Business Transactions & Vouchers

• A business transaction involves the exchange of values between two parties, embodying a "Give and Take" aspect.

Source Documents and Vouchers

• All business transactions require documentation as evidence.
• Examples of source documents are cash memos for cash sales, invoices for credit sales, and receipts for cash payments.
• A source document or voucher is the main evidence supporting a business transaction.
• It serves as the initial record for a business transaction and forms the basis for entries in accounting books.
• If there is a lack of documentation then a necessary voucher should be prepared detailing the transaction.
• Vouchers are filed separately in chronological order and numbered serially.
• Accounting vouchers serve as documentary evidence for and record of accounting transactions.
• A simple transaction with one debit and one credit uses a transaction voucher.

Elements of a Transaction Voucher:

• Voucher Number
• Date
• Debit Account
• Credit Account
• Amount
• Narration (description)
• Authorizing Signature
• Preparer Signature

Accounting Vouchers

• Accounting vouchers are written documents with analysis of business transactions, prepared by an accountant and countersigned by an authorized person.
• The vouchers help in accounting and recording the transaction.
• The documents are written and based on transaction evidence.
• They contain transaction analysis, indicating the debited and credited accounts
• Vouchers are prepared by a accountant and authorized by a signatory
• Accounting vouchers can be cash vouchers (debit, or credit) or non-cash vouchers, also known as transfer vouchers.

Cash Vouchers

• Cash vouchers are used for recording transactions that involve cash payments.
• Cash payments may be related to expenses, purchase of assets, loan repayment, drawings and advances, or payments to creditors.
• Cash vouchers involve one aspect of cash and the other covers payment to a party, an expense, or an item of property.

Subtypes of Cash Vouchers

• Debit vouchers, used for cash payments
• Credit vouchers, used for cash receipts

Credit Vouchers

• Used for recording transactions involving cash receipts only.
• The cash receipts are on account of cash sales (goods or assets) or revenue income (interest, rent), cash receipts from debtors, loans taken, cash withdrawn from bank or receipts of advances.
• In a cash receipt, one aspect involves cash, and the other is either a person/party from whom cash is received, revenue for which cash is received, or property sale on which cash is received.

Transfer Vouchers

• Transfer vouchers are prepared to record non-cash transactions including credit purchases/sales, returns (goods sold/purchased), asset depreciation, and bad debts.
• With business transactions, there's an increasing role is credit transactions.
• These vouchers are prepared in both debit and credit forms at the same time.

Accounting Equation

• The basic accounting equation is Assets = Liabilities + Capital.
• The business assets are financed by the proprietor or by outside entities
• Introducing an asset creates a corresponding liability.
• Every transaction influences the accounting equation by either increasing or decreasing assets, liabilities, or capital.
• All transactions have some assets

Effects of Accounting Equations

• Any increase or decrease in capital leads to a corresponding change in assets.
• Money borrowed from outside entities is a liability.
• Increase or decrease in capital can result in increase or decrease of assets
• The fundamental accounting equation can also be expressed as:
  • Liabilities = Assets - Capital or L=A-C
  • Capital = Assets - Liabilities or C=A–L

Expenses and Revenue

• Expenses and revenue impact the capital component of the accounting equation
• A business incurs expenses like salary, rent, insurance, postage, repairs, which reduces cash and the net income of the business
• Business revenue comes from many sources like rent received, commission received etc

Accounting Equation Representation

• Assets + Revenue = Liabilities + Capital + Revenue
• Assets – Expenses = Liabilities + Capital – Expenses
• Accounting equation influenced by business transaction
• The dual aspect concept of accounting is satisfied by every transaction
• Used for balance sheets

Verifying the Accounting Equation

• Assets, liabilities, and capital form the core elements of each business transaction, their relationship expressed by the accounting equation: which must remain balanced.
• At any point, individual assets, liabilities, or capital can change, but the equation as a whole remains equal. Meaning that both sides of the equation should always remain equal.

Implications

• Goods purchased that are paid in cash will lead to one asset (goods) going up, and another asset (cash) going down. The other sides of the accounting equation will read as they are
• Cash payments for employee salaries reduce an asset. This expense reduces capital

Cash Basis of Accounting:

• Records entries only when cash changes hands (received or paid).
• The profit or loss equals the difference between total revenues and total expenses for a period.
• Revenue can only be recognized on receipt of cash
• Incomes and Expenses that are outstanding, prepaid, or in advance are not taken into account.

Advantages of Cash Basis:

• Simple, with no adjustment entries.
• Straightforward because estimates/judgments are minimal.
• Ideal for entities operating mostly on a cash basis

Disadvantages of Cash Basis:

• Lacks a true view of profit/loss and ignores outstanding/prepaid expenses.
• Does not adhere to the matching concept.

Accrual Basis of Accounting

• Considers revenue and expense for income determination, relating to the accounting period
• Income is measured regardless of when the cash has changed hands or not

Key Aspects

• The base is about revenue and expenditures being taken into account for the purpose of revenue during that period
• Considers money that has been transferred and cash which will be sent/received
• Outstanding expenses are due payments which aren't paid off
• Prepaid expenses are paid in advance.
• Accrued income is income earned but not due for payment
• Cash received is income that the business has got before earning it.

Advantages of Accrual Basis

• Based on transactions and shows right amount of income
• Used for businesses
• This application is more scientific in principle

Disadvantages of Accrual Basis

• Personal judgement is required
• True cash is not shown

Hybrid Basis of Accounting

• Cash and accrual accounting combine their advantages and limitations
• Can only be used if the business deals with cash and is not big
• System is a combination of both types of accounting
• Benefits of both systems and negates any disadvantages

Double Entry Mechanism

• The mechanism involves every transaction being noted with how it impacts credit and debit
• For every transaction that is marked one account is debited and another credited
• Based on principle of credit having a debit

Advantages of Double Entry Mechanism

• Systematic records with business transactions
• Complete record of business transactions
• Statements of account with data can be prepared