Transaction Recognition.

Business transactions are events that have a monetary impact on the financial statements of
an organization. When accounting for these transactions, we record numbers in two accounts,
where the debit column is on the left and the credit column is on the right.

A debit is an accounting entry that either increases an asset or expense account, or decreases
a liability or equity account. It is positioned to the left in an accounting entry.

A credit is an accounting entry that either increases a liability or equity account, or decreases
an asset or expense account. It is positioned to the right in an accounting entry.

Basis of Recording a transaction

 Common examples

Assets Liabilities Capital/Equity Expenses Incomes

Non-current Non-current Well, capital is capital.  Water  Revenue/sales
Assets (>1yr) Liabilities  Electricity
 Land  Long term (Funds/assets brought  Rent Other Incomes
 Buildings Loans into the business by  Rates  Investment
 Leasehold  Debentures the  Interest paid income
Property  Lease- owner(s)/shareholders.  Repair  Interest
 Plant obligations E.g the total amount of  Depreciation received
 Motor  Deferred tax money that an  Salaries  Commissions
Vehicles individual starts a  Wages received
business with.  Tax  Gain on disposal
 Investments  Traveling of assets
 Goodwill  Discount  Discount
 Intellectual- allowed received
Property e.g
(©, ®)

Current Liabilities
 Payables/cred
itors
Current Assets  Accrued
(< 1yr) expenses
 Closing  Short term
Inventory loans
 Receivables  Bank
/debtors overdraft
 Cash at
bank
 Cash in
hand
 Prepaid
expenses

Accounting Entries for Assets, Liabilities and Capital

 Effect upon Accounts to be updated
Transaction Assets Liabilitie Capita Debit Credit
s l
i. Bought a van on credit sh. Increase Increase - Motor vehicle-870000 Creditors-870000
870,000
ii. Repaid by cash amount owed
to Duff sh.100,000
iii. Bought goods for sh.140,000
paying by cheque
iv. The owner puts a further
sh.400,000 cash into the
Business
v. A debtor returns to us
sh.15,000goods. we agree to
make an allowance for them
vi. Bought goods on credit
sh.76,000
vii. The owner takes out sh.20,000
cash for his personal use
viii. Paid a creditor sh.115,000 by
cheque
ix. Bought extra equipment on
credit for sh.1100
x. Bought extra stock by cheque
sh.3800
xi. Paid creditors by cheque
sh.11,500
xii. Debtors paid sh.6,400 by
cheque and sh.900 by cash

xiii. Owner put in an extra

sh.15,000 into the business,
sh.13,000by cheque and
sh.2,000 in cash.

xiv. Bought land worth sh. 11.5m

via cheque
xv.

xvi.

xvii.

xviii.

xix.

xx. .

Recording of Expenses and Incomes

 Effect upon Accounts to be updated
Transaction Expenses Incomes Assets Debit Credit
i. Paid rent worth ksh. 150,000,
cash
ii. Paid Salaries and wages
amounting to sh. 890,000, cash
iii. Electric bill worth 450,000
was paid via cheque
iv. Motor vehicles were repaired
at a cost of sh. 89,000
v. Sold goods worth 1,199,000

vi. Bought office supplies (pens,

books, files, staples, ink) for
sh.50,000 cash
vii. Received a discount of sh.
45,000 from the creditors.
viii. Gave a discount to one of the
debtors amounting to sh.
40,000
ix. Repainted the office at a cost
of sh.59, 000 paid via cheque
x. Paid legal and audit fees
amounting to sh.450,000 in
cash.
xi. Received interest income of
sh.451,000 directly credited to
the bank.
xii. Paid interest on an outstanding
loan amounting to sh. 56,000
xiii. Paid to Kenya Revenue
Authority tax worth 232,000
via wire-transfer.
xiv. Sold goods worth sh. 47,0000
cash
xv. Made credit sales to Aurora
worth sh. 89,0000
xvi.

xvii.

xviii.

xix.

xx.

xxi.

xxii.
 xxiii.

xxiv.

xxv.

xxvi.

xxvii.

xxviii.

T-ACCOUNTS

You describe the entries in the accounts by saying something like ‘debit account “x” with £z
and credit account “y” with £z’, inserting the names of the accounts and the actual amount in
place of x, y, and z. So, for example, if you paid £10 by cheque for a kettle, you could say
‘debit the kettle account with £10 and credit the bank account with £10’. To actually make
this entry, you enter £10 on the left-hand (i.e. debit) side of the kettle account and on the
right-hand (i.e. credit) side of the bank account.
Draw the relevant accounts.
Illustration

Prepare the relevant T-Accounts.

Transactions Involving Stocks

Example:
20X9
May 1 Bought goods on credit £220 from D Small.
== 2 Bought goods on credit £410 from A Lyon & Son.
== 5 Sold goods on credit to D Hughes for £60.
== 6 Sold goods on credit to M Spencer for £45.
== 10 Returned goods £15 to D Small.
== 11 Goods sold for cash £210.
== 12 Goods bought for cash £150.
== 19 M Spencer returned £16 goods to us.
== 21 Goods sold for cash £175.
== 22 Paid cash to D Small £205.
== 30 D Hughes paid the amount owing by him £60 in cash.
== 31 Bought goods on credit £214 from A Lyon & Son.
Required Prepare the Relevant T-Accounts.
Journal Entries &Ledger Accounts