Class 11 Accountancy (Financial Accounting) Chapter 3 Recording of Transactions – I

Key Concept: Transaction Analysis

a) Increase in Assets by \$50,000; Increase in Liabilities by \$50,000

[Solution Description]

The transaction involves purchasing office equipment, which increases the company’s assets by \$50,000. Since the purchase is on credit, liabilities also increase by \$50,000. Hence, the equation $A = L + C$ now reflects an increase in both assets and liabilities.

Key Concept: Books of Original Entry

d) Sales Book

[Solution Description] The book used to record credit sales transactions is specifically designed for such entries and forms part of the books of original entry, known as the Sales Book.

Key Concept: Basic Definition

d) Journal Voucher

[Solution Description] Complex transactions, which involve multiple debits and credits, require the use of Journal Vouchers. These vouchers are specifically designed to handle complex transaction entries in accounting.

Key Concept: Basic Definition

b) To provide evidence of transactions

[Solution Description] Vouchers serve as documentary evidence supporting transactions and play a crucial role in recording financial data accurately.

Key Concept: Voucher Purpose

a) Cash voucher

[Solution Description]

The term “cash voucher” refers to a specific type of accounting voucher that’s used to document transactions involving cash payments or receipts. Since cash vouchers are designed to track the movement of cash within an organization, they compile essential details regarding these monetary exchanges.

Key Concept: Account Categories

d) Revenue

[Solution Description] ‘Sales Revenue’ belongs to the Revenues/Gains category. This category represents income earned by the company.

Key Concept: Compound Voucher Analysis

b) Compound Voucher

[Solution Description]

A compound voucher records transactions involving multiple debits or credits. In this case, since the transaction involves two debits and one credit, a compound voucher is required.

Key Concept: Voucher Purpose

c) To document transactions where goods or services are provided on credit

[Solution Description] A credit voucher is used to document transactions where goods or services are provided on credit. It records multiple credits and one debit in such transactions.

Key Concept: Basic Equation

b) Assets equal Liabilities plus Capital

[Solution Description] The accounting equation $$A = L + C$$ stands for Assets equals Liabilities plus Capital. It represents the fundamental relationship in accounting that must always balance, showing that what the business owns (assets) is funded by loans or debts (liabilities) and by the owner’s contributions and retained earnings (capital).

Key Concept: Simple Transaction Analysis

b) Decreases

[Solution Description]

When expenses are paid in cash, the cash account decreases because money is leaving the business to settle the expense.

Key Concept: Simple Journal Entry

a) Cash A/c Dr. To Sales A/c

[Solution Description] The transaction involves increasing cash, which is an asset, and recognizing revenue. Therefore, Cash A/c is debited, and Sales A/c is credited. The correct journal entry will be: Cash A/c Dr. To Sales A/c.

Key Concept: Basic Definition

a) An exchange of economic consideration between parties

[Solution Description] A business transaction is defined as an exchange involving economic consideration between parties, which results in recording the transaction in at least two accounts due to its two-fold effect.

Key Concept: Compound Entry

c) Debit machinery, Credit suppliers and bank

[Solution Description]

A compound journal entry involves more than two accounts being affected by a single transaction. In this case, multiple debits or credits are recorded. For example, if purchasing equipment on credit affects the Equipment account, Accounts Payable, and another expense account, it becomes a compound entry.

Key Concept: Journal Entry Understanding

b) Debit Supplier B’s Account, Credit Purchase Returns Account

[Solution Description] The correct journal entry when goods are returned involves debiting the supplier’s account because we owe them less now, and crediting the Purchase Returns Account to reflect the return of goods. Thus, the entry should be: Debit Supplier B’s Account, Credit Purchase Returns Account.

Key Concept: Conceptual Understanding

b) Decrease revenue

[Solution Description]

Sales returns represent goods that have been returned by customers, often due to defects or wrong shipments. When such returns occur, they lead to a reduction in the revenue initially recorded. Hence, on the income statement, sales returns reduce the gross revenue figure, leading to decreased net revenue. The impact can be summarized as follows:

Sales Returns result in:

– Decreasing Gross Revenue (since originally booked sales are reversed)

Thus, the option describing this accurately would involve decreasing revenue.

Key Concept: Transaction Impact

c) A = \$13,000, L = \$7,000, C = \$6,000

[Solution Description] Initially, the accounting equation is $A = L + C$, where A = \$10,000, L = \$4,000, and C= \$6,000 ($C = A – L$). After receiving a loan of \$3,000, both assets and liabilities increase by \$3,000, leading to new values: A = \$13,000, L = \$7,000, and C remains \$6,000. The new equation is $A = \$13,000$, $L = \$7,000$, $C = \$6,000$.

Key Concept: True Meaning

b) Assets = Liabilities + Capital

[Solution Description] The accounting equation signifies that the total assets of a business are equal to the sum of its liabilities and capital, expressed as $$A = L + C$$.

Key Concept: Ledger Posting

c) Folio column

[Solution Description] When posting transactions from a journal to a ledger, the journal page number is recorded in the folio column of the ledger. This practice facilitates easy cross-referencing between the journal and the ledger.

Key Concept: Increase/Decrease

b) Credit

[Solution Description] In accounting, an increase in revenue is credited, as per the standard rules of debit and credit.

Key Concept: Voucher Purpose

c) To document both cash receipts and payments

[Solution Description] A cash voucher is prepared to document transactions where cash is received or paid out. It serves as a record for accounting purposes.

Key Concept: Voucher Identification

a) Cash Voucher

[Solution Description] This transaction involves an outflow of cash to purchase stationery, which is recorded using a cash voucher.

Key Concept: Basic Identification

c) IGST

[Solution Description] Goods sold between different states attract inter-state GST, which is called Integrated Goods and Services Tax (IGST). This is because the transaction occurs across state boundaries.

Key Concept: Advanced Journal Entries, Error Identification

b) Debit Sales Returns, Credit Bills Receivable by \$85,500

[Solution Description] To correct this error, an adjusting entry should be made. Initially overstating the bills receivable account, it inflates assets by \$85,500 (\$95,000 – \$9,500). The correction involves debiting the revenue or income statement accounts (like sales returns) for \$85,500 and crediting the bills receivable for \$85,500 to reduce the previously overstated figures. This adjustment correctly reflects financial positions without impacting the profit & loss since it’s rectifying a non-cash transaction error.

Key Concept: Ledger Account Opening

c) By code number

[Solution Description] Ledger accounts are often organized using a systematic approach such as assigning a unique code number to each account. This method facilitates quick identification and efficient posting of transactions.

Key Concept: Voucher Purpose

d) To record cash payments or receipts

A cash voucher is prepared for recording transactions involving cash payments or receipts in business.

Key Concept: Voucher Purpose

c) To record all financial transactions

[Solution Description] An accounting voucher is prepared to record financial transactions that have occurred, ensuring there is a written document for verification and auditing purposes.

Key Concept: Compound Entry

a) Debit Office Supplies \$1,200; Credit Cash \$300; Credit Accounts Payable \$900

[Solution Description] The journal entry involves recording the purchase of office supplies worth \$1,200 with \$300 paid in cash and the remaining \$900 as accounts payable. This is a compound entry that includes more than two accounts.

To record this transaction:

– Debit Office Supplies account by \$1,200 to reflect the increase in assets.

– Credit Cash account by \$300 to reflect the decrease in cash.

– Credit Accounts Payable by \$900 to reflect the liability incurred.

Therefore, the correct journal entry will be:

${Debit Office Supplies } \$1,200$

${Credit Cash } \$300$

${Credit Accounts Payable } \$900$

Key Concept: Ledger Posting Frequency, Complex Posting Scenarios

d) All of the above.

[Solution Description] Monthly postings can lead to several issues: increased risk of errors due to accumulated data, difficulty in tracking individual transaction discrepancies, delayed detection of fraudulent activities, and challenges in maintaining up-to-date financial analyses. These factors could impede timely decision-making processes and affect financial reporting accuracy.

Key Concept: Legal Evidence

a) Journal

[Solution Description] The Journal serves as stronger legal evidence compared to the Ledger due to its nature of recording transactions at the source with original details.

Key Concept: Application of Rules

b) Equipment and Accounts Payable

[Solution Description] When a company purchases equipment on credit, the Equipment account (an asset) increases as the company now owns more equipment. Additionally, Accounts Payable (a liability) also increases because the company owes money for this purchase. The rules of debit and credit indicate that an increase in assets is debited, and an increase in liabilities is credited.

Key Concept: Journal Entry Components

d) Particulars

[Solution Description] The components of a journal entry typically include the date, particulars, ledger folio (L.F.), and amount. Of these components, the “particulars” section is specifically used to describe the nature or purpose of the transaction. It provides details about what the transaction entails, such as purchases, sales, expenses, etc.

