2

DHARMA CHAKKARA
 Business Transaction and Source document

⮚ According to the verifiable objective concept, each transaction recorded in the

books of accounts should have adequate proof to support it. The documents on the
basis of which transactions are recorded in the books of accounts are called source
documents. They provide information about the nature of transactions; parties
involved it, quantity, date, amount etc. It is the origin of transaction and it initiates
the accounting process
⮚ Example:
⮚ Cash memo, Invoice/bill, receipt, debit note, credit note, etc.

Accounts 3
 ACCOUNTING VOUCHERS

⮚ An accounting voucher may be defined as a written document to be used in support

of entry made in the books of accounts.
⮚ On verifying source documents vouchers are prepared first.
⮚ A voucher will be revealed which account to be debited and which account to be
credited.
⮚ Then on the basis of Vouchers recording is made in the journal.
⮚ These vouchers may be preserved in any case till the audit of the accounts and tax
assessments for the relevant period are completed.

Accounts 4
CLASSIFICATION OF VOUCHERS

•VOCUHERS
• CASH
• Debit Vouchers for cash
• payments

•Credit Vouchers for

•Cash receipts

• NON CASH

Accounts 5
 CASH VOUCHERS
⮚ Cash vouchers are prepared for cash transactions i.e, to record cash receipts and
payments. Cash vouchers are of two types Debit vouchers and Credit vouchers.
(a)Debit vouchers: It is prepared to record transactions involving cash payments. The
situation may be
(1) For cash payment of expenses like rent, wages, salary etc.
(2) For cash purchase of goods,
(3) For cash purchase of fixed assets,
(4) For cash payment to creditors,
(5) For recording drawings,
(6) For depositing cash into the bank.

6
Accounts
 CASH VOUCHERS
⮚ Cash vouchers are prepared for cash transactions i.e, to record cash receipts and
payments. Cash vouchers are of two types Debit vouchers and Credit vouchers.

(b) Credit Vouchers: It is prepared to record transactions involving cash receipts.

The situation may be
(1) For cash receipts of incomes like commission received, interest received,
discount received etc.
(2) For cash sales of goods
(3) For cash sales of fixed assets,
(4) For cash receipts from debtors,
(5) For withdraw cash from bank.

7
Accounts
 Non-cash voucher

⮚ Non-cash voucher or Transfer vouchers Except for Cash and Bank receipts and
Payments, all transactions are recorded in Transfer Voucher.
⮚ This voucher also referred to as the Journal Voucher. Non-cash vouchers prepared
to record transactions not involving cash.
⮚ These are used in the following cases.
a) For credit purchase or credit sales of goods.
b) For credit purchase or credit sales of fixed assets.-
c) For providing depreciation.
d) For writing off bad debts

Accounts
8
 Compound Voucher

⮚ A document showing a transaction that contains multiple debits and one credit or
which contains multiple credits and one debit is called compound voucher.

COMPOUND
VOUCHER

DEBIT CREDIT
COMPOUND COMPOUND
VOUCHER VOUCHER

Accounts 9
 Compound Debit Voucher

⮚ A document showing a transaction that contains multiple debits and one credit is
called compound debit voucher.
⮚ Usually it is used for expenses or expenditure

Accounts 10
 Compound Credit Voucher

⮚ A document showing a transaction that contains multiple credits and one debit is
called compound credit voucher.
⮚ It is used to record incomes and gains

Accounts 11
 Other types of vouchers

⮚ Complex Vouchers/Journal Vouchers

⮚ A document showing transactions that contain multiple debits and multiple credits
are called complex voucher.
⮚ Example: on 02-04-2020 Bought machinery and furniture from AB Ltd for Rs.1,
80,000 and
⮚ Cash paid for Rs.1, 00,000 and balance payable in 30 days. CGST 6%,SGST 6%

Accounts 12
 ACCOUNTING EQUATION

⮚ Accounting Equation Accounting equation signifies that the assets of a business are
always equal to the total of capital (owners claim) and Liabilities (outsiders claim).
⮚ Accounting equation is a statement of equality between debits and credits.
⮚ Assets = Liabilities + Capital
⮚ The above equation can also be expressed as follows:
⮚ Assets – Liabilities = Capital
⮚ Assets – Capital = Liabilities
⮚ Assets – Liabilities – Capital = 0
⮚ The accounting equation is often called as Balance Sheet equation as it shows the
fundamental relationship among the components of Balance Sheet. Assets, Liabilies
and Capital are the three basic elements of every business transaction.

Accounts 13
 ACCOUNTING EQUATION

⮚ This equation set the foundation of double-entry accounting and highlights the
structure of the balance sheet.
⮚ Assets: Cash, Accounts Receivable, Inventory, Machinery, furniture etc.
⮚ Liabilities (outsiders’ equity): Accounts Payable, Short-term borrowings, Long-
term Debt etc.
⮚ Owner’s Equity: Capital, Retained Earnings
⮚ Assets = Liabilities + capital
⮚ The relationship between assets, liabilities and capital, as mentioned above in the
form of accounting equation remains unchanged.
⮚ It has been a mathematical truth. No business transaction can break the
relationship between these terms.
⮚ A business transaction will result in the changes in either of the assets, liabilities or
capital of the firm and even after the change the assets will be again equal to the
total of capital and liabilities.

Accounts 14
Accounts 15
 Usage of Debit and Credit

⮚ Double entry system is the most progressive, scientific and complete system of
recording the financial transaction of a business.
⮚ According to this system there are two accounts involved in every business
transaction. It may be asset, liability,capital revenue or expense.
⮚ One of them is debited and the other is credited.
For example,
⮚ if the furniture is purchased in the business, furniture (asset) is increased whereas
cash (asset) is decreased.
⮚ When salary paid, salary (expense) is increased and cash is decreased.
⮚ If goods sold on credit, Stock (asset) decreased and debtors (asset) increased.
⮚ There can be no transactions in the business which affects only one account or one
aspect.
⮚ As such, both the aspects (debit/credit) of every transaction are to be recorded
under double entry system..

Accounts 16
 Meaning of Debit and Credit

⮚ All accounts are divided into two sides.

⮚ The left side of an account is traditionally called Debit side and the right side of an
account is called Credit side.
⮚ Normally account is prepared in ‘T’ shape.
⮚ For example, all transaction relating to cash are recorded in a particular account
known as Cash Account and its format will be as given below

Accounts 17
 Rule for Debit and Credit

⮚ There are two approaches for deciding which account is to be debited and which
account is to be credited.
⮚ American Approach or Modern Approach
⮚ English Approach or Traditional approach (Out of Syllabus)
Modern approach

Accounts 18
 Modern approach

⮚ Asset Accounts (Land and Building, Plant and machinery, furniture, stock, debtors,
cash,bank etc) Debit the increases and Credit the decreases.
⮚ Liability Accounts(Creditors, bank loan, outstanding expenses, bills payable etc.)
Debit the decreases and credit the increases
⮚ Capital Account (Capital account and drawings account) Debit the decreases and
credit the increases
⮚ Income/ Revenue account (sales, discount received, interest received, commission
received, discount received, bad debts recovered etc.) Debit the decreases and
credit the increases
⮚ Expenses/ loss Accounts (purchases, wages, salary, depreciation, bad debts, rent,
discount allowed etc.)

Accounts 19
Accounts 20
Accounts 21
DHARMA CHAKKARA 22
DHARMA CHAKKARA 23
DHARMA CHAKKARA 24
DHARMA CHAKKARA 25
DHARMA CHAKKARA 26
 Ledger

⮚ Business transactions are first entered in the primary book called Journal.
⮚ The next step is to transfer the entries to respective accounts in Ledger.
⮚ Ledger is a book in which various accounts are opened and transactions are posted
from Journal.
⮚ A ledger is also called the ‘Book of Final entry’, since all transactions recorded first
in Journal and finally posted to various accounts maintained in Ledger.
Features of Ledger
⮚ Various accounts like asset accounts, liability accounts, capital account, expense
accounts, revenue accounts are maintained in ledger
⮚ It is prepared from Journal.
⮚ Trial Balance and Final Accounts are prepared from Ledger accounts.

