We start with the initial state after Rohit commenced the business:

Initial Equation: Assets (Cash ₹5,00,000) = Liabilities (₹0) + Capital (₹5,00,000)

1. Opened a bank account by depositing ₹4,80,000.

• Analysis: This transaction involves the movement of funds from one asset form (Cash) to another (Bank). It does not involve any external party or affect the owner's claim.

• Effect on Assets: The 'Cash' asset decreases by ₹4,80,000, and the 'Bank' asset increases by ₹4,80,000. The total value of assets remains unchanged.

• Effect on Liabilities and Capital: There is no change in Liabilities or Capital.

• Resulting Equation:
  Assets (Cash ₹20,000 + Bank ₹4,80,000) = Liabilities (₹0) + Capital (₹5,00,000)
  ₹5,00,000 = ₹0 + ₹5,00,000

2. Bought furniture for ₹60,000 and paid by cheque.

• Analysis: The business acquires a new asset (Furniture) by giving up another asset (Bank balance).

• Effect on Assets: The 'Furniture' asset increases by ₹60,000, and the 'Bank' asset decreases by ₹60,000. The total value of assets remains unchanged.

• Effect on Liabilities and Capital: There is no change in Liabilities or Capital.

• Resulting Equation:
  Assets (Cash ₹20,000 + Bank ₹4,20,000 + Furniture ₹60,000) = Liabilities (₹0) + Capital (₹5,00,000)
  ₹5,00,000 = ₹0 + ₹5,00,000

3. Bought plant and machinery for ₹1,25,000 from M/s Ramjee Lal, paying ₹10,000 as a cash advance.

• Analysis: The business acquires an asset (Plant & Machinery) by giving up some cash and creating a liability for the remaining amount owed.

• Effect on Assets: The 'Plant & Machinery' asset increases by ₹1,25,000, while the 'Cash' asset decreases by ₹10,000. The net increase in total assets is ₹1,15,000.

• Effect on Liabilities and Capital: The liability to M/s Ramjee Lal (Creditors) increases by the unpaid amount of ₹1,15,000 (₹1,25,000 - ₹10,000). There is no change in Capital.

• Resulting Equation: Both the Assets side and the Liabilities side of the equation increase by ₹1,15,000, maintaining the balance.
  Assets (Cash ₹10,000 + Bank ₹4,20,000 + Furniture ₹60,000 + P&M ₹1,25,000) = Liabilities (Creditors ₹1,15,000) + Capital (₹5,00,000)
  ₹6,15,000 = ₹1,15,000 + ₹5,00,000

4. Purchased goods on credit from M/s Sumit Traders for ₹55,000.

• Analysis: The business acquires an asset (Stock of Goods) by creating a liability to pay the supplier later.

• Effect on Assets: The 'Stock' asset increases by ₹55,000.

• Effect on Liabilities and Capital: The liability to M/s Sumit Traders (Creditors) increases by ₹55,000. There is no change in Capital.

• Resulting Equation: Both the Assets side and the Liabilities side increase by ₹55,000, maintaining the balance.
  Assets (Cash ₹10,000 + Bank ₹4,20,000 + Furniture ₹60,000 + P&M ₹1,25,000 + Stock ₹55,000) = Liabilities (Creditors ₹1,70,000) + Capital (₹5,00,000)
  ₹6,70,000 = ₹1,70,000 + ₹5,00,000

5. Sold goods costing ₹25,000 for ₹35,000 on credit to Rajani Enterprises.

• Analysis: This transaction has a dual effect on assets and also affects capital. The business gives up one asset (Stock) and receives another (Debtors). The difference between the selling price and the cost is profit, which increases the owner's capital.

• Effect on Assets: The 'Stock' asset decreases by its cost of ₹25,000. A new asset, 'Debtors' (amount receivable from Rajani Enterprises), increases by the selling price of ₹35,000. The net effect is an increase in total assets by ₹10,000 (₹35,000 - ₹25,000).

• Effect on Liabilities and Capital: There is no change in Liabilities. The profit of ₹10,000 (₹35,000 - ₹25,000) increases the Capital.

