Various Terminologies in Accounting

Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw various importance of accounting, such as what are the importance and the benefits of writing accounting for a business. Along with that we also understood various accounting concepts. As when we write accounts then at that time, what are the concepts that we need to remember. In today's session, we will be seeing various accounting terminologies. What are the terminologies that you would be using when you will be writing the accounts? But before we start using those terminologies, we should have a clear understanding of the terminologies.

Like the first terminology that we will be seeing is double accounting system. We already saw that there should be a business transaction, and accounting is the recording of financial transactions. Okay. Now if the recording is done, how would it be recorded? It will be done through a double entry accounting system, which means, any one of the things would be debited and one of the things would be credited. Okay.

Now suppose that Mr A gave 5 thousand rupees to Mr B. The money was sent away from one person and one person received it. That was 2 transactions, that is double entry. That is I gave money to someone and someone received the money. Whatever account that we write, whatever transaction that we will do would be based on a double accounting system. The total of both of the things should match, for instance if the debit is 5k, so the credit should also be 5k, as it is a double accounting system. It cannot happen as if I write that I gave Mr A, 5 thousand rupees. You gave him the money, along with that he received the money, right. So in double accounting, it is always the case, in which, two accounts are affected.

If we take a simple example, you sold some goods for 5k. Okay. You sold it in cash and you received 5k. Two things happened here. First is that you made a sale, and you received the money, and the second thing is that you sold the goods. Okay. So in layman terms its entry would be like, as money came, so money would be debited and as the goods were sold, and the sale is an income, so sales will be credited. So what is the entry? Cash in bank, debit. To sales, credit. So here you saw, debit and credit, both are happening here. Hence, this is called the double entry accounting system. Okay. Any transaction that occurs has double entry, two accounts would be affected, and the total for debit and credit would be the same. So this is the meaning of the double accounting system.

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The second one is the reporting period. As I told you in the last session. You need to decide in advance about which accounting period you are writing the account. You keep on writing the account, non stop, but if you don’t set up a cut off then when would you make a profit and loss statement and when would you make a balance sheet. Now generally in India we follow a period from April to March. Why? Because it is according to the Income tax returns. Right. And If our business is very large then there is also an audit of the business. For audit the period is also between April to March. Okay. So in most cases the period of April to March is followed. This is called the reporting period. As for this particular reporting period, I am writing this account. For this reporting period, I am recording the Income, Expense, Assets and Liabilities. Then on 31 March, or whatever closing date that I have, then my whole profit and loss and my ledgers will be closed and a balance sheet would be made. So that it lets me understand where my business stands. Reporting period is the most important thing, as for which period I want to write the accounts. Okay.

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Then there are various invoices, various vouchers. Now what happens is, in accounting, you cannot do any entry as a standalone. Suppose you are writing an account for a company, you are an accountant. Your boss tells you, there is a sale of 5k make an entry for it. Will you do the entry? No. Why? You will tell the boss to give you a sales invoice, you need a voucher or a verification. In future, if there is an audit, or if a chartered accountant asks, what sale is this? Whom did you make it? Or Why and When did this happen? Then how would you answer the question? Okay. So every entry, behind every accounting entry there is a voucher, a support, that we call an audit trail. Okay. As this is an invoice, or a sale of 5k, so there would be a sales invoice. Whenever you make a sale you get an invoice in which there is a name of the business. Like from ABC private limited, you purchased something from this business. Suppose you bought a refrigerator, so there would be a sales invoice from the ABC private limited. There would be ABC private limited written on its letterhead. There would also be a PAN number and also there would be a GST number. Then there would be the name of the customer to which the item was sold. Then there would be a description of the item sold. Like I sold a Samsung Refrigerator. When did I sell it? So there would be a date for it, as I sold it on 15th of March. How much did I sell it for? I sold it for 45k, and I applied 10 percent gst on it. Okay. So this would be your sales invoice. Just like that would be a purchase invoice, when you will purchase something from someone, then a purchase invoice would be given. Okay. Now the confusion here is, how to identify all of those. As which one is the purchase invoice and which one is the sales invoice. For that there is a very simple way. In a sales invoice, in a company for which you are writing the account, or if you are writing the account for your company, then you would be issuing a sales invoice to a customer. So, the name of the company would be in the seller, and in the customer, there would be the name of the person buying. That would be your sales invoice. Okay

In that there would be your PAN Number, your GST number. Generally for a sales invoice, you have printed a book, so a number of the sales, a number for the sales invoice will be maintained. The number can be from the range that you have stated like from 1 to 100, then from 100 to 200. The invoice can also be traced from the invoice series, and identify it as a sales invoice and purchase invoice. Okay. On the contrary side. In a purchase invoice, there would be a name of the person buying the product. The PAN number will be of the customer and also the address and GST number would be of the person buying it. And your name would be as a customer. Are you getting it?

