Recording of Transactions-II class 11 Notes Accountancy

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Recording of Transactions-II class 11 Notes Accountancy

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CHAPTER – 3

Recording of Transactions-II class 11 Notes Accountancy

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 namely Debit and Credit. It means that every transaction in accounting effect both Debit (DR.) and Credit (Cr.) side equally.

Total assets of the business firm are financed through the funds raised from either the outsiders (which consists generally Creditors and lenders) or the Owners (which is called Capital).

According to Business entity concept, Business is separate legal entity from its owner thus the amount invested by the owner in the business is liability of the business is called Captial. Accounting equation thus referred to a equation in which total assets is always equal to total Liabilities (i.e. Capital + Liabilities)

Assets = Capital + Liabilities

ANALYSIS OF BUSINESS TRANSACTIONS

Business transaction may affect either both sides of the equation or one side of the equation but the ultimate effect must be equal on the both sides. All the effects are as follows:-

1. Transaction affecting both sides of the equation: A. Commenced business with Cash Rs. 3,00,000.

Assets=Capital + Liabilities
CashCapital
Transactions3,00,000=3,00,000

Explanation:- As Cash is invested by the owner, it should be shown in Capital (anything which is bring in by the owner is termed as Capital) & Business is receiving asset in the form of cash, it is to be shown in the Assets side as Cash.

B. Bought goods from Ram Rs. 30,000

Effect

Assets=Capital + Liabilities
Cash GoodsCapital Creditors
Old Equation3,00,000 + –=3,00,000 + –
Transactions0 + 30,000=0 + 30,000
N.E.3,00,000 + 30,000=3,00,000 + 30,000

Explanation:- As goods is purchased on credit, one effect is that it should be shown in the assets side as Goods & other effect is that goods are purchased on credit so it is to be shown in Liabilities as Creditors..

C. Sold goods (costing Rs. 10000) for cash at Rs. 13000 Effect

Assets=Capital + Liabilities
Cash GoodsCapital Creditors
Old Equation3,00,000 + 30,000=3,00,000 + 30,000
Transactions+13000 + 10,000=+ 3000 + 30,000
N.E.3,13,000 + 20,000=3,03,000 + 30,000

Explanation:- The transaction will affect both sides as cash has been received so it is to be added back in cash (Rs 13,000) & Goods are to be reduced by 10,000 as goods has been sold also profit of Rs. 3,000 Is to be added back in Capital. Net effect will remain same for both sides

D. Paid to creditors Rs. 20,000

Assets=Capital + Liabilities
Cash GoodsCapital Creditors
Old Equation3,13,000 + 20,000=3,03,000 + 30,000
Transactions– 20000 + 0=+ 3000 + 20,000
N.E.2,93,000 + 20,000=3,03,000 + 10,000

Explanation:- The transaction will affect both sides as cash has been paid so it is to be deducted from cash as well from creditors as payment made to them.

· Transaction related to Expenses

All the expense or Losses is to born by the owner although business has separate legal entity from its owner as He/She is the person who has taken risk to do business.

E. Rent paid Rs. 5,000.

Effect

Assets=Capital + Liabilities
Cash GoodsCapital Creditors
Old Equation3,13,000 + 20,000=3,03,000 + 10,000
Transactions– 5,000 + 0=– 5000 + 0
N.E.2,88,000 + 20,000=2,98,000 + 10,000

Explanation:- The transaction will affect both sides as cash has been paid so it is to be reduced as well as Capital is to be reduced because expense is to be born by the owner

· Transaction related to Income

Income or Profit is the reward for taking risk, as risk is taken by the owner so it is to be added in Capital.

F. Commission received Rs. 8,000.

Effect

Assets=Capital + Liabilities
Cash GoodsCapital Creditors
Old Equation2,88,000 + 20,000=2,98,000 + 10,000
Transactions+ 8,000 + 0=+8000 + 0
N.E.2,96,000 + 20,000=3,06,000 + 10,000

Explanation:- The transaction will affect both sides as cash has been received so it is to be added back in cash as well as in Capital.

· Transaction related to Accrued/outstanding Income

Income is to be added back into the capital but as it is not received should be shown in the Assets Side as accrued Income because it meant to be received in this financial year.

A. Accrued Interest Rs. 10,000

Effect

Assets=Capital + Liabilities
Cash Goods AccuredCapital Creditors
Income
Old Equation2,88,000 + 20,000 + –=3,06,000 + 10,000
Transactions+ 8,000 + 0 + 10,000=+10,000 + 0
N.E.2,96,000 + 20,000 + 10,000=3,06,000 + 10,000

Explanation:- The transaction will effect both sides as Accrued Income has been added back to the capital & as it is not received so it is to be shown in the assets side as an asset.

