Double Entry System PDF

MODULE - II Journal and Other 5 Subsidiary Books DOUBLE ENTRY...

MODULE - II Journal and Other 5 Subsidiary Books DOUBLE ENTRY SYSTEM Notes As stated earlier, in accounting, transactions are recorded in a systematic manner. But then what is that system. The system of accounting which has universal application is termed as, double entry system. This system is based on the basic concept of accounting i.e. dual aspect concept. In this lesson you will learn about double entry system of accounting, accounts and their types, accounting vouchers and method of preparing the vouchers. OBJECTIVES After going through this lesson you will be able to : state the meaning of double entry systems of book keeping; explain the advantages and limitations of double entry system; classify the accounts in different catagories; know the rules for debit and credit; identify the source documents; understand the meaning of accounting vouchers; understand the different types of vouchers and know the method of preparation of voucher. 5.1 MEANING OF DOUBLE ENTRY SYSTEM OF BOOK-KEEPING The double entry system of bookkeeping can be defined as the system of recording transactions having two fundamental aspects - one involving the receiving of a benefit and the other giving the benefit - in the same set of books. In this theory, as the two fold aspects of each transaction are recorded, therefore it is called ‘double entry system’. As per dual aspect concept of accounting every transaction involves two aspects, an aspect of receiving and an other aspect of giving. One who receives is a debtor and one who gives is a creditor. Under the double entry system, both the aspects of giving and receiving are recorded in terms of accounts. The account which ACCOUNTANCY 51  MODULE - II Double Entry System Journal and Other Subsidiary Books receives the benefit is debited and the account which gives the benefit is credited. It is the ultimate result of this system that every debit must have corresponding credit and vice versa thus, on any particular day the total of the debit entries and the credit entries on the various accounts must be equal. For example, we bought machinery of ` 30,000 for business. It has brought two Notes changes, machinery increases by ` 30,000 and cash decreases by an equal amount. While recording this transaction in the books of accounts, both the changes must be recorded. In accounting language, these two changes are termed as “a debit change” & “a credit change”. Here machinery account will be debited and cash account will be credited. Thus, we see that for every transaction there will be two entries, one debit entry and another credit entry. For each debit there will be a corresponding credit entry of an equal amount. Conversely, for every credit entry there will be a corresponding debit entry of an equal amount. So, the system under which both the changes in a transaction are recorded together, one change is debited, while the other change is credited with an equal amount, is known as double entry system of book- keeping. Double entry system is based on the principle that “Every debit has a credit and every credit has a debit.” 5.2 ADVANTAGES & LIMITATIONS OF DOUBLE ENTRY SYSTEM The main advantages of double entry system of book keeping are as follows: 1. The nominal aspects of transactions being recorded make it possible to prepare Trading and Profit and Loss Account from which the Gross Profit and Net Profit earned by the business during a particular period can be easily ascertained. 2. As all personal accounts of debtors and creditors as well as real accounts are kept, it is possible to prepare Balance Sheet. 3. The transactions being recorded in the most scientific and systematic way give the most reliable information of business. 4. It prevents frauds because doing alterations in any account becomes difficult. 5. It enables the trader to compare the different items, such as sales, purchases, opening stock and closing stock of one period with similar items of preceding period and the trader may thus, know whether his business is progressing or not. 6. Trial balance can be prepared on any day to prove the arithmetical accuracy of accounting records. 