Accounting Equation and Journal: ISC Class 11 Accounts Notes

What Accounting Equation and Journal is about

Weightage: Accounting Equation and Journal belongs to the unit Journal, Ledger and Trial Balance, which CISCE weights at 12 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

The accounting equation and its use

Assets = Liabilities + Capital, or Capital = Assets − Liabilities.

Each transaction affects the equation in one of these ways, and the two sides always stay equal:

• An asset rises and another asset falls (buy machinery for cash).
• An asset and a liability rise together (buy goods on credit).
• An asset and capital rise together (owner brings cash).
• An asset falls and a liability falls (pay a creditor).
• An asset falls and capital falls (expense paid; drawings).

Revenue and gains increase capital; expenses, losses and drawings decrease capital. A credit sale at a profit raises debtors by the selling price, lowers stock by the cost and adds the profit to capital.

Usefulness: it proves that double entry is complete; it shows the financial position after each transaction; and it lets you find any one missing element (capital, assets or liabilities) from the other two.

Worked example

Suppose Ritu has assets of ₹4,45,000 and creditors of ₹80,000. She then pays the creditors ₹78,000 in full settlement. Find her capital before and after the payment. [2 marks]

Try it first, then show the solutionSolution

1. Before: Capital = Assets − Liabilities = 4,45,000 − 80,000 = ₹3,65,000.
2. Payment: cash (asset) falls by ₹78,000; creditors fall by ₹80,000; the ₹2,000 discount received is a gain, so capital rises by ₹2,000.
3. After: Assets = 4,45,000 − 78,000 = ₹3,67,000; Liabilities = 0; Capital = 3,65,000 + 2,000 = ₹3,67,000.

Answer: Capital ₹3,65,000 before and ₹3,67,000 after (assets ₹3,67,000 = liabilities nil + capital ₹3,67,000).

Classification of accounts: traditional and modern

Traditional approach

• Personal accounts (persons and bodies with whom the business deals):
• Natural: individuals, e.g. Ramesh's A/c, Capital A/c, Drawings A/c.
• Artificial: legal bodies, e.g. State Bank of India, Tata Motors Ltd., a school, a club.
• Representative: accounts standing for a person or group, e.g. outstanding salary A/c (employees), prepaid rent A/c (landlord), commission received in advance A/c.
• Real accounts (assets other than debtors):
• Tangible: cash, furniture, building, stock, machinery.
• Intangible: goodwill, patents, trademarks.
• Nominal accounts: expenses, losses, incomes and gains, e.g. wages, rent, discount allowed, interest received, loss by fire.

Modern (accounting equation) approach: five types: Assets, Liabilities, Capital, Revenues (incomes/gains) and Expenses (losses). Drawings is treated as a reduction of capital.

Worked example

Classify under both approaches: (i) Bank Overdraft A/c, (ii) Outstanding Wages A/c, (iii) Trademark A/c, (iv) Discount Received A/c. [2 marks]

Try it first, then show the solutionSolution

1. (i) Bank overdraft: personal (artificial) / liability.
2. (ii) Outstanding wages: personal (representative) / liability.
3. (iii) Trademark: real (intangible) / asset.
4. (iv) Discount received: nominal / revenue (gain).

Answer: (i) Personal-artificial, liability; (ii) personal-representative, liability; (iii) real-intangible, asset; (iv) nominal, revenue.

Double entry and the rules of debit and credit

Double entry system: every transaction has two aspects of equal value; one account is debited and another credited with the same amount. So total debits always equal total credits, which is the basis of the trial balance.

Traditional (golden) rules

Account	Debit	Credit
Personal	The receiver	The giver
Real	What comes in	What goes out
Nominal	All expenses and losses	All incomes and gains

Modern rules

Type	Increase	Decrease
Assets	Debit	Credit
Expenses/losses	Debit	Credit
Liabilities	Credit	Debit
Capital	Credit	Debit
Revenues/gains	Credit	Debit

Drawings reduce capital, so Drawings A/c is debited. Both approaches always give the same entry.

Worked example

Using both approaches, explain the entry for: 'Paid ₹15,000 to Vinod, a creditor, by cheque.' [2 marks]

Try it first, then show the solutionSolution

1. Traditional: Vinod (personal) receives, so debit Vinod; Bank (personal-artificial) gives, so credit Bank.
2. Modern: liability (Vinod) decreases, so debit; asset (bank) decreases, so credit.

