Livestock Economics, Marketing and Business Management

SOURCE DOCUMENTS

• Documents on the basis of the above transactions are recorded in the books of account are known as source documents.
• Examples of source documents are bills, invoices, receipts, cash memos, vouchers etc.
• These documents provide written evidence of a transaction or event that has taken place.

Accounting Equation

Assets = Equities

• The properties owned by business are called “Assets”.
• The rights to properties are called “Equities”.
• Equities may be subdivided into two types: the rights of creditors and the rights of the owners.
• The equity of creditors represents debts of the business and are called liabilities.
• The equity of the owner is called capital.
  • So,
    • Assets = Liabilities + Capital (or)
    • Assets – Liabilities = Capital.
• The Accounting Equation can be understood with the help of following transactions.

Transaction 1

• A starts a business with a capital of Rs. 10,000.
• There are two aspects of transactions. The business has received a cash of Rs. 10,000.
• It is its asset but on the other hand it has to pay a sum of Rs. 10,000 to A. Thus:

Capital and Liabilities	Rs.	Assets	Rs.
Capital	10,000	C ash	10,000

Transaction 2

• A purchases furniture for cash worth Rs. 2,000. The position of his business will be as follows:

Capital and Liabilities	Rs.	Assets	Rs.
Capital	10,000 ­­­­­­	Cash Furniture	8,000 2,000
	10,000		10,000

Transaction 3

• A purchases cotton bales from B for Rs. 5,000 on credit.
• He sells for cash cotton bales costing Rs. 3,000 for Rs. 4,000 and Rs. 1,000 for Rs. 1,500 on credit to P.
  • As a result of these transactions the business makes a profit of Rs 1,500 (i.e. Rs.5,500 - Rs.4,000), this will increase A’s Capital from Rs.10,000 to Rs.11,500.
  • The business will have a liability of Rs.5,000 to B and two more assets in the form of a debtor P for Rs.1,500 and stock of cotton bales of Rs.1,000. The position of his business will now be as follows:

Capital and Liabilities	Rs.	Assets	Rs.
Creditor (B) Capital	5,000 11,500	Cash(Rs.8000+4000) Stock of cotton bales Debtor (P) Furniture	12,000 1000 1500 2000
	16,500		16,500

Transaction 4

• A withdraws cash of Rs 1,000 and cotton bales of Rs 200 for his personal use.
• The amount and the goods withdrawn will decrease relevant assets and A’s capital. The position will be now as follows.

Capital and Liabilities	Rs.	Assets	Rs.
Creditor (B) Capital (Rs 11500-Rs 1200	5,000 10,300 ___________ 15,300	Cash (Rs 12000-Rs 1000) Stock of cotton sales Debtor (P) Furniture	11,000 800 1,500 2,000 ___________ 15,300

• The result of applying the system of double entry system may be summarized in the following rule:
  • “For every debit there must be equivalent credit and vice versa.”

Journal

• Journal records all daily transactions of a business into the order in which they occur.
• A journal is defined as a book containing a chronological record of transactions.
• It is the book in which transactions are recorded under the double entry system. Thus journal is the books, of original record.
• The journal does not replace but preceds the ledger.
• The process of recording transaction in a journal is termed as Journalising. A proforma of Journal is given below.

Journal

Date	Particulars	L.F	Debit Rs	Credit Rs
(1)	(2)	(3)	(4)	(5)

• Date: The date on which the transaction was taken place is recorded here.
• Particulars: The two aspects of transaction namely debit and credit are recorded here.
• L.F: It means Ledger Folio. The transactions entered in the journal are later on posted to the ledger.
• Debit: In this column the amount to be debited is entered.
• Credit: In this column the amount to be credited is shown.

Closing of accounts: (Closing entries)

• Closing entries are entries passed at the end of accounting year to close different accounts.
• These entries are passed to close accounts relating to incomes, expenses, gains and losses.
• In other words, these entries are passed to close the different accounts pertaining to Trading and Profit and Loss account.
• The accounts relating to assets and liabilities are not closed but they are carried forward to next year.
• Hence no entries are to be passed regarding those accounts which relate to the balance sheet.
• The principle of passing a closing entry is very simple.
• In case an account shows a debit balance, it has to be credited in order to close it.
• For e.g. if the Purchases Account is to be closed, the Purchases Account will have to be credited so that it may be closed because it has a debit balance.
• The closing entries are passed in the journal proper.