Source documents

Document is an evidence of transaction or an event and is known as source document based on which
accounts are debited and credited with the transacted amount. Source document is of prime importance
because accounting is based on factual financial information i.e., evidence. These documents are evidence in
support of a transaction. They are also sometimes called supporting documents.

1. Cash Memo: cash Memo is prepared by the seller when goods are sold against cash .it has details of
goods sold, quantity, rate of each item and the total amount received, besides the date of transaction
and other terms and condition, if any .It is an evidence for the purchaser for, goods purchased against
cash and for the seller ,it is an evidence of sales for cash.
2. Invoice/Bill: An Invoice/Bill is prepared by the seller when the goods are sold on credit. It has the
details of the party to whom goods are sold, goods sold, and the total sale amount. The original copy
of the sales invoice is sent to the purchaser and the duplicate copy is retained as an evidence of the
sales for recording it in the books of account and for future reference. For the purchaser, credit
purchases are evidenced by bill received from the supplier.

3. Receipt: When cash or cheque is received from a customer, a receipt for the amount is received is
issued. The receipt is prepared in duplicate. The original copy is given to the party making the
payment and the duplicate is kept for record. It has details of date, amount, and name of the party and
the nature of payment.
4. Pay- in –Slip: It is a source document used for depositing cash or cheques into bank. Pay - in- slip is
a form available from a bank .It has a counterfoil which is retained by the [Link] counterfoil
of the pay- in -slip gives the details regarding the date and the amount in cash or cheque deposited.

5. Cheque: Cheque is a document in writing, drawn upon the bank with which the account is held and
payable on demand. The bank supplies the cheque forms. The name of the party to whom payment is
to be made is written after the words „Pay To‟. The amount is written both in words and figures. A
cheque is dated and signed by the drawer. The cheque details are entered in the counter foil which
remains with the account holder and is the source voucher for recording the transactions in the books
of accounts.
6. Debit Note: A debit note is made out evidencing that a debit has been made to the account of the
party named in the debit note. It details for the reason of debit. The effect of a debit note is that
amount due to the supplier is reduced or, if the account is already settled, goods can be purchased
without payment.

7. Credit note:Credit Note is made out evidencing that credit has been granted to a debtor. The effect of
a credit note is that the amount of the customer‟s indebtedness is reduced or, if it is already settled, to
enable the customer to purchase goods to the value of credit without further payment.
Voucher
Voucher is a document evidencing a business transaction. On the basis of the Source Documents, a
voucher detailing the accounts that are debited and credited is prepared. Vouchers can be categorised in to :

a) Source Vouchers/Source Documents/Supporting Vouchers.

b) Accounting Vouchers.

Source Vouchers/Source Documents/Supporting Vouchers :These are the documents which come into
existence when a transaction is entered into.

Features:

 It is written document.
 It contains complete details of the transaction.
 It is a proof of transaction having taken place.
 It is generally for a business transaction.
 It is signed by the maker.

Accounting Vouchers: Accounting Voucher is a written document containing an analysis of business

transactions for accounting and recording purposes, prepared by the accountant on the basis of
supporting vouchers and signed by another authorised person.

Features:

 It is written document.
 It is prepared on the basis of evidence of the transaction i.e Source Document.
 It is an analysis of a transaction.
 It is prepared and signed usually by an accountant and countersigned by authorised signatory.
 In the case of cash/ bank voucher, it is a receipt.

Types of Accounting Vouchers.

i. Cash voucher
ii. Non cash Vouchers /Transfer Voucher
Cash vouchers: cash vouchers refer to the voucher prepared at the time of receipt/payment of cash
and includes receipt and payment through cheques.
Cash vouchers can be of two types
 Credit voucher: it is prepared when cash is received.
  Debit Vouchers: Debit Vouchers are prepared when payment is made. Payment may be made
against expense, purchase of goods, purchase of fixed assets, payment to creditors, deposits
into bank, drawings etc.

Non- cash Vouchers or Transfers Vouchers: Non cash vouchers are the vouchers prepared for
transactions not involving cash. Examples of these are Invoice or Bills, credit and debit notes etc. Non cash
Vouchers are prepared for the transactions of credit sales, credit purchases, goods returned (both inwards
and outwards), rectifying the errors.
 Accounting Entries for some Specific Transactions:

1. Bad Debts: If an amount , say of credit sales, is not recoverable or is partially recoverable, then the
amount not recoverable is Bad Debt.
a) When the total due amount due is not recoverable
Bad Debts A/c Dr
To Debtor‟s A/c
b) When part of the debt is recovered
Cash or Bank A/c Dr (with the amount recovered)
Bad Debts A/c Dr (with the amount which is not
recovered)
To Debtor‟s A/c ( Total amount of Debt)

