1. Voucher and Transactions
Transactions refer to any financial activities that affect the financial position of a business and can be measured in monetary terms. Every business transaction — whether it involves buying, selling, paying, or receiving cash — must be recorded with proper documentation to ensure accountability and transparency.
Vouchers are the primary documents used to record and verify these business transactions. They serve as proof that a transaction has occurred and form the basis for accounting entries.
2. Source Documents and Vouchers
Source Documents are original documents that provide evidence of a transaction. These documents are crucial for preparing vouchers, as they verify the details of each transaction. Common source documents include:
- Invoices: Provided by sellers to buyers, indicating goods or services delivered and the amount owed.
- Receipts: Issued as proof of payment received.
- Debit Notes: Issued to indicate that a buyer has returned goods or received a price reduction.
- Credit Notes: Issued when goods are returned to a supplier or when a discount is given.
- Cheque: Used as proof of payment when payments are made by cheque.
- Bank Statements: Provide details of transactions made through bank accounts.
Vouchers are prepared based on these source documents, recording the details necessary to make entries in the accounting system. They include information like the date of the transaction, the amount, the accounts involved, and the signatures of the individuals authorizing the transaction. Vouchers ensure the accuracy and authenticity of the information recorded in the books.
3. Types of Vouchers
- Cash Voucher: Used for transactions involving cash payments or receipts, like cash purchases or sales, salary payments, etc.
- Bank Voucher: Prepared for transactions involving bank accounts, such as cheque payments, bank deposits, and bank charges.
- Purchase Voucher: Used for recording purchases of goods or services on credit.
- Sales Voucher: Prepared for credit sales transactions.
- Journal Voucher: Records adjustments or other transactions that don’t involve cash or bank accounts, like depreciation or provision for bad debts.
4. Preparation of Vouchers
The preparation of vouchers involves recording the necessary details of each transaction. Each voucher generally contains the following elements:
- Date of the Transaction: The day the transaction occurred.
- Voucher Number: A unique identifier for each voucher for easy tracking and referencing.
- Details of Transaction: Description of the transaction, including names of the parties involved.
- Amount: The monetary value of the transaction.
- Accounts Involved: Specific ledger accounts affected by the transaction.
- Authorization: Signature of the person who authorized the transaction.
Steps to Prepare a Voucher:
- Gather the relevant source documents.
- Determine the accounts affected by the transaction.
- Record the date, amount, and details on the voucher.
- Get the voucher authorized by an authorized person.
- File the voucher with other transaction records for future reference.
Example: Suppose a company purchases office supplies worth ₹5,000 in cash. A cash voucher would be prepared, detailing the transaction date, amount, purpose (office supplies), accounts affected (cash and office supplies), and the signature of the authorized person.
5. Accounting Equation Approach: Meaning and Analysis
The Accounting Equation Approach is a fundamental concept in accounting, expressing the relationship between assets, liabilities, and owner’s equity in a business. The accounting equation is:
Assets = Liabilities + Owner's Equity
This equation is the foundation of double-entry accounting, as every transaction affects this equation in two ways to keep it balanced. Each transaction results in an increase or decrease in at least two accounts, ensuring that the accounting equation remains in balance.
Analysis of Accounting Equation
- Assets: Resources owned by the business, such as cash, inventory, buildings, and equipment.
- Liabilities: Obligations the business owes to outsiders, like loans, accounts payable, and mortgages.
- Owner's Equity: The owner’s claim on the assets of the business, calculated as the residual value after deducting liabilities from assets.
Example of Applying the Accounting Equation:
- Transaction: A business purchases furniture worth ₹10,000 with cash.
- Impact on Accounting Equation:
- Assets (Furniture) increase by ₹10,000.
- Assets (Cash) decrease by ₹10,000.
- The equation remains balanced as only the composition of assets changes, with no change to liabilities or owner’s equity.
6. Rules of Debit and Credit
The Rules of Debit and Credit form the basis for making entries in double-entry accounting. Each transaction affects two or more accounts, with one account being debited and the other credited. The rules vary depending on the type of account involved.
The main types of accounts are Assets, Liabilities, Equity, Revenue, and Expenses. Here are the general rules for each type:
Asset Accounts:
- Debit: Increases in assets (e.g., purchase of equipment).
- Credit: Decreases in assets (e.g., cash payment).
Liability Accounts:
- Debit: Decreases in liabilities (e.g., repayment of a loan).
- Credit: Increases in liabilities (e.g., taking a loan).
Equity Accounts:
- Debit: Decreases in owner’s equity (e.g., drawings by the owner).
- Credit: Increases in owner’s equity (e.g., additional capital investment).
Revenue Accounts:
- Debit: Decreases in revenue (uncommon).
- Credit: Increases in revenue (e.g., sales income).
Expense Accounts:
- Debit: Increases in expenses (e.g., rent paid).
- Credit: Decreases in expenses (uncommon).
The Rules of Debit and Credit Summarized
| Account Type | Debit (DR) | Credit (CR) |
|---|
| Asset | Increase | Decrease |
| Liability | Decrease | Increase |
| Equity | Decrease | Increase |
| Revenue | Decrease (uncommon) | Increase |
| Expense | Increase | Decrease (uncommon) |
Applying Debit and Credit Rules
In each transaction:
- The account that receives the benefit (increases) is debited.
- The account that gives the benefit (decreases) is credited.
Example: If a company pays rent of ₹2,000:
- Rent Expense (Expense) is debited, as expenses increase with debit entries.
- Cash (Asset) is credited, as cash decreases with credit entries.
Another Example:
- A business takes out a loan of ₹50,000 from a bank.
- Bank Loan (Liability) is credited for ₹50,000, as liabilities increase with credit.
- Cash (Asset) is debited for ₹50,000, as assets increase with debit.
Summary
- Vouchers and Source Documents: Vouchers document transactions and are prepared based on source documents like invoices, receipts, and cheques. They include essential transaction details like date, amount, accounts affected, and authorization.
- Preparation of Vouchers: Involves recording transaction details, determining accounts affected, and getting authorization.
- Accounting Equation Approach: Every transaction affects the accounting equation — Assets = Liabilities + Owner's Equity — keeping it balanced.
- Rules of Debit and Credit: Define how each account type is affected by debits and credits, ensuring accurate entries for every transaction.
These concepts form the core of accounting, ensuring systematic, accurate, and verifiable financial records.