Answer: Vinod A/c Dr ₹15,000 To Bank A/c ₹15,000 under both approaches.

The journal: meaning, format and advantages

The journal (from the French *jour*, day) is the book of original (prime) entry in which transactions are recorded in chronological order as they occur, showing the accounts debited and credited. Recording in it is journalising.

Format

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2026 Apr 1	Cash A/c ... Dr		50,000
	To Capital A/c			50,000
	(Being business started with cash)

• The account debited is written first with 'Dr' at the end; the account credited is written on the next line, indented, beginning with 'To'.
• The narration in brackets explains the entry.
• L.F. (ledger folio) is filled in when the entry is posted to the ledger.
• Columns are totalled page by page ('Total c/f' and 'Total b/f').

Advantages: chronological, complete record; each entry shows both aspects, reducing errors; the narration explains the transaction; it is the basis for ledger posting; it helps locate errors and supports audit.

Worked example

Journalise: 2026 April 4, Sold goods to Hari for ₹36,000 on credit. [1 mark]

Try it first, then show the solutionSolution

1. Hari receives the goods (personal: debit receiver); sales is a revenue (nominal: credit income).

2. Date	Particulars	L.F.	Dr (₹)	Cr (₹)
   2026 Apr 4	Hari A/c ... Dr		36,000
   	To Sales A/c			36,000
   	(Being goods sold on credit)

Answer: Hari A/c Dr ₹36,000 To Sales A/c ₹36,000, with narration.

Simple and compound entries; discounts

A simple entry has one debit and one credit. A compound entry has more than one debit or more than one credit (or both), used when several transactions happen on the same date with a common account, or one transaction affects three or more accounts.

Trade discount is a deduction from the list price given at the time of sale; it is not recorded: entries are made at the net (invoice) price.

Cash discount is allowed for prompt payment and is recorded: as Discount Allowed (expense, debit) by the seller and Discount Received (gain, credit) by the buyer. When a debt is settled 'in full settlement' for less than the amount due, the difference is a cash discount.

Bad debts: when a debtor cannot pay, the amount not recovered is debited to Bad Debts A/c (a loss).

Worked example

Suppose on 2026 April 8, Pooja Traders paid Mehta & Co. ₹88,200 by cheque in full settlement of ₹90,000. Journalise. [2 marks]

Try it first, then show the solutionSolution

1. Mehta's debt of ₹90,000 is fully cleared: debit Mehta & Co. ₹90,000.
2. Bank gives ₹88,200 (credit); the ₹1,800 saved is discount received (credit).

3. Date	Particulars	L.F.	Dr (₹)	Cr (₹)
   2026 Apr 8	Mehta & Co. ... Dr		90,000
   	To Bank A/c			88,200
   	To Discount Received A/c			1,800
   	(Being payment made in full settlement)

Answer: Compound entry: Mehta & Co. Dr ₹90,000; To Bank ₹88,200; To Discount Received ₹1,800.

Goods withdrawn, free samples and losses of goods

When goods leave the business without a sale, they are credited to Purchases A/c at cost (not to Sales), because purchases must show only goods available for sale:

• Goods taken by the owner: Drawings A/c Dr, To Purchases A/c.
• Goods given as free samples: Advertisement A/c Dr, To Purchases A/c.
• Goods given as charity: Charity A/c Dr, To Purchases A/c.
• Goods lost by fire or theft (uninsured): Loss by Fire/Theft A/c Dr, To Purchases A/c. If partly insured and the claim is admitted: Insurance Claim A/c Dr (amount admitted), Loss by Fire A/c Dr (balance), To Purchases A/c.

Assets bought are debited to the asset account, never to purchases; and sale of an old asset is credited to the asset account, never to sales.

Worked example

Suppose goods costing ₹50,000 (selling price ₹65,000) were destroyed by fire, and the insurer admitted a claim of ₹32,000. Journalise. [2 marks]

Try it first, then show the solutionSolution

1. Goods are removed at cost, ₹50,000 (credit Purchases).
2. Insurance Claim A/c Dr ₹32,000 (amount receivable); Loss by Fire A/c Dr ₹18,000 (50,000 − 32,000).

