Chapter 2: Recording of Transactions
2.1 Rules of Debit and Credit
In Double Entry Book-keeping, transactions are recorded by applying either the Traditional Approach (Classification of Accounts) or the Modern Approach (Accounting Equation Approach).
2.1.1 Traditional Approach (Golden Rules of Accounting)
| Type of Account | Meaning & Examples | Golden Rule of Debit (Dr.) & Credit (Cr.) |
|---|---|---|
| 1. Personal Account | Accounts of individuals, firms, companies, banks, and representative accounts. • Natural: Ram’s A/c, Sita’s A/c • Artificial: Nepal Bank Ltd. A/c, Himalayan Traders A/c • Representative: Outstanding Salary A/c, Prepaid Rent A/c, Capital A/c, Drawings A/c | Debit the Receiver Credit the Giver |
| 2. Real Account | Accounts of tangible and intangible assets/properties owned by the business (excluding debtors/banks). • Tangible: Cash A/c, Furniture A/c, Machinery A/c, Building A/c, Goods/Purchase/Sales A/c • Intangible: Goodwill A/c, Patent A/c, Trademark A/c | Debit what comes in Credit what goes out |
| 3. Nominal Account | Accounts of all expenses, losses, incomes, and gains. • Expenses/Losses: Salary A/c, Rent A/c, Wages A/c, Depreciation A/c, Bad Debts A/c, Loss by Fire A/c • Incomes/Gains: Commission Received A/c, Interest Received A/c, Discount Received A/c | Debit all expenses and losses Credit all incomes and gains |
2.1.2 Modern Approach (Accounting Equation / DEALER Rule)
| Category of Account | Normal Balance | When Increased (↑) | When Decreased (↓) |
|---|---|---|---|
| 1. Assets (Cash, Bank, Debtors, Stock, Furniture, Machinery) | Debit (Dr.) | Debit (Dr.) | Credit (Cr.) |
| 2. Expenses & Losses (Purchases, Wages, Salary, Rent, Depreciation) | Debit (Dr.) | Debit (Dr.) | Credit (Cr.) |
| 3. Drawings (Owner’s personal withdrawals) | Debit (Dr.) | Debit (Dr.) | Credit (Cr.) |
| 4. Liabilities (Creditors, Bills Payable, Bank Loan, Outstanding Exp.) | Credit (Cr.) | Credit (Cr.) | Debit (Dr.) |
| 5. Capital / Owner’s Equity | Credit (Cr.) | Credit (Cr.) | Debit (Dr.) |
| 6. Revenues / Incomes & Gains (Sales, Interest/Commission Received) | Credit (Cr.) | Credit (Cr.) | Debit (Dr.) |
2.2 Source Documents and Primary Recording Through Journal
2.2.1 Source Documents of Accounting
Every journal entry must be supported by an authentic source document:
- Cash Memo: Issued by seller for cash sales; acts as evidence of cash purchase/sale.
- Invoice / Tax Invoice (VAT Bill): Issued by seller for credit sales (showing quantity, rate, trade discount, and 13% VAT in Nepal).
- Receipt: Issued when cash or cheque is received from a customer/debtor.
- Debit Note: Prepared by a buyer when returning goods to a supplier (informing the supplier that their account has been debited).
- Credit Note: Prepared by a seller when goods are returned by a customer (informing the customer that their account has been credited).
- Pay-in-Slip (Deposit Slip): Counterfoil evidencing deposit of cash or cheques into a bank account.
- Cheque: Written unconditional order directing a bank to pay a specified sum to a named person or bearer.
2.2.2 Specimen Format of Journal
The Journal is the book of original entry where transactions are recorded chronologically along with a brief explanation called Narration.
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) |
|---|---|---|---|---|
| YYYY-MM-DD | Account to be Debited …………………………… Dr. To Account to be Credited (Being brief narration of transaction) | XXX | XXX |
2.2.3 Standard Journal Entries for Important Transactions
| S.N. | Nature of Transaction | Journal Entry (Particulars) | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|---|
| 1. | Started business with Cash Rs. 1,00,000 and Goods Rs. 50,000 | Cash A/c ………………………………………… Dr. Purchase (Stock) A/c ………………………… Dr. To Capital A/c | 1,00,000 50,000 | 1,50,000 |
| 2. | Purchased goods of list price Rs. 50,000 at 10% Trade Discount and 5% Cash Discount for immediate cash payment | Purchase A/c (50,000 - 10% TD) ………… Dr. To Cash A/c (45,000 - 5% CD) To Discount Received A/c (5% of 45,000) | 45,000 | 42,750 2,250 |
| 3. | Sold goods costing Rs. 20,000 for Rs. 25,000 plus 13% VAT in cash | Cash A/c ………………………………………… Dr. To Sales A/c To VAT (Output VAT) A/c (13% of 25,000) | 28,250 | 25,000 3,250 |
| 4. | Goods withdrawn by owner for personal use Rs. 4,000 and distributed as free samples Rs. 2,000 | Drawings A/c ………………………………….. Dr. Advertisement (Free Sample) A/c ………… Dr. To Purchase A/c (at cost price) | 4,000 2,000 | 6,000 |
| 5. | Debtor Hari who owed Rs. 10,000 became insolvent and only 60 paisa in a rupee was recovered | Cash A/c (60% of 10,000) ………………….. Dr. Bad Debts A/c (40% unrecoverable) ……. Dr. To Hari’s A/c | 6,000 4,000 | 10,000 |
| 6. | Cash received from Bad Debts previously written off Rs. 3,000 | Cash A/c ………………………………………… Dr. To Bad Debts Recovered A/c (never credit Debtor) | 3,000 | 3,000 |
| 7. | Goods costing Rs. 15,000 destroyed by fire; Insurance company admitted claim of Rs. 11,000 | Insurance Company A/c (Claim admitted) Dr. Loss by Fire A/c (Uninsured loss) ………… Dr. To Purchase A/c | 11,000 4,000 | 15,000 |
2.3 Accounting for Bills of Exchange
2.3.1 Meaning and Parties
A Bill of Exchange is an unconditional written order signed by the maker (Drawer/Creditor), directing a certain person (Drawee/Debtor) to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument at a fixed future date.
- Three Parties: (1) Drawer: Seller/Creditor who writes the bill; (2) Drawee (Acceptor): Buyer/Debtor who accepts to pay; (3) Payee: Party who receives payment (Drawer himself, a Bank, or an Endorsee).
- Days of Grace: In computing the maturity date of a time bill, 3 extra days (Days of Grace) are added to the nominal period of the bill.
2.3.2 Comparative Journal Entries in the Books of Drawer and Drawee
| Stage / Event | In the Books of Drawer (Creditor / Seller) | In the Books of Drawee (Debtor / Buyer) |
|---|---|---|
| 1. Credit Sale / Purchase of Goods | Drawee’s A/c ……………………………… Dr. To Sales A/c | Purchase A/c ……………………………… Dr. To Drawer’s A/c |
| 2. Drawing & Accepting the Bill | Bills Receivable (B/R) A/c …………….. Dr. To Drawee’s A/c | Drawer’s A/c ………………………………. Dr. To Bills Payable (B/P) A/c |
| 3A. Case I: Bill Retained & Honored on Maturity | Cash / Bank A/c ………………………….. Dr. To Bills Receivable A/c | Bills Payable A/c …………………………. Dr. To Cash / Bank A/c |
| 3B. Case II: Bill Discounted with Bank before Maturity | Bank A/c ……………………………………. Dr. Discount A/c ………………………………. Dr. To Bills Receivable A/c | No entry at the time of discounting (On maturity: B/P A/c Dr. To Bank A/c) |
| 3C. Case III: Bill Endorsed to a Creditor (Endorsee) | Endorsee’s A/c …………………………… Dr. To Bills Receivable A/c | No entry at the time of endorsement (On maturity: B/P A/c Dr. To Cash/Bank A/c) |
| 3D. Case IV: Bill Sent to Bank for Collection | (i) On sending: Bill for Collection A/c ………………….. Dr. To Bills Receivable A/c (ii) On realization: Bank A/c ……………………………………. Dr. To Bill for Collection A/c | No entry when sent for collection (On maturity:) Bills Payable A/c …………………………. Dr. To Cash / Bank A/c |
| 4. Dishonor of Bill (with Noting Charges) | Always Debit Drawee (with Bill + Noting Charges): Drawee’s A/c ……………………………… Dr. • To B/R A/c + To Cash A/c (if retained) • To Bank A/c (if discounted) • To Endorsee’s A/c (if endorsed) | Bills Payable A/c …………………………. Dr. Noting Charges A/c ……………………… Dr. To Drawer’s A/c |
2.4 Subsidiary Books (Special Purpose Books)
When transactions are voluminous, the Journal is subdivided into Subsidiary Books.
