Business Transactions And Source Documents

Introduction

A business transaction is an exchange of two things, like the purchase of a laptop for cash. In this case, the delivery of a laptop and payment of cash are the two transactions. The business transactions must have support evidence of at least one of the salary slip, sale invoice, cash memo, bill, cheque, etc. Such evidence for undertaking transactions is termed as a Voucher or source document. In business, a number of Accounting vouchers are prepared such as journal vouchers, cash vouchers, etc. These vouchers are required for auditing and taxation purpose. A simple transaction has one debit and one credit and such a transaction contain a transaction voucher. On the other hand, a transaction that records multiple debits and credits is called a compound voucher. Such transactions are known as complex transactions. The format of a voucher of the complex transaction is given as under;

 

Accounting Equation

An accounting equation considers that every transaction has a dual aspect, and therefore, affects both the Debit (Dr.) and Credit (Cr.) equally. In other words, an accounting equation always equates total assets with total liabilities (capital + liabilities) in a business. The accounting equation is also known as the balance sheet equation as it reflects the relationship between different components of a balance sheet. In the above equation, capital represents the claim of the owners and that of the outsiders are called liabilities. The assets given in the balance sheet shows what the business owns. For example, Dev commenced business with the capital of Rs. 1,000,000. In this case, Rs. 1,000,000 account for the asset in the asset side of the Balance Sheet. The same amount also represents capital on the liability side. The balance sheet in the books of Dev will appear as under:

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Capital

1,000,000

Cash

1,000,000

 

1,000,000

 

1,000,000

 

Using debit and credit

As stated above, each transaction has a dual effect. When the transactions are recorded the total amount of debt should be equal to that of credit. In a simple form, an account looks like T, such that the left side (debit) record increases and the right side (credit) shows decreases in the item.

 

Rules of debit and credit

Every account can be categorized into one of the five types namely, asset, liability, capital, expenses/losses, and revenues/gains.

The fundamental rules followed to record the changes in these accounts are-

  • Debit what comes in and credit what goes out.

  • Debit all expenses and losses and credit all gains and revenues.

  • Debit the receiver and credit the giver.

By using the above three golden accounting rules, the treatment of changes in each of the account can be ascertained and given below:

Transaction

Increase

Decrease

Asset

Debit

Credit

Liability

Credit

Debit

Capital/ Equity

Credit

Debit

Expenses/ losses

Debit

Credit

Revenues/ gains

Credit

Debit

 

Illustration 1: Analyse the effect of each transaction on assets and liabilities and to show whether the accounting equation holds true:

1. Dev commenced a business with Rs. 1,000,000 cash and Rs. 100,000 worth stock.

                                     Dr.                                                        Cr.

Assets

Amount (Rs.)

Liabilities + Capital

Amount (Rs.)

Cash

1,000,000

Capital (cash + stock)

1,100,000

Stock

100,000

 

 

 

1,100,000

 

1,100,000

2. Purchased machinery for Rs. 200,000 such that half is paid in cash and balance at a later date.

                               Dr.                                                                Cr.

Assets

Amount (Rs.)

Liabilities + Capital

Amount (Rs.)

Cash

1,000,000

Capital

1,100,000

Stock

100,000

Amount due to P&M supplier

100,000

Machinery

200,000

 

 

(-) cash paid

-100,000

 

 

 

1,200,000

 

1,200,000

 

3. Deposited Rs. 500,000 in the bank.

                                  Dr.                                                             Cr.

Assets

Amount (Rs.)

Liabilities + Capital

Amount (Rs.)

Cash

900,000

Capital

1,100,000

Stock

100,000

Amount due to P&M supplier

100,000

Machinery

200,000

 

 

Bank

500,000

 

 

(-) cash

-500,000

 

 

 

1,200,000

 

1,200,000

 

4. Purchased office furniture for Rs. 75,000 and paid by cheque.

                                  Dr.                                                               Cr.

Assets

Amount (Rs.)

Liabilities + Capital

Amount (Rs.)

Cash

400,000

Capital

1,100,000

Stock

100,000

Amount due to P&M supplier

100,000

Machinery

200,000

 

 

Bank

500,000

 

 

Furniture

75,000

 

 

(-) Bank

-75,000

 

 

 

1,200,000

 

1,200,000

 

5. Withdrawn from Bank for personal use Rs. 23,000.      

                                      Dr.                                                                Cr.

Assets

Amount (Rs.)

Liabilities + Capital

Amount (Rs.)

Cash

400,000

Capital

1,100,000

Stock

100,000

Amount due to P&M supplier

100,000

 



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