• Resulting Equation: Both the Assets side and the Capital side increase by ₹10,000, maintaining the balance.
  Assets (Cash ₹10,000 + Bank ₹4,20,000 + Debtors ₹35,000 + Stock ₹30,000 + Furniture ₹60,000 + P&M ₹1,25,000) = Liabilities (Creditors ₹1,70,000) + Capital (₹5,10,000)
  ₹6,80,000 = ₹1,70,000 + ₹5,10,000

Analysis Table Showing Effect on Accounting Equation

Final Position Summarised as a Balance Sheet

The final equation shows the financial position of the business, which can be presented in the form of a Balance Sheet:

Balance Sheet of Rohit as at ...

Journal Entries

Books of Saroj Mart

Journal

Books of Suman

Journal

Working Note: Calculation for GST Set-off and Payment

1. Calculation of Total Input and Output GST:

• Total Input GST Available (Asset):
  • Input IGST (from transaction i) = ₹63,000
  • Input CGST (from iii + iv) = ₹2,700 + ₹4,500 = ₹7,200
  • Input SGST (from iii + iv) = ₹2,700 + ₹4,500 = ₹7,200
• Total Output GST Collected (Liability):
  • Output CGST (from transaction ii) = ₹36,000
  • Output SGST (from transaction ii) = ₹36,000

2. GST Set-off Procedure:

The Output GST liability is settled by using the available Input GST credit in the following order:

Conclusion: After setting off all liabilities, there is no GST to be paid to the government. Instead, there is a remaining Input IGST credit of ₹5,400 which will be carried forward to the next tax period.

Books of Nexus Electronics

Journal

Working Note: Calculation for GST Set-off and Payment

1. Calculation of Total Input and Output GST:

• Total Input GST Available (Asset):
  • Input IGST = ₹36,000 (from i) + ₹7,200 (from vi) = ₹43,200
  • Input CGST = ₹4,500 (from iv) + ₹7,200 (from v) = ₹11,700
  • Input SGST = ₹4,500 (from iv) + ₹7,200 (from v) = ₹11,700
• Total Output GST Collected (Liability):
  • Output IGST (from transaction iii) = ₹27,000
  • Output CGST (from transaction ii) = ₹45,000
  • Output SGST (from transaction ii) = ₹45,000

2. GST Set-off Procedure and Final Payment Calculation:

The Output GST liability is settled by using the available Input GST credit in the prescribed order.

Conclusion:
Total GST to be paid to the government = ₹17,100 (CGST) + ₹33,300 (SGST) = ₹50,400.
This amount is paid via Bank, as reflected in the final journal entry.

The correct statement is (iii) Every transaction must be recorded with equal total debits equal to total credits.

Reasoning:

The double-entry system is based on the Dual Aspect Concept, which states that every transaction has two effects that are equal and opposite. This is the foundation of the accounting equation ($Assets = Liabilities + Capital$). To keep this equation in balance, for every debit entry, there must be a corresponding credit entry of an equal amount.

The other two statements are incorrect because they are too restrictive:

• Statement (i) is incorrect. A transaction can involve a debit to one asset and a credit to another asset. For example, when a business purchases machinery for cash, Machinery A/c is debited (an asset increases) and Cash A/c is credited (an asset decreases).
• Statement (ii) is incorrect. A transaction can involve a debit to one liability and a credit to another liability. For example, when a creditor is paid by accepting a Bill of Exchange, Creditors A/c is debited (a liability decreases) and Bills Payable A/c is credited (a new liability is created).

Capital is the owner's investment in the business. It is affected by the introduction of funds, withdrawal of funds, and the operational results (profits or losses) of the business.

Transactions that Increase Capital:

• Introduction of Fresh Capital: When the owner invests additional money or assets into the business, it directly increases their capital contribution.
• Net Profit: At the end of the accounting period, if the total revenues are more than the total expenses, the resulting net profit belongs to the owner and is added to their capital.
• Interest on Capital: In a partnership or even in a sole proprietorship, if it is decided to allow interest on the owner's capital, this interest is treated as an expense for the business but an income for the owner, thereby increasing the capital balance.