DHARMA CHAKKARA 27
 Classification of Ledger

⮚ Accounts All ledger accounts are put into five categories, namely, assets, liabilities.
Capital, revenue and expenses.
⮚ All accounts may further be put into two groups, i.e. permanent accounts and
temporary accounts.
⮚ Permanent accounts:
All assets, liabilities, and capital accounts are permanent accounts. All permanent
accounts are balanced and carried forward to the next accounting period. All
permanent accounts appear in the Balance Sheet.
⮚ Temporary Accounts:
All revenue and expenses accounts are temporary accounts. Temporary accounts
are not balanced, they

DHARMA CHAKKARA 28
 Balancing of Accounts

⮚ Balancing of accounts is the process of ascertaining the difference between the

totals of debit side and the credit side of the account and inserting the difference on
the side where the amount is less in order to make the totals of the account equal.
Permanent accounts in the ledger are periodically balanced.
⮚ In case debit side exceeds credit side ,the difference is written on the credit of the
account as ‘By balance c/d’
⮚ In such a case the amount is said to have debit balance which means that the debit
side is more.
⮚ In case credit side exceeds debit side ,the difference is written on the debit of the
account as ‘To balance c/d’
⮚ In such a case the amount is said to have credit balance which means that the credit
side is more

DHARMA CHAKKARA 29
Difference between journal and ledger

DHARMA CHAKKARA 30
 GST Transactions

⮚ To study about GST we can classify transactions into two-Interstate transactions and intra state
transactions.
⮚ Interstate transactions are transactions between states.
⮚ Intrasatate transactions are transaction within the state.
⮚ Accounts involved in GST Accounting
Input Taxes (At the time of purchase of goods/assets or payment of expenses)
1. Input IGST Account
2. Input CGST Account
3. Input SGST Account
⮚ In put IGST, Input CGST and Input SGST are paid at the time of purchase of goods/asset or payment of
expenses. IGST is concerned with interstate transactions.CGST and SGST is concerned with intrastate
transactions.Input tax paid is considered as an asset,because it can be set off against Output tax liability.
Output Taxes(At the time of sale of goods or receipts of income)
4. Output IGST
5. Output CGST
6. Output SGST
⮚ Output IGST, Output CGST and Output SGST are collected at the time of sale of goods or receipt of any
type of income. IGST is concerned with interstate transactions. CGST and SGST is concerned with
intrastate transactions. Output tax collected is considered as a Liability because it payable to the
government after set off with Input tax credit.

DHARMA CHAKKARA 31
 SUMMARY

1. Meaning of source documents : Various business documents such as invoice, bills, cash
memos, vouchers, which form the basis and evidence of a business transaction recorded in
the books of account, are called source documents.
2. Meaning of accounting equation : A statement of equality between debits and credits
signifying that the assets of a business are always equal to the total liabilities and capital.
3. Rules of debit and credit : An account is divided into two sides. The left side of an account is
known as debit and the credit. The rules of debit and credit depend on the nature of an
account. Debit and Credit both represent either increase or decrease, depending on the nature
of an account. These rules are summarised as follows : Name of an account Debit Credit
Assets Increase Decrease Liabilities Decrease Increase Capital Decrease Increase Revenues
Decrease Increase Expenses increase Decrease
4. Books of Original entry : The transactions are first recorded in these books in a chronological
order. Journal is one of the books of original entry. The process of recording entries in the
journal is called journalising.
5. Ledger : A book containing all accounts to which entries are transferred from the books of
original entry. Posting is process of transferring entries from books of original entry to the
ledger

DHARMA CHAKKARA 32