Unit 2: The accounting equation & recording transactions
Basic Accounting notes · PTU syllabus (BBA 102-18)
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Unit summary
Every transaction must be recorded systematically. This unit covers the accounting equation, types of accounts and the rules of debit and credit, recording in the journal, posting to ledger accounts, subsidiary books, and preparing the trial balance.
After this unit you can
- Show the effect of transactions on the accounting equation
- Classify accounts and apply the golden rules of debit and credit
- Journalise transactions and post them to the ledger
- Prepare subsidiary books and a trial balance
PTU syllabus topics
- Accounting equation
- types and nature of accounts
- rules of debit and credit
- recording transactions in the journal
- preparation of ledger accounts and subsidiary books
- preparation of trial balance
- Personal account
- Debit the receiver, credit the giver
- Real account
- Debit what comes in, credit what goes out
- Nominal account
- Debit expenses and losses, credit incomes and gains
- Accounting equation
- Assets = Liabilities + Capital
Topic 1
The accounting equation
Assets = Liabilities + Capital. Every transaction keeps the equation balanced.
| Transaction | Assets | Liabilities | Capital |
|---|---|---|---|
| Started business with cash ₹1,00,000 | +1,00,000 (cash) | — | +1,00,000 |
| Bought goods on credit ₹20,000 | +20,000 (stock) | +20,000 (creditors) | — |
| Sold goods costing ₹10,000 for ₹15,000 cash | +15,000 cash, −10,000 stock | — | +5,000 (profit) |
Topic 2
Types of accounts and rules of debit and credit
- Personal account
- Debit the receiver, credit the giver
- Real account
- Debit what comes in, credit what goes out
- Nominal account
- Debit all expenses and losses, credit all incomes and gains
Modern (accounting equation) approach: increase in assets and expenses → debit; increase in liabilities, capital and revenue → credit.
Topic 3
Journal and ledger
The journal is the book of original entry, recording transactions in date order with a narration.
Example
Bought furniture for cash ₹5,000 — Furniture A/c Dr 5,000; To Cash A/c 5,000 (Being furniture purchased for cash).
The ledger is the book of final entry, where all entries for one account are collected. Posting transfers journal entries to ledger accounts; each account is then balanced.
Topic 4
Subsidiary books
| Subsidiary book | Records |
|---|---|
| Purchases book | Credit purchases of goods |
| Sales book | Credit sales of goods |
| Purchases returns book | Goods returned to suppliers |
| Sales returns book | Goods returned by customers |
| Cash book | All cash (and bank) receipts and payments |
| Bills receivable / payable books | Bills received / accepted |
| Journal proper | Entries that fit no other book (opening, closing, adjustment) |
Topic 5
Trial balance
A trial balance lists all ledger balances to check that total debits = total credits, proving arithmetical accuracy.
Error of omission
Transaction not recorded at all
No
Error of commission
Wrong amount posted, wrong side
Often yes
Error of principle
Capital item treated as revenue
No
Compensating errors
Two errors cancel out
No
Exam tip
A trial balance that agrees does not prove the books are error-free — list the errors it cannot reveal.
Key terms
- Accounting equation
- Assets = Liabilities + Capital
- Journal
- Book of original entry in chronological order
- Ledger
- Book of final entry, account by account
- Posting
- Transferring entries from journal to ledger
- Trial balance
- A statement checking that debits equal credits
Quick revision
- Personal: debit receiver; real: debit what comes in; nominal: debit expenses.
- Journal → ledger → trial balance.
- Subsidiary books split routine transactions.
- Trial balance cannot detect errors of omission, principle or compensating errors.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.State the accounting equation.
- Q2.State the golden rules of accounting.
- Q3.What is posting?
- Q4.Name four subsidiary books.
- Q5.Name two errors not disclosed by the trial balance.
Long-answer questions
- Q1.Show the effect of a series of transactions on the accounting equation.
- Q2.Journalise transactions, post them to the ledger and prepare a trial balance.
- Q3.Explain subsidiary books with their formats.
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