Key Concept: GST Calculation

c) \$1,800

[Solution Description]

The GST rate on services is 18%, which needs to be calculated on the service value of $\$10,000$.

Total GST Amount = Service Value $\times$ GST Rate:

$= \$10,000 \times 18% = \$1,800$

Thus, the total GST amount applicable is $\$1,800$.

The correct answer is option c).

Key Concept: Derivative Equations

b) $$A – C = L$$

[Solution Description] The balance sheet equation is given by $$A = L + C$$. A derivative form can be found by rearranging this equation.

Subtracting $$L$$ from both sides gives $$A – L = C$$, and subtracting $$C$$ from both sides gives $$A – C = L$$. Therefore, both $$A – L = C$$ and $$A – C = L$$ are correct forms.

Key Concept: Journal Entry Analysis

b) Debit Purchases Returns account, credit Accounts Payable

[Solution Description] When goods are returned that were previously purchased on credit, the Purchases Returns account (also known as Purchase Return Outwards) is debited because it represents a reduction in expense, while Accounts Payable is credited because it reduces the liability owed to the supplier.

Key Concept: Transaction Impact

d) Sales Revenue

[Solution Description] When goods are sold for cash, it affects two accounts: Cash and Sales Revenue. The cash account increases and is therefore debited, while the sales revenue account increases and is credited according to the rules of debit and credit for revenues.

Key Concept: Ledger Balancing

a) \$22,000 debit

[Solution Description] To find the final balance, we need to adjust the initial debit balance by subtracting any returns. Starting with a debit balance of \$25,000, subtract the return of \$3,000:

$$\$25,000 – \$3,000 = \$22,000$$

So, the final balance in the Purchases Ledger is a debit of \$22,000.

Key Concept: Journal vs Ledger

c) The journal is the book of first entry, and the ledger is the book of second entry.

[Solution Description] In accounting, the journal is known as the book of first entry where transactions are initially recorded in chronological order. The ledger is considered the book of second entry, which contains classified records of all transactions posted from the journal entries to their respective accounts. Option (c) accurately describes this distinction.

Key Concept: Source Identification

c) Invoice

[Solution Description] An invoice is a commercial document that itemizes and records a transaction between a buyer and a seller. It lists the products or services provided, quantities, and agreed-upon prices.

Key Concept: Transaction Effects

c) No immediate effect on cash book

[Solution Description]

Purchasing office supplies on credit does not immediately affect the cash book because there is no cash movement at the time of purchase. Instead, it affects accounts payable and inventory or supplies accounts. The cash book remains unchanged until the payment is made.

Key Concept: Journal vs Ledger

a) Journal is the book of first entry; Ledger is the book of second entry

[Solution Description] The journal is known as the book of first entry because it records transactions in chronological order. The ledger, on the other hand, is referred to as the book of second entry where these journal entries are classified into respective accounts.

Key Concept: Basic Accounting Equation

b) Decrease in assets, decrease in liabilities

[Solution Description] When a company uses cash to pay off its liabilities, assets (cash) decrease, and liabilities also decrease. Hence, there is no change in owner’s equity, maintaining the equality in the accounting equation: Assets = Liabilities + Owner’s Equity.

Key Concept: Transaction Impact

b) Assets increase, Liabilities increase

[Solution Description]

When a company purchases office supplies on credit, it means they have acquired an asset (office supplies) and incurred a liability since they haven’t paid cash immediately. Therefore, the Assets side of the accounting equation will increase due to the addition of office supplies, and the Liabilities side will increase due to the credit arrangement made for payment.

Using the accounting equation:

$$\text{Assets} = \text{Liabilities} + \text{Capital}$$

The purchase leads to:

– Increase in Assets (Office Supplies)

– Increase in Liabilities (Accounts Payable)

Hence, the correct effect on the accounting equation is: Assets increase, Liabilities increase.

Key Concept: Balance Sheet Impact

c) Assets increase, Liabilities increase

[Solution Description] In this case, purchasing goods on credit increases the assets (inventory) by  20,000 and also increases liabilities by the same amount. Hence, both sides of the accounting equation $A = L + C$ remain balanced because the increase in assets equals the increase in liabilities.

