Meaning of source documents: Various business documents such as invoice, bills, cash memos, vouchers, which form the basis and evidence of a business transaction recorded in the books of account, are called source documents.
Meaning of accounting equation: A statement of equality between debits and credits signifying that the assets of a business are always equal to the total liabilities and capital.
Rules of debit and credit: An account is divided into two sides. The left side of an account is known as debit and the credit. The rules of debit and credit depend on the nature of an account. Debit and Credit both represent either increase or decrease, depending on the nature of an account. These rules are summarised as follows:
Name of an account : Debit / Credit
- Assets : Increase / Decrease
- Liabilities : Decrease / Increase
- Capital : Decrease / Increase
- Revenues : Decrease / Increase
- Expenses : increase / Decrease
Books of Original entry: The transactions are first recorded in these books in a chronological order. Journal is one of the books of original entry. The process of recording entries in the journal is called journalising.
Ledger: A book containing all accounts to which entries are transferred from the books of original entry. Posting is process of transferring entries from books of original entry to the ledger.
Journal: Basic book of original entry.
Cash book: A book used to record all cash receipts and payments.
Petty cash book: A book used to record small cash payments.
Purchase journal: A special journal in which only credit purchases are recorded.
Sales journal: A special journal in which only credit sales are recorded.
Purchases Return Book: A book in which return of merchandise purchased is recorded.
Sales Return Book: A special book in which returns of merchandise sold on credit are recorded.