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SPECTRUM STUDY CIRCLE(The Acme of Excellence) 1

15/22 IInd Floor Ashok Nagar, New Delhi-110018. Ph.: 25499279, 55711031(O), 9810865706(M)
PREPARED BY ROHIT KOHLI: 9810634853

Source Document of Accountancy


Various Transactions are made in a business every day such as purchase and sale of goods and services,
receipt or payment of cash and so on. Each business transaction should be supported by documentary
evidence such as cash memo, cash receipt, invoice or bill, debit and credit notes, pay-in-slip, cheque etc.
These business documents are called source documents and these are the first record about the details of a
business transaction. Such documents report the date, the amount, parties involved and the nature of the
transaction. Entries in the books are always made from the source documents.
The following are the most common source documents: -
(1) Cash Memo:- When a trader sells goods for cash, he gives a cash memo and when he purchase good for
cash he receives a cash memo. Details regarding the item, quantity, rate and the total price is mentioned in
the cash memo.
(2) Invoice and Bill: - When a trader sells goods on credit, he prepares a sale invoice which contains the
name of the party to whom goods are sold, the rate, quantity and the total amount of sale. The original copy
of the sale invoice is sent to the purchaser and its duplicate copy is kept for making records in out books of
accounts.
(3) Receipt: - When a trader receives cash from a customer, he issues a receipt containing the date, amount
and the name of the customer. The original copy of the receipt is given to the customer and its duplicate
copy is kept for making records in the books of accounts.
(4) Debit Note: - When we return goods to supplier, we prepare a debit note and sent it to the supplier with
the returned goods. Debit note is a document which indicates that supplier’s account is being debited.
(5) Credit Note: - When goods are received back from a credit note sent to him indicating that the
customer’s account has been credited in our books. A duplicate copy of the credit note is retained for record
purpose.
(6) Pay – in – Slip: - This is a form available from a bank and is used to deposit money in the bank to pay a
specified sum to the bearer or the person named in it. Each cheque has a counterfoil in which the same
details as entered in the cheque are filled. The counterfoil remains with the account holder for future
reference.

VOUCHERS
Meaning of Voucher
On the basis of source documents entries are, first of all, recorded on Vouchers and then on the basis of
Vouchers recording is made in the Journal or books of original entry. Vouchers are printed separately by all
the firms in the their own names . A separate Voucher is prepared for each transaction and it specifies the
accounts to be debited and credited. Vouchers are prepared by an accountant and each Voucher is
countersigned by an authority person of the firm.
Types of Vouchers
Vouchers may be classified into two categories as follows:
(1) Cash Vouchers
(2) Non – Cash Vouchers or Transfer Vouchers
(1) Cash Vouchers : Cash Voucher are prepared for cash transactions i.e., cash receipts and cash
payments. These are of two types viz., Debit Vouchers and Credit Vouchers.
(2) Non – Cash Vouchers or Transfer Vouchers: The se Vouchers are prepared for non-cash
transactions such as:
 For Credit Purchase or Credit Sale of goods
 For Credit Purchase or Credit sale of investments
 For Credit Purchase or Credit Sale of fixed assets
 For Return of goods purchased or sold on credit
 For Providing depreciation
 For Writing off bad debts
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15/22 IInd Floor Ashok Nagar, New Delhi-110018. Ph.: 25499279, 55711031(O), 9810865706(M)
PREPARED BY ROHIT KOHLI: 9810634853

Meaning of Double Entry System


According to this system every business transaction affects atleast two accounts in opposite directions. For
example, if the furniture is purchased in the business, furniture is increased whereas the cash is decreased.
There can be no transaction in the business which affects only one account or which has only one aspect. As
such, both the aspects of every transaction are recorded under this system.
The amount of every transaction is written twice, once as a debit and again as a credit. For example, we
received Rs. 5,000 from Mohan. This transaction affects two accounts – Cash Account and Mohan’s
Account. Cash account is receiving a benefit (as cash is coming in) and hence Cash account will be debited,
whereas Mohan is yielding a benefit and hence his account will be credited.
Classification of Accounts

(1) Personal Accounts


(2) Impersonal Accounts
(a) Real Accounts
(b) Nominal Accounts
(1) Personal Accounts:- The accounts which relate to an individual, firm, company or an institution are
called personal accounts. Account of Mohan, Account of Ram Chander Krishan Chander, Account of
D.C.M. Limited, Account of Delhi University, Bank Account, Capital Account of the proprietor, Drawing
Account of the Proprietor etc. are examples of Personal Accounts
(2) Real Accounts: - The accounts of all those things whose values can be measured in the term of money
and which are the properties of the business are termed as real accounts. Such as cash account, Furniture
Account, Machinery Account, Building Account, Goodwill Account etc.
(3) Nominal Accounts:- These accounts include the accounts of all expenses and incomes.
The example of nominal accounts relating to expenses are Salaries paid, Rent paid, Discount allowed, Bad
Debts etc.
The example of nominal accounts relating to incomes are Commission received, Interest received, Discount
received etc.
RULES:- The following three are the basic rules for recording the transaction:-
1) Personal Accounts:- Debit the receiver and Credit the giver.
2) Real Accounts:- Debit what comes in and credits what goes out.
3) Nominal Accounts:- Debit all exp. (and loses) and credit all incomes and gains.
The left hand side of an account is called the debit side and the right-hand side of an account is called
credit side.

 ACCOUNTING EQUATION BASED CLASSIFICATION:

1. Assets Accounts These accounts relate to tangible or intangible real assets. Eg. Land A/c, Building
A/c, cash A/c, Patents, Goodwill, Trademark etc.
2. Liabilities Accounts These accounts relate to the financial obligations of an enterprise towards
outsiders. Eg Trade creditors, Bills Payable , Bank Overdraft, Loans, Outstanding
Exp. etc.
3. Capital Accounts These accounts relate to owners of an enterprise. Eg. Capital A/c, Drawings A/c.
4. Revenue Accounts These accounts relate to the amount charged for goods sold or services rendered
or permitting others to use enterprise’s resources yielding interest, royalty or
dividend. Eg. Sales A/c, Discount Received A/c, Dividend Received A/c, Interest
Received A/c.
5. Expenses Accounts These accounts relate to the amount incurred or lost in the process of earning
revenue. Eg. Purchase A/c, Discount allowed A/c, Royalty paid A/c, Interest
payable A/c, Loss by Fire A/c etc.
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 DISTINCTION BETWEEN REAL ACCOUNT AND NOMINAL ACCOUNT

Real Account Nominal Account


⇒ These accounts relate to properties of the ⇒ These accounts relate to expenses, losses,
business. income and gains.
⇒ These accounts are shown in Balance Sheet. ⇒ These accounts are shown in profit and loss
⇒ Closing balances of these accounts are carried account.
over to the next year as opening balances. ⇒ Closing balance of these accounts are closed by
⇒ These accounts indicate financial position of transfer to profit and loss account.
the business. ⇒ These accounts assist in calculating profit and
⇒ As per double entry rule, property received is loss of the business.
debited and property given is credited. ⇒ As per double entry rule, expenses and losses
are debited and income and gains are credited.

 JOURNAL
A Journal is a book in which transactions are recorded in the order in which they occur i.e., in chronological
order. A journal is the primary books of account under which all the transactions are recorded with
complete narration on the basis of the three basic rules given for recording the transactions. The process of
recording a transaction in a journal is called Journalizing. An entry made in the journal is called a ‘Journal
Entry’.
A journal entry is an analysis of all the effect of a single transaction on the various accounts, usually
accompanied by an explanation. For each transaction, this analysis identifies the accounts to be debited or
credited.
FORMAT:
Date Particulars L.F. Amount (Dr.) Amount (Cr.)

Note:- The ‘Ledger Folio column’ is filled in at the time of posting into the ledger and not at the time of
journalizing.

 ADVANTAGES OF JOURNAL
♦ Chronological record:- It records the transactions in the order in which they occur.
♦ Explanation of transaction:- Each journal entry in the journal carries narration which gives a brief
explanations of the transaction.
♦ Recording the both aspects:- Both the aspect (i.e., debit and credit) of a transaction are recorded in
the journal. Since the amounts recorded in both debit amount column and credit amount column
must be equal, the possibility of accounting error is reduced and the detection of errors, if any,
committed becomes easy.

 LIMITATIONS OF JOURNAL:
When the number of transactions is large, it is practically impossible to record all the transactions
through one journal because of the following reasons:
(i) The system of recording all the transactions in a journal required (a) the writing down of the
name of account involved as many times as the transactions occur; and (b) an individual posting
of each account debited and credited and hence involves the repetitive journalizing and posting
labour.
(ii) Such system does not provide the information on prompt basis.
(iii) Such a system does not facilitate the installation of an internal check system since, the journal
can be handled by only one person.
(iv) The journal becomes bulky and voluminous.
To overcome and shortcomings of the use of the journal only as a book of original entry, the journal is
subdivided into special journal.
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15/22 IInd Floor Ashok Nagar, New Delhi-110018. Ph.: 25499279, 55711031(O), 9810865706(M)
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 NARRATION:
The narration is the explanation of the entry and facilitates quick understanding. The length of the
narration depends on the complexity of the transaction and whether management wants the journal itself
to contain all relevant information. Most often narration are in brief.
S.No. Particulars Amount Amount
(Dr.) (Cr.)
1. On bringing of Capital in Cash:
Cash Account ...........…...........… Dr.
To Capital Account
(Being cash brought as capital in to business)
2. On brining of capital in the mode of cheque:
Bank Account ...........…...........… Dr.
To Capital Account
(Being capital brought into business)
3. On deposit of cash into bank:
Bank Account ...........…...........… Dr.
To Cash Account
(Being Cash deposited into bank)
4. On purchase of assets for cash.
Assets (name of assets) Account ...........…. Dr.
To Cash Account.
(Being assets purchase for cash)
5. On purchase of assets on credit:
Assets Account ...........…...........…. Dr.
To Supplier Account
(Being assets purchased on credit from .............)
6. On sale of goods for cash.
Cash Account ...........…...........…… Dr.
To Sales Account
(Being goods sold for cash)
7. On sale of goods on credit.
Sundry Debtors Account ...........…… Dr.
To Sales Accounts
(Being goods sold to Mr. ............. on credit)
8. On return of goods from customer:
Sales Account ...........…...........… Dr.
To Sundry Debtors / Cash A/c
(Being goods return from Mr. ...........…)
9. On payment received from debtors:
(i) Received in cash:
Cash Account ...........…...........… Dr.
To Sundry Debtors Account
(Being cash received from .............)

(ii) Received by cheque and the same is deposited into


bank:
Bank Account ...........…...........… Dr.
To Sundry Debtors Account
(Being cheque received from customer deposited into bank)
10. On Dishonour of cheque deposited into Bank:
Sundry Debtors A/c ...........…...........… Dr.
To Bank A/c
(Being dishonour of cheque received from customer)
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11 On Payment received from debtors:
Cash / Bank Account ...........…............. Dr.
Discount Account ...........…...........…... Dr.
To Sundry Debtors Account
(Being amount received from ............. after giving a discount
@…%)
12 For bad debts:
Bad Debts Account ...........…............. Dr.
To Sundry Debtors Account
(Being amount due from Mr............. is confirmed as bad debts)
13 For provision for bad and doubtful debt:
Profit and Loss Account ...........…............. Dr.
To Provision for doubtful debt Account
(Being prov. made for doubtful debts @ ..% of Sundry debtors)
14 For transfer of Bad Debts of provision for doubtful debts
account (if prov. for doubtful debts account maintained)
Provision for doubtful debts account ............. Dr.
To Bad Debts Account
(Being amt. of bad dents trad. to prove for doubtful debts
account)
15 On purchase of raw material / trading goods for cash:
Purchase/Goods Account ...........…............. Dr.
To Cash Account
(Being goods purchased for cash)
16. On purchase of raw material/trading goods on credit:
Purchase / Goods Account ...........…............. Dr.
To Sundry Creditors Account
(Being goods purchased on credit)
17. On return of purchased goods to the supplier:
Sundry Creditors Account ...........…............. Dr.
To Purchase / Goods A/c
(Being goods return to Mr. ...........…)
18. On Payment made to supplier/creditor:
Sundry Creditor Account ...........…............. Dr.
To cash/Bank account
(Being cash / cheque no......paid to Mr.............)
19 On payment made to creditors after availing cash discount
Sundry Creditors Account ...........…............. Dr.
To cash/bank A/c
To Discount A/c
(being cash/cheque no…paid to Mr. .. after discount @..%)
20 On payment of expenses:
Expenses Account ...........…...........… Dr.
To cash/Bank A/c
(Being cash paid for .............)
21 On expenses due but no paid:
Expenses Account ...........…............. Dr.
To Expenses outstanding/payable account
(Being expenses for the month of .............due but not paid)
22 On income accrue but not received:
Income Accrue/Received A/c ...........…. Dr.
To respective Income A/c
(Being Income accrues but not received during the year.)
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23 On amount withdrawn from bank:
Cash Account ...........…...........…. Dr.
To Bank A/c
(Being amount withdrawn from bank for business use)
24 On amount withdrawn from bank for private use:
Capital / Drawing Account ...........… Dr.
To Bank A/c
(Being amount withdrawn from bank for personal use.)
25 On withdrew of trading gods for private use:
Capital / Drawing Account ...........…......... Dr.
To Purchase / Goods A/c
(Being goods withdrew from business for personal use.)
26 For distribution of trading goods free as a sample:
Advertisement A/c ...........…............. Dr.
To Purchase A/c.
(Being distribution of trading goods free as a sample debited to
advertisement A/c and credited to purchases A/c)

