Source documents
A source document is the first written proof of a transaction. Common ones:
- Cash memo: given for cash sales.
- Invoice/bill: for credit sales or purchases, showing quantity, rate, GST and terms.
- Receipt: proof that cash has been received.
- Debit note: sent by a buyer to a supplier when goods are returned (the supplier's account is debited).
- Credit note: sent by a seller to a customer for goods returned (the customer's account is credited).
- Pay-in slip: used to deposit cash or cheques in the bank.
- Cheque: an order to a bank to pay a stated amount.
Preparing accounting vouchers
An accounting voucher is prepared from source documents and approved by an authorised person. It must show: name of firm, date, serial number, account(s) to be debited and credited, amount in figures and words, narration, and signatures of the preparer and the authoriser.
Types of vouchers
- Cash vouchers: debit voucher (cash paid) and credit voucher (cash received).
- Non-cash or transfer voucher: no cash involved, e.g. credit purchase or depreciation.
- Compound voucher: one debit and many credits, or many debits and one credit (for example, salary paid to three workers).
- Complex (journal) voucher: many debits and many credits.
The accounting equation
Because of the dual aspect principle, every transaction has two equal effects, so Assets = Liabilities + Capital (A = L + C). Other forms: Capital = Assets − Liabilities; Liabilities = Assets − Capital.
Effects:
- Both sides up: bought goods on credit; took a loan; owner brought capital.
- Both sides down: paid a creditor; repaid a loan; drawings.
- One asset up, another down: bought furniture for cash.
- Expense paid: assets down, capital down. Income received: assets up, capital up.
See the full lesson on the accounting equation for more practice.
Rules of debit and credit
Debit (Dr) means the left side of an account; Credit (Cr) means the right side. Modern (accounting-equation) rules:
- Assets: increase → debit; decrease → credit.
- Expenses and losses: increase → debit; decrease → credit.
- Liabilities: increase → credit; decrease → debit.
- Capital: increase → credit; decrease → debit (drawings are debited).
- Revenues and gains: increase → credit; decrease → debit.
Every transaction debits one or more accounts and credits one or more accounts with the same total. This is the double entry system.
Key formulas and definitions
- Assets = Liabilities + Capital
- Capital = Assets − Liabilities
- Closing capital = Opening capital + Profit − Drawings (+ additional capital)
- Debit: assets ↑, expenses ↑, drawings ↑
- Credit: liabilities ↑, capital ↑, revenues ↑
- Total debits = Total credits
Worked examples
1. Show the accounting equation: (1) Started business with cash ₹1,00,000; (2) bought goods on credit ₹30,000; (3) bought furniture for cash ₹10,000.
(1) Cash 1,00,000 = Capital 1,00,000. (2) Cash 1,00,000 + Stock 30,000 = Creditors 30,000 + Capital 1,00,000. (3) Cash 90,000 + Stock 30,000 + Furniture 10,000 = 30,000 + 1,00,000. Total 1,30,000 = 1,30,000.
2. Continue: (4) paid rent ₹5,000; (5) sold goods costing ₹20,000 for ₹26,000 cash.
(4) Cash 85,000; capital 95,000. (5) Cash 1,11,000, stock 10,000; profit ₹6,000 adds to capital → 1,01,000. Assets 1,11,000 + 10,000 + 10,000 = 1,31,000 = 30,000 + 1,01,000.
3. Assets ₹4,50,000 and liabilities ₹1,20,000. Find capital.
Capital = 4,50,000 − 1,20,000 = ₹3,30,000.
4. State the account debited and credited: salary paid in cash ₹12,000.
Salary A/c (expense ↑) Dr ₹12,000; Cash A/c (asset ↓) Cr ₹12,000.
5. State the accounts: loan of ₹50,000 taken from bank, received in bank account.
Bank A/c (asset ↑) Dr; Bank Loan A/c (liability ↑) Cr.
6. Which voucher is used for: (a) cash sales, (b) credit purchase, (c) wages paid?
(a) Credit (receipt) voucher. (b) Transfer (non-cash) voucher. (c) Debit (payment) voucher.
Common mistakes
- Crediting expenses when they increase. Expenses increase on the debit side.
- Forgetting that an expense also reduces capital in the equation.
- Thinking debit always means "bad" or "loss". Debit just means the left side.
- Mixing up debit note (sent by buyer on purchase return) and credit note (sent by seller on sales return).