Transactions that Decrease Capital:

• Drawings: When the owner withdraws cash or goods from the business for personal use, it is termed as drawings and is deducted from the capital.
• Net Loss: If the total expenses of an accounting period exceed the total revenues, the resulting net loss is borne by the owner and is deducted from their capital.
• Interest on Drawings: If the business charges interest on the owner's drawings, this amount is treated as an income for the business but a cost to the owner, reducing their capital balance.
• Payment of Personal Expenses: If the business pays for the owner's personal expenses (e.g., life insurance premium, income tax), it is treated as drawings and reduces capital.

No, debit does not always mean increase, and credit does not always mean decrease. The effect of a debit or a credit depends entirely on the nature of the account being affected.

The rules for debit and credit can be understood using the modern approach, which classifies accounts into five types based on the accounting equation:

As you can see, for Assets and Expenses, a debit means an increase. However, for Liabilities, Capital, and Revenue, a debit means a decrease.

The correct option is (ii).

Here is the detailed classification of each account which justifies the choice:

The classification in option (ii) perfectly matches this analysis:

• Assets: 1, 6
• Liabilities: 4, 5
• Capital: 8
• Revenue: 7, 3
• Expense: 2, 9, 10

The analysis of each transaction is based on the modern rules of accounting. The account to be debited or credited is determined by the nature of the account and whether it is increasing or decreasing.

The rules are as follows:

• Debit (Dr.): An increase in Assets or Expenses, OR a decrease in Liabilities, Capital, or Revenue.
• Credit (Cr.): An increase in Liabilities, Capital, or Revenue, OR a decrease in Assets or Expenses.

The table below shows the accounts affected, their type, and their movement (increase/decrease), which determines the debit and credit entry for each transaction.

(d) Record the page number of the ledger account.

Reasoning: The Ledger Folio (L.F.) column is a cross-referencing tool in the journal. When a transaction is posted from the journal to a specific account in the ledger, the page number of that ledger account is written in the L.F. column of the journal entry. This makes it easy to trace any entry from the journal to its corresponding ledger account and vice-versa (where a Journal Folio or J.F. column is maintained).

(d) Debit to debtors and Credit to fees income.

Reasoning: When services are sold on credit, two things happen:

1. The business earns revenue (Fees Income). As per accounting rules, an increase in revenue is credited.
2. The customer owes money to the business, becoming a Debtor (or Accounts Receivable). A debtor is an asset to the business. An increase in an asset is debited.

Therefore, the correct entry is to debit Debtors and credit Fees Income.

(b) Debit equipment for ₹ 10,00,000 and Credit cash ₹ 2,00,000 and creditors ₹ 8,00,000.

Reasoning: This is a compound journal entry. The total value of the asset acquired must be recorded.

1. The total cost of the equipment is $\textsf{₹ } \ 2,00,000 + \textsf{₹ } \ 8,00,000 = \textsf{₹ } \ 10,00,000$. Since an asset (Equipment) is increasing, it must be debited for the full amount.
2. Cash, an asset, is decreasing by $\textsf{₹ } \ 2,00,000$. A decrease in an asset is credited.
3. A liability to the supplier (Creditor or Accounts Payable) is being created for $\textsf{₹ } \ 8,00,000$. An increase in a liability is credited.

The total debit ($\textsf{₹ } \ 10,00,000$) equals the total credits ($\textsf{₹ } \ 2,00,000 + \textsf{₹ } \ 8,00,000$).

(b) Accounts to be debited listed first.

Reasoning: By convention and standard accounting practice, when preparing a journal entry, the account(s) to be debited are always written first. The account(s) to be credited are written on the subsequent lines, slightly indented, and are prefixed with the word "To". This formatting ensures clarity and uniformity in the journal.

(d) Total amount debited will equal total amount credited.

Reasoning: This is the fundamental principle of the double-entry system of accounting, based on the dual aspect concept. Every transaction has two effects, and to keep the accounting equation balanced, the total value of the debits for any given transaction must be exactly equal to the total value of the credits.