52 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other The main limitations of double entry system of book keeping are as follows: Subsidiary Books 1. This system requires the maintenance of a number of books of accounts which is not practical in small concerns. 2. This system is costly because a number of records are to be maintained. 3. There is no guarantee of absolute accuracy of the books of accounts inspite of agreement of the trial balance. Notes INTEXT QUESTIONS 5.1 Complete the sentences : i. The Double entry theory of book-keeping is a system of recording transactions having _________. ii. One who receives is a ___________ and who gives is a _____________. iii. The Double entry system prevents frauds by not rendering ___________. iv. There is ____________ of absolute accuracy of the books of accounts inspite of agreement of trial balance. 5.3 MEANING AND CLASSIFICATION OF ACCOUNTS An accounting system records, retains and reproduces financial information relating to financial transaction flows and financial position. Financial transaction flows encompass primarily inflows on account of incomes and outflows on account of expenses. Elements of financial position, including property, money received, or money spent, are assigned to one of the primary groups i.e. assets, liabilities, and equity. Within these primary groups each distinctive asset, liability, income and expense is represented by its respective “account”. An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, capital, income and expense. It is a record of all business transaction relating to a particular person or item. In accounting we keep a separate record of each individual, asset, liabilities, expense or income. The place where such a record is maintained is termed as an ‘Account’. Such as the Account of Madan, the Account of Brij, the Account of Building, the Account of Rent, the Account of Discount and likewise. All transactions entered into with Madan will be recorded in the Account of Madan and similarly, all transactions relating to Brij will be recorded in the Account of Brij. Thus, an account is a systematic record of transactions pretaining to a particular item or person, which can be measured in terms of money during a particular period of time. Account is a head under which particular type of transactions are consolidated, classified and recorded. Example: A sales account is opened for recording the sales of goods or services. Similarly expenses during the financial period are ACCOUNTANCY 53  MODULE - II Double Entry System Journal and Other Subsidiary Books recorded using the respective expense accounts. The account may be classified in two ways: i. Traditional classification ii. Modern classification. Classification of Accounts Based on Nature or Traditional Classification Notes On the basis of their nature accounts are of the following three types : i) Personal Accounts : Accounts in the name of individuals or group of individuals are called personal accounts e.g. Ramesh, Mahesh, M/s M.K. Computers etc. ii) Nominal Accounts : Accounts of expenses or losses incomes or gains are called nominal accounts e.g. wages paid, commission received etc. iii) Real Accounts : Accounts of assets are called real accounts e.g. building, furniture etc. Modern Classifications On the basis of this classification accounts are divided into five catagories as given below : i. Capital, ii. Assets, iii. Liabilities, iv. Expenses and v. Income Classification of Accounts Traditional Concept Modern Concept Real Personal Nominal Asset Capital Income Accounts Accounts Accounts Accounts Accounts Accounts Liabilities Expenses Accounts Accounts The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the accounting year. Income is immediate inflow during the accounting year. Expense is the immediate outflow during the accounting year. An asset is a long-term inflow with implications extending beyond the financial period. Liability is long term outflow with implications extending beyond the financial period. 