2. Bad Debts Recovered: A debtor whose account was earlier written off as “Bad Debt” may pay the
amount partly or fully. The amount received is gain tot the business because the debtor‟s account
was earlier written off as bad debt i.e., loss. Recovery of bad debt is recorded (credited) in an account
titled Bad Debts Recovered Account and not the personal account of the debtor from whom the
amount is received.
Cash/ Bank A/c Dr
To Bad Debts recovered A/c

3. Banking Transactions: Businesses normally make and receive payments through a bank account.
payments by cheque ,cheque received, withdrawal of cash from bank, deposits into bank , bank
charges and interests charged on overdraft by bank etc.
4. Goods given as Charity or Goods Donated: The amount of purchase is reduced with the purchases
cost of goods given as charity or donation. Purchases are reduced because goods are not sold.
Charity/donation A/c (purchase cost)
To Purchases A/c (purchase cost)

5. Distribution of Goods as samples: Goods are distributed as samples to encourage sales. It is not sale
but part of the advertisment or sales promotion expense.
Advertisement Expense/Samples Dr
To Purchases A/c
6. Loss of stock by Theft or Fire:
Loss of stock by theft or fire A/c Dr
To Purchases
a) In case goods were insured and insurance claim for the amount of loss is lodged
Insurance Co Dr
To Loss of stock by theft or fire A/c
b) When the full amount of claim is received from the insurance company:
Bank A/c Dr
To Insurance Co
c) When the insurance company does not pay full claim:
Bank A/c Dr
Loss of stock by Theft/Fire Dr
To Insurance Company
7. Drawings : Drawings means amount or goods withdrawn by the proprietor for personal use
a) Drawings in cash:
Drawings A/c Dr
To Cash A/c
b) Drawings of Goods:
Drawings A/c Dr
To Purchases A/c
8. Purchase and Sale of fixed assets: fixed assets such as machinery, furniture and fixtures etc are
purchased to increase the earning capacity of the business and not for the resale like goods.
a) On purchase of fixed assets:
Fixed asset A/c Dr
To cash/bank A/c
To supplier‟s A/c
b) On sale of fixed assets
Cash /Bank A/c Dr (sold against immediate receipt)
Purchaser‟s A/c Dr (if sold on credit)
Loss on sale of fixed assets A/c Dr (book value- sale value)
To Fixed Assets A/c (book value)
To Gain (profit)on sale of fixed assets (sale value – book value)

9. Expenditure on installation of machinery and on construction of building: Expenditure incurred on

carriage and installation of machinery e.g., freight, wages paid for installation etc. are capital
expenditure and are debited to machinery Account.

10. Miscellaneous or Sundry Expenses:

Miscellaneous or Sundry Expenses Dr
To Cash A/c
 Adjustment Entries
a) Closing Stock: Closing stock means stock of unsold goods at the end of the accounting [Link] is
valued at cost or net realisable value whichever is less.
Closing stock A/c
To Trading A/c

b) Outstanding Expense: Outstanding expenses are the expenses that are of the current year but have
not been paid till the year end. Outstanding expenses is a liability to firm .An increase in liability is
credited.
For e.g.: Wages A/c Dr
To Outstanding Wages A/c
c) Prepaid or Unexpired Expenses: expenses paid in advance, i.e., expenses that are of next year but
paid in current year are called prepaid expenses.
Prepaid Expenses A/c Dr
To relevant expenses A/c

d) Accrued income or Income Earned but not Received: The income which has been earned but has not
been received or has not become due is called accrued income .Accrued income is an asset to a firm.
An increase in asset is debited.

e) Income received in Advance or Un earned Income: Income received but not earned i.e, against
which the sale of goods or services is yet to be made is called income received in advance.
For e.g.: Rent received A/c Dr
Rent received in advance A/c

f) Depreciation : due to the use of fixed assets ,value of the assets decrease every [Link] fall in the
value is called depreciation.
Depreciation A/c Dr
To Fixed Asset A/c

g) Interest on capital: Funds invested by the proprietor in the business is Capital. Profit after allowing
interest on capital to determine correct profit or loss for the year. Interest on capital is an expense for
a business but a gain to the proprietor. Interest on Capital is allowed on the balance of the capital
account in the beginning of the accounting year. In case the proprietor introduces additional capital
during the year, interest on such capital is also allowed from the date capital introduced till the end of
the accounting year.
Interest on capital A/c Dr
To Capital A/c
Discount ,Rebate and cash discount

Basis Trade Discount Rebate Cash Discount

Nature It is allowed on sales or It is allowed because of It is allowed on payment
purchase of certain quantity reasons other than those made on or before a
for which trade discount certain date
and cash discount are
allowed
Nature of It is allowed on both cash It is allowed on both cash It is allowed on payment
and credit sales or and credit sales.
transaction purchases
Recording It is not recorded separately It is recorded separately in It is recorded separately in
in the books of account the books of accounts the books of account
because it is allowed after
the sales is made.
Deduction The amount of trade It is not deducted from the It is not deducted from the
discount is deducted from invoice but it is deducted invoice
from invoice the invoice from sales/purchases in
Trading account
Consideration The consideration for The consideration for The consideration for
allowance is purchases allowance is other than for allowance is payment.
which trade discount and
cash discount are allowed
Relation It is related to sale and It is related to sale and It is related to payment
purchase of discount purchase of goods
LEDGER
A Ledger is a book which contains, in a summarised and classified form, a permanent record of all
transactions. A ledger is also called the Book of Final Entry. Ledger is also called the principal Book of
Account.

