1. Business Transactions, Vouchers and Accounting Equation

The accounting process begins with identifying and recording business transactions. Each transaction must be supported by a voucher (e.g., invoice, receipt) as proof. The accounting equation, Assets = Liabilities + Capital, forms the basis of the double-entry system, showing that every transaction affects at least two accounts to maintain this balance. This equation provides a fundamental framework for understanding the financial position of a business.

2. Using Debit and Credit, Journal and Ledger

The double-entry system utilizes debit (Dr.) and credit (Cr.) entries. Under this system, every transaction involves debiting one account and crediting another, ensuring the accounting equation remains balanced. Transactions are first recorded chronologically in the Journal, which serves as the book of original entry. Subsequently, entries are classified and posted to respective accounts in the Ledger, the principal book of accounts.

3. Subsidiary Books and Balancing Accounts

To manage a large volume of transactions efficiently, businesses maintain subsidiary books like cash book, purchases book, sales book, etc. These books record specific types of transactions. At the end of an accounting period, the balances of all ledger accounts are determined through the process of balancing accounts, summarizing the financial activity in each account.

4. Bank Reconciliation Statement

A Bank Reconciliation Statement (BRS) is prepared to reconcile the differences between the balance shown in the bank column of the cash book and the balance shown in the bank statement (passbook). Differences arise due to timing lags in recording transactions, errors, or bank charges. BRS is essential for ensuring the accuracy of cash and bank balances.

5. Trial Balance and Rectification of Errors

A Trial Balance is a statement prepared to check the arithmetic accuracy of the ledger postings. It lists all the debit and credit balances extracted from the ledger accounts. If the total debits equal total credits, the trial balance is said to be balanced, suggesting accuracy. If it doesn't balance, it indicates errors, which then need to be identified and rectified through journal entries.

6. Bills of Exchange and Promissory Notes

Bills of Exchange and Promissory Notes are important negotiable instruments used in business transactions, particularly for credit sales. A promissory note is a written promise to pay a certain sum of money. A bill of exchange is a written order from a drawer to a drawee to pay a sum of money to a payee. Accounting for these instruments involves understanding their acceptance, endorsement, and discounting.