4.

Recording Business
Transactions

This chapter discusses the following themes

110

4.1

Business transactions and accounting equation

4.2

Transactions and double entry theory

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Let us record business transactions systematically

The stage drama Jayagrahanaya won the first place in the islandwide short episode
stage drama competition organised recently by the Ministry of Education. Your
attention is drawn to a few dialogues from this drama.
Appuhamy -

Dhanapala Puthe, I started this boutique in small scale though it is in

this condition today.Those days I spent only about twelve rupees for
this.

Dhanapala -

Oh Appachchi, how did you manage to begin a business like this with
such a small amount?

Appuhamy -

That is how it is Puthe, you have to learn the tricks of the trade now
a days. Listen to me. I started this business at the beginning with a
small amount of my money. Later I felt I should develop this and got
a loan from the bank at the junction. Those days the business was
really successful.
Any how Puthe, from that day onwards, I used to write down all my
transactions in a book. At the same time puthe, I never mixed up the
business transactions with my personal transactions. Puthe, these are
our resources. If you don't manage them properly, it will go waste.

Dhanapala -

So Appachchi, how did you manage to keep records of your

transactions so well, without having any knowledge on commerce?

Appuhamy -

This is the thing puthe, those days your cousin used to come to this
boutique and he recorded something called accounts in the books. I
of course dont know anything about it.
One day I went to the bank to get a loan. I happened to take these
books of accounts along with me. The moment the bank clerk saw
these records, he immediately attended to my work.

Surely, vivid ideas would have arisen in you, if you read the above dialogues
attentively. Furthermore, we will try to identify activities that take place in a business
and understand the way in which they are recorded .
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111

Introduction
Resources are required to carry out a business. These resources are
provided by the businessman / businessmen and external parties as well. In
accounting, it is assumed that the business is an independent unit separate from its
owner /owners. The accounting equation reflects the resources of the business and the
obligation of the business towards the parties who supply those resources.
A business operates in different ways, using these resources. These activities
can be explained as transactions in general. A business transaction influences a
business unit in two ways. Recording transactions in accounts means, writing down
this dual effect or influence in accounts, according to the system called "Double Entry
Theory". All business transactions which can be measured in monetary terms are
recorded in accounts according to the double entry theory .

You will be able to understand the following basic terms by studying this chapter.

112

_ Resources

_ Accounting entity concept

_ Assets

_ Accounting equation

_ Owners equity (capital)

_ Double entry theory

_ Liabilities

_ Account

_ Transactions

_ Recording transactions

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4.1. Business transactions and accounting equation

Earning profits is the main objective of every business. Therefore, there is an
economic existence for businesses. They exchange resources with external parties for
this purpose. All the things used in the process of daily operations of a business are
called resources.
You may be able to understand about various resources used by a business from
the following examples.

Physical resources such as machinery, motor vehicles, buildings etc.

Human resources such as managers, foremen, clerks, labourers etc.

Financial resources such as cash in hand and cash in bank

Information obtained from various persons, institutions and the internet

When the businesses exchange resources with external parties, the quantity and
the monetary value of resources change as a result. Resources of a business are called
assets.
Transactions mean exchanging resources between the business and various other
parties or economic events.
Transactions of different nature take place when starting and carrying out
a business. Look at the following example.
Example :- 01.

Following are some of the transactions of Piyumis business

during month of May in 20XX.

i. 01.05- Piyumi started the business by investing Rs.50,000

ii. 07.05- Opening a current account by depositing Rs.10,000 in
the bank
iii. 10.05- Purchasing goods worth Rs. 20,000 from Nuwan
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113

iv. 13.05 -Obtaining a loan of Rs.30,000 from the bank

v. 14.05 -Paying telephone charges Rs. 5,000 by the business
vi. 17.05- Repaying Rs. 5,000 as part of the bank loan by the business
vii. 18.05- Selling goods worth Rs.3,000 to Prasanna
viii. 19.05- Receiving an income of Rs.2,500 by the business as lease
ix. 21.05- Withdrawing Rs.4,000 from the deposits of the bank
x. 23.05- Piyumi removing goods worth Rs. 1,000 for her personal use
from the business
xi. 27.05- Deciding to purchase a machine for the business
xii. 29.05- Recruiting two employees to work for the business
By focusing your attention to the above transactions, you may realize that
transactions of different nature can take place in a business. But, transactions which
are measurable in terms of money only are recorded in the books of accounts.
Therefore, the transactions no.xi and no. xii of the above example are not recorded in
the books of accounts.