Features of Ledger

i. Ledger is a master record of all the accounts of the business.

ii. It is prepared from journal.
iii. Ledger accounts show the current balance in all accounts
iv. Trial Balance and Final Accounts are prepared from Ledger accounts.
v. Ledger accounts summarise the effect of transactions upon assets, liabilities, capital ,incomes
and expenditures

Utilities of Ledger

i. Provides complete information of a particular account.

ii. Information of incomes and expenses.
iii. Preparation of Trial balance.
iv. Helpful in preparing Final accounts

The process of transferring the transactions written in the Journal to a Ledger is called Posting

Basis Journal Ledger

Nature of book It is book of original or primary It is a book of final entry
entry
Basis of preparation Source documents such as Journal is the basis of transactions in Ledger
vouchers are the basis of
recording transactions in Journal
Stage of recording Recording in the Journal is the Recording in the Ledger is the second stage
first stage
Object It is prepared to record all It is prepared to see the net effect of various
transactions in chronological transactions affecting a particular account
order
format Journal have five columns: Ledger has four identical columns on both
Date ,particulars, ledger Folio, debit side and credit side date , particulars,
debit amount, credit amount Journal Folio, Amount
 SPECIAL PURPOSE BOOK

A special form of journal or subdivision of journal in which journal entry is not passed for the
transactions recorded, they are directly posted into ledger accounts .These book of original entry or
primary entry are called special purpose books.

The journal for convenience is divided into following Subsidiary Books:

a) Cash book
b) Purchase book
c) Sales book
d) Purchase return book
e) Sales return book
f) Journal proper.

Advantages of Subsidiary Books

a) Division of work
b) Specialisation and efficiency
c) Saving of time
d) Availability of information
e) Facility in checking
f) Responsibility

CASH BOOK
Cash book is book of primary entry in which cash and bank transactions are recorded in a
chronological order. Receipts are recorded on the debit side of Cash Book while payments are
recorded in the credit side. Cash transactions are recorded in the cash column and bank transactions
are recorded in the bank [Link] is balanced by deducting total payments from total receipts to
know the cash in hand and balance at bank.

Cash account is Real account (traditional approach) and an asset Account

(Modern approach).Debit what comes in credit what goes out or Increases
in assets are debited and decreases are credited

Features of Cash Book

1. Only cash and bank transactions are recorded in the cash book.
2. Cash receipts and cheques deposited are recorded in the debit side while cash and cheque payments
are recorded on the credit side.
3. It records only one aspect of transaction ,i.e., cash
4. Cash and bank transactions are recorded in the cash book in a chronological order,i.e., in order they
are entered.
5. It performs the function of journal and ledger at the same time.
 Kinds or types of cash book

1. Simple Cash book or Single column cash book: For recording cash transactions only.
2. Two column or Double column cash book: Cash book with cash and bank column

Discount received, Discount allowed and cancellation of Discount Received and Discount
allowed are recorded through Journal Proper

Simple Cash book or Single column cash book

1. When cash book is maintained, Cash Account is not opened in Ledger

2. .Cash book is balanced like any other accounts.
3. It does not record a non cash transaction cheque received or given and cash discount allowed and
received.
4. When an entry is recorded in simple cash book , corresponding entry is recorded in Ledger.
5. Cash book will not have credit balance.

“Cash Book (cash column ) cannot have credit balance.” Why

Cash Book (cash column ) cannot have credit balance because cash payments cannot exceed cash in
hand. At the most it can show nil balance when cash payments are equal to cash in hand.

Two column or Double column cash book

It is a cash book which has two amount columns for amount on each side: one column to record cash
transactions and other column to record bank transactions. Deposits of cheques or cash, issue of
cheques and withdrawal of cash from bank etc. are recorded in bank column of the cash book. Thus
two column cash book represents two accounts Cash Accounts and Bank Accounts.

Bank may allow withdrawing more amount than deposited. If the bank allows the firm to withdraw
more amount than the balance in the account, it is known as Overdraft or Bank Overdraft. In such
case, the total of the bank column on the credit side will be bigger than the total of debit side
 [Link] column will either have debit balance or nil balance.

2. Bank column may either have debit balance(balance in Bank) or Credit balance(Overdraft)

[Link] cash book with Cash and Bank columns is maintained, Cash Account and Bank Account are opened in
Ledger