· Transaction related to Prepaid or Advance Income

As Income received in advance so it is not belong to current financial year, so it cannot be added back to the Capital. It as an amount which is received by the business firm for the future course of activity till the activity not happened it is the Liability of the business.

Assets=Capital + Liabilities
Cash Goods AccuredCapital Creditors Prepaid
IncomeRent
Old Equation2,96,000 + 20,000 + 10,000=3,06,000 + 10,000 +
Transactions+ 5,000 + 0 + 0=+10,000 + 0 + 5,000
N.E.3,01,000 + 20,000 + 10,000=3,06,000 + 10,000 + 5,000

Explanation:-The transaction will effect both sides as Prepaid Income is a Liability should be shown in the Liability side & Cash received by the business should be added back to the Cash column of assets side.

2. Transaction affecting one side of the equation:

(I) Transaction affecting Assets side of the equation:

· Transaction related to Prepaid or Advance Expense

As Expense paid in advance so it is not belong to current financial year, so it can not be deducted from Capital. It as an amount which is paid by the business firm for the future course of activity till the activity not happened it is the Assets of the business.

A. Prepaid insurance paid Rs. 4,000

Effect

Assets=Capital + Liabilities
Cash Goods Accured PrepaidCapital Creditors Prepaid
Income ExpenseRent
Old Equation3,01,000 + 20,000 + 10,000 –=3,06,000 + 10,000 + 5,000
Transactions– 4,000 + 0 + 0 + 4,000=+ 0 + 0 + 0
N.E.2,97,000 + 20,000 + 10,000 + 4,000=3,06,000 + 10,000 + 5,000

Explanation:- The transaction will affect both sides as Prepaid expense is a Asset should be shown in the Assets side & Cash paid by the business should be deducted from Cash column of assets side.

B. Purchased Machinery for Cash Rs. 80,000

Effect

Assets=Capital + Liabilities
Cash Goods Accured Prepaid MachineryCapital Creditors Prepaid
Income ExpenseRent
Old Equation2,97,000 + 20,000 + 10,000 + 4,000 –=3,06,000 + 10,000 + 5,000
Transactions– 80,000 + 0 + 0 + 0 80,000=+ 0 + 0 + 0
N.E.2,17,000 + 20,000 + 10,000 + 4,000 80,000=3,06,000 + 10,000 + 5,000

Explanation:- The transaction will affect one side as cash has been paid for purchased of machinery & Machine is an fixed asset so it is separately shown in the asset side as well as cash is to be reduced.

(II) Transaction affecting Liability side of the equation:

· Transaction related to outstanding Expense

As Expense not paid yet or Outstanding but belong to current financial year so it is deducted from Capital & business has to pay it in near future so it is the liability of the firm.

A. Salary outstanding Rs. 8,000

Effect

Assets=Capital + Liabilities
Cash Goods Accured Prepaid MachineryCapital Creditors Prepaid Outstanding
Income ExpenseRent Exp
Old Equation2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000
Transactions– 0 + 0 + 0 + 0 + 80,000=– 8,000 + 0 + 0 + 8,000
N.E.2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000

Explanation:- The transaction will affect Liability side as outstanding expense is a Liability should be shown in the Liability side & Expense should be deducted from Capital

· Transaction related to Interest on Capital

As interest on capital is the Expense of business it should be shown or deducted in the capital as well as interest of capital is the amount which is to be given to the owner as capital is the amount which is invested by the owner, therefore it is to be added back to Capital.

A. Interest on Capital Rs. 10,000

Assets=Capital + Liabilities
Cash Goods Accured Prepaid MachineryCapital Creditors Prepaid Outstanding
Income ExpenseRent Exp
Old Equation2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000
Transactions– 0 + 0 + 0 + 0 + 0=– 10,000
+ 10,000 + 0 + 0 + 0
N.E.2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000

Explanation:-The transaction will affect Liability side as Interest of Capital should be added back & deducted from Capital as both of them belong to the owner.

· Transaction related to interest on Drawing

As interest on Drawing is the Income of business it should be shown or added back in the capital as well as interest of Drawing is the amount which is to be given by the owner to the business so it is treated as drawing and deducted from the Capital.

A. Interest on Drawing Rs. 1,000

Effect

Assets=Capital + Liabilities
Cash Goods Accured Prepaid MachineryCapital Creditors Prepaid Outstanding
Income ExpenseRent Exp
Old Equation2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000
Transactions– 0 + 0 + 0 + 0 + 0=– 1,000
+ 1,000 + 0 + 0 + 0
N.E.2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000

Explanation:- The transaction will effect Liability side as Interest of Drawing should be added back & deducted from Capital as both of them belong to the owner.

