Understanding the recording of transactions is one of the most fundamental topics in accounting and is a crucial part of the EPFO APFC & EO/AO Exam syllabus. Without proper recording, accounting information would be unreliable, incomplete, and unusable for decision-making. This chapter forms the backbone of the entire accounting process, and most questions in the exam are based on definitions, concepts, and applications covered here.
This comprehensive guide covers all key concepts, principles, formats, and examples you need to master for the EPFO exam — explained in a simple and revision-friendly manner.
1. Introduction to Recording of Transactions
Accounting is a systematic process of recording, classifying, summarizing, and interpreting financial transactions. The very first step in this process is recording, where every financial transaction of a business is documented chronologically and accurately in the books of accounts.
It ensures that all events measurable in monetary terms are captured.
It forms the basis for preparing financial statements.
It helps in tracking performance and financial position.
✅ In the EPFO exam, this chapter is crucial because it connects fundamental accounting principles with practical applications like journal entries, ledgers, trial balances, and error detection.
2. Key Concepts and Terms
Before diving deeper, let’s understand a few essential terms often asked in the EPFO exam:
Transaction: Any financial event that affects the financial position of a business and can be measured in monetary terms.
Account: A record summarising all transactions related to a person, asset, liability, income, or expense.
Debit (Dr): Entry on the left-hand side of an account.
Credit (Cr): Entry on the right-hand side of an account.
Double Entry System: Every transaction affects two accounts — one debit and one credit.
Accounting Equation: Assets = Liabilities + Capital
3. Steps in Recording Transactions
The process of recording transactions follows a systematic flow. Questions on this sequence are frequently asked in EPFO exams.
1. Source Documents: Original proof of transactions (invoice, cash memo, cheque, etc.).
2. Journal: Transactions are first recorded chronologically.
3. Ledger: Entries are classified under various accounts.
4. Trial Balance: Summarises all balances to check arithmetic accuracy.
5. Financial Statements: Final accounts like Profit & Loss and Balance Sheet are prepared.
4. Source Documents and Vouchers
Source documents are essential evidence for every financial transaction. Without them, entries cannot be recorded in the books.
Examples:
Invoice / Bill: Issued for goods or services sold.
Cash Memo: Proof of cash purchases or sales.
Cheque / Pay-in-slip: Used for bank transactions.
Debit Note / Credit Note: For purchase or sales returns.
Voucher: Prepared before recording transactions in the journal.
✅ Remember: Voucher → Journal → Ledger → Trial Balance → Financial Statements.
5. Journal – Book of Original Entry
The journal is the first formal record of transactions. It records them in chronological order with a narration explaining each entry.
Format of Journal Entry:
Date Particulars L.F. Debit (₹) Credit (₹)
DD/MM/YY Account Dr. XXXX
To Account XXXX
✅ Narration: A short explanation of the transaction written under the entry.
6. Rules of Debit and Credit
Understanding the rules of debit and credit is crucial for solving MCQs and journal entry questions in the EPFO exam.
Traditional (English) Approach
Type of Account Debit Rule Credit Rule
Personal Debit the receiver Credit the giver
Real Debit what comes in Credit what goes out
Nominal Debit expenses/losses Credit incomes/gains
✅ Example:
Purchase of machinery: Machinery A/c Dr. / To Cash A/c
Salary paid: Salary A/c Dr. / To Cash A/c
Modern (Accounting Equation) Approach
Type Debit Rule Credit Rule
Assets Increase Dr. Decrease Cr.
Liabilities Decrease Dr. Increase Cr.
Capital Decrease Dr. Increase Cr.
Expenses/Losses Increase Dr. Decrease Cr.
Income/Gains Decrease Dr. Increase Cr.
✅ EPFO Tip: Most MCQs follow the modern approach.
7. Types of Accounts
Understanding the classification of accounts is essential for correctly applying debit and credit rules.
1. Personal Accounts: Related to persons or entities.
Example: Ram A/c, Creditors A/c
2. Real Accounts: Related to assets and properties.
Example: Building A/c, Machinery A/c
3. Nominal Accounts: Related to income, expenses, losses, or gains.
Example: Rent A/c, Commission A/c
8. Ledger – The Principal Book
The ledger is the main book of accounts where all journal entries are classified into individual accounts. It shows the cumulative effect of transactions related to a particular account.
Format of Ledger:
Debit Side Credit Side
Date Particulars Date Particulars
Amount Amount
✅ Posting Rule:
Debit in journal → Debit in ledger
Credit in journal → Credit in ledger
9. Balancing Ledger Accounts
At the end of an accounting period, each account is balanced:
Debit > Credit: Debit balance
Credit > Debit: Credit balance
These balances are then transferred to the Trial Balance.
10. Trial Balance
A trial balance is a statement that shows the debit and credit balances of all ledger accounts to check the arithmetic accuracy of records.
Format:
Account Name Debit (₹) Credit (₹)
Cash A/c XXXX
Capital A/c XXXX
…
✅ Even if the trial balance tallies, errors may still exist (like errors of principle or omission).
11. Common Accounting Errors
1. Error of Omission: Transaction not recorded.
2. Error of Commission: Wrong amount or incorrect account.
3. Error of Principle: Wrong classification (e.g., treating revenue expense as capital).
4. Compensating Error: Two errors cancel each other.
5. Transposition Error: Reversal of digits (e.g., ₹540 instead of ₹450).
✅ EPFO Tip: Some errors do not affect the trial balance.
12. Subsidiary Books (Special Journals)
To reduce workload and improve efficiency, similar transactions are recorded in special journals instead of the general journal.
Book Purpose
Cash Book Cash and bank transactions
Purchases Book Credit purchases
Sales Book Credit sales
Purchase Returns Book Goods returned to suppliers
Sales Returns Book Goods returned by customers
Bills Receivable/Payable Book Bills received or issued
Journal Proper Miscellaneous transactions
✅ MCQ Tip: Cash purchases are recorded in the Cash Book, not in the Purchases Book.
13. Cash Book – A Combined Journal and Ledger
The cash book records all cash and bank transactions and serves as both a journal and ledger.
Types of Cash Book:
Single Column: Cash only
Double Column: Cash + Bank
Triple Column: Cash + Bank + Discount
Petty Cash Book: Small day-to-day expenses
14. Bank Reconciliation Statement (BRS)
A BRS is prepared to reconcile the difference between the Cash Book bank balance and the Pass Book balance.
Common Reasons for Differences:
Cheques issued but not presented
Cheques deposited but not cleared
Bank charges not recorded
Interest credited by bank
15. Quick Revision Points for EPFO Exam
✅ Voucher → Journal → Ledger → Trial Balance → Final Accounts
✅ Every transaction has two effects under the double-entry system.
✅ Ledger is known as the King of Books.
✅ Trial Balance checks arithmetic accuracy but not principle errors.
✅ Cash Book is both a journal and a ledger.
✅ Bank Reconciliation Statement ensures accuracy of bank records.
✅ Errors of Principle do not affect the trial balance.
Conclusion
The recording of transactions forms the backbone of accounting and is one of the most important topics for the EPFO APFC & EO/AO exam. By mastering the fundamentals — from source documents and journals to ledgers, trial balance, and subsidiary books — you can confidently answer most accounting-related questions. Focus on understanding the rules of debit and credit, practice journal entries, and revise key terms frequently. With consistent practice and conceptual clarity, this section can become one of the easiest and most scoring parts of your EPFO preparation.
