1. State the three fundamental steps in the accounting process.

[Image of the accounting cycle process] 1. Identification of business transactions based on source documents.
2. Recording of identified transactions in the books of original entry (Journal).
3. Classification of recorded transactions by posting them to the Ledger accounts.

2. Why is the evidence provided by source documents important?

Source documents (like cash memos, invoices, and pay-in slips) act as objective evidence for transactions. They provide the necessary data for recording, ensure accuracy, and serve as legal evidence for auditing and tax purposes.

3. Should a transaction be first recorded in a journal or ledger? Why?

It must be recorded in the Journal first. The journal is the “Book of Original Entry” where transactions are recorded chronologically. Recording here first ensures that no transaction is missed and provides a complete historical record before they are classified into ledgers.

4. Journal Entry formatting: Debits vs Credits?

In a journal entry, Debits are listed first. The Credit account title is indented on the next line and usually prefixed with the word “To”.

5. Why are some accounting systems called double accounting systems?

The Double Entry System is based on the principle that every transaction has a twofold effect, affecting at least two accounts. For every debit, there must be an equal and corresponding credit.

6. Give a specimen of an account.

An account is usually maintained in a “T” shape:

Dr. [Account Name] Cr.
Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
	To [Debit Side]				By [Credit Side]

7. Why are the rules of debit and credit same for both liability and capital?

According to the Accounting Equation ($Assets = Liabilities + Capital$), both Liabilities and Capital represent the sources of funds (claims against assets). Therefore, they follow the same rule: Increases are credited, and decreases are debited.

8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?

The J.F. (Journal Folio) number indicates the page number of the journal from which the entry was posted. It provides a “cross-reference” or audit trail, making it easy to trace any ledger entry back to its original recording.

9. What entry (debit or credit) would you make to:

(a) Increase Revenue: Credit
(b) Decrease Expense: Credit
(c) Record Drawings: Debit (Decreases Capital)
(d) Record Fresh Capital: Credit

10. If a transaction has the effect of decreasing an asset/liability?

• Decrease in Asset: Recorded as a Credit.
• Decrease in Liability: Recorded as a Debit.

1. Describe the events recorded in accounting systems and the importance of source documents.

Accounting systems record Economic Events. These are events that can be measured in monetary terms and change the financial position of the business. They are classified into:
• External Events: Transactions between the business and an outsider (e.g., purchasing goods from a supplier, selling to a customer).
• Internal Events: Economic events occurring entirely within the enterprise (e.g., depreciation of machinery, supply of raw material to the production department).

Importance of Source Documents: Source documents (Cash Memos, Invoices, Receipts) are the foundation of the accounting process.
1. Evidence: They serve as legal evidence in case of disputes or tax audits.
2. Accuracy: They contain precise details (date, amount, description) ensuring accurate recording.
3. Audit Trail: They allow auditors to verify the authenticity of recorded transactions.

2. Describe how debits and credits are used to analyse transactions.

Debits (Dr.) and Credits (Cr.) are used to record the dual aspect of every transaction. To analyse a transaction, accounts are classified into five categories, and specific rules apply:

1. Assets & Expenses (Debit Balance Nature):
• Increase $\rightarrow$ Debit
• Decrease $\rightarrow$ Credit

2. Liabilities, Capital & Revenue (Credit Balance Nature):
• Increase $\rightarrow$ Credit
• Decrease $\rightarrow$ Debit

Analysis Process: Identify the accounts involved $\rightarrow$ Determine their nature (Asset/Liability etc.) $\rightarrow$ Apply the rule of increase/decrease.

3. Describe how accounts are used to record information about the effects of transactions?

An account is a summarized record of relevant transactions at one place relating to a particular head (person, asset, expense, or income).

• Grouping: Instead of listing transactions chronologically (as in a Journal), accounts group similar transactions together. For example, all cash receipts and payments are grouped in the “Cash Account”.
• Direction: It has two sides. The left side is the Debit side and the right side is the Credit side.
• Net Effect: By balancing the account at the end of a period, we can determine the net effect (balance) of all transactions on that specific item.

4. What is a journal? Give a specimen showing at least five entries.

A Journal is the book of original entry where transactions are recorded for the first time in chronological order (date-wise).

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
Jan 01	Cash A/c …Dr.    To Capital A/c (Started business with cash)		1,00,000
				1,00,000
Jan 02	Purchases A/c …Dr.    To Cash A/c (Goods purchased for cash)		20,000
				20,000
Jan 05	Rohan (Debtor) …Dr.    To Sales A/c (Goods sold on credit)		15,000
				15,000
Jan 10	Rent A/c …Dr.    To Cash A/c (Rent paid for the month)		5,000
				5,000
Jan 15	Furniture A/c …Dr.    To Cash A/c (Bought furniture for office use)		10,000
				10,000

5. Differentiate between source documents and vouchers.

Basis	Source Document	Voucher
Meaning	It is a document that evidences that a transaction has occurred.	It is a document prepared by the firm to authorize recording in books.
Purpose	Used as evidence (Proof) of transaction.	Used to analyze the transaction (Determine Debit/Credit).
Preparation	Prepared at the time of the event (often by outside party).	Prepared after the event, based on source documents.
Examples	Cash Memo, Invoice, Pay-in slip.	Debit Voucher, Credit Voucher, Journal Voucher.

6. “Accounting equation remains intact under all circumstances.” Justify with example.

The Accounting Equation is: $$ \text{Assets} = \text{Liabilities} + \text{Capital} $$ Every transaction affects this equation in such a way that the equality is always maintained.

Example Justification:
1. Start Business with Cash ₹50,000:
$\rightarrow$ Asset (Cash) +50,000 = Capital +50,000. (Balanced)

2. Buy Goods on Credit ₹10,000:
$\rightarrow$ Asset (Stock) +10,000 = Liabilities (Creditors) +10,000.
Total: Assets (60k) = Liab (10k) + Cap (50k). (Balanced)

3. Pay Cash to Creditor ₹5,000:
$\rightarrow$ Asset (Cash) -5,000 = Liabilities (Creditors) -5,000.
Total: Assets (55k) = Liab (5k) + Cap (50k). (Balanced)

7. Explain the double entry mechanism with an illustrative example.

The Double Entry Mechanism follows the rule that “Every Debit has a corresponding Credit of equal amount.” This ensures the arithmetic accuracy of the books.

Illustrative Example: Purchasing Machinery for Cash ₹50,000.

Step 1: Identify Accounts.
The two accounts involved are ‘Machinery’ and ‘Cash’.

Step 2: Classify Accounts.
Both Machinery and Cash are Asset accounts.

Step 3: Apply Rules.
• Machinery is coming in (Asset Increasing) $\rightarrow$ Debit Machinery.
• Cash is going out (Asset Decreasing) $\rightarrow$ Credit Cash.

Step 4: Record Entry.
Machinery A/c …Dr. ₹50,000
   To Cash A/c ₹50,000

Note: This question asks for T-Accounts (Ledgers). Here is the summary of key accounts: