Lesson
Learn how business activities are identified, measured, and recorded in accounting books.
Learn how business activities are identified, measured, and recorded.
Concept explanation
Recording of transactions means writing business activities in accounting books in a proper way.
Whenever something happens in a business that can be measured in money, it should be recorded.
If a shop buys goods for Rs.10,000, it is recorded.
If a shop sells goods for Rs.5,000, it is recorded.
If the owner only plans to buy goods next week, it is not recorded yet.
Accounting records real business events, not just thoughts or plans.
A business records transactions to know how much cash it has.
It helps the business know how much it purchased and sold.
It shows how much the business has to pay and receive.
It helps calculate whether the business made profit or loss.
It shows assets owned by the business and liabilities payable by the business.
Recorded: Bought goods for cash Rs.10,000.
Recorded: Sold goods on credit Rs.8,000.
Recorded: Paid rent Rs.3,000.
Recorded: Received commission Rs.2,000.
Recorded: Took loan from bank Rs.50,000.
Recorded: Owner introduced capital Rs.1,00,000.
Not recorded: Customer asked price.
Not recorded: Owner plans furniture.
Not recorded: Shopkeeper feels sales will increase.
Not recorded: Employee promises to work harder.
Not recorded: Owner is very skilled.
Reason: only money-measurable business events are recorded.
Riya starts a stationery shop.
Day 1: she brings Rs.50,000 cash into the business.
Day 2: she buys notebooks for Rs.12,000.
Day 3: she sells notebooks for Rs.4,000 cash.
Day 4: she sells pens to Amit Rs.2,000 on credit.
Day 5: she pays rent Rs.3,000.
Day 6: a customer asks the price of a diary but does not buy.
Record Day 1 to Day 5 because real business transactions happened.
Do not record Day 6 because no sale happened.
This is the first step before journal entries.
A source document is proof of a transaction.
Examples include cash memo, invoice, receipt, bill, bank slip, cheque counterfoil, debit note, and credit note.
If goods are purchased, the purchase invoice is proof.
If rent is paid, the receipt is proof.
Source document means proof of transaction.
Step 1: read the business event carefully.
Step 2: check whether it can be measured in money.
Step 3: check whether it belongs to the business.
Step 4: identify the accounts affected.
Step 5: decide debit and credit.
Step 6: write the journal entry.
Recording starts before debit and credit. Understand the transaction clearly first.
A cash transaction means money is paid or received immediately.
Example: sold goods for cash Rs.5,000.
A credit transaction means money will be paid or received later.
Example: sold goods to Amit Rs.5,000 on credit.
A cash sale affects Cash immediately.
A credit sale creates a Debtor.
Visual flow
Business event
Money-measurable?
Business-related?
Source document
Identify accounts
Journal entry
Ledger
Trial balance
Final accounts
Solved examples
Example 1
Should it be recorded? Yes. Accounts affected: Cash and Capital.
Cash came into the business.
Capital increased because the owner introduced money into the business.
Example 2
Should it be recorded? Yes. Accounts affected: Purchases and Cash.
Goods were purchased for the business.
Cash went out of the business.
Example 3
Should it be recorded? No. No accounts are affected yet.
No sale happened.
No money-measurable transaction has taken place yet.
Example 4
Should it be recorded? Yes. Accounts affected: Raju / Debtor and Sales.
Sales happened even though cash was not received immediately.
A customer now owes money to the business.
Example 5
Should it be recorded? Yes. Treatment: Drawings, not business expense. Accounts affected: Drawings and Cash.
Business cash went out.
Because the expense is personal, it is treated as drawings.
Avoid these
Practice prompts
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Now that you understand which transactions are recorded, learn what proof supports each entry.
Continue to Source Documents and Vouchers