Business Transactions, Vouchers and Accounting Equation

Business Transactions And Source Document

As discussed in the chapter on Basic Accounting Terminology, a Business Transaction is an economic event that changes the financial position of an entity and is measurable in monetary terms. These transactions are the foundation of the accounting process. Examples include buying or selling goods, receiving or paying cash, incurring expenses, or taking loans.

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For a transaction to be recorded in the books of accounts, there must be reliable and objective evidence that it occurred. This evidence is provided by Source Documents. Source documents are the original written records that verify a transaction. They are crucial for the Objectivity Concept in accounting.

Examples of Source Documents:

• Cash Memo / Bill / Invoice: Issued when goods are sold or purchased for cash or credit. It details the items, quantity, rate, amount, date, and parties involved.
• Receipt: Issued when cash or a cheque is received from a party.
• Pay-in-slip: Used when depositing cash or cheques into the bank account.
• Cheque: A written order to a bank to pay a stated amount of money to a specified person or bearer. Used for making payments.
• Debit Note: Issued to a supplier when goods are returned by the buyer (Purchase Return). It indicates that the supplier's account is being debited.
• Credit Note: Issued to a customer when goods are returned by the customer (Sales Return). It indicates that the customer's account is being credited.

Source documents serve as the basis for preparing accounting vouchers and are essential for verifying the accuracy of accounting records during an audit. Maintaining proper source documents is a legal requirement for businesses in India.

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Preparation Of Accounting Vouchers

An Accounting Voucher is a written document prepared on the basis of a source document, authorising and summarising a business transaction for the purpose of recording it in the books of accounts. While the source document is the evidence that a transaction took place, the accounting voucher is the document prepared internally by the business to initiate the accounting entry.

Vouchers are typically pre-numbered and prepared chronologically. They contain details like the date, voucher number, amount, narration (brief description of the transaction), names of the accounts to be debited and credited, and authorisation signatures.

Types of Accounting Vouchers:

• Debit Voucher: Prepared for transactions involving cash/bank payments (e.g., payment of salary, purchase of assets for cash, cash purchases of goods). It indicates which account is to be debited.
• Credit Voucher: Prepared for transactions involving cash/bank receipts (e.g., cash sales, receipt from debtors, interest received). It indicates which account is to be credited.
• Non-Cash Voucher / Transfer Voucher / Journal Voucher: Prepared for transactions that do not involve cash or bank (e.g., credit purchases, credit sales, depreciation of assets, goods returned). It documents transactions that are recorded in the Journal.

Answer:

Proper voucher preparation ensures that all transactions are authorised, documented, and accurately recorded, strengthening the internal control system of the business.

Accounting Equation

The Accounting Equation is the fundamental principle of the double-entry system of accounting. It expresses the relationship between a business's Assets, Liabilities, and Capital (Owner's Equity). This equation holds true at all times and after every transaction.

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The Fundamental Equation

Assets = Liabilities + Capital

This equation can also be expressed as:

Assets - Liabilities = Capital

Or

Assets - Capital = Liabilities

Derivation/Explanation:

The total resources owned by a business are its Assets. These resources have been provided by two sources:

• External Parties: Funds provided by creditors, banks, etc. These represent the business's Liabilities (claims of outsiders).
• Internal Parties: Funds provided by the owner(s). This represents the owner's claim, known as Capital.

Therefore, the total resources (Assets) must always equal the total claims against those resources (Liabilities + Capital).

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Impact of Transactions on the Accounting Equation

Every transaction affects at least two components of the equation, but the equation always remains in balance. The total of the left side (Assets) will always equal the total of the right side (Liabilities + Capital).

Examples of Transactions and their effect on the Accounting Equation:

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Answer:

The Accounting Equation is a powerful tool for understanding the double-entry system and how every transaction impacts the financial structure of a business while maintaining balance. It forms the basis for preparing the Balance Sheet.