 COMPOUND ENTRY:

When more than two accounts are involved in a transaction and the transaction is recorded by means of
single journal entry instead of passing several journal entries, such single journal entry is termed as
‘Compound Journal Entry’. A compound journal may also be passed if there are more transactions of
the same nature, taking place on the same date. It may be recorded in the following three way:
(i) by debiting one account and crediting two or more accounts; or
(ii) by debiting two or more accounts and crediting one account; or
(iii) by debiting several accounts and crediting several accounts.
Example:-
Paid Rs. 920 to Mr. Gopal in full settlement of his account of Rs. 1,000.
Gopal A/c ...........… Dr. 1000
To Cash a/c 980
To discount received A/c 20
(Being cash paid to Gopal in full settlement of his account)

 OPENING ENTRY

A Journal entry by means of which the balances of various assets, liabilities and capital appearing in the
balance sheet of previous accounting period are brought forward in the books of current accounting
period, is known as ‘Opening Entry’.
While passing an opening entry. All those accounts which denote what the business possesses (assets)
are debited and all the accounts showing amounts due by the business (liabilities) are credited.
⇒ If Capital is not given, it can be easily found out by deducting liabilities from assets.
Opening entries are the following:
Cash Account ............. Dr.
Cash at Bank Account ............. Dr.
Sundry Debtors Account ............. Dr.
Stock Account ............. Dr.
Fixed Assets Account ............. Dr.
To Sundry Creditors Account
To Capital Account
⇒ The opening entry is made in the journal. At the end of the trading period, closing entries are made,
the object being to close the books.
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15/22 IInd Floor Ashok Nagar, New Delhi-110018. Ph.: 25499279, 55711031(O), 9810865706(M)
PREPARED BY ROHIT KOHLI: 9810634853

 LEDGER:

A ledger is a principal book, which contains all the accounts to which the transactions recorded in the
books of original entry are transferred. As the ledger is the ultimate destination of all transactions, the
ledger is called the ‘Book of Final Entry.’
The ledger may be kept in the form of a bound book, a loose-leaf set of pages, or some kind of electronic
storage device such as magnetic tape or floppy diskettes or CDs, but it is always kept current in a
systematic manner.

Utility of the ledger:


⇒ It provides complete information about all the accounts in one book.
⇒ It enables to ascertain what the main item of revenues are.
⇒ It enables to ascertain what the main item of expenses are.
⇒ It enables to ascertain what the assets are and of what value.
⇒ It enables to ascertain what the liabilities are and of what amounts.
⇒ It facilitate (i.e. make easy) the preparation of Final Accounts.

 DISTINCTION BETWEEN JOURNAL AND LEDGER:

Journal Ledger
⇒ It is a book of primary entry. ⇒ It is book of final or secondary entry.
⇒ It is prepared on the basis of source documents ⇒ It is prepared on the basis of journal.
of transactions.
⇒ Recording of transactions in the journal is the ⇒ Recording in the ledger is third or final stage. It
second stage. It is done after preparing is prepared after the journal entry.
vouchers.

TRIAL BALANCE
Meaning of Trial Balance, After posting the accounts in the Ledger, a statement is prepared to show
separately the debit and credit balances. Such a statement is known as the Trial Balance.Whichever way it is
prepared, the totals of the two columns should agree. An agreement indicates reasonable arithmetic accuracy
of the accounting work. If the two sides do not agree, there is definitely some error or errors.

Objectives (need) of Preparing the Trial Balance


The preparation of Trial Balance has the following objectives:
(i) To ascertain arithmetic accuracy of ledger accounts. The Trial Balance enables one to establish
whether the posting and other accounting processes have been carried out without committing
arithmetical errors.
(ii) To help in preparation of final accounts. Financial statements are normally prepared on the basis
of the Trial Balance. Otherwise, the work may be cumbersome.
(iii) Summary of each account. The Trial Balance serves as a summary of what is contained in the
ledger. The ledger may have to be referred to only when much detail is required in respect of an
account.
(iv) To help in locating errors. Trial Balance helps in locating errors in book-keeping work. It should,
however, be noted that it does not disclose all the errors in book-keeping work but only
arithmetic inaccuracy.