Accounting involves identifying, recording, classifying, and summarising business transactions to communicate financial information to interested users. The first step in this process is identifying transactions and preparing source documents.
A Source Document is a written document that provides evidence of a business transaction. It contains essential details such as the date, amount, parties involved, and nature of the transaction. Common examples include:
An Accounting Voucher is a document prepared by an accountant to analyze and record transactions in the books of accounts. Vouchers are arranged chronologically, serially numbered, and kept as audit evidence.
The Accounting Equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner's equity). It is also known as the Balance Sheet Equation.
Derivatives of the accounting equation include:
Every business transaction has a two-fold effect (dual aspect) that keeps the accounting equation balanced at all times.
In double-entry bookkeeping, every transaction affects at least two accounts. The terms Debit (Dr.) and Credit (Cr.) indicate whether transactions are recorded on the left or right side of an account, which is structured like a T-Account.
Accounts are divided into five categories, each following specific rules for recording increases and decreases:
| Category of Account | Debit (Dr.) Side | Credit (Cr.) Side |
|---|---|---|
| Assets | Increase (+) | Decrease (-) |
| Expenses / Losses | Increase (+) | Decrease (-) |
| Liabilities | Decrease (-) | Increase (+) |
| Capital | Decrease (-) | Increase (+) |
| Revenues / Gains | Decrease (-) | Increase (+) |
The Journal is the basic book of original entry where transactions are recorded chronologically as they occur. The process of recording transactions in a journal is called Journalising.
A standard journal contains five columns: Date, Particulars, Ledger Folio (L.F.), Debit Amount, and Credit Amount.
| Date | Particulars | L.F. | Debit Amount (₹) | Credit Amount (₹) |
|---|---|---|---|---|
| 2017 Dec.24 | Purchases A/c To Govind Traders A/c (Being goods purchased on credit) | 30,000 | ||
| 30,000 |
GST is an indirect tax levied on the supply of goods and services. It comprises:
GST paid on purchases is recorded as Input GST (an asset), while GST collected on sales is recorded as Output GST (a liability).
The Ledger is the principal book of accounting where transactions of a similar nature are classified and recorded in individual accounts.
A ledger account is divided into two symmetric sides: Debit (left) and Credit (right).
| Dr. (Debit Side) | Cr. (Credit Side) | ||||||
|---|---|---|---|---|---|---|---|
| Date | Particulars | J.F. | Amount (₹) | Date | Particulars | J.F. | Amount (₹) |
| 2017 June 5 | To Capital A/c | 2,00,000 | 2017 June 8 | By Bank A/c | 80,000 | ||
The process of transferring journal entries to the ledger accounts is called Posting. It involves locating the account in the ledger, entering the date, writing the corresponding account name in the particulars column, entering the journal folio page, and recording the amount.
| Basis of Comparison | Journal | Ledger |
|---|---|---|
| Type of Book | Book of first/original entry. | Book of second/principal entry. |
| Record Format | Chronological record (date-wise). | Analytical record (account-wise). |
| Process Name | Journalising. | Posting. |
| Legal Evidence | Greater importance as legal evidence. | Lesser importance as legal evidence. |