So to bifurcate the purchase and the sales invoice, there is a simple way, as whose name is printed on top of the bill. Is it your company? Then it is a sales invoice. If the name is of the party in front then it is a purchase invoice. In the similar manner, a serial number can also help you trace the bill. Generally, sales invoices are in a single serial, like 1 2 3 4, it would be in series. Whereas the purchase invoice is in different series, as it was purchased from many different vendors, so obviously it would be a different series. Okay. So, this was a sales and purchase invoice. To book the entry of sales, you need a sales invoice and to book the entry of purchase you need a purchase invoice.

Now lets suppose there is a sweeper and we have set his salary as 15 hundred per month, and I pay him in cash. Now what happens in this case? This is a cash voucher. You will make a cash voucher, in which it would be written that you have paid this money to a sweeper. The amount for this is 15 hundred rupees for this month. I have paid him 15 hundred rupees this month for cleaning work.

Now what will it be? It will be a voucher, that will be given to an accountant, so the accountant would know that the amount of 1500 have been paid for this month, and it was for the cleaning work. So he can make an entry, cleaning expense debit, if you have made a separate head for the cleaning. Then he would be able to properly maintain the cleaning expense debit, to cash in the bank. Getting me? As I said double accounting system, as two different accounts have been hit. One would be for the expense, for what? It would be for cleaning and the second one would be, as you paid some money from your side. Which means your cash decreased and it would be credited. Clear?

These vouchers would act as an initial entry recording. Whenever you would be recording an entry, then you should know that this is petty cash, this is a cash voucher and this is a sales voucher and this one is a purchase voucher. So according to this, vouchers would be selected to determine which one would hit the head of the profit and loss account. Understood?

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The last thing here is debit note and credit note. Now what is this thing? Imagine we sold some product, it was 500 quantity, that was sold to a customer. I am a seller of bearings, you all know what a bearing. It is used in machinery. The customer had said to me that I need 50 bearings of size 10. I said okay, you will get your order. According to this I sold him 50 bearings, on 15th Date. The price of each bearing was 1000 rupees, and I gave him an invoice of 50 thousands rupees. So in this case, I issued him a sales invoice. Okay. Suppose, the products reached him and when he picked the bearings up. He got to know that the bearings that he got, there were 5 bearings with the size of 5. And those bearings would be of no use to him. Now what would he do? I asked him to return those 5 bearings to me. This thing is called sales return, which means that the sales that I made have returned back to me. Then in that case a debit note would be issued. Okay. A voucher would be made of 5k, in which 5 bearings were returned. Then to book those return the voucher that would be used is called debit note. And then I would confirm as to, yes the 5 number bearing was send because of a mistake. Then I will issue him a credit note. This would be a complete cycle. How?

Sales invoice would be issued by me to the customer, when the sales were returned to me then the customer issued a debit note to me. Then to confirm that debit note, I issued a credit note. Okay. It would work in this way. Whenever we make a sale to any customer then what would be the entry? If he made the payment in cash then, cash in the bank would be debit, to sales. If the sales were done in credit then, the money will be coming but not now, in 30 days. Then the particular customer name would be debited to sales. Can you see here, in sales, the entry always is of credit. Are you getting me? But in the case when the sales is returned, then the entry would be debit. So, when you are looking at the sales ledger then the debit would only be there in case of returns of the sales.

Same thing is the purchase invoice. In purchase ledger, purchase is generally debited, because it is an expense of ours. So, if the purchase ledger is only getting debited then its fine. But if it is getting credited then it would only happen in one instance, that is purchase return. We had purchased something and that was not according to our specification. The specification that I gave, that I want a thing like this, of this type. But the product that we received is not according to our specification, or, it is of the same type but the quality is inferior. It is not of the quality that I asked for. Okay. Then at that time I would be returning that item. If I return that item then it would be with a purchase return. Okay.

So these are different kinds of terminologies. When you will start accounting then at that time, you would get to know that there are a lot of different kinds of terminologies. If you are working as an accountant at a particular company. Then you might get asked to issue a debit note. Debit note means, the sales are to be returned. Okay.

These various kinds of terminologies are used while we are writing accounts, or maintaining accounts. Okay.

If you have any queries or comments…….

In the next topic we will learn about the starting point of the accounting, from where does the accounting start from.

Until then Thank You.