Accounting entity concept

You know by now that transactions of different nature take place in a business as
it has an economic existence. In accounting, business is considered as an independent
entity separate from the owner of the business.
This is called the Accounting entity concept. According to this concept, business
transactions are entered in the records of the business, by looking at them from the
point of view of the business and not from the point of view of the owner.

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Accounting equation
The mathematical explanation which reflects the relationship between the resources
(assets) and the obligations of the business towards the parties who supply the
resources to the business is called the accounting equation.
Accordingly, accounting equation shows two variables.

Economic resources (assets) of the business

The obligations of the business towards the parties who

supplied the resources to the business (liabilities)

In considering the above situations, it is clear that a very simple accounting

equation is generated through the business transactions.

Assets

Liabilities

In general, two parties supply the necessary economic resources, when a

business is started and carried on.

The owner/ owners of the business

Other external parties

As stated above, the obligation or the liability of the business towards the
parties who gave the resources to the business.
Accordingly, the obligation of the business towards the owners can be stated as
the capital and towards the external parties as liabilities. Then the basic accounting
equation is can be shown as follows.

Assets = Owners Equity (capital) + Liabilities

We can also show the variables of the basic accounting equation that we
constructed as follows.
Owners equity
Liabilities
Assets

=
=
=

Assets
- Liabilities
Assets
- Owners equity
Liabilities + Owners equity
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115

Components of accounting equation

Assets, liabilities and owner's equity are considered as components of accounting
equation

Assets
The group of economic resources of a business is called assets.
Different types of assets originate according to the nature of transactions that
take place during the operating activities of a business. Therefore, assets can be
identified as the group of expected future economic benefits that the business owns or
controls.
Following features can be seen in assets of a business.

Originates as a result of a past transaction

Lies under the control of the business

Bring economic benefits to the business in the future

Able to measure the cost of it with reliability

A business has assets of different nature.

We can divide these assets into two parts according to the changes that take
place according to the operations of a business.

Current assets
The assets are there in the business for 12 months or less than that. They often
change their nature through day today activities of the business. There are also
called short term assets.
Closing stock, trade debtors, cash in hand are examples for current assets.

Non current assets

This is the group of assets which are in the business for more than 12 months and
they do not change their nature largely due to the day today activities of the
business. These are also called long term assets. Machinery, buildings and motor
vehicles investment are examples for these.

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Owners equity (capital)

The value of the resources invested in the business by the owner/ owners is called the
owners equity (capital)
Owner/ owners can invest capital in the business in cash or other asset as well.
Various, names are given to capital according to the nature of the business.

Example :- Sole traders

- owners wealth/ equity

Partnerships

- partners' wealth / equity

Limited companies

- shareholders equity

Liabilities
Liabilities are the funds provided by external parties to obtain assets of the business
in addition to the capital invested by the owners' of the business
Business liabilities have following features.

An obligation generated through a past transaction

The relevant payment can be measured with reliability

When settling the obligation, assets go out of the business

According to the period of repayment, you can divide business liabilities into
two as follows.