54 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other 5.4 RULES OF ACCOUNTING (DEBIT AND CREDIT) Subsidiary Books Using Debit and Credit In Double Entry accounting both the aspects of the transaction are recorded. Every transaction has two aspects according to this system, both the aspects are recorded. If the business acquires something, it must have been acquired by giving something Notes else. While recording each transaction, the total amount debited must be equal to the total amount credited. The terms ‘Debit’ and ‘Credit’ indicate whether the transaction is to be recorded on the left hand side or right hand side of the account. In its simplest form, an account looks like the English Language Letter ‘T’. Because of its shape, this simple form of account is called T-account. You must have observed that the T format has a left side and a right side for recording increases and decreases in the item. This helps in ascertaining the ultimate position of each item at the end of an accounting period. For example, if it is an account of a supplier, all goods/materials supplied shall appear on the right (Credit) side of the Supplier’s account and all payments made on the left (debit) side. In a‘T’ account, the left side is called debit (usually abbreviated as Dr.) and the right side is known as credit (as usually abbreviated Cr.). Account Title  (Left Side) (Right Side) Specimen of T-account Rules of Accounting All accounts are divided into five categories for the purpose of recording of the business transactions: (i) Assets, (ii) Liability, (iii) Capital, (iv) Expenses/Losses, and (v) Revenues/Gains. Two Fundamental Rules are followed to record the changes in these accounts: 1. For recording changes in Assets/Expenses/Losses “Increase in Asset is debited, and decrease in Asset is credited.” “Increase in Expenses/Losses is debited, and decrease in Expenses/ Losses is credited.” 2. For recording changes in Liabilities, Capital and Revenue/Gains “Increase in Liabilities is credited and decrease in Liabilities is debited.” “Increase in Capital is credited and decrease in Capital is debited.” ACCOUNTANCY 55  MODULE - II Double Entry System Journal and Other Subsidiary Books “Increase in Revenue/Gains is credited and decrease in Revenue/Gain is debited”. The rules applicable to the five kinds of accounts are summarised in the following chart: Rules of Accounting Notes Assets Expenses/Losses (Increase) (Decrease) (Increase) (Decrease) + – + – Debit Credit Debit Credit Capital Liabilities Revenue/Gains (Decrease) (Increase) (Decrease) (Increase) (Decrease) (Increase) – + – + – + Debit Credit Debit Credit Debit Credit I. Analysis of Rule Applied to Assets Accounts Rohit Purchased Furniture for ` 80,000. Analysis of Transaction : In this transaction, the two affected accounts are Cash account and Furniture account. Cash account is an assets account and has decreased. As per rule if asset decreases the affected account is credited, so cash account should be credited. Furniture is also an asset and it has increased. As per rule if asset increases the affected account is debited thus, furniture account is to be debited. Cash Furniture Dr. Cr Dr Cr 80000 80000 (Decrease) (Increase) II. Analysis of Rule Applied to Liabilities Accounts Purchased Machinery for ` 60,000 on credit from M.B. Machinery Mart. Analysis of Transaction : In this transaction, the two affected accounts are machinery and M.B. Machinery Mart. Machinery is an asset, an asset has increased therefore, machinery account is debited. M.B. Machinery Mart is the creditor on account of supply of machinery and constitutes the liability for the buying firm which has increased. Rule is that on increase of liability the concerned liability account is credited and vice-versa, therefore M.B. Machinery Mart A/c is credited. 56 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other Machinery A/c M.B.Machinery Mart A/c Subsidiary Books Dr Cr Dr Cr 60000 60000 (Increase) (Increase) III. Analysis of Rule Applied to Capital Accounts Notes Cash of ` 50,000 introduced in business as Capital by Suman Sharma. Analysis of Transaction : In this transaction, the two affected accounts are Cash account and Suman Sharma [Capital account]. Cash is an asset which increase when invested in business as per rule if an asset increases it is debited therefore cash account will be debited. Suman Sharma invested capital which increase the capital account, and as per rule if capital increases it is credited therefore capital account will be credited. Cash A/c Capital A/c Dr Cr Dr Cr 50000 50000 (Increase) (Increase) IV. Analysis of Rule Applied to Expenses/Losses Accounts Paid `6000 to the employees as Salary. Analysis of Transaction : In this transaction, the two affected accounts are Salary account and Cash