(c) Debit monthly bill and Credit cash.

Reasoning: A "monthly bill" (like electricity, telephone, etc.) is an expense for the business. The payment of this bill involves two accounts:

1. The respective Expense account (e.g., Electricity Expense A/c). An increase in an expense is debited.
2. The Cash account (assuming payment is by cash). Cash is an asset, and its balance is decreasing. A decrease in an asset is credited.

Thus, the entry is to debit the Expense (monthly bill) and credit Cash.

(a) Debit salaries Credit cash.

Reasoning: This is similar to the previous question. Salaries are an expense for the business.

1. Salaries Account is an expense account. When salaries are paid, the expense increases. An increase in expense is debited.
2. Cash Account is an asset account. When cash is paid, the asset decreases. A decrease in an asset is credited.

Hence, the correct journal entry is to debit the Salaries account and credit the Cash account.

Rent Account

Reasoning: Rent is an expense for the business. According to the rules of accounting, an increase in an expense is always debited. The corresponding credit would be to the Bank Account, as the bank balance (an asset) is decreasing.

Debtors Account

Reasoning: Debtors are an asset (money owed to the business). When a debtor pays, this asset decreases. A decrease in an asset is always credited. The corresponding debit would be to the Cash/Bank Account, as another asset is increasing.

Cash Account

Reasoning: Assuming the purchase was made in cash (as is common for such items unless stated otherwise), the Cash balance, which is an asset, decreases. A decrease in an asset is credited. The corresponding debit would be to the Stationery Account (an expense).

Machinery Account

Reasoning: A machine is a fixed asset for the business. When it is purchased, the value of assets increases. An increase in an asset is always debited. The corresponding credit would be to the Bank Account.

Creditors Account

Reasoning: A creditor is a liability (money owed by the business). When a creditor is paid, this liability decreases. A decrease in a liability is always debited. The corresponding credit would be to the Bank Account.

Stationery Account

Reasoning: When stationery was originally purchased, the Stationery Account (an expense) was debited. Returning it is a reversal or reduction of that expense. A decrease in an expense is credited. The corresponding debit would be to the Cash Account, which is increasing.

Debtors Account

Reasoning: When services are provided on credit, the customer becomes a debtor. A debtor is an asset to the business. The value of this asset is increasing. An increase in an asset is always debited. The corresponding credit would be to the Service Revenue Account.

(iv) All of the above

Reasoning: An accounting voucher is an internal document that is prepared as an authorization to make an entry in the books of accounts. A voucher is prepared for every single business transaction, whether it is a cash transaction (receipts or payments) or a non-cash/credit transaction (credit sales or purchases). It serves as documentary evidence for the entry.

(i) Documentary evidence

Reasoning: The accounting process begins with a transaction, which is supported by a source document (e.g., invoice, cash memo, receipt). This source document provides the documentary evidence based on which an accounting voucher is prepared. The voucher then becomes the basis for recording the journal entry. Therefore, a voucher is prepared from the documentary evidence, not from the journal entry or ledger account.

(i) Two

Reasoning: In the double-entry system, every account is represented in a 'T' format. It has two sides: the left side is known as the Debit (Dr.) side, and the right side is known as the Credit (Cr.) side. This structure allows for recording the two-fold aspect of every transaction.

(ii) Machine account

Reasoning: A machine is a fixed asset, not goods bought for resale. The 'Purchases Account' is used exclusively for recording the purchase of goods intended for resale. When a machine is purchased, an asset (Machinery) increases. An increase in an asset is always debited. The Cash Account would be credited as it is a decreasing asset.

(iii) $Capital = Assets – Liabilities$

Reasoning: The fundamental accounting equation is $Assets = Liabilities + Capital$. By rearranging this equation to solve for Capital, we subtract Liabilities from both sides, which gives us: $Assets - Liabilities = Capital$. This correctly represents that capital is the owner's residual claim on the assets of the business after all external liabilities have been settled.

