4. Basis of Accounting

Basis of Accounting:

Cash Basis of Accounting: Under this method only cash transactions are recorded in the books of accounts. Entries are made only if cash is received or paid.

Accrual Basis of Accounting: Under this method all transactions are recorded in the books of accounts (Cash and Non-Cash). Entries are made on the Accrual basis, it means cash and Non-cash both transactions are recorded in the books of accounts.

Source of Documents

All financial transactions are recorded in the books of accounts on the basis of source document or on the basis of some evidence. Source documents are helpful to prove that a transaction is actually made or not.

Cash Memo: Cash Memo is A bill of sale, it is a written document by a 'seller' to a purchaser, reporting that on a specific date, a particular sum of money or other "value received",

Invoice or Bill: When goods are sold on credit, An invoice or bill is issued on the name of the buyer, indicating the products, quantities, and agreed prices for products or services, the seller has provided the buyer.

Receipt: A receipt is a written acknowledgment that a specified a sum of money has been received from the customer as an exchange for goods or services. The receipt is evidence of purchase of the goods or service.

Pay-in-Slip: Pay in slip is a form that is filled when the money is deposited by a customer in to his bank account.

Cheque: A cheque is a document (usually a piece of paper) that orders a payment of money. The person writing the cheque, the drawer, usually has a account where the money is deposited.

Debit Note: When we return goods back to the supplier, a debit not is made on the name of supplier, it means his account his debited. Debit Note proves that a debit entry has been made to a debtor's or creditor's account.

Credit Note: When we receive goods back from our customer, then a credit not is made on the name of the customer, it means customer’s account is credited.

Meaning of Voucher: Voucher is the documentary proof or evidence in support of a transaction. For example when we purchase goods for cash, we get cash memo, and when we purchase goods on credit, we get an invoice, when we make payment we get Receipt.

Types of Vouchers

There are two types of vouchers a) Cash Voucher b) Non Cash Voucher

Cash Vouchers: Cash vouchers are prepared for cash transactions only, when cash is received or paid. There are two types of cash vouchers: a) Debit Vouchers b) Credit Vouchers

Debit Vouchers: Debit vouchers are prepared only for cash payments.

Credit Vouchers : Credit vouchers are the opposite side of debit vouchers, Credit vouchers are prepared when we receive cash

Preparation of accounting vouchers: All business transactions recorded in the books of accounts can be compared with the source documents. Accounts are debited or credited on the basis of these source documents. After deciding, that what to be debited or credited, the next step is the preparation of the vouchers.

Meaning of Accounting Equation

The Accounting Equation' is based on the double-entry book keeping system. For every debit there must be a credit. The accounting equation states that the sum of the Total assets must be equal to the sum of the liabilities.

Assets = Liabilities + Capital

                  Or

 Capital = Assets - Liabilities

                 Or

 Liabilities = Assets - Capital

                 Or

 Assets = Total Liabilities or Total Equity

               Or

 Total Assets = Internal Liabilities + External Liabilities