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117

Current liabilities
The group of obligations that has to be settled by the business in twelve months or
a time period less than that is called current liabilities.
Example :- Trade creditors, bank overdrafts, accrued expenses (expenses
payable)
Non current liabilities
The group of obligations that has to be settled by the business within a period of
more than one year is called non current liabilities. In many instances, the business
has to forward securities for these.
Example :- Bank loans repayable in 10 years, debentures issued by limited
companies
Day today activities of a business change the values of the components of accounting
equation.
Let us focus our attention to the following example.
Samarasinghe started a business by investing Rs. 50,000
Obtained a bank loan of Rs. 20,000 as the money was not enough
to run the business.
Basically, when a business is started and carried on, the necessary economic resources
are supplied by the owner/ owners.
The economic resources (cash or goods) invested in the business by the owner/
owners this way, are called the capital.
Focus your attention to the first transaction of the example above. You can see that
Samarasinghe has started the business by investing Rs. 50,000 and as a result,
following situations were created.
Generating a total value/ assets of Rs. 50,000 (cash) for the business and
at the same time the owner (Samarasinghe) is getting the ownership/ equity
for the assets of the business worth Rs. 50,000.
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When considering the above business transaction, we can construct a simple

accounting equation as follows :

Assets

Owners equity

01

Accordingly, we can show the accounting equation relevant to the first transaction this
way.
Assets
Rs.
Cash 50,000

=
=

Owners equity
Rs.
Capital 50,000

When the resources invested by the owner/owners are not enough to carry on the
business, the necessary resources are obtained from the external parties too. Also
we know that these resources taken from the external parties are called liabilities.
Now pay your attention to the second transaction of the above example. The
following situations were created by the transaction of getting Rs. 20,000 from the
bank, as the money was not enough to run the business.
Increasing the total value/assets of the business by Rs. 20,000 (cash) and
the bank is getting the ownership for the assets of the business worth
Rs.20,000 (liability)
We can build up accounting equations in relation to the above business transaction as
follows:

Assets

Owners equity + Liabilities

02

Now we can show the accounting equation after including the second business
transaction also as follows.
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119

Assets
(Rs)
Cash 70,000

=
=

Owners equity
(Rs)
Capital 50,000

+
+

Liabilities
(Rs)
Bank loan 20,000

The Figure 4.1 shows all the components of the basic accounting equation.
Madhurathnas Business

Resources
invested by
the external
parties

Resources
invested by the
owner

Capital
(Rs.50"000&

Assets
^Rs.70"000&

Liabilities
^Rs.20"000&

Figure 4.1 Components of accounting equation

We hope that you have understood by now, about the components of the
accounting equation, and also the changes that take place in the components of the
accounting equation as a result of the business transactions. In order to further your
knowledge on this, now, you may pay your attention to the transactions took place in
Piyumis business.
We can show how the transactions of Piyumis business influenced the basic
accounting equation as follows:

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Transaction 01
Piyumi started a business by investing Rs. 50,000
Business is receiving cash asset of Rs. 50,000 and at the same time,creating
an ownership / equity for Rs. 50,000
Assets
Rs.
Cash

= Owners equity
Rs.
50"000 = Capital 50"000

Liabilities
Rs.

50"000

50"000
Transaction 02

Business is opening a current account by depositing Rs. 10,000 in the bank

Creating a bank asset of Rs. 10,000 and the cash asset is decreasing by
Rs. 10,000
Assets
Rs.
Cash
Bank

=
40"000 =
10,000
50"000

Owners equity
Rs.
Capital 50"000

Liabilities
Rs.

50"000

Transaction 03
Purchasing a stock of goods worth Rs. 20,000 from Nuwan
Business is receiving a stock of goods worth Rs.20,000 and creating a liability
called creditor in Nuwans name for Rs. 20,000

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121

Assets
Rs.
Cash 40,000
Bank 10,000
Stock 20,000
70,000

Owners equity
Rs.
Capital 50,000

50,000

+
+

Liabilities
Rs.
Creditors 20,000

20,000

Transaction -04
Obtaining a loan of a Rs. 30.000 from the bank
Increasing the cash asset of the business by Rs. 30.000 and a liability called
the bank loan is coming into effect.
Assets
Rs.
Cash
Bank
Stock

