Various transactions are made in business everyday, such as sales & purchases of goods and services, receipt and payment of cash, etc. Every business transaction is required to be supported by documentary evidence, such as invoice or bill, debit or credit note, cash receipt, cash memo, cheque, etc. All such documents are known as source documents. They are the first records of the details of business transactions. These documents contain date, amount and parties involved in business transactions. Entries in the books of accounts are made from these source documents. The most common source documents are as follows:
Invoice and Bill
When a trader sells goods on credit, he prepares a sales invoice which contains the nature of the party to whom the goods are being sold, rate, quantity amount and date of sale. The original copy of the sales invoice is sent to the buyer and its duplicate copy is retained for record. In the same way, when a trader purchases goods on credit, he receives a sales bill from the seller. An advice is prepared for credit sales and bill is received for credit purchases. Specimen of an invoice and a bill are as follows :
Receipt
When a trader receives cash from a customer, he issues a receipt containing date, amount and the name of the customer. The original copy of the receipt is given to the customer and its duplicate is kept in record. Similarly, whenever, we make a payment, we obtain a receipt from the party to whom we make payment.
Debit Note
When the buyer returns goods to the seller, he prepares debit note and sends it to the seller with goods thus returned. Debit note is a document which indicates that seller’s account is being debited. It is a source document which contains date of transaction, name of account being debited, and reasons for return. Its duplicate copy or the counter-foil of the debit note is kept in record to debit the account of the seller. A specimen copy of the debit note follows:
Performa of Debit Note
Gurucharan Products Ltd.
105, Ansari Road,
Delhi-110006
No……. Date……….
To
Name and Address (of the person to whom goods is sent)
We are debiting your account as follows :
Amount
Rs.
50 Boxes, vide your Invoice No. 8,000
151 are being returned as they
are badly damaged
For Gurucharan Products Ltd.
Manager
Credit note
When goods are received back from customer a credit note is sent to him indicating that customer’s account has been credited in our books of account. A duplicate copy of the credit note is kept for record.
Pay-in-slip
This is a form which available from a bank. It is used to deposit cheque and cash in the bank. Each pay-in-slip has a counter foil which is returned by the bank to the despositor duly signed and stamped thereon by the cashier of the bank.
Cheque
A cheque is an order in writing drawn upon a bank to pay a specified amount to the bearer or the person named in it. Specimen of a cheque follows:
Specimen of Cash Memo
Gulmohar Watch Co.
A-150, Lal Chowk Srinagar
No.
M/s……………. Dated …………
Qty Description Rate Amount
Rs. Rs.
10 Titan Raga 3000 30000
8 Titan Regalice 3200 25,600
Less Discount 55,600
10% 5,560
Total 50,040
Goods once sold are not
exchanged or taken back
Manager
Gulmohar Watch Co.
Voucher
A voucher may be defined as a written document in support of a business transaction. It is a documentary evidence of transaction.
Vouchers are of two types:
(a) Supporting Vouchers and
(b) Accounting vouchers. The later ones are of two types :
Cash Vouchers and Non-Cash Vouchers.
Supporting Vouchers
The documents supporting business transactions are called supporting vouchers such as receipt of rent, cash memo, counter foils of pay in slips, credit memos, etc.
Special features of supporting vouchers :
(i) They can be used as legal evidence.
(ii) They are signed by the maker.
(iii) They are written documents.
(iv) They are related to business transactions.
(v) They contain details of business transactions.
(vi) They are documentary evidence.
Accounting Vouchers
They are also written documents about business transactions for accounting and recording purposes. They are prepared by accountants on the basis of supporting vouchers and are countersigned by another responsible person.
Types of accounting vouchers
Accounting vouchers are of two types, namely cash vouchers and non-cash vouchers. Cash vouchers are again of two types—credit vouchers (cash receipts) and debits vouchers (cash payments). Non cash vouchers are transfer vouchers for non-cash transactions.
Credit voucher (cash receipts)
These receipts are of 5 types :
(1) Cash Receipts, (2) Cash Receipts for Sales of Assets, (3) Cash Receipt from Debtors, (4) Rent Receipt and (5) Loan Receipt.
Features of accounting vouchers
(i) They are written documents.
(ii) They are signed by the maker.
(iii) They are related to business transactions.