· Transaction related to Drawing

As Drawing is the amount withdrawn by owner from business so it is to be deducted from Capital & also from the Cash.

A. Owner withdrew cash of Rs. 10,000

Assets=Capital + Liabilities
Cash Goods Accured Prepaid MachineryCapital Creditors Prepaid Outstanding
Income ExpenseRent Exp
Old Equation2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000
Transactions– 10,000 + 0 + 0 + 0 + 0=– 1,000 + 0 + 0 + 0
N.E.2,17,000 + 20,000 + 10,000 + 4,000 + 80,000=3,06,000 + 10,000 + 5,000 + 8,000

Explanation:- The transaction will affect both sides as Drawing should be deducted from Capital & also deducted from Cash as withdraw by owner.

RULES OF DEBIT & CREDIT

Every business transaction affects two or more accounts. An account is summarised record of transaction at one place relating to a particular head. An account is divided into two parts i.e. debit Credit. Debit refer to the left side of an account and Credit refers to the right side of an account

Approaches for the rules of Debit & Credit

1. Traditional Approach

Under this approach, all ledger accounts are mainly classified into two categories:-

(I) Personal Accounts: It includes all those accounts which are related to any person i.e. Individuals, firms, companies, Banks etc. This can further classified into three categories:-

1. Natural Persons: All the accounts of human beings / Persons are included such Ram A/C, Shyam A/C etc.

2. Artificial Persons: This includes all such accounts which are treated as persons in the eyes of law & have separate legal entity such as Reliance Ltd., XYZ Ltd.

3. Representative Persons: This includes all such accounts which represents some persons such as Capital (Represent Owner) Outstanding Salary (Represent Employee)

(II) Impersonal Accounts: It includes all those accounts which are not related to any person this can be classified as :-

1. Real Accounts: Under this all accounts related to assets are included ( except Debtors). These can be Tangible i.e. Machinery, Furniture , Building, Cash etc. and Intangible I.e. Goodwill, Trade Mark, Patents Rights etc.

2. Nominal Accounts : this includes all the accounts related to Expenses/Losses & Incomes / Gains e.g. Salary, Rent, Commission received etc. they are used to record the transaction in the books of accounts.

Rules of Debit/Credit under Traditional Approach

Classification of AccountsRules of Dr./ Cr.
Personal Accounts (All Personal Accounts)Debit the receiver, Credit the Giver
Real AccountDebit what Comes In, Credit whats Goes Out
Nominal AccountDebit all Losses/Expenses, Credit all Income / Gains.

SOURCE DOCUMENTS

A written document which provides evidence of the transactions is called the Source Documents. Source document is the first evidence of a transaction which takes place such as Cash Memo, Bill or Invoice, Receipt, Pay-in-slip, cheques, Debit-Note & Credit -Note.

(a) Invoice (Bill): An invoice is prepared by Seller at the time of sale of goods on credit. It contains details such as the goods sold, the party to whom goods are sold, sales amount, date etc.

(b) Cash Memo : It is prepared by the Seller at the time of Sale of goods on Cash. It contains details such as goods sold, quantity, amount received, date etc.

(c) Pay-in-Slip : It is used to deposit cash or cheque into bank. It has a counterfoil which is returned to the depositor with the Signature of the authorized person.

(d) Receipt: it is used when a customer give cash to the Business firm. It is an acknowledgement of payment or cash received by firm.

(e) Cheque : A cheque is a order in writing, drawn upon a specified banker and payable on demand.

(f) Debit Note : it is prepared when a buyer returned goods to seller or when purchased return transaction is entered in the books of accounts. It is prepared by the buyer of the goods.

(g) Credit Note : it is prepared when a seller received goods from buyer or when Sales return transaction is entered in the books of accounts. It is prepared by the Seller of the goods.

VOUCHER

A voucher is a document evidencing a business transaction. Recording in books of accounts are done on the basis of voucher. It is an accounting evidence of a business transaction.

Classification of Accounting Vouchers

VouchersFurther classificationPurpose
Cash VouchersDebit Vouchers

Credit Vouchers

To show Cash Payment

To show Cash Receipt

Non Cash VoucherTransfer VoucherTo show Transactions not involving cash

CASH VOUCHERS

Cash voucher is prepared to record all the transactions which involve cash either in the form of receipt or payment. Thus cash voucher is further classified into Debit Voucher & Credit Voucher.

Debit Voucher

Debit voucher is prepared for all cash payment made by the business firm such as Payment of Rent payment of salary, payment for purchase of goods etc.

Recording of Transactions-II class 11 Notes

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