1. Source Documents
Source documents are the original documents that serve as evidence for a business transaction. Recording starts only after verifying source documents.
- Cash Memo: For cash purchases/sales (issued by seller).
- Invoice / Bill: For credit purchases/sales — contains details of goods, quantity, price.
- Receipt: Written acknowledgement of cash received.
- Debit Note: Issued by buyer to seller — recording return of goods purchased (purchase return).
- Credit Note: Issued by seller to buyer — recording return of goods sold (sales return).
- Cheque: A negotiable instrument directing the bank to pay a specified amount.
- Pay-in-Slip: Used when depositing money into a bank account.
- Voucher: An internal document created by the accountant based on source documents, authorising recording of a transaction.
2. Accounting Vouchers
- Cash Voucher (Receipt Voucher): For cash received transactions.
- Payment Voucher: For cash paid transactions.
- Transfer / Journal Voucher: For non-cash transactions (adjustments, depreciation, non-cash entries).
3. Classification of Accounts
Traditional Approach (3 Types)
| Type of Account | Debit Rule | Credit Rule | Examples |
|---|---|---|---|
| Personal Account (Persons, companies, banks) |
Debit the Receiver | Credit the Giver | Ramesh's A/c, Bank A/c, Capital A/c |
| Real Account (Assets – tangible & intangible) |
Debit what comes in | Credit what goes out | Cash A/c, Machinery A/c, Goodwill A/c |
| Nominal Account (Expenses, losses, incomes, gains) |
Debit all expenses & losses | Credit all incomes & gains | Salary A/c, Rent A/c, Commission Received A/c |
1. Personal: Debit the Receiver, Credit the Giver
2. Real: Debit what comes in, Credit what goes out
3. Nominal: Debit all expenses/losses, Credit all incomes/gains
Modern Approach (5 Types)
| Element | Debit Effect | Credit Effect |
|---|---|---|
| Assets | Increase (+) | Decrease (–) |
| Liabilities | Decrease (–) | Increase (+) |
| Capital | Decrease (–) | Increase (+) |
| Revenue/Income | Decrease (–) | Increase (+) |
| Expenses/Losses | Increase (+) | Decrease (–) |
4. Journal
The Journal is the primary book of original entry (Books of prime entry). Every financial transaction is first recorded in the Journal in chronological order.
- Narration: A brief explanation of the journal entry written in parentheses at the bottom of each entry — starts with "Being…"
- Compound Entry: A journal entry that involves more than two accounts in a single transaction (one debit, multiple credits — or vice versa).
- Opening Entry: First entry in the new financial year to bring forward assets and liabilities from the previous year.
5. Ledger
The Ledger is the principal book of accounts (book of secondary entry). Transactions from the journal are posted (transferred) to individual accounts in the ledger.
- Each account in the ledger is in a T-form with Debit side (Dr.) on the left and Credit side (Cr.) on the right.
- Balancing the Ledger: At the end of the period, both sides are totalled. The difference is the balance. If Dr. total > Cr. total → Debit balance (asset/expense). If Cr. > Dr. → Credit balance (liability/income/capital).
- Nominal accounts are closed (balanced off to P&L Account) at year end — they show no balance carried forward.
6. Trial Balance
A Trial Balance is a statement prepared at the end of the accounting period listing all ledger account balances (Debit and Credit) to check arithmetical accuracy.
If the Trial Balance agrees (balances match), it provides a preliminary check on the accuracy of posting. However, it does NOT detect all types of errors (e.g., errors of omission, commission).