account. Salary account is an expense and has increased. As per rule if expenses increase it will be debited. Cash is an asset and has decreased, as per rule if assets decrease, it will be credited. Salary A/c Cash A/c Dr Cr Dr Cr 6000 6000 (Increase) (Decrease) V. Analysis of Rule Applied to Revenue/Profit Accounts Received interest for the month `4000. Analysis of Transaction : In this transaction, the two affected accounts are Interest and Cash. Interest is an item of Income and Cash an item of asset, as per rule if revenue increases it will be credited and if asset increases it will be debited. Cash A/c Interest A/c Dr Cr Dr Cr 4000 4000 (Increase) (Increase) ACCOUNTANCY 57  MODULE - II Double Entry System Journal and Other Subsidiary Books INTEXT QUESTIONS 5.2 I. Fill in the blanks: i. On the basis of traditional classification accounts can be classified Notes as – a) ___________ b) ___________ c) __________ ii. On the basis of Modern classification accounts can be classified as: a) ___________ b) ___________ c) __________ d) _____________ e) ___________ iii. _________________ is immediate inflow while ____________ is immediate outflow. iv. Increase in assets is _______________ and decrease in Asset is ____________. v. Left hand side of an account is called __________ and right hand side of account is called _____________. II. A list of the accounts is given below. Tick the category to which each of the account belongs: Type of Account Name of Account Asset Liability Capital Revenue Expense i. Wages ii. Building iii. Cash iv. Gupta (Supplier) v. Sharma (Owner) vi. Sugam (Customer) vii. Interest received viii. Commission Earned ix. Discount allowed x. Rent Paid Illustration 1 From the following transactions, state the titles of the accounts that will be affected, types of the accounts and the account to be debited and the account to be credited: 58 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other Transaction ` Subsidiary Books 1. Ankur started business with cash 6,00,000 2 Purchased goods for cash 80,000 3. Paid salaries 10,000 Notes 4. Sold goods to Rohit on credit 60,000 5 Office machine purchased for cash 2,000 6 Ankur took loan from Bank 30,000 7 Ankur received commission 4,000 8. Paid for printing and stationary 500 9. Paid rent 6,000 10 Received cash from Rohit a debtor 60,000 Solution Tran. Name of Type of Rules applicable to A/cs No. Accounts Accounts in Debit/Credit items of Increase/Decrease 1 2 1 2 1 2 1 Cash Capital Asset Capital Cash Capital (Increase) (Increase) 2 Purchases Cash Expense Asset Purchase Cash (Increase) (Decrease) 3 Salaries Cash Expense Asset Salaries Cash (Increase) (Decrease) 4 Rohit Sales Asset Revenue Rohit Sales (Debtor) (Increase) (Increase) 5 Office Cash Asset Asset Office Cash machine machine (Decrease) (Increase) 6 Cash Bank Loan Asset Liability Cash Bank Loan (Increase) (Increase) 7 Cash Commission Asset Revenue Cash Commission (Increase) (Increase) ACCOUNTANCY 59  MODULE - II Double Entry System Journal and Other Subsidiary Books 8 Printing & Cash Expense Asset Printing and Cash Stationary Stationery (Decrease) (Increase) 9 Rent Cash Expense Asset Rent Cash Notes (Increase) (Decrease) 10 Cash Rohit Asset Asset Cash Rohit (Increase) (Decrease) 5.5 SOURCE DOCUMENTS Accounting process begins with the origin of a business transaction and is followed by analysis of such transaction. First, there should be a document showing that an accounting event took place. Such a document is usually called a source document. Source documents serve as a basis for an accounting entry. Source documents are documents on the basis of which the accountants record accounting transactions. Source documents are also called as business documents. Some examples of source documents are invoices, material requisition forms, bank statements, cash memos, receipts etc. Each transaction in a business is supported by the documentary evidence, which are considered source documents. Examples of source documents are an invoice shows sale of goods on credit, a Cash Memo shows cash sales and the receipt issued by the payee shows the transaction against cash payment etc. Thus, documents which facilitate evidence of the transactions are known as the source documents. These are the primary evidence in support of the concerned business transactions, and are also termed as