(iv) Cash account

Reasoning: When the proprietor withdraws cash for personal use, two accounts are affected. First, the 'Drawings Account' is debited to record the withdrawal. Second, 'Cash', which is an asset, is decreasing from the business. A decrease in an asset is always credited. The question asks which account should be credited.

Both (i) and (iv) are correct statements.

Reasoning: According to the modern rules of accounting:

• For Assets, the rule is Debit the increase and Credit the decrease. So, statement (i) is correct.
• For Expenses, the rule is Debit the increase and Credit the decrease. So, statement (ii) is incorrect.
• For Revenue, the rule is Debit the decrease and Credit the increase. So, statement (iii) is incorrect.
• For Capital, the rule is Debit the decrease and Credit the increase. So, statement (iv) is correct.

Since the question asks to find "the" correct statement, it is potentially flawed. However, both are fundamental rules of the double-entry system.

(iv) Ledger

Reasoning: The Ledger is known as the principal or main book of accounts. It is a collection of all accounts (Asset, Liability, Capital, Revenue, and Expense) of a business. Transactions are first recorded in a Journal (or subsidiary books like Cash Book/Purchases Book) and then posted to their respective accounts in the ledger.

(iii) Journalising

Reasoning: While 'recording' is a general term, the specific technical term for the process of analysing a transaction and recording it in the Journal is called Journalising. 'Posting' refers to transferring entries from the journal to the ledger, and 'Casting' means totaling the columns of a book.

The accounting process involves a series of steps to record, classify, and summarize financial transactions. The three fundamental steps are:

1. Recording: This is the first step where financial transactions are identified from source documents (like invoices and receipts) and recorded chronologically in a book of original entry. This process is called Journalising, and the book used is the Journal.

2. Classifying: After recording, all transactions of a similar nature are grouped together in one place. This is done by transferring the entries from the Journal to their respective accounts in the main book of accounts, known as the Ledger. This process is called Posting.

3. Summarising: At the end of the accounting period, the classified data is presented in an understandable and useful manner for internal and external users. This involves preparing a Trial Balance to check the arithmetical accuracy of the postings and then preparing the Financial Statements (i.e., the Trading and Profit and Loss Account and the Balance Sheet).

The evidence provided by source documents (such as cash memos, invoices, debit/credit notes, receipts, etc.) is critically important to accounting due to the following reasons:

• Objectivity and Verifiability: Source documents provide objective and verifiable evidence that a transaction has occurred. This aligns with the Objectivity Concept, ensuring that accounting records are based on facts and are free from personal bias.
• Basis for Recording: They are the primary basis for preparing accounting vouchers and recording entries in the books of accounts. Without a source document, a transaction cannot be recorded.
• Audit and Verification: During an audit, source documents are used by auditors to verify the authenticity and accuracy of the transactions recorded in the books.
• Legal Evidence: They serve as legal evidence in case of any disputes, for example, a dispute with a customer or a supplier.
• Tax Compliance: Tax authorities, like those administering GST, require source documents as proof of transactions for assessment and compliance purposes.

A transaction should always be first recorded in a Journal.

Reason:

The Journal is known as the Book of Prime Entry or Book of Original Entry. It is where transactions are recorded for the very first time, in chronological order as they occur. It provides a complete record of each transaction in one place, showing both the debit and credit aspects, along with a narration explaining the transaction.

The Ledger, on the other hand, is the Principal Book of Accounts. Its purpose is to classify transactions by posting them to individual accounts. This process of posting from the journal to the ledger can only happen after the transaction has been initially recorded and analysed in the journal. Therefore, recording in the journal is the first step in the accounting cycle after the identification of a transaction.

In a standard journal entry:

• Debits are listed first. The account to be debited is written on the first line, and its amount is entered in the debit column.
• Credits are indented. The account to be credited is written on the line below the debit entry, and it is slightly indented to the right. The word 'To' is traditionally prefixed to the credited account's name.

Accounting systems based on this principle are called double-entry systems (not double accounting systems) because they are founded on the Dual Aspect Concept.

