Recording of Transactions — I

The full picture

Before any accounting can happen, you need proof that a transaction occurred. That proof is called a source document — the original paper or digital record that says what happened, when, and for how much. Common examples are purchase invoices, cash receipts, debit notes, credit notes, and pay-in slips. Think of a kirana shop owner who buys vegetables from a wholesaler: the bill the wholesaler hands him is the source document. Without it, there is nothing to record. Under the Companies Act 2013 (Section 128), companies must preserve accounting records for eight years; GST-registered businesses must keep records for 72 months under the CGST Act. The rule is simple: no document, no entry.

Every transaction in accounting must satisfy one golden rule — the accounting equation: Assets = Liabilities + Capital (Owner's Equity). Assets are everything the business owns or is owed: cash, stock, furniture, a bank balance, amounts due from customers. Liabilities are amounts the business owes to outsiders: bank loans, amounts due to suppliers. Capital is what the owner has put in, adjusted for profit or loss. If Neha opens a textile business by depositing ₹2,00,000 into a new bank account, Assets rise by ₹2,00,000 (bank) and Capital rises by ₹2,00,000 — the equation stays perfectly balanced. This balance must hold after every single transaction, no exceptions.

Double-entry bookkeeping records two sides of every transaction using debits and credits — two simple labels for left (Dr) and right (Cr). The trick is that each account type responds differently: Assets and Expenses increase on the debit side and decrease on the credit side. Liabilities, Capital, and Revenues increase on the credit side and decrease on the debit side. That is the whole rule set. When Neha's business borrows ₹50,000 from a bank, Cash (asset) is debited ₹50,000 because it increases, and Bank Loan (liability) is credited ₹50,000 because it increases too. Total debits always equal total credits — that is why the equation never breaks.

A journal is the book where you record transactions as they happen, in date order. Each journal entry has: the date, the account(s) debited (written first, on the left), the account(s) credited (written below, indented right), the amount for each, and a narration — a short explanation in brackets. The narration is important for CBSE board exams; always write it. For example: on 1 April, Ravi starts a tiffin service with ₹80,000 cash. Journal entry — Dr Cash A/c ₹80,000 / Cr Capital A/c ₹80,000 / (Being capital introduced in cash). Then on 3 April he pays ₹5,000 rent — Dr Rent A/c ₹5,000 / Cr Cash A/c ₹5,000 / (Being rent paid for April). Practice writing narrations in your own words; examiners do read them.

The accounting equation and debit-credit rules are two sides of the same coin. When you debit an asset and credit a liability, assets go up on one side and liabilities go up on the other — the equation stays balanced. When you debit an expense and credit cash, expenses go up (reducing profit, which reduces equity) and cash goes down — balance is maintained again. Every journal entry you write is essentially a proof that the equation holds. This is why journal entries are the bedrock of all accounting that follows: ledgers, trial balances, and final accounts all grow from this single first step.

An Indian example

Ananya runs a small stationery shop in Kochi. On 5 June she buys pens and notebooks worth ₹18,000 from a wholesaler on credit (she will pay next month). The wholesaler hands her an invoice — that invoice is the source document. Now she records the transaction: she debits Purchases A/c ₹18,000 (goods bought for resale, recorded as an expense of the period) and credits Creditor A/c ₹18,000 (she now owes the wholesaler). The accounting equation check: goods worth ₹18,000 have entered the business (increasing her stock) while her creditor liability also rises by ₹18,000 — both sides move equally, so the equation holds. When she pays the wholesaler next month, she will debit Creditor A/c ₹18,000 (liability decreases) and credit Cash A/c ₹18,000 (asset decreases). At every step, the source document, the equation, the debit-credit rule, and the journal entry all work together — exactly as this chapter teaches.

Key concepts covered

• Source documents
• Accounting equation
• Rules of debit & credit
• Journal entries

Common misconceptions to watch for

• Wrong belief: 'Debit means money is going out of the business and credit means money is coming in.' Correction: Debit and credit are just labels for the left and right sides of an entry — they do NOT directly mean outflow or inflow. When you receive cash, you DEBIT Cash (it increases). When you borrow a loan, you CREDIT the Loan account (liability increases). What debit or credit does depends entirely on the type of account.
• Wrong belief: 'The journal and the ledger are the same book, or you can skip one.' Correction: They are two separate books with different purposes. The journal records transactions chronologically as they occur — it is the first record (the book of original entry). The ledger then groups those entries account by account so you can see, for example, the total of all cash movements. You cannot prepare a ledger without a journal, and the journal alone is not enough to prepare a trial balance.
• Wrong belief: 'Every purchase is immediately an expense, so you always debit an Expense account when you buy something.' Correction: It depends on what you buy. Buying goods for resale goes to Purchases A/c (treated as an expense in the period). Buying a fixed asset like a computer or furniture goes to the Asset account (e.g., Furniture A/c), not an expense — it will be charged as depreciation over future years. Confusing capital purchases with revenue expenses is one of the most common errors in board exam answers.