Owners equity +
Liabilities
Rs.
Rs.
70"000 } Capital 50"000
Creditors
20"000
10"000
Bank loan 30"000
20"000
100"000

50"000

50"000

Transaction -05
Business is paying telephone charges Rs. 5,000
Cash assets decreasing by Rs. 5,000 for paying the telephone bill and owners
equity is also reducing by Rs. 5,000
Assets
( Rs. )
Cash
Bank
Stock

owners equity +
( Rs.)
65"000 } Capital 45"000

10"000
20"000
95"000

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45"000
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Liabilities
( Rs.)
Creditors 20"000
Bank loan 30"000

50"000

Transaction 06
Paying Rs. 5,000 to the bank as a part of the bank loan
Cash assets are decreasing by Rs. 5,000 and the liability of bank loan is
decreasing by Rs. 5,000.

Assets
Rs.
Cash
Bank
Stock

=
60"000 }
10"000
20"000
90"000

Owners equity +
Rs.
Capital 45"000

Liabilities
Rs.
Creditors 20"000
Bank loan 25"000

45"000

45"000

Transaction 07
Selling a stock worth Rs. 3,000 to Prasanna at the same price
Creating an asset called debtor in Prasannas name and the stock assets are
decreasing by Rs. 3,000

Assets
Rs.
Cash
Bank
Stock
Debtorsa

=
60"000 }
10"000
17"000
3"000
90"000

Owners equity
Rs.
Capital 45"000

45"000

For free distribution

Liabilities
Rs.
Creditors 20"000
Bank loan 25"000

45"000

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Transaction 08
Business is receiving a leasing income of Rs. 2,500
Cash asset is increasing by Rs. 2,500 and the owners equity is increasing
by Rs. 2,500
Assets
Rs.
Cash
Bank
Stock
Debtor

=
62"500 }
10"000
17"000
3"000

Owners equity +
Liabilities
Rs.
Rs.
Capital 47"500 Creditors
20"000
Bank loan 25"000

92"500

47"500

45"000

Transaction 09
Withdrawing Rs. 4,000 from the bank
Cash asset is increasing by Rs. 4,000 and the bank asset is decreasing by
Rs. 4,000

Assets
Rs.
Cash
Bank
Stock
Debtors

=
66"500 }
6"000
17"000
3"000
92"500

124

Owners equity +
Liabilities
Rs.
Rs.
Capital 47"500
Creditors 20"000
Bank loan 25"000

47"500

For free distribution

45"000

Transaction 10
Piyumi is taking a stock worth Rs. 1000 from the business for her personal use
Decreasing the asset of stock by Rs. 1,000 and the owners equity is
decreasing by Rs. 1,000 since all what is taken (goods/cash) from the
business by the owner for the personal use is drawings.
Assets
Cash
Bank
Stock
Debtors

=
Rs.
66"500
6"000
16"000
3"000
91"500

Owners equity +
Rs.
Capital 46"500

Liabilities
Rs.
Creditors 20"000
Bank loan 25"000

46"500

45"000

Activity 01
Following are some of the transactions that took place in Sanaths business.
i.

Sanath started a business by investing Rs. 100,000

ii.

Purchasing a machine for Rs. 10,000

iii.

Purchasing a block of land for Rs. 50,000 by the business

iv.

Getting a bank loan of Rs. 25,000 to expand the business

v.

Purchasing a stock of goods worth Rs. 7,000 from Nuwan

vi.

Depositing Rs. 15,000 in the bank

vii.

Selling a stock worth Rs. 3,000 at the same price

viii.

Withdrawing Rs. 5,000 from the bank for the use of the business

ix.
x.

Paying Nuwan Rs. 2,000

Selling a stock worth Rs. 1000 to Ajith for Rs. 1500

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125

While discussing with your friend,

i.

Show separately how each transaction given above influence the basic
accounting equation.

ii.

Complete the following table by taking into consideration the final basic
accounting equation you prepared as the answer for (a) above.

Items
Capital

Value Rs.
..............

Non current liabilities

Bank loan

..............