vouchers. Vouchers may be divided into two categories (a) Supporting vouchers and (b) Accounting vouchers. Supporting Vouchers The vouchers which support the business transactions are called supporting vouchers. Examples of supporting vouchers are: Rent receipt, Cash memo invoice etc Accounting Vouchers These are the source documents on the basis of which transactions are recorded in the books of accounts. Accounting vouchers are the written documents containing the analysis of business transactions for accounting and recording purposes prepared by the accountants on the basis of supporting vouchers and signed by another authorised person. Features of an Accounting Voucher are as follows: 1. It is a written document. 2. It is the base for entries in the books of accounts. 60 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other 3. It is prepared on the basis of evidence of the transaction. Subsidiary Books 4. It contains analysed information of a transaction so that the concerned accounts could be debited and credited. 5. It is prepared by an accountant and countersigned by the authorised signatory. 5.6 TYPES OF ACCOUNTING VOUCHERS Notes Accounting vouchers may be classified as cash vouchers and non-cash vouchers. There are two types of cash vouchers) debit vouchers and ii) credit vouchers. The non-cash vouchers are also called as transfer vouchers. Types of Accounting Vouchers Cash Voucher Non-Cash Voucher Transfer Voucher Debit Voucher Credit Voucher (For Non-Cash or credit (For Cash Payment) (For Cash Receipts) Transactions) Debit Voucher Debit Vouchers are prepared for recording of transactions involving cash payments only. Cash payments in the business are made on account of Payment to creditors, Purchases of goods, Purchases of assets, Repayment of loans, Depositing cash into Bank, Drawings & advances and expenses etc. In case of all cash payments, one aspect is cash and the other is either the party to whom the payment is made, or an expense or an item of property for which the payment is made. A format of debit voucher is as follows: (3) DEBIT VOUCHER Hari Narayan & Sons...................................................................... Received Rs.............. Darya Ganj, New Delhi 100 002 (1) Voucher No. 5 Date 10.6.2012 (2) Amount (`) Debit : Furniture A/c 10,000 (4) (Being the furniture (6) Purchased vide Cash Memo No. 15) (9) Revenue Total 10,000 Stamp Affix (5) Sd/- Sd/- Manager Accountant (10) (8) (7) ACCOUNTANCY 61  MODULE - II Double Entry System Journal and Other Subsidiary Books A Debit Voucher gives the following information: 1. Name and Address of the Organisation. 2. Date of Preparing the Voucher. 3. Accounting Voucher Number. 4. Title of the Account Debited. Notes 5. Net Transaction Amount. 6. Narration, i.e., a brief decription of the transaction. 7. Signature of the Person Preparing it. 8. Signature of the Authorised Signatory. 9. Supporting Voucher Number. 10. A Document in lieu of the Supporting Voucher. Illustration 2 The following transactions took place in M/s. Tarun Retailers. Prepare debit voucher: 2012 ` Jan. 1 Bought materials for cash vide Cash Memo No. 20 17,200 Jan. 5 Wages paid for the month of December 2011, wide Wage Sheet No. 35 5,000 Solution : (i) M/s. Tarun Retailers...................................................................... Received Rs.............. Voucher No. 1 Date 1.1.2012 Amount (`) Debit : Purchases A/c 17,200 (Being the materials purchased vide Cash Memo No. 20) Revenue 17,200 Stamp Sd/- Sd/- Manager Accountant M/s. Tarun Retailers...................................................................... Received Rs.............. (ii) Voucher No. 2 Date 5.1.2012 Amount (`) Debit : Wages A/c 5,000 (Being wages paid for December 2011 vide Wage Sheet No. 35) Revenue 5,000 Stamp Sd/- Sd/- Manager Accountant 62 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other Illustration 3 Subsidiary Books The following transactions took place in M/s. Sunil Traders. Prepare debit vouchers: 2012 ` Jan. 1 Bought furniture from Relax Furniture for cash vide Cash Memo No. 24 9,500 Notes Jan. 7 Wages paid for the month of December, 2011, vide Wage Sheet No. 30 3,500 Jan. 10 Paid cash to Hari & Sons A/c vide Cash Receipt No. 70 5,000 Jan. 15 Paid for Postage 720 Solution : M/s. Sunil Traders...................................................................... Received