2.4.1 Golden Rules for Preparing Subsidiary Books
- Only Credit Transactions of Goods (Merchandise): Only credit purchases and credit sales of goods meant for resale are recorded in Purchase Book and Sales Book.
- Strict Exclusions (What is NEVER recorded in Purchase/Sales Book):
- Cash Purchases or Cash Sales → Recorded in Cash Book (ignored in Purchase/Sales Book).
- Purchase or Sale of Fixed Assets (Furniture, Machinery, Computers) on credit → Recorded in Journal Proper (ignored in Purchase/Sales Book unless the business is a dealer in that item).
- Treatment of Trade Discount & Delivery/Packing Charges:
- Deduct Trade Discount directly in the inner column.
- Add Carriage/Packing charged on the invoice to get the final invoice total.
- VAT charged on the invoice is not part of the cost of the goods: it is kept in a separate VAT column and posted to the VAT A/c, not to Purchase A/c.
2.4.2 Summary of Subsidiary Books
| Subsidiary Book | Transactions Recorded | Source Document | Final Total Posted To |
|---|---|---|---|
| 1. Purchase Book (Invoice Book) | Credit purchases of trading goods only | Inward Purchase Invoice | Purchase A/c (Dr. side) |
| 2. Sales Book (Day Book) | Credit sales of trading goods only | Outward Sales Invoice | Sales A/c (Cr. side) |
| 3. Purchase Return Book (Return Outward) | Return of credit-purchased goods to suppliers | Debit Note | Purchase Return A/c (Cr. side) |
| 4. Sales Return Book (Return Inward) | Return of credit-sold goods by customers | Credit Note | Sales Return A/c (Dr. side) |
| 5. Bills Receivable Book | All Bills of Exchange received from debtors | Bills Accepted by Debtors | Bills Receivable A/c (Dr. side) |
| 6. Bills Payable Book | All Bills of Exchange accepted in favor of creditors | Bills Drawn by Creditors | Bills Payable A/c (Cr. side) |
2.4.3 Worked Numerical Example: Purchase Book & Purchase Account
Illustration 2.1:
Prepare a Purchase Book of Kathmandu Electronics Store from the following transactions for Magh 2082:
- Magh 2: Purchased from Pashupati Electric Co. on credit: 10 Refrigerators @ Rs. 25,000 each and 20 Heaters @ Rs. 3,000 each, less 10% Trade Discount.
- Magh 9: Purchased from Lumbini Traders for cash: 5 Washing Machines @ Rs. 35,000 each.
- Magh 16: Purchased Office Furniture on credit from Heritage Furniture Works for Rs. 45,000.
- Magh 24: Purchased from Bagmati Appliances on credit: 15 Microwave Ovens @ Rs. 12,000 each and 10 Induction Stoves @ Rs. 4,000 each; Trade Discount 5% and Carriage charges Rs. 2,000 added in bill.
Solution:
In the Books of Kathmandu Electronics Store
Purchase Book
| Date | Particulars (Name of Supplier & Details) | Invoice No. | L.F. | Details (Rs.) | Total Amount (Rs.) |
|---|---|---|---|---|---|
| 2082 Magh 2 | Pashupati Electric Co. 10 Refrigerators @ Rs. 25,000 each 20 Heaters @ Rs. 3,000 each Total List Price Less: 10% Trade Discount | 2,50,000 60,000 3,10,000 (31,000) | 2,79,000 | ||
| Magh 24 | Bagmati Appliances 15 Microwave Ovens @ Rs. 12,000 each 10 Induction Stoves @ Rs. 4,000 each Total List Price Less: 5% Trade Discount Add: Carriage Charges | 1,80,000 40,000 2,20,000 (11,000) 2,000 | 2,11,000 | ||
| End of Magh | Purchase A/c ………………………………………………… Dr. | 4,90,000 |
Notes:
- Transaction of Magh 9 is omitted because it is a cash purchase (recorded in Cash Book).