Current liabilities
Creditors

..............

126

Items

Value Rs.

Non current assets

Land
Machinery

..............
..............

Current assets
Stock
Debtors
Bank
Cash

..............
..............
..............
..............

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Activity 02
Find the relevant values of the following equation with your friend and write them.
1'

Liabilities

Rs.
1"00"000}
2'

Owners equity

Rs.
@

Rs.
@

3'

Owners equity

5'

Assets

Owners equity

Liabilities
Rs.

100"000

Assets
Rs.
200"000

Rs.

Assets

Liabilities
Rs.
40"000

Rs.

4'

Assets

20"000

Liabilities

Rs.

Rs.

Rs.

150"000

25"000

Liabilities
Rs.
20"000

Assets
Rs.
160"000

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Owners equity
Rs.
@

127

4.2

Transactions and double entry theory

Transactions of different nature take place during the operations of a business.

The nature of business resources changes due to transactions.These changes are
measured in monetary terms and recorded in the books of accounts. In accounting,
the relevant transactions are recorded according to the Double Entry System. This
chapter expects to provide you with knowledge about the double entry system.
You may have realized by now that all the business transactions that can be
measured in monetary terms have a dual nature. Here the dual means two actions. In
accounting this dual nature is identified as debit and credit
The accounting system that records the dual nature of each and every
transaction in two accounts at the same time in order to create a credit value
equivalent to the debit value is called the double entry system.
Luca Pacioli, an Italian mathematician first presented his views about this Double
entry system in 1494 A.D.
It is important to identify correctly, the dual impact of business transactions when
using the double entry system. The dual impact of transactions would be increase or
positive (plus +) and decrease or negative (minus -). These positive and negative
changes are recorded in accounts.

Account
The model used to record accurately, the nature of the dual impact related to
business transactions as debit and credit is called the account.
You can see three basic features in an account.

128

Name of the account / heading (written on top of the account horizontally)

The left side of the account
(called the debit side)
The right side of the account
(called the credit side)

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A model and the details included in an account maintained by a business are

shown below.
''''''''''''''''''''''''''''''''''''''' Account
Debit
Date

Credit
Description

^2&

^1&

L. Value.
F
Rs.

^3&

^4&

Date

^5&

Description

^6&

L. Value
F
Rs.

^7&

^8&

(1) and (5) show the date of the transaction

(2) and (6) show the name of the other account related to the double entry

(3) and (7) show the page number (Ledger folio) of the relevant account

(4) and (8) show the value of the transaction in rupees

Types of accounts
Can you remember the accounting equation? The components of it are,

Assets

Owners equity

Liabilities

In accounting, separate accounts are maintained to record the changes in these

components. As such, we can identify three kinds of accounts called Asset account,
Capital account and Liabilities account.
If you study the transaction number (v), (viii) and (x) of Piyumis business in the
example (01), you see the changes in the owner's equity through some of the business
transactions. You may understand that in addition to the above accounts there were
also events which are shown below.

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129

Transaction - v
14.05 Business is paying telephone charges of Rs. 5,000
Transaction - viii
19.05 Business is receiving a leasing income of Rs. 2,500
Transaction - x
23.05 Piyumi is taking a stock of goods worth Rs. 1,000 from the business
for her personal use
These types of transactions change the owners equity (either decrease or increase the
equity). There are two kinds of accounts which show these changes in the owners
equity.

Income / Profit accounts

- example - receiving leasing income

(transaction No. viii)

Expenditure/ loss accounts

- example - paying telephone charges

(transaction No. v)

Although the effect of the transaction number 10 decreases the equity, it does not
belong to both income and expenditure accounts. There the owner draws what he
invested in the business.
Drawings of goods and cash belong to this category. They are temporarily
recorded in an account called the drawings account, which shows the decrease in the
equity.
You can now identify five kinds of accounts by studying the above part of this
chapter. They are shown below with examples.