This concept states that every business transaction has two equal and opposite effects on at least two different accounts. The system records both of these effects to keep the accounting equation ($Assets = Liabilities + Capital$) in balance. For every debit, there must be a corresponding credit of an equal amount.

Because every transaction involves this "double" or two-fold entry (a debit and a credit), the system is known as the double-entry system.

Cash Account

Dr.Cr.

The rules of debit and credit are the same for both liability and capital because, from the perspective of the business (as per the Business Entity Concept), both represent obligations or claims against the firm's assets.

This is clearly reflected in the accounting equation:

$Assets = Liabilities + Capital$

Here:

• Liabilities are the claims of outsiders against the business assets.
• Capital is the claim of the owner(s) against the business assets.

Since both liabilities and capital appear on the same side (right side) of the accounting equation and represent claims on the business, they follow the same rule: an increase is credited, and a decrease is debited.

There seems to be a slight confusion in the question. The L.F. (Ledger Folio) number is entered in the journal, while the J.F. (Journal Folio) number is entered in the ledger.

Purpose of L.F. (Ledger Folio) in the Journal: Its purpose is to record the page number of the ledger where the journal entry has been posted. This serves as a cross-reference, indicating that the posting is complete and allowing for easy tracing of the transaction from the journal to the specific ledger account.

Purpose of J.F. (Journal Folio) in the Ledger: Its purpose is to record the page number of the journal from which the entry was posted. This allows anyone looking at a ledger account to quickly trace the entry back to its original source in the journal to see the full details of the transaction.

(a) To increase revenue, you would make a Credit entry.

(b) To decrease an expense, you would make a Credit entry.

(c) To record drawings, you would make a Debit entry to the Drawings Account.

(d) To record fresh capital, you would make a Credit entry to the Capital Account.

Based on the rules of accounting:

• If a transaction has the effect of decreasing an asset, the decrease is recorded as a credit.
• If a transaction has the effect of decreasing a liability, the decrease is recorded as a debit.

Events Recorded in Accounting Systems

Accounting systems do not record all events that occur in a business; they only record financial transactions and economic events that can be measured in monetary terms. This is dictated by the Money Measurement Concept. A recordable event must meet two criteria:

1. It must be measurable in a monetary unit (e.g., Indian Rupees).
2. It must change the financial position of the business (i.e., change the value of its Assets, Liabilities, or Capital).

Examples of events recorded include:

• Purchase and sale of goods or assets (cash or credit).
• Payment of expenses like salaries, rent, and electricity.
• Receipt of income like sales revenue, commission, or interest.
• Introduction of capital by the owner or borrowing funds from a bank.
• Withdrawal of cash or goods by the owner for personal use (drawings).

Events that are important to the business but cannot be expressed in monetary terms, such as the appointment of a new CEO, the signing of a contract (before any exchange of value), a strike by employees, or the superior quality of a product, are not recorded in the books of accounts.

Importance of Source Documents

A source document is the original, written evidence that a business transaction has occurred. Examples include cash memos, invoices, receipts, debit/credit notes, and cheques. They are the bedrock of the accounting process and their importance is immense:

• Evidence of Transaction: They provide proof that a transaction took place, detailing its nature, date, amount, and parties involved.
• Ensuring Objectivity: They support the Objectivity Principle by providing unbiased evidence, ensuring that accounting is based on facts, not personal opinions.
• Basis for Recording: They are the starting point for the accounting cycle. An accounting voucher is prepared based on the source document, which in turn is used to record the journal entry.
• Audit Trail: Source documents are crucial for auditors. They use them to verify and vouch for the transactions recorded in the books, forming a clear audit trail from the financial statements back to the initial event.
• Legal and Tax Compliance: These documents serve as legal evidence in case of disputes. They are also essential for tax authorities (e.g., GST officials) to verify sales, purchases, and tax liabilities.

Debits and credits are the fundamental tools of the double-entry system used to analyse and record the two-fold effect of every financial transaction. "Debit" (Dr.) refers to the left side of an account, and "Credit" (Cr.) refers to the right side. The process of using them to analyse a transaction involves a systematic, four-step approach:

Step 1: Identify the Accounts Involved
The first step is to identify at least two accounts that are affected by the transaction. For example, in 'Paid rent of $\textsf{₹ } \ 5,000$ by cash', the two accounts involved are 'Rent Account' and 'Cash Account'.