- Transaction of Magh 16 is omitted because Office Furniture is a fixed asset, not trading merchandise for an electronics store (recorded in Journal Proper).
2.5 Ledger Accounts and Cash Books
2.5.1 Ledger Accounts
A Ledger is the principal book of accounts containing classified and summarized records of all individual accounts (Personal, Real, and Nominal).
- T-Shape Format: Divided into Debit (left side: Date, Particulars To …, J.F., Amount) and Credit (right side: Date, Particulars By …, J.F., Amount).
- Continuous / Running Balance Format: Used in banks and computerized accounting (Date, Particulars, L.F., Debit Rs., Credit Rs., Dr./Cr., Balance Rs.).
2.5.2 Cash Books (Single, Double, and Triple Column)
A Cash Book serves as both a Book of Original Entry (Subsidiary Book) and a Principal Ledger Account (when a Cash Book is maintained, no separate Cash Account or Bank Account is opened in the Ledger).
- Single Column Cash Book: Records only cash receipts (Dr.) and cash payments (Cr.). Cash column can never have a credit balance because one cannot pay out more physical cash than is available.
- Double Column Cash Book: Contains either (a) Cash & Discount Columns, or (b) Cash & Bank Columns.
- Triple Column Cash Book: Contains Discount, Cash, and Bank columns on both Debit and Credit sides.
- Discount Columns (Discount Allowed on Dr. side; Discount Received on Cr. side) are merely totaled and NEVER balanced.
2.5.3 Contra Entries (C) in Double/Triple Column Cash Book
A Contra Entry is a transaction that affects both Cash and Bank accounts simultaneously within the business. It is denoted by writing C in the Ledger Folio (L.F.) column on both sides.
| Contra Transaction | Debit Side Entry (Receipts) | Credit Side Entry (Payments) |
|---|---|---|
| 1. Cash deposited into Bank (or Bank account opened with cash) | Write To Cash A/c and enter amount in Bank Column | Write By Bank A/c and enter amount in Cash Column |
| 2. Cash withdrawn from Bank for Office Use (not personal use) | Write To Bank A/c and enter amount in Cash Column | Write By Cash A/c and enter amount in Bank Column |
| 3. Bearer Cheque received on an earlier date (treated as Cash) deposited into Bank on a later date | Write To Cash A/c and enter amount in Bank Column | Write By Bank A/c and enter amount in Cash Column |
Warning: Cash withdrawn from bank for personal/domestic use (Drawings A/c Dr. To Bank A/c) is NOT a Contra Entry; it is recorded only on the Credit side (By Drawings A/c in Bank column).
2.5.4 Worked Numerical Example: Triple Column Cash Book
Illustration 2.2:
Prepare a Triple Column Cash Book from the following transactions for Chaitra 2082:
- Chaitra 1: Cash in hand Rs. 45,000 and Bank Overdraft Rs. 20,000.
- Chaitra 5: Sold goods for cash Rs. 60,000 and deposited Rs. 40,000 into the bank on the same day.
- Chaitra 10: Received a cheque of Rs. 28,500 from Ramesh in full settlement of his account of Rs. 30,000 and deposited into bank immediately.
- Chaitra 15: Paid to creditor Suman by cheque Rs. 19,200 after deducting 4% cash discount (Full debt = Rs. 19,200 / 0.96 = Rs. 20,000; Discount = Rs. 800).
- Chaitra 22: Withdrew Rs. 10,000 from bank for office use and Rs. 5,000 from bank for personal use.
- Chaitra 30: Paid office salary Rs. 15,000 in cash.