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Types of accounts

Assets accounts

Example

Furniture account
Cash account

Liabilities accounts

Bank loan account

Trade creditor's account

Expenditure accounts

Telephone charges account

Salaries and wages account

Income accounts

Sales accounts
Discounts received account

Equity accounts

Capital account

(Capital accounts)

Balance of the profit and loss account

(You get this balance by comparing the income
and expenditure of the business within a certain
period)
Drawings account (reduces the equity)

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131

We can show the five kinds of accounts you identified above, in Figure 4.2

Cr
Rs. cts

Liabilities A/C
Dr
Cr

Capital A/C

Assets A/C
Dr

Rs. cts

Cr

Dr
Rs. cts

Expenditure A/C
Cr
Dr
Rs. cts

Rs. cts

Rs. cts

Rs. cts

Dr

Income A/C
Rs. cts

Rs. cts

Cr

Rs. cts

Figure 4.2 - Types of accounts

Recording transactions in accounts

The business transactions that can be measured in monetary terms are recorded in
accounts. Here the transactions are recorded in relevant accounts as,

Debit
&
Credit

You know by now that debit entries are recorded on the left side of the
account and the credit entries are recorded on the right side. The debit entries and
credit entries are recorded in each account in relation to business transactions are
different from each other.
All the transactions which can be measured in monetary terms are recorded as debit
and credit according to the dual nature of a transaction.
The book which contains all the accounts is called the Ledger. The documents file,
which contains all the primary accounts when the accounting system of a business is
computerised, is called the main ledger'. In such a situation those information are
recorded in a compact disk or a tape.
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Double entry principles are used to record business transactions in accounts in this
way. You will be able to understand this by focusing your attention to the following
table.
Double entry principle
Type of Ledger Account
Usual balance

Increase

Decrease

Asset account

Debit

Debit

Credit

Liabilities account

Credit

Credit

Debit

Income account

Credit

Credit

Debit

Expenditure account

Debit

Debit

Credit

Equity (Capital) account

Credit

Credit

Debit

Let us examine how we can record business transactions in accounts according to

double entry principles. We can do this by taking into consideration some of the
transactions of Piyumis business.
Transaction - 1
01.05.20xx Piyumi is starting the business by investing Rs. 50,000
Business is receiving Rs. 50,000 and at the same time, Piyumi is getting
the ownership for the assets of the business worth Rs. 50,000. It is a
liability or an obligation towards Piyumi, when you look at the
transaction from the point of view of the business.

Cash is an asset. Cash account is debited as assets increase. (debit entry)

Capital account is credited to represent the owners equity. (credit entry).

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133

Cash account
Debit
Date
Description

LF Amount Date
Rs.

Description

LF 01
Credit
LF Amount
Rs.

20
'05'01 Capital A/C

02 50"000

Increase in Assets is a debit entry

Capital Account
Debit
Date Description

LF

Amount
Rs.

Date

Description

LF 02
Credit
LF Amount
Rs.

20
'05'01

Cash A/C

01

50"000

Increase in capital is a credit entry

Transaction - 2
07.05.20xx - Business is depositing Rs. 10,000 in the bank and opening a current
account.
Bank account of the business is increasing by Rs. 10,000 and cash account
is decreasing by Rs. 10,000.

Deposit in the bank is an asset. Therefore, the bank account is debited. (debit entry)
Cash is an asset. The decrease in cash is credited in the cash account. (credit entry)

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Bank account
Debit
Date

Description

LF Amount Date
Rs.

Description

LF 03
Credit
LF Amount
Rs.

20
'05'07 Cash A/C

01

10"000

Increase in assets is a debit entry

Cash account
Debit
Date Description

LF Amount
Rs.

Date

LF 01
Credit
LF Amount
Description
Rs.

20
'05'07

Bank A/C

03

10"000

Decrease in assets is a credit entry

Transaction - 3
13.05.20xx Obtaining a loan of Rs. 30,000 from the bank
Cash asset of the business is increasing by Rs. 30,000 and a liability of
Rs. 30,000 for the loan taken from the bank has come into effect.
Cash is an asset. Increase in cash is debited to the cash account. (debit entry)
Bank loan is a liability. Therefore, bank loan account is credited (credit entry)

Debit
Date

Cash Account
Description

LF

Amount
Rs.