Answer: Insurance Claim A/c Dr ₹32,000; Loss by Fire A/c Dr ₹18,000; To Purchases A/c ₹50,000.

Opening entry

At the start of a new year, the closing balances of last year's assets and liabilities are brought into the new books through one compound opening entry:

All asset accounts Dr; To all liability accounts; To Capital A/c (balancing figure).

Capital is the excess of assets over liabilities. Nominal accounts never appear in an opening entry because they are closed at the end of every year.

Worked example

Suppose the balances of Arya Stores on 1st April 2026 were: cash ₹35,000; bank ₹1,20,000; debtors ₹85,000; stock ₹1,40,000; furniture ₹60,000; machinery ₹2,50,000; creditors ₹95,000; bills payable ₹25,000; bank loan ₹1,00,000. Pass the opening entry. [3 marks]

Try it first, then show the solutionSolution

1. Total assets = 35,000 + 1,20,000 + 85,000 + 1,40,000 + 60,000 + 2,50,000 = ₹6,90,000.
2. Liabilities = 95,000 + 25,000 + 1,00,000 = ₹2,20,000; capital = 6,90,000 − 2,20,000 = ₹4,70,000.

3. Date	Particulars	Dr (₹)	Cr (₹)
   2026 Apr 1	Cash A/c ... Dr	35,000
   	Bank A/c ... Dr	1,20,000
   	Sundry Debtors A/c ... Dr	85,000
   	Stock A/c ... Dr	1,40,000
   	Furniture A/c ... Dr	60,000
   	Machinery A/c ... Dr	2,50,000
   	To Sundry Creditors A/c		95,000
   	To Bills Payable A/c		25,000
   	To Bank Loan A/c		1,00,000
   	To Capital A/c		4,70,000
   	(Being balances brought forward)

Answer: Opening entry with total ₹6,90,000 on each side; capital ₹4,70,000.

Goods and Services Tax: a brief theoretical introduction

GST is a single, destination-based, multi-stage indirect tax on the supply of goods and services, introduced in India from 1st July 2017 under the Constitution (One Hundred and First Amendment) Act, 2016. It replaced many earlier indirect taxes such as central excise duty, service tax and VAT.

Components

• CGST (Central GST) and SGST (State GST) or UTGST (Union Territory GST): levied together on a supply within a state (intra-state), shared equally.
• IGST (Integrated GST): levied by the Centre on a supply from one state to another (inter-state) and on imports.

Input tax credit (ITC): tax paid on purchases (input tax) can be set off against tax collected on sales (output tax), so tax is paid only on the value added at each stage, removing the 'tax on tax' (cascading) effect.

Advantages: one nation, one tax; no cascading; common national market; online registration, returns and payment through the GST portal; better compliance.

*Note: the ISC 2028 syllabus excludes journal entries for transactions with GST.*

Worked example

Suppose a trader in Pune sells goods to a customer in Nashik, and another sells to a customer in Indore. Which GST components apply to each, and why? [2 marks]

Try it first, then show the solutionSolution

1. Pune to Nashik is within Maharashtra: an intra-state supply attracts CGST and SGST.
2. Pune to Indore crosses state lines (Maharashtra to Madhya Pradesh): an inter-state supply attracts IGST.

Answer: Nashik: CGST + SGST (intra-state). Indore: IGST (inter-state).

Accounting Equation and Journal in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Accounting Equation, Classification of Accounts and Rules of Debit and Credit
• Journal Entries: Compound Entries, Discounts, Goods Withdrawn and Opening Entry

Accounting Equation and Journal: key facts

Accounting equation

Assets = Liabilities + Capital

Capital = Assets − Liabilities; Liabilities = Assets − Capital.

Expanded equation

Assets = Liabilities + Opening capital + Revenues − Expenses − Drawings

Shows how profit and drawings change capital.

Invoice price

Invoice price = List price − Trade discount

Trade discount is not recorded; entries are at the invoice price.

Bad debt on insolvency

Bad debt = Amount due × (1 − rupee rate received)

'60 paise in the rupee' means 60% is received; 40% is bad debt.

Accounting Equation and Journal: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

How the school exam asks Accounting Equation and Journal

The question patterns to expect, and the method that works for each.

