Recording of Transactions – I

Source documents, the accounting equation, the rules of debit and credit, journal entries with narrations, and posting to the ledger and balancing it.

Key ideas

• Every entry starts from a source document: a cash memo, invoice, receipt, pay-in-slip, cheque or debit note.
• The accounting equation always holds: each transaction changes at least two items by equal amounts.
• Debit an increase in an asset, an expense or drawings; credit an increase in a liability, capital or a revenue; decreases go the other way.
• A journal entry names the account debited (Dr.) first, then “To” the account credited, then the narration in brackets.
• Goods bought and sold go to the Purchases and Sales accounts; goods the owner takes for personal use are Drawings Dr. To Purchases.
• Posting carries each entry to the ledger: “To …” on the debit side of the account debited and “By …” on the credit side of the account credited.
• To balance an account, write the difference on the smaller side as “Balance c/d” so the totals agree, then bring it down on the other side as “Balance b/d”.

Remember

Watch out

• Debiting Cash when cash is paid out: cash going out is credited.
• Debiting furniture bought for the office to Purchases instead of Furniture.
• Writing “Balance c/d” on the bigger side of the account.
• Recording goods taken by the owner as a sale.

Worked example