Rs.............. Voucher No. 1 Date 1.1.2012 (i) Amount (`) Debit : Furniture A/c 9,500 (Being furniture purchased vide Cash Memo No. 24) Revenue 9,500 Stamp Sd/- Sd/- Manager Accountant M/s. Sunil Traders...................................................................... Received Rs.............. Voucher No. 2 Date 7.1.2012 (ii) Amount (`) Debit : Wages A/c 3,500 (Being wages paid for December 2011 vide Wage Sheet No. 30) 3,500 Revenue Stamp Sd/- Sd/- Manager Accountant M/s. Sunil Traders...................................................................... Received Rs.............. Voucher No. 3 Date 10.1.2012 (iii) Amount (`) Debit : Hari & Sons A/c 5000 (Being amount paid vide Cash Receipt No. 70) 5000 Revenue Stamp Sd/- Sd/- Manager Accountant ACCOUNTANCY 63  MODULE - II Double Entry System Journal and Other M/s. Sunil Traders...................................................................... Received Rs.............. Subsidiary Books (iv) Voucher No. 4 Date 15.1.2012 Amount (`) Debit : Postage A/c 720 (Being the amount paid for Postage) Notes 720 Revenue Stamp Sd/- Sd/- Manager Accountant Credit Vouchers These vouchers are prepared for recording of transactions involving only cash receipts. Cash receipts in the business take place on account of Cash sales of goods, Cash receipts from debtors, Cash sales of assets, Cash withdrawn from bank for office use, Revenue income like interest, rent etc. received in cash, Loan taken and Receipts of advances etc. In all cash receipts, one aspect is cash and the other is either person or party from whom cash is received or item of revenue on account of which cash is received or the property on the sale of which cash is received. A format of credit voucher is as follows: (3) CREDIT VOUCHER Ram Narayan Printers (1) 7, Karol Bagh, New Delhi Voucher No. 302 Date 4.2.2012 (2) Amount (`) Credit : Sales A/c 12,000 (4) (Being goods sold for (6) cash vide Bill No. 15) (9) Total 12,000 (5) Sd/- Sd/- Manager Accountant (8) (7) The Credit Voucher gives the following information: 1. Name and Address of the Organisation. 2. Date of Preparing the Voucher. 3. Accounting Voucher Number. 4. Title of the Account Credited. 5. Net Amount of the Transaction. 6. Narration, i.e., a brief description of the transaction. 64 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other 7. Signature of the Person Preparing it. Subsidiary Books 8. Signature of the Authorised Signatory. 9. Supporting Voucher Number. Illustration 4 Prepare Credit Vouchers from the source vouchers of M/s. M.K. Computers, Notes Paschim Vihar, New Delhi based on the following transactions: 2012 ` May 5 Sold Hard diskes for cash vide Cash Memo No. 10 72,000 May 16 Sold old Computer Monitor for cash vide cash Memo No. 34 13,000 May 30 Withdrawn cash from Bank for office use vide cheque No. 300407 8,700 Solution : (i) M.K. Computers Paschim Vihar, New Delhi Voucher No. 1 Date : 5.5.2012 Amount (`) Credit : Sales A/c 72,000 (Being the amount of Cash Sales vide Cash Memo No. 10) 72,000 Sd/- Sd/- Manager Accountant (ii) M.K. Computers Paschim Vihar, New Delhi Voucher No. 2 Date : 16.5.2012 Amount (`) Credit : Old Computer Monitors A/c 13,000 (Being old Computer Monior sold for cash vide Cash Memo No. 10) 13,000 Sd/- Sd/- Manager Accountant ACCOUNTANCY 65  MODULE - II Double Entry System Journal and Other Subsidiary Books (iii) M.K. Computers Paschim Vihar, New Delhi Voucher No. 3 Date : 30.5.2012 Amount (`) Credit : Bank A/c 8,700 (Being Cash withdrawn from Bank vide Notes Cheque No. 300407) 8,700 Sd/- Sd/- Manager Accountant Illustration 5 Prepare Credit Vouchers from the following information, gathered from supporting vouchers of M/s. Genius Leather Stores, Meerut. 