06

30"000

Date

LF 01
Description

Credit
LF Amount
Rs.

20
'05'13

Bank loan A/C

Increase in assets is a debit entry

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135

Bank loan account

Debit
Date

Description

L
F

Amount Date
Rs.

Description

L.F. 06
Credit
L Amount
Rs.
F

20
'13'05

Cash A/C

01 30"000

Increase in liabilities is a credit entry

Transaction - 4
14.05.20xx

Business is paying Rs. 5,000 as telephone charges.

Paying telephone charges of Rs. 5000 are expenditure to the business.

As cash is paid, cash asset is decreasing by Rs. 5000
Tele.charges are expenditure as the tele. charges account is debited. (Debit entry)
Cash is an asset. As cash is decreasing, cash account is credited. (credit entry)

Telephone charges account

Debit
Date

Description

L
F

Amount Date
Rs.

Cash A/C

01

5"000

Description

L
F

L.F 07
Credit
Amount
Rs.

20
'14'05

Increase in expenditure is a debit entry

L.F 01

Cash account

Debit
Date

Description

L
F

Credit

Amount Date
Rs.

Description

L... Amount
Rs.
F

20
'14'05

Tele. charges A/C

07

Decrease in assets is a credit entry

136

For free distribution

5"000

Transaction - 5
19.05.20xx

Business is receiving an income of Rs. 2,500 as lease.

Cash asset of the business is increasing by Rs. 2,500. Receiving money

as lease is an income to the business. Therefore, the income is increasing
by Rs. 2,500.
Cash is an asset. Increase in cash is debited to the cash account. (debit entry)
Receiving lease is an income as the lease income account is credited. (Credit entry)

Debit
Date Description

Cash account
LF Amount Date
Rs.

Description

LF 01
Credit
LF Amount
Rs.

20

Income A/C

'19'05

09

2"500

Increase in assets is a debit entry

Lease account

Debit
Date

Description

LF Amount Date
Rs.

Description

LF 09
Credit
LF Amount
Rs.

20
'19'05

Cash A/C

01

2"500

Increase in income is a credit entry

For free distribution

137

Activity 03

Enter the following transactions correctly in relevant accounts.

138

01.01.20XX

Mahinda is starting a business by investing Rs.80,000

04.01.20XX

Buying goods worth Rs. 20,000 for resale

07.01.20XX

Purchasing on credit, a machine worth Rs. 10,000 from Ajith

& Company

09.01.20XX

Obtaining a loan of Rs. 25,000 from the bank

12.01.20XX

Paying Rs.3,000 for electricity

17.01.20XX

Cash sales Rs. 12,000

20.01.20XX

Receiving an income of Rs. 5,000 as commission

24.01.20XX

Mahinda is taking a stock of goods worth Rs. 4,000 from the

business for his personal use

25.01.20XX

Paying Ajith & company Rs.6,000

28.01.20XX

Paying Rs. 3,000 for electricity

For free distribution

Activity 04

Assume
that Pali, one of your school friends,
has forwarded the following table to you.
Description
Item No.
01

Asset increases

Liability increases

02

Expenditure increases

Asset decreases

03

Income increases

Asset increases

04

Asset increases

Equity increases

05

Equity decreases

Asset decreases

06

Asset decreases

Liability decreases

a. Mention a transaction for each of the above item in the table

b. Enter the transactions you mentioned above accurately in relevant accounts

Activity 05

Observe the following table

Capital Rs.
Transaction No.
01

Liabilities Rs.

Assets Rs.

15000

02

15000
7000

7000

03

10000

- 10000
04
05
06

- 6000
- 2 000
4000

6000
2000

12000

8000

Write two transactions that are possible under each of the above items.
For free distribution

139