Solution:
Triple Column Cash Book
| Dr. Date | Particulars (Receipts) | L.F. | Disc. Allowed | Cash (Rs.) | Bank (Rs.) | Cr. Date | Particulars (Payments) | L.F. | Disc. Received | Cash (Rs.) | Bank (Rs.) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Chaitra 1 | To Balance b/d | 45,000 | — | Chaitra 1 | By Balance b/d (Overdraft) | — | 20,000 | ||||
| Chaitra 5 | To Sales A/c | 60,000 | — | Chaitra 5 | By Bank A/c | C | 40,000 | — | |||
| Chaitra 5 | To Cash A/c | C | — | 40,000 | Chaitra 15 | By Suman’s A/c | 800 | — | 19,200 | ||
| Chaitra 10 | To Ramesh’s A/c | 1,500 | — | 28,500 | Chaitra 22 | By Cash A/c | C | — | 10,000 | ||
| Chaitra 22 | To Bank A/c | C | 10,000 | — | Chaitra 22 | By Drawings A/c | — | 5,000 | |||
| Chaitra 30 | By Salary A/c | 15,000 | — | ||||||||
| Chaitra 30 | By Balance c/d | 60,000 | 14,300 | ||||||||
| Total | 1,500 | 1,15,000 | 68,500 | Total | 800 | 1,15,000 | 68,500 | ||||
| Baishakh 1 | To Balance b/d | 60,000 | 14,300 |
2.5.5 Petty Cash Book (Imprest System)
To relieve the main cashier from recording numerous small daily expenses (tea, postage, bus fare, stationery), a Petty Cashier is given a fixed advance called the Imprest Amount (Float) at the beginning of each period. At the end of the period, the exact amount spent is reimbursed so the Petty Cashier starts the next period with the original Imprest Amount again.
2.6 Trial Balance
2.6.1 Meaning and Objectives
A Trial Balance is a statement of all debit and credit balances extracted from the Ledger accounts and Cash Book on a particular date to verify the arithmetical accuracy of posting and balancing.
Quick Rule for Placing Ledger Balances in Trial Balance:
- Debit Column (Dr.): All Assets (Cash, Bank, Debtors, Stock, Furniture, Machinery, Goodwill, Bills Receivable, Prepaid Expenses), Expenses/Losses (Opening Stock, Purchases, Wages, Carriage Inward, Carriage Outward, Salary, Rent, Bad Debts, Depreciation, Discount Allowed, Sales Return / Return Inward), and Drawings.
- Credit Column (Cr.): All Liabilities (Creditors, Bills Payable, Bank Overdraft, Bank Loan, Outstanding Expenses), Capital, Reserves/Provisions (General Reserve, Provision for Bad Debts), and Incomes/Revenues (Sales, Purchase Return / Return Outward, Discount Received, Interest/Commission Received, Bad Debts Recovered).
Note on Closing Stock: Closing Stock is generally NOT included inside the Trial Balance because it is already part of Purchases/Opening Stock (it appears as an adjustment outside the Trial Balance). It appears inside the Trial Balance only if Purchases have already been adjusted (Adjusted Purchases = Opening Stock + Net Purchases - Closing Stock).
2.7 NEB Board Exam Practice Questions
Group A: Very Short Answer Questions (1 Mark Each)
- State the Golden Rules of debit and credit for Real and Nominal Accounts.
- What is a Contra Entry? Give two examples.
- Differentiate between a Debit Note and a Credit Note.
- Why is the Cash Book called both a Subsidiary Book and a Principal Book?
- What is meant by the Imprest System of Petty Cash Book?
- Why is Closing Stock generally excluded from the Trial Balance?
Group B & C: Short and Long Numerical Questions (5 / 8 Marks)
- Journal, Ledger & Trial Balance (8 Marks): From the following transactions of Annapurna Traders, prepare (a) Journal Entries, (b) Ledger Accounts, and (c) a Trial Balance:
- Shrawan 1: Commenced business with cash Rs. 3,00,000 and bank balance Rs. 2,00,000.
- Shrawan 4: Purchased goods on credit from Everest Suppliers Rs. 1,20,000 at 10% trade discount.
- Shrawan 10: Sold goods on credit to Manakamana Store for Rs. 90,000.
- Shrawan 15: Paid Rs. 1,05,000 by cheque to Everest Suppliers in full settlement of their account.
- Shrawan 22: Received Rs. 88,000 in cash from Manakamana Store in full settlement of their account.
- Shrawan 30: Paid rent Rs. 15,000 and salary Rs. 25,000 in cash. (Ans: Trial Balance Total = Rs. 5,93,000 [Dr: Cash Rs. 3,48,000 + Bank Rs. 95,000 + Purchase Rs. 1,08,000 + Discount Allowed Rs. 2,000 + Rent Rs. 15,000 + Salary Rs. 25,000 = Rs. 5,93,000; Cr: Capital Rs. 5,00,000 + Sales Rs. 90,000 + Discount Received Rs. 3,000 = Rs. 5,93,000])
Worked answers to these exercises are in Chapter 2 Solutions.