Key Concept: Posting Process

c) The process of transferring journal entries to individual accounts in the ledger

[Solution Description] Posting is the process of transferring journal entries to individual accounts in the ledger. It involves recording each debit and credit from the journal into the respective ledger accounts, ensuring that each transaction’s effects are reflected in the financial records.

Key Concept: Voucher Purpose

d) All of the above

[Solution Description] Vouchers are prepared to provide evidence of business transactions, recording two-fold effects in accounts such as cash received and paid, cash/credit sales, or cash/credit purchase.

Key Concept: Combined Entries

c) $\$59,000$

[Solution Description]

The purchase involves an IGST charge due to inter-state transaction. Thus, we need to calculate the IGST on the initial amount and add it back to the principal amount to determine the total credit entry.

Calculation:

$\text{IGST} = \$50,000 \times 0.18 = \$9,000$

Total Credit Amount:

$\$50,000 + \$9,000 = \$59,000$

Hence, the supplier’s account will be credited by $\$59,000$.

Key Concept: Rules of Debit and Credit

d) Asset

[Solution Description] According to the rules of debit and credit, an increase in asset accounts is debited because assets represent resources owned by a business, and when they increase, it means more resources have been acquired.

Key Concept: Journal Subdivisions

b) Cash Book

[Solution Description] The subdivisions of the journal include the Journal Proper, Cash Book, and Other Day Books. These are specialized books used to record specific types of transactions before posting them to the ledger.

Key Concept: Simple Calculation

b) \$3,000

[Solution Description] To find the output CGST, we multiply the sale value by the CGST percentage. The calculation is as follows:

$\text{CGST} = \$50,000 \times \frac{6}{100} = \$3,000$

So, the output CGST is $\$3,000$.

Key Concept: Transaction Analysis

c) Rs.2,30,000

[Solution Description]

Initially, starting the business with Rs.2,00,000 cash sets capital at Rs.2,00,000. Purchasing inventory decreases cash by \Rs.50,000 but does not affect capital directly; instead, it changes the composition of assets. Earning revenue of \Rs.30,000 on credit increases accounts receivable (asset) and also increases capital as revenues enhance owner’s equity.

Breakdown:

Initial Capital: Rs.2,00,000

Inventory Purchase: No direct effect on capital

Revenue Earned: +Rs.30,000 to capital

New Capital = Rs.2,00,000 + Rs.30,000 = Rs.2,30,000

Correct option is C.

Key Concept: Journal Folio

c) It serves as a cross-reference to locate the original journal entry

[Solution Description] Entering the journal page number in the folio column signifies the cross-referencing between the journal and the ledger. It helps track back the specific transaction details in the journal if any clarification is needed later.

Key Concept: Purpose Identification

c) To record cash sales

[Solution Description] The primary purpose of a cash memo is to record cash sales. This means it is issued when a sale is completed with immediate cash payment.

Key Concept: Types of Accounting Vouchers

b) Cash Voucher

[Solution Description] A cash voucher is used when there is a cash transaction, such as a cash receipt or payment. Other types of vouchers are specific to their functions in recording transactions.

Key Concept: Basic Equation

c) A = L + C

[Solution Description]

The basic accounting equation is given by $A = L + C$ where A represents Assets, L represents Liabilities, and C is Capital. This equation shows that an organization’s assets are funded by both liabilities and capital.

Key Concept: Transaction Impact

c) Total assets remain unchanged; liabilities remain unchanged.

[Solution Description] When office furniture is purchased for cash, it leads to an increase in assets (office furniture) and a simultaneous decrease in assets (cash). The overall effect on the accounting equation is:

{Assets (Furniture)} & : +\$5,000

{Assets (Cash)} & : -\$5,000

Thus, there is no overall change in total assets, liabilities, or capital.

Key Concept: Transaction Analysis

c) Increase in assets (accounts receivable); increase in equity (sales revenue)

[Solution Description] When goods are sold on credit, accounts receivable increase, indicating that the business expects to receive payment in the future. Sales revenue also increases because the business has earned income from selling its products.

Key Concept: Terminology

c) Posting

[Solution Description] The process of transferring journal entries to ledger accounts is known as posting. This step involves taking the debits and credits from journal entries and applying them to respective accounts in the ledger, allowing for the summarization and analysis of financial data.

Key Concept: Posting Process

c) It indicates the page number of the corresponding account in the ledger.

[Solution Description] The Ledger Folio column signifies the page number of the ledger where an account’s corresponding entry can be found. This helps trace transactions from the journal to the ledger during the posting process.