Step 2: Determine the Nature of the Accounts
Next, classify each account into one of the five categories based on the accounting equation: Asset, Liability, Capital (Equity), Expense, or Revenue. In our example, Rent is an 'Expense' and Cash is an 'Asset'.

Step 3: Determine the Effect on the Accounts
Analyse whether the transaction causes each account to increase or decrease. In our example, the Rent expense is increasing, and the Cash asset is decreasing.

Step 4: Apply the Rules of Debit and Credit
Finally, apply the established rules of debit and credit to determine which account to debit and which to credit. The rules are:

Applying these rules to our example:

• Rent Account (Expense) is increasing → Debit Rent Account.
• Cash Account (Asset) is decreasing → Credit Cash Account.

This systematic analysis ensures every transaction is correctly recorded, maintaining the balance of the accounting equation where total debits always equal total credits.

An account is a formal record in a ledger that represents, in a T-shape format, all transactions related to a particular item like an asset, liability, capital, revenue, or expense. Accounts are the primary tools for classifying and summarizing the effects of transactions.

Here’s how they are used to record information:

1. Classification of Transactions: While a journal records transactions chronologically, it does not show the net effect on any single item. An account solves this by grouping all transactions of a similar nature. For example, the 'Cash Account' will contain all cash receipts and cash payments, the 'Sales Account' will contain all sales, and so on. This process of transferring entries from the journal to the ledger accounts is called posting.

2. Recording Increases and Decreases: An account has two sides: the left side (Debit) and the right side (Credit). Based on the nature of the account, these sides are used to record increases and decreases.

• For Asset and Expense accounts, increases are recorded on the debit side and decreases on the credit side.
• For Liability, Capital, and Revenue accounts, increases are recorded on the credit side and decreases on the debit side.

3. Summarization and Finding Balances: At the end of an accounting period, each account is totalled. The difference between the total of the debit side and the total of the credit side is called the balance of the account. This balance represents the net effect of all transactions on that particular item. For example, the balance of the Cash Account shows the cash in hand, and the balance of the Sales Account shows the total sales for the period.

Example: If a business receives $\textsf{₹ } \ 10,000$ from sales and pays $\textsf{₹ } \ 3,000$ for rent, the Cash Account would record this as:

Cash Account

Dr.Cr.

In this way, accounts transform a long list of journal entries into a concise summary, showing the final position of each financial element.

A Journal is the primary book of accounting, also known as the Book of Original Entry. It is where financial transactions are first recorded in a chronological (day-to-day) order.

The key features of a journal are:

• It maintains a chronological record of all transactions.
• It analyses each transaction into its debit and credit aspects based on the double-entry system.
• It provides a complete story of each transaction in one place, including a brief explanation called a narration.
• The process of recording transactions in a journal is called Journalising.

Below is a specimen of a journal showing five entries:

In the Books of Modern Traders

Journal

Although both source documents and vouchers are integral to the accounting process, they are distinct from each other. The key differences are as follows:

The statement, "Accounting equation remains intact under all circumstances," is the fundamental principle on which the entire system of double-entry accounting is based. This equation is also known as the Balance Sheet Equation.

The accounting equation is expressed as:

$Assets = Liabilities + Capital$

This equation signifies that the assets of a business are always equal to the total of its liabilities (claims of outsiders) and capital (claims of owners). The reason it always remains intact or in balance is due to the dual aspect concept. Every business transaction has two effects that are equal and opposite, ensuring that the equation always balances. A transaction will affect at least two accounts, and the total debits will always equal the total credits.

The effects can be summarized as:

• An increase in an asset is accompanied by a corresponding decrease in another asset, OR
• An increase in an asset is accompanied by a corresponding increase in a liability or capital, OR
• A decrease in a liability is accompanied by a corresponding increase in another liability or capital, OR
• A decrease in an asset is accompanied by a corresponding decrease in a liability or capital.