(iv) They are prepared by accountants.
Transfer vouchers : Transfer Vouchers are prepared to record non-cash transactions of business. There is neither any receipt nor any payment.
Names of transfer vouchers :
(i) Credit sales, (ii) Credit Purchases
(iii) Return of Goods sold, (iv) Return of Goods purchased, (v) Bad debts,
(vi) Depreciation of assets.
The difference
(i) Supporting vouchers are prepared by the maker and accounting vouchers are prepared by the accountant.
(ii) Supporting vouchers contain detail of transaction. On the other hand, an accounting voucher contains analysis of a transaction.
(iii) A supporting voucher is the evidence of the transaction whereas an accounting voucher is the evidence of correct analysis.
(iv) A supporting voucher follows a transaction. An accounting voucher follows a supporting voucher.
Preparation of vouchers
Vouchers are prepared by the clerks by filling in the appropriate blanks with the information taken from invoice. It normally contains the following information :
(i) Name and address of the enterprise.
(ii) Voucher number
(iii) Date
(iv) Debit
(v) Credit
(vi) Proof of receiving the amount.
(vii) Revenue stamp.
(viii) Signature of the authorised officer.
recording : accounting equation
Accounting equation states the equality of debits and credits. The left side of the equation represents Assets (Debit) and right side represents Liabilities and owners equity (Credit). The relationship of assets on the left side and liabilities and owner’s equity on the right side in the equation-form is known as the ‘Accounting Equation’ as follows:
Assets (A) = Liabilities (L) + Owner’s Equity (E)
This equation can be stated in any of the following forms:
A = L + E
or A – L = E
or A – E = L
or A – E – L = 0
As the components of balance sheet are depicted in the accounting equation, it is also called. ‘Balance Sheet Equation’. The owner’s equity re-presents the amount invested by owners in the business plus retained earnings.
Analysis of transaction
Each transaction is to be analysed and recorded in the books of account in chronological order. Each transaction has effect on assets and liabilities. Their increase is added and decrease is subtracted. The net result is assets are equal to liabilities and owner’s capital. There is decrease in capital on account of expenses and losses and increase due to income and profits. If one asset is purchased and the other goes out of business, there is no impact on capital and equities.
Definition of account
An account is a formal record of all transactions relating to changes in a particular item. Transactions of similar nature are brought together at one place in an account which are opened in a book called ledger.
Rules of debits and credit
The basic rules of debit and credit are as follows :
(i) Any increase on the left hand side of the equation is a debit.
(ii) Any decrease on the left hand side of the equation in a credit.
(iii) Any increase on the right hand side of the equation is a credit.
(iv) Any decrease on the right hand side of the euqation is a debit.
Debit and credit principles
Personal Account : Debit the receiver, credit the giver.
Real Account : Debit what comes in, Credit what goes out.
Nominal Account : Debit all losses and expenses, Credit the gains and income.
Nature of accounts
Personal Account : These accounts which relate to persons, firms and institutions are called personal accounts.
Types of personal accounts
Natural personal Account : Natural personal means human beings such as Utsav, Lagan, Abhaya, capital and drawing accounts of the proprietor and partners.
Artificial Personal Account : These accounts are of firms, companies, institutions, factories, establishments, such as Frank Bros & Co., Delhi Public School, Ram & Shyam Bros., Life Insurance Company of India.
Representative Personal Account : When an account represents a particular person or group of persons, it is termed as representative personal account. For example; if the salaries for the month of December are not paid to the employees, the amount payable to these employee will be added and put under one common title salaries account. This account represents the accounts of all the persons to whom salaries have to be paid. This is therefore, termed as representative personal account.
Other examples of the representative personal accounts are Prepaid Insurance Account, Accrued Interest Account, Unearned Commission Account, etc.
Impersonal Accounts
All those accounts which are not personal are treated as impersonal accounts. These accounts may be related to assets, expenses, losses, gains and incomes.
Real Accounts
Real Accounts are classified as follows :
(i) Tangible Real Accounts : Accounts of those assets which can be seen, touched and felt such as Land and Buildings, Machinery, Furniture, Vehicles etc.
(ii) Intangible Real Accounts : These accounts cannot be touched, but can be measured. They have no physical shape or size. Such as Goodwill, Trade Marks, Patent Rights etc.
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