Basic Accounting Terms – Meaning, Classification and Process
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- Last Updated on 30 September, 2022
Table of Content
1. Meaning of Important Terms
1.1 Double Entry System
- This system was invented by an Italian merchant named Fra Luco Pacioli in 1494 A.D.
- According to this system, every transaction has got a two-fold aspect (dual aspect), i.e., one party giving the benefit and the other receiving the benefit and it has effect of opposite nature on two financial items.
- Information of one financial nature at one place is known as an account which is divided into two sides, debit and credit.
- In short, one account is to be debited and another account is to be credited for every transaction in order to have a complete record of the same.
- Therefore, every transaction affects two accounts in opposite direction.
- For example, if goods are sold to Mr. A on credit, the same will affect goods/sales account and A’s account and entries will be made in opposite direction in these two accounts.
- This system is called Double Entry System since it keeps records for every transaction in two accounts.
- Therefore, the basic principle, under this system, is that for every debit there must be a corresponding credit or vice versa.
- Before going to discuss the double entry principle it becomes necessary to explain certain terms which are frequently used in accounting. They are discussed in later questions.
1.2 Meaning of Transactions
- A business dealing, which can be measured and expressed in terms of money and must be recorded in the books of account, is called a ‘transaction’.
- In a transaction, there must be some monetary change between the parties.
- In other words, the meaning of a transaction is to ‘receive’ and ‘give’, viz., one party receive and the other party gives, e.g. if X gives ` 400 to Y, Y is receiving ` 400 whereas X is giving the same and there is a monetary change between the parties.
- This give and take can be of Cash, Property, Goods, Services and benefits etc. which has monetary value.
- So, a transaction also means a change in affairs that alters the financial state of parties in any way.
- There are always two parties in a transaction of which one must be the entity in whose books, accounting is being done.
(Transaction is a give & take which has some financial effect on entity)
1. Goods a/c if prepared is treated as a real a/c but instead of preparing goods a/c, we prepare Purchase a/c, Sale a/c etc. to get full information, which are treated as nominal a/