To justify this, let's consider the following example where we analyze the effect of several transactions on the accounting equation.

Example

Let's assume Mr. Rohan starts a business. We will see how the accounting equation holds true after each transaction.

Conclusion

As demonstrated in the table above, after every single transaction, the total of the Assets column is always equal to the sum of the Liabilities and Capital columns. In the end, the total assets of the business are $\textsf{₹ }$ 5,05,000 (Cash: 3,85,000 + Stock: 50,000 + Furniture: 25,000) which is exactly equal to the Capital of $\textsf{₹ }$ 5,05,000, as liabilities are nil. This proves that the accounting equation remains balanced and, therefore, intact under all circumstances.

The double-entry mechanism is a scientific system of bookkeeping where every business transaction is recorded with two effects: a debit effect and a credit effect of an equal amount. This mechanism is based on the Dual Aspect Concept, which posits that every transaction has two aspects that impact the accounting equation ($Assets = Liabilities + Capital$).

The mechanism works by applying specific rules to determine which account to debit and which to credit. The core of the system is to ensure that for every transaction, the total debits are always equal to the total credits.

Illustrative Example:

Let's consider a comprehensive transaction:

"On May 10, 2018, a business purchases machinery for $\textsf{₹ } \ 1,00,000$. It pays $\textsf{₹ } \ 40,000$ immediately by cheque and agrees to pay the remaining balance of $\textsf{₹ } \ 60,000$ to the supplier, 'Bharat Machines', next month."

Let's analyse this transaction using the double-entry mechanism:

1. Identify the Accounts Affected:

• Machinery Account (An Asset is coming into the business).
• Bank Account (Payment is being made by cheque, so the bank balance is affected).
• Bharat Machines Account (An obligation to pay is being created).

2. Determine the Nature and Effect:

• Machinery Account is an Asset, and it is increasing by $\textsf{₹ } \ 1,00,000$.
• Bank Account is an Asset, and it is decreasing by $\textsf{₹ } \ 40,000$.
• Bharat Machines Account is a Liability (Creditor), and it is increasing by $\textsf{₹ } \ 60,000$.

3. Apply the Rules of Debit and Credit:

• An increase in an Asset (Machinery) is debited.
• A decrease in an Asset (Bank) is credited.
• An increase in a Liability (Bharat Machines) is credited.

4. Record the Journal Entry:

This results in the following compound journal entry:

Journal Entry

Here, we can see that the Total Debit ($\textsf{₹ } \ 1,00,000$) is exactly equal to the Total Credits ($\textsf{₹ } \ 40,000 + \textsf{₹ } \ 60,000 = \textsf{₹ } \ 1,00,000$). This is the essence of the double-entry mechanism, which ensures arithmetical accuracy and provides a complete and systematic record of all business transactions.

The Accounting Equation is based on the principle: Assets = Liabilities + Capital. The effect of each transaction is shown below:

Verification: Total Assets ($\textsf{₹ }1,60,000 + 30,000 + 12,000 + 7,000 = \textsf{₹ }2,09,000$) = Total Liabilities + Capital ($\textsf{₹ }7,000 + 2,02,000 = \textsf{₹ }2,09,000$). The equation is balanced.

The Accounting Equation is: Assets = Liabilities + Capital. The effect of each transaction is as follows:

Verification: Total Assets ($\textsf{₹ }2,39,000 + 35,000 + 20,000 = \textsf{₹ }2,94,000$) = Total Liabilities + Capital ($\textsf{₹ }40,000 + 2,54,000 = \textsf{₹ }2,94,000$). The equation is balanced.

The Accounting Equation: Assets = Liabilities + Capital

Verification: Total Assets ($\textsf{₹ }1,32,500 + 32,500 + 10,000 = \textsf{₹ }1,75,000$) = Total Liabilities + Capital ($\textsf{₹ }0 + 1,75,000 = \textsf{₹ }1,75,000$). The equation is balanced.

The Accounting Equation: Assets = Liabilities + Capital