c Dr., Cash A/c Cr. (Shyam is the receiver, so his account is debited)

2. Real Accounts

Accounts relating to assets (tangible or intangible). Examples: Cash Account, Machinery Account, Building Account, Furniture Account, Goodwill Account, Patent Account.

Rule: Debit what comes in, Credit what goes out.

• When an asset comes into the business, its account is debited.
• When an asset goes out of the business, its account is credited.

Examples:

• Furniture purchased for Rs 10,000 → Furniture A/c Dr., Cash A/c Cr. (Furniture comes in, so debited; Cash goes out, so credited)
• Cash received from debtor → Cash A/c Dr., Debtor A/c Cr. (Cash comes in, so debited; the debtor's claim goes out, so credited)

3. Nominal Accounts

Accounts relating to expenses, losses, incomes, and gains. Examples: Salary Account, Rent Account, Interest Account, Commission Account, Discount Account.

Rule: Debit all expenses and losses, Credit all incomes and gains.

• When an expense or loss occurs, the account is debited.
• When an income or gain occurs, the account is credited.

Examples:

• Rent paid Rs 5,000 → Rent A/c Dr., Cash A/c Cr. (Rent is an expense, so debited)
• Interest received Rs 2,000 → Cash A/c Dr., Interest A/c Cr. (Interest is an income, so credited)

Summary Table: Rules of Debit and Credit

Tips for Identifying Account Types

• Ask "Who?" → Personal account (Ram, Shyam, Bank, Capital)
• Ask "What thing?" → Real account (Cash, Machinery, Building)
• Ask "Why?" → Nominal account (Rent, Salary, Commission, Interest)

Golden Rules Table with Examples

The Journal

Meaning

The journal is the book of original entry (book of prime entry) where every business transaction is recorded in chronological order (date-wise). It is the first place where transactions are recorded after being identified and measured.

Format of a Journal

The standard journal format has five columns:

Particulars column: The account to be debited is written first, starting from the left margin. Below it, the account to be credited is written with the prefix "To" and indented to the right. Below the credit account, a brief narration is written in brackets.

L/F (Ledger Folio): The page number of the ledger where the account is posted. This is filled later when the entry is posted to the ledger.

Narration: A brief explanation of the transaction, written in brackets after the credit entry. It helps in understanding the nature and purpose of the transaction.

Journalising Process

The steps for recording a transaction in the journal are:

1. Identify the transaction from the source document. 2. Determine which accounts are affected. 3. Classify the accounts as Personal, Real, or Nominal. 4. Apply the rules of debit and credit. 5. Write the entry in the journal in the proper format. 6. Write a brief narration.

Compound Journal Entry

When a transaction involves more than one debit or more than one credit, a compound entry can be passed instead of separate entries. The total of debits must equal the total of credits.

Example: Paid salary Rs 10,000 and rent Rs 5,000 by cash.

Opening Entry

At the beginning of a new accounting year, the opening balances of all assets and liabilities are recorded through an opening entry. The rule is:

All assets are debited, all liabilities are credited, and the difference is credited to the Capital Account.

Example: Opening balances — Cash Rs 50,000, Stock Rs 30,000, Debtors Rs 20,000, Furniture Rs 10,000, Creditors Rs 15,000, Bank Loan Rs 25,000.

Capital = Total Assets - Total Liabilities = 1,10,000 - 40,000 = 70,000.

Illustrative Journal Entries

Here are the most common types of journal entries you will encounter in CBSE exams. Study the format carefully.

1. Commencement of Business

Raj started business with cash Rs 2,00,000 and goods Rs 50,000.

2. Cash Purchases

Purchased goods for cash Rs 25,000.

3. Credit Purchases

Purchased goods on credit from Mohan Rs 40,000.

4. Cash Sales

Sold goods for cash Rs 35,000.

5. Credit Sales

Sold goods on credit to Suresh Rs 30,000.

6. Payment of Expenses

Paid rent Rs 8,000 and salary Rs 12,000.

7. Receipt from Debtor

Received Rs 28,000 from Suresh in full settlement of Rs 30,000.

8. Payment to Creditor

Paid Rs 38,000 to Mohan in full settlement of Rs 40,000.

9. Purchase of Asset

Bought furniture for Rs 15,000 and paid by cheque.

10. Withdrawal by Owner (Drawings)

Owner withdrew cash Rs 10,000 for personal use.

11. Goods Returned by Buyer (Sales Return)

Suresh returned goods worth Rs 5,000.

12. Goods Returned to Seller (Purchase Return)

Returned goods worth Rs 4,000 to Mohan.

13. Trade Discount

Purchased goods listed at Rs 50,000 at 10% trade discount from Ravi.

Trade discount = 10% of 50,000 = Rs 5,000. Net purchase = Rs 45,000. Trade discount is NOT recorded in the books.

14. Cash Discount

Paid Rs 44,100 to Ravi in full settlement of Rs 45,000 (cash discount 2%).

Cash discount = 2% of 45,000 = Rs 900. Paid = 45,000 - 900 = Rs 44,100.

15. Bank Transactions

Deposited Rs 25,000 into bank.