2012 ` (i) July 5 Received cash from Sohan & Co. on Account vide cash receipt No. 35 12,000 (ii) July 10 Commission received vice cash receipt No. 74 3,500 (iii) July 15 Sold leather purses for cash vide Cash Memo No. 412 4,500 (iv) July 24 Sold two old leather colouring machines vide Cash Memo No. 3714 12,500 Solution : (i) M/s. Genius Leather Stores, Meerut Voucher No. 1 Date : 5.7.2012 Amount (`) Credit : M/s. Sohan & Co. 12,000 (Being Cash received on account from Sohan & Co. vide cash receipt No. 35) 12,000 Sd/- Sd/- Manager Accountant (ii) M/s. Genius Leather Stores, Meerut Voucher No. 2 Date : 10.7.2012 Amount (`) Credit : Commission A/c. 3,500 (Being the amount of commission received vide cash receipt No. 74) 3,500 Sd/- Sd/- Manager Accountant 66 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other (iii) M/s. Genius Leather Stores, Meerut Subsidiary Books Voucher No. 3 Date : 15.7.2012 Amount (`) Credit : Sales A/c. 4,500 (Being the amount of cash sales vide Cash Memo No. 412) 4,500 Notes Sd/- Sd/- Manager Accountant (iv) M/s. Genius Leather Stores, Meerut Voucher No. 4 Date : 24.7.2012 Amount (`) Credit : Leather Colouring Machine 12,500 (Being two old leather colouring machine sold for cash vide Cash Memo No. 3714) 12,500 Sd/- Sd/- Manager Accountant Transfer Voucher or Non Cash Voucher Non cash vouchers refer to vouchers prepared for transactions not involving cash. They are also called transfer vouchers. The transfer vouchers are prepared to record non-cash transactions of the business involving Credit sales, Credit purchases, Depreciation on assets, Return of goods purchased on credit, Bad debts, Return of goods sold on credit etc. These vouchers are prepared both in debit and credit forms simultaneously. A format of Transfer Voucher is given as follows: (3) TRANSFER VOUCHER Radhika Pearls Store (1) 32, Vikas Nagar, Lucknow Voucher No........ Date 1.4..2012 (2) Amount (`) Debit : Machinery A/c ---------- (4a) ---------- Credit : Raman ---------- (4b) (Being the machinery purchased (6) vide Cash Memo No...........) ---------- (5) Sd/- Sd/- Manager Accountant (8) (7) ACCOUNTANCY 67  MODULE - II Double Entry System Journal and Other Subsidiary Books A Non-Cash Voucher gives the following information: 1. Name and Address of the Organisation. 2. Date of Preparing Voucher. 3. Accounting Voucher Number. 4. (a) Title of the Account Debited. Notes (b) Title of the Account Credited. 5. Net Transaction Amount. 6. Narration, i.e., a brief description of the transaction. 7. Signature of the Person Preparing it. 8. Signature of the Authorised Signatory. 9. Supporting Voucher Number. Illustration 6 Prepare Transfer Vouchers of Sunny Garments, Kanpur from the source vouchers based on the following transactions: 2012 ` Jan 3 Purchased goods from M/s. Jim & Joney vide Bill No. 20 47,000 Jan. 8 Sold goods to M/s. Sita Ram vide Invoice No. 4171 13,980 Solution: Sunny Garments, Kanpur Voucher No........... Date: 3.1.2012 Amount (`) Debit : Purshases A/c 47,000 47,000 Credit : M/s. Jim & Joney 47,000 (Being goods purchased from M/s. Jim & Joney vide Bill No. 20) 47,000 Sd/- Sd/- Manager Accountant Sunny Garments, Kanpur Voucher No........... Date: 8.1.2012 Amount (`) Debit : M/s. Sita Ram 13,980 13,980 Credit : Sales A/c 13,980 (Being the amount of credit sales vide Invoice No. 4171 to M/s. Sita Ram) 13,980 Sd/- Sd/- Manager Accountant 68 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other Illustration 7 Subsidiary Books Prepare a transfer Voucher from the following supporting voucher. Ratan & Sones Sale Invoice No. 121 Date : 15.3.2012 To M/s. Naresh Brothers Notes Qty. Particulars Rate Amount (`) (`) 120 Nos. Cricket balls 100 12,000 70 Nos. Full size bat 1000 70,000 82,000 Sd/- Ratan & Sons Solution : Ratan & Sons Voucher No. 1 Date : 15.3.2012 Amount (`) Debit : M/s. Naresh Brothers 82,000 82,000 Credit : Sales A/c 82,000 (Being the credit sales vide Invoice No. 121 to M/s. Naresh Brothers) 82,000 Sd/- Sd/- Manager Accountant INTEXT QUESTIONS INTEXT QUESTIONS 5.3 5.3 I. Which of the following statements is true and which is false? i. For every transaction there will be two entries. ii. 'One who gives is a debtor and one who receives is a creditor'. iii. A system is called ‘double entry system’ because the two fold aspect of each transaction are recorded. iv. The totals of debit entries on any day need not be equal to credit entries related to various accounts. II. Put a mark against each transaction in the column of correct type of voucher. ACCOUNTANCY 69  MODULE - II Double Entry System Journal and Other Subsidiary Books Debit Credit Transfer Vouchers Vouchers Vouchers 1. Purchase furniture for cash 2. Sale of goods for cash Notes 3. Sale of goods to Vikram 4. Depreciation charged on Building 5. Withdrew cash from Bank for office use. III. Multiple Choice Questions i. Which English alphabet is similar to the shape of an account? a) I b) T c) H d) D ii. How many sides does an account