Tricks to remember Accounting Equation and Journal

Short memory aids. Say each one aloud once, then use it on a question the same day.

• "AE debit, LCR credit" for the modern rules

  Assets and Expenses grow on the debit side; Liabilities, Capital and Revenues grow on the credit side. A decrease goes to the opposite side.

  Use it when: Modern rules of debit and credit.

• Goods leave at cost through Purchases

  Drawings, samples, charity, fire, theft: the five Purchases credits.

  Use it when: Goods leaving without a sale.

• Trade discount: 'TD Not Done'

  Trade discount is Not Done in the books; Cash discount is Counted.

  Use it when: Discount entries.

Accounting Equation and Journal: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 6-mark question split into 2 + 1 + 2 + 1 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Accounting Equation and Journal

The slips examiners see most often, and what to write instead.

• ✗Mistake: Recording trade discount

  Trade discount is given at the time of sale on the list price and never enters the books; only the invoice price is recorded.

  Wrong working

  Purchases A/c Dr 1,00,000; To Mehta 90,000; To Discount Received 10,000.

  Right working

  Purchases A/c Dr 90,000; To Mehta & Co. 90,000.

  ✓Do this: Deduct trade discount first, then record.

  Usually costs: 1 mark per entry.

• ✗Mistake: Crediting Sales for goods taken by the owner or given away

  No sale has taken place; the goods leave at cost through Purchases.

  ✓Do this: Drawings/Advertisement/Charity/Loss A/c Dr, To Purchases A/c, at cost.

  Usually costs: 1 mark.

• ✗Mistake: Debiting Purchases for an asset bought

  Purchases means goods for resale. Furniture or machinery bought for use is debited to its own asset account.

  ✓Do this: Ask: will the business sell this item in its ordinary trade?

  Usually costs: 1 mark.

• ✗Mistake: Missing or vague narrations

  The narration is part of a journal entry; 'Being entry passed' says nothing about the transaction.

  ✓Do this: Write a short specific narration: '(Being goods sold to Raju; half received in cash)'.

  Usually costs: ½ mark per entry in many schools' schemes.

• ✗Mistake: Showing a credit sale in the equation at selling price for stock

  Stock falls by the cost; debtors rise by the selling price; the difference (profit) goes to capital.

  ✓Do this: Three changes for a sale at profit: stock − cost, debtors/cash + price, capital + profit.

  Usually costs: 1-2 marks and the final equation.

Practice questions on Accounting Equation and Journal

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   Commission received in advance is a:
   (a) nominal account
   (b) real account
   (c) representative personal account
   (d) natural personal account

   Hint

   Advance and outstanding accounts.

   Answer

   (c) representative personal account.

2. Q2 · 2 marks · Short answerExam level

   State the golden rules of debit and credit.

   Hint

   Three types of account.

   Answer

   Personal: debit the receiver, credit the giver. Real: debit what comes in, credit what goes out. Nominal: debit all expenses and losses, credit all incomes and gains.

3. Q3 · 2 marks · Short answerExam level

   Differentiate between CGST and IGST.

   Hint

   Intra- vs inter-state.

   Answer

   CGST is the central share of tax levied (with SGST/UTGST) on a supply within one state. IGST is levied by the Centre on a supply from one state to another (and on imports), and is later shared with the destination state.

4. Q4 · 2 marks · Short answerHarder exam level

   Suppose a business has assets ₹7,50,000 and capital ₹5,20,000. It then buys goods ₹40,000 on credit and pays a creditor ₹30,000. Find the liabilities after both transactions.

   Hint

   Start with L = A − C.

   Answer

   Opening liabilities = 7,50,000 − 5,20,000 = ₹2,30,000; + 40,000 − 30,000 = ₹2,40,000 (assets ₹7,60,000 = ₹2,40,000 + ₹5,20,000).

5. Q5 · 2 marks · Short answerHarder exam level

   Journalise: sold goods to Neel at a list price of ₹40,000 less 15% trade discount and 2% cash discount; Neel paid immediately by cheque.

   Hint

   Cash discount on the invoice price.

   Answer

   Invoice price = 40,000 × 85% = ₹34,000; cash discount = 2% × 34,000 = ₹680. Bank A/c Dr ₹33,320; Discount Allowed A/c Dr ₹680; To Sales A/c ₹34,000.