Common Mistakes Students Make

1. Writing "To" before the debit account: The debit account is written first WITHOUT "To." Only the credit account has "To" before it. Wrong: "To Cash A/c Dr." Correct: "Cash A/c Dr." on the debit side, then "To Capital A/c" on the credit side.

2. Forgetting the narration: Every journal entry must have a narration in brackets. Without it, the entry is incomplete. Write: "(Being cash received from Ram)" or similar.

3. Confusing discount allowed and discount received: Discount allowed is given BY us TO the debtor — it is an expense (debited). Discount received is given TO us BY the creditor — it is an income (credited).

4. Recording trade discount in the books: Trade discount is deducted from the list price and is NOT recorded separately. Only the net amount is recorded. Cash discount IS recorded.

5. Mixing up debit note and credit note: Debit note is sent by the buyer (for purchase returns). Credit note is sent by the seller (for sales returns). Think: debit note = buyer debits the seller, credit note = seller credits the buyer.

6. Not balancing the debit and credit totals: Every journal entry must have equal debit and credit amounts. If they do not match, the entry is wrong.

7. Treating capital as a real account: Capital is a personal account (it represents the owner). It follows the rule: credit the giver. When the owner brings capital, the owner is the giver, so Capital A/c is credited.

8. Incorrect classification of accounts: Purchases and Sales are nominal accounts (they relate to expenses and revenue), NOT real accounts. Purchases Return and Sales Return are also nominal accounts.

9. Writing "Cash" when it should be "Bank": If payment is made by cheque, credit the Bank Account, not Cash Account.

10. Forgetting compound entries: When multiple expenses are paid together, use a compound entry (multiple debits, one credit) rather than separate entries. It saves time and space.

Exam Tips

1. Practise journal entries daily. This is the most scoring part of Accountancy. With practice, you can identify debit and credit accounts within seconds.

2. Always write the proper format: Date, Particulars (debit account Dr., To credit account), L/F, Debit amount, Credit amount, Narration. Missing any column loses marks.

3. For source document questions, remember the list: Invoice, Receipt, Cheque, Debit Note, Credit Note, Cash Memo, Pay-in-Slip. Write at least one line on each.

4. For voucher questions, know the four types and when each is used: Debit voucher (cash payment), Credit voucher (cash receipt), Transfer/Journal voucher (non-cash), Compound voucher (multiple debits/credits).

5. For debit-credit rule questions, draw a table with three rows (Personal, Real, Nominal) and the corresponding rule. This is a sure-shot 3-mark question.

6. For trade discount questions, always compute the net amount first (List Price minus Trade Discount). Then record only the net amount. Never record trade discount separately.

7. For cash discount questions, the discount is calculated on the NET amount (after trade discount, if any). Discount Allowed A/c is debited; Discount Received A/c is credited.

8. In the exam, do rough work first: Identify the accounts, classify them, apply the rule, then write the entry. Do not write the entry directly without analysis — you risk getting it wrong.

9. Number your entries: If the question gives 10 transactions, number your journal entries 1 to 10. This makes it easy for the examiner to verify.

10. Write neat and aligned: The debit and credit amounts should be in separate columns. Misaligned amounts create confusion and can cost marks.

Quick Revision Notes

• Source documents = written evidence of transactions (invoice, receipt, cheque, debit note, credit note, cash memo, pay-in-slip).
• Accounting voucher = authorises recording of a transaction (debit, credit, transfer/journal, compound).
• Three account types: Personal, Real, Nominal.
• Personal: Debit the receiver, Credit the giver.
• Real: Debit what comes in, Credit what goes out.
• Nominal: Debit all expenses/losses, Credit all incomes/gains.
• Journal = book of original entry, chronological order.
• Format: Date | Particulars | L/F | Debit Rs | Credit Rs.
• Debit account written first (no "To"), Credit account with "To" and indented.
• Every entry needs a narration in brackets.
• Compound entry: multiple debits or credits, total debits = total credits.
• Opening entry: debit all assets, credit all liabilities, credit capital (balancing figure).
• Trade discount: not recorded, deducted from list price.
• Cash discount: recorded — Discount Allowed (debit, expense), Discount Received (credit, income).
• Debit note: sent by buyer for purchase returns.
• Credit note: sent by seller for sales returns.
• Purchases and Sales are nominal accounts.
• Capital is a personal account.
• Bank payments: credit Bank A/c (not Cash A/c).
• Drawings: debit Drawings A/c, credit Cash/Goods A/c.

Related Guides:

• [Chapter 1 — Introduction to Accounting](/school/cbse/class/11/accountancy/cbse-introduction-to-accounting)
• [Chapter 2 — Theory Base of Accounting](/school/cbse/class/11/accountancy/cbse-theory-base-of-accounting)
• [Chapter 3 Solutions — Recording of Transactions I](/school/cbse/class/11/accountancy/solutions/cbse-recording-transactions-1-exercise-solutions)
• [All Class 11 Accountancy Solutions](/school/cbse/class/11/accountancy/solutions)
• [Class 11 Accountancy Subject Guide](/school/cbse/class/11/accountancy)