have? a) One b) Two c) Three d) Four iii. Where are all the transactions of a particular account recorded? a) Under the particular account b) Under any account c) Under more than two accounts d) Under many accounts iv. Under how many heads accounts can be grouped under Modern System of accounting: a) Two b) Three c) Four d) Five v. Treatment of assets account is similar to a) Expenses b) Revenue c) Capital d) Liabilities WHAT YOU HAVE LEARNT System under which both the changes in a transaction are recorded together, one change is debited while the other change is credited with equal amount is known as double entry system. Account is a head under which particular type of transactions classified and consolidated are recorded. Traditional classifications of the accounts are as: personal, real and nominal. On the basis of modern classification accounts are divided into assets, liabilities, revenue, expense and capital. Effects of debits and credits on various types of accounts. 70 ACCOUNTANCY  Double Entry System MODULE - II Journal and Other Assets Expenses Subsidiary Books Debit Credit Debit Credit (increase) (decrease) (increase) (decrease) + - + - Capital Liabilities Revenue Notes Debit Credit Debit Credit Debit Credit (decrease) (increase) (decrease) (increase) (decrease) (increase) - + - + - + Source Document and Vouchers: A document evidencing that an accounting event took place is called source document i.e. cash memo, invoice, receipt, Debit Note, Credit Note, Cheque and Pay-in slip. A voucher is documentary evidence in support of a transaction. They are cash voucher (Dr & Cr voucher) and transfer voucher for credit transaction. TERMINAL EXERCISE 1. Define double entry system. 2. State various advantages of double entry system. 3. State the limitations of double entry system. 4. What is meant by an account? 5. Explain the modern classification of different types of Accounts. 6. State the fundamental rules, followed to record the changes (increase / decrease) in various accounts. 7. What is accounting voucher? Explain in brief different types of accounting vouchers. 8. Prepare debit vouchers from the following transactions: i) Goods purchased for cash `1,50,000 ii) Cash paid to Raghav (creditor) `1,00,000 iii) Paid for office expense `15,000. 9. Prepare credit vouchers from the following transactions: i) Additional capital introduced `2,00,000 ii) Compensation received from the Insurance company `50,000 iii) Drew cash for office from Bank `1,50,000 10. Prepare transfer vouchers from the following transactions: i) Goods purchased from Mehta & Co. `25,000 ii) Sales return from customers `1,500 iii) Goods given as charity `3,000 ACCOUNTANCY 71  MODULE - II Double Entry System Journal and Other Subsidiary Books 11. Prepare necessary accounting vouchers from the following transactions: a) Goods sold to Salma on credit `8,000 b) Withdraw cash for personal use `5,000 c) Cash received from Bhoomi `15,000 d) Salary paid `5,000 e) Depreciation charged `7,000 Notes f) Cash deposited into Bank `10,000 12. Put the following on the proper side of Furniture Account: ` Furniture purchased 20,000 Furniture sold 12,000 Furniture again purchased 6,000 Furniture discarded 1,500 A part of furniture worth ` 500 was broken 500 13. From the following data, prepare proprietors Capital Account: ` Commenced business with Cash 30,000 Net loss as per Profit & Loss Account 4,000 Drawings during the year 5,000 Additional capital introduced during the year 3,000 ANSWER TO INTEXT QUESTIONS 5.1 i) dual aspect ii) debtor & creditor iii) any alteration in an account iv) no guarantee 5.2 I. i) personal, real and nominal ii) capital, liabilities, expense, revenue and assets iii) assets, liabilities iv) debited, credited v) debit, credit II. i) Wages – Expense, ii) Building – Asset, iii) Cash – Asset, iv) Gupta (Supplier) – Liability, v) Sharma Owner – Capital vi) Sugam (Customer) – Asset, vii) Interest received – Revenue viii) Commission earned – Revenue, ix) Discount allowed – Expense, x) Rent Paid – Expense. 5.3 I. i. False ii. False iii. True iv. False II. i. Debit ii) Credit iii) Transfer iv) Transfer v) Credit III. i) b, ii) b, iii) a, iv) d, v) a. ACTIVITY FOR YOU Draft a list of activities involving your monetary transactions of last week and prepare vouchers from those transactions (atleast ten). 72 ACCOUNTANCY