6. Q6 · 3 marks · Short answerHarder exam level

   Journalise: (a) paid ₹12,000 for the proprietor's son's school fees from the business bank account; (b) purchased a computer for office use ₹55,000 by cheque; (c) sold an old printer at its book value ₹4,000 for cash.

   Hint

   Watch the asset items.

   Answer

   (a) Drawings A/c Dr 12,000 To Bank A/c 12,000. (b) Computer A/c Dr 55,000 To Bank A/c 55,000. (c) Cash A/c Dr 4,000 To Printer (or Office Equipment) A/c 4,000 (not Sales).

7. Q7 · 3 marks · Short answerHOTS / competency

   On the same day a trader received ₹19,600 in cash from Asha in full settlement of ₹20,000 and ₹29,400 in cash from Bimal in full settlement of ₹30,000. Pass a single compound entry and explain why one entry is allowed here.

   Hint

   Look for a common account on the same side, on the same date.

   Answer

   Both receipts are on the same date and share a common account (Cash) on the debit side, so one compound entry may be passed: Cash A/c Dr ₹49,000; Discount Allowed A/c Dr ₹1,000 (400 + 600); To Asha ₹20,000; To Bimal ₹30,000 (being cash received in full settlement). Each debtor is credited with the full amount owed.

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose goods with a selling price of ₹26,000 (cost ₹20,000) were given away as charity. A student debited Charity A/c and credited Sales A/c with ₹26,000. State two effects of this error on the final accounts.

   Hint

   Compare with the correct entry at cost through Purchases.

   Answer

   Correct: Charity Dr 20,000 To Purchases 20,000. The student's entry overstates sales by ₹26,000 and leaves purchases ₹20,000 too high, so gross profit is overstated by 26,000 − 20,000 = ₹6,000. Charity is also overstated by ₹6,000, so net profit is unaffected; but gross profit, sales, purchases and charity are all misstated.

9. Q9 · 3 marks · Short answerHarder exam level

   Pass the opening entry: cash ₹18,000; debtors ₹62,000; stock ₹95,000; prepaid rent ₹6,000; machinery ₹1,80,000; creditors ₹54,000; outstanding wages ₹7,000; bank overdraft ₹20,000.

   Hint

   Capital is the balancing figure.

   Answer

   Assets = ₹3,61,000; liabilities = ₹81,000; capital = ₹2,80,000. Debit the five assets; credit creditors 54,000, outstanding wages 7,000, bank overdraft 20,000 and capital 2,80,000.

10. Q10 · 3 marks · Short answerHarder exam level

    Explain how input tax credit removes the cascading effect, using a manufacturer who pays ₹1,800 GST on inputs and collects ₹3,000 GST on sales.

    Hint

    Net tax payable.

    Answer

    The manufacturer sets off the ₹1,800 input tax against the ₹3,000 output tax and pays only ₹1,200 to the government: tax only on the value he added. Without ITC he would pay ₹3,000 on a price that already contains ₹1,800 tax, a tax on tax.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Accounting equation?Show answer

   Assets = Liabilities + Capital.

2. 2.Rule for real accounts?Show answer

   Debit what comes in, credit what goes out.

3. 3.Is trade discount recorded?Show answer

   No; only cash discount is recorded.

4. 4.Goods taken by the owner: which account is credited?Show answer

   Purchases A/c, at cost.

5. 5.What is the balancing figure in an opening entry?Show answer

   Capital.

6. 6.Which GST applies to an inter-state supply?Show answer

   IGST.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐A = L + C after every transaction.
• ☐Revenue and gains raise capital; expenses, losses and drawings lower it.
• ☐Personal: receiver Dr, giver Cr. Real: comes in Dr, goes out Cr. Nominal: expenses Dr, incomes Cr.
• ☐Modern: assets and expenses increase by debit; liabilities, capital and revenue by credit.
• ☐Trade discount not recorded; cash discount recorded.
• ☐Goods out without a sale: credit Purchases at cost.
• ☐Opening entry: assets Dr; liabilities and capital Cr.
• ☐GST: CGST + SGST within a state; IGST between states; ITC prevents tax on tax.

Accounting Equation and Journal: frequently asked questions