What is a Transaction in Accounting?
An agreement between the buyer and the seller based on which goods and services are exchanged is called a Transaction. Transaction record in accounting is defined as a business occurrence that has a monetary effect on the financial records of a firm.
Example: Purchase of machine, land or building, sale to a customer in credit or cash, etc. Accrual and Cash accounting are two ways in which any business transaction is recorded. In accrual-based accounting, the focus is on the transactions where income is earned and expenses are incurred, whereas Cash accounting income is recorded when credit payments or cash payments are made.
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What are Transactions in Accounting and the Methods of Transaction Records?
So, what is transaction accounting? When a transaction in accounting occurs, it can be recorded in various ways. Some of them are listed as follows that will help you understand the fundamental question of “What is a transaction in accounting?”
Journal and Ledger Entries
The first thing any accountant will learn is recording a transaction in the form of a journal. This is considered as the most basic way to record any type of transaction. In Journal and ledgers, the accountant manually adds the debit and the credit for each transaction. Therefore, this process is subject to error. In practical scenarios, Journals are not used. Instead, automated approaches such as accounting software like Tally are used to record simple transactions.
Receipts
If a supplier invoice is received, the accountant can record it in the accounts payable section of any accounting software. This will create a journal entry that will credit the accounts payable and debit the expenses.
Issuance of Invoice
When issuing an invoice to a supplier, the accountant will first enter data regarding price, quantity and tax amount to make a bill in the accounting software and then the software will automatically credit the sales account.
Supplier Payments
When a payment is made to the supplier, the accountant will enter the invoice number in the software which will result in a credit or cash account in the transaction records of the firm.
Paychecks
The Payroll management system is used by the accounts to manage employee payments for salary and other incentives. The amount to be paid and the hours worked by the employee are added in the software along with other relevant information. The software then creates a journal where the cash account gets credited.
Solved Examples
All the above-mentioned techniques of maintaining transaction records create the necessary accounts and ledgers. From here the transaction gets made into proper financial statements and bookkeeping takes place.
The following examples will explain the basic method of recording transactions in the form of a journal.
1. Recording of Transaction 1 NCERT Solutions
The business was started by Mr A on 19th August 2020 with cash of Rs 1,00,000. Record the following transaction in the books of Mr A.
2. Recording of Transaction 2 NCERT Solutions
Goods purchased by Ravi from Mahesh for Rs 10,000 on 19th August 2020.
Process of the Recording of Transactions
Seven steps are taken while recording transactions. The seven steps are:
Analyzing each transaction and determine the effect of the transaction on different accounts
Recording the transaction in the form of a double-entry bookkeeping journal.
Transferring the information that is recorded in the journal to different types of ledger accounts.
Prepare a trial palace which will help determine the error in recording accounts, if any,
Make adjustment entries wherever needed
Prepare the adjusted trial balance
Finally, complete bookkeeping by preparing financial statements of the balance sheet and profit and loss account.
There are certain documents called transaction source documents that help determine the related business transactions in financial records. Examples of such documents are Bank stunts, cash register, credit card receipts, packing slip, time card, etc.
Tips for Recording Transactions
Learning and practicing a combination of theoretical and practical subjects can be difficult. However, there are a few tips that can be useful for students.
Familiarize yourself with them.
Try Solving at least two Illustrations of every Type
A good student not only acquires the important topics, instead they choose to know problems of every type. Conceptual understanding is really important and that can only be attained by solving multiple questions and not just of one type, but rather questions of all types. This opens up your mind and prepares it to work with a broader aspect, hence polishing the concepts even more.
Test yourself after every Chapter
Do not skip on the next chapter without testing yourself for the one you have just completed. Practice questions related to that chapter so that you’re more clear with the concepts. This will help you gain confidence too. Looking over the notes might not be enough and hence, you need to go through the chapter thoroughly as almost all the topics can be considered important. This also helps you to take a clearer picture of how much you have understood, what are your weaker areas, what are your strengths and every other important thing.
Work hard from the Starting
Studying before the deadline is not a quality of a good student. If you wish to work on your concepts and better understanding, then you need to study from day one and not rely on one-day hard work. You may also miss many topics if you study just before the exam. It might help you in the short run but in the long run, you can remember only those concepts that you have understood and not crammed. Hence, students are advised to be consistent and put in all their efforts into achieving the goals that they have set for themselves.
Discipline is more Important than just Motivation
Motivating yourself to study is important but not every day. You need to be disciplined otherwise whenever your motivation will come down, you won’t be having the urge to study. Discipline avoids such situations. If you’re disciplined, you’ll prepare yourself to study even if you don’t feel like doing so. Stick to your schedule regardless of all the distractions around you and that's the key to success. Hence, students shall try their level best to be disciplined at all times to be able to move forward and not let any hurdle stop them time and again.
Do not Hesitate to Participate
Participation is the key to being active. Many students who do not participate in the class find the subject boring and feel tired while attending classes. Participation keeps you active throughout the class and builds up interest. Students who participate in the class tend to have good knowledge about the subject as they are aware of what is happening in the class. Hence, students who want to excel shall always stay active and participate as much as they can.
Know your study Pattern
Everyone has their way and pattern of studying. Some find it easy to study the whole day while some study just for a few hours and score better. They know their capacity. Similarly, study patterns and styles are there which can be identified by regular practice. Hence, students shall rely the most on introspection. Observe, select and stick to it.
Try to understand ‘why’
When you know why you’re doing something, you automatically get interested in knowing how to do it. So if you know why you’re studying a particular topic, you’ll get interested in learning more about it. This will also help you gain a deeper understanding of the concepts as well. Hence, students shall be able to find the why behind their every action and let this fuel them to take action, even when they are low on motivation.
Compete with yourself:
Competing with others isn’t a good option as you don’t know how, when, and what’s their style of studying. And, even if you know, then there’s no point competing yourself with some other person as everyone is unique and has a different aspect of thinking and acquiring things. Compete with yourself, try to hold a record of your previous marks and create a realistic goal for the next exam. This will help you score better than not anyone else, but yourself, thus leading to improvement.
Fun Facts
History is written by Accountants: The first-ever recorded name in human history belonged to an accountant. The record was made 5000 years ago. The name of the accountant was “Kushim”
The father of modern accounts is Luca Pacioli. He was an Italian accountant who taught Leonardo da Vinci.
FAQs on Recording Financial Transactions: A Guide
1. What are the 'Golden Rules of Accounting,' and how are they applied when recording transactions for the CBSE Class 11 exam?
The three Golden Rules of Accounting are fundamental for recording any transaction correctly. For exams, you must identify the type of account involved and then apply the correct rule:
- Personal Accounts: This rule applies to accounts of persons, firms, or companies. The rule is: Debit the receiver, Credit the giver.
- Real Accounts: This rule applies to all assets and properties of the business. The rule is: Debit what comes in, Credit what goes out.
- Nominal Accounts: This rule applies to all expenses, losses, incomes, and gains. The rule is: Debit all expenses and losses, Credit all incomes and gains.
2. What is the difference between a Trade Discount and a Cash Discount, and which one is recorded in the books of accounts?
This is a frequently asked question to test conceptual clarity. Trade Discount is a reduction in the list price of goods, offered by a seller to a buyer at the time of purchase. It is not recorded in the books of accounts; transactions are recorded at the net value (List Price - Trade Discount). In contrast, Cash Discount is an incentive offered for prompt payment. It is recorded in the books as 'Discount Allowed' (an expense for the seller) or 'Discount Received' (an income for the buyer).
3. What are the essential steps to follow when recording a business transaction in a Journal for a 3-mark question?
To score full marks on a journal entry question, follow these steps systematically:
- Step 1: Identify the two accounts affected by the transaction.
- Step 2: Determine the nature of these accounts (Personal, Real, or Nominal).
- Step 3: Apply the correct Golden Rule of Accounting to determine which account should be debited and which should be credited.
- Step 4: Record the entry in the proper journal format, including the date, particulars, Ledger Folio (L.F.), debit amount, and credit amount.
- Step 5: Write a brief, clear narration in brackets below the entry explaining the transaction.
4. From an examination perspective, what are some of the most frequently asked journal entries related to starting a business?
For questions on the commencement of a business, examiners often test the following entries:
- For bringing in cash as capital: Cash A/c Dr. To Capital A/c.
- For bringing in assets like furniture or machinery as capital: Furniture A/c Dr. / Machinery A/c Dr. To Capital A/c.
- For purchasing goods for the new business: Purchases A/c Dr. To Cash/Bank A/c (if paid) or To Creditor's A/c (if on credit).
- For opening a bank account: Bank A/c Dr. To Cash A/c.
5. Why are the personal transactions of a business owner not recorded in the firm's books of accounts?
The personal transactions of an owner are excluded due to the Business Entity Concept, a fundamental accounting principle. This concept states that the business and its owner are two separate and distinct legal entities. Therefore, only transactions that affect the financial position of the business are recorded. For example, if the owner pays their child's school fees from their personal bank account, it is not a business transaction. Recording it would violate this core principle and misrepresent the firm's financial performance and position.
6. How does the 'Going Concern Concept' influence the recording and valuation of assets in financial statements?
The Going Concern Concept assumes that a business will continue its operations for the foreseeable future and will not be forced to liquidate. This assumption is critical because it justifies recording fixed assets at their original cost and then depreciating them over their useful economic life. If this concept did not exist, all assets would have to be valued at their net realisable value (market value if sold today), which would not provide a true and fair view of a continuing business's financial position.
7. How should a compound journal entry be recorded? Provide an example that might appear in a 5-mark question.
A compound journal entry is one that involves more than two accounts, where there can be multiple debits and/or multiple credits. For a 5-mark question, you might see a transaction for payment of multiple expenses at once.
Example: On March 31, paid salary Rs. 10,000 and rent Rs. 5,000 by cheque.
The correct compound entry would be:
Salary A/c Dr. 10,000
Rent A/c Dr. 5,000
To Bank A/c 15,000
(Being salary and rent paid for the month)
8. How does the principle of double-entry bookkeeping ensure accuracy, and what are its key limitations that students must know?
The double-entry principle ensures arithmetical accuracy by recording every transaction with an equal debit and credit amount, ensuring the Trial Balance always tallies. However, it has limitations and cannot prevent all errors:
- It does not detect errors of principle: Recording a transaction in the wrong class of account (e.g., treating a capital expenditure like the purchase of a machine as a revenue expense like repairs).
- It does not detect errors of complete omission: If a transaction is completely missed and not recorded at all, the trial balance will still agree.
- It does not detect compensating errors: When two or more errors cancel each other out (e.g., an over-debit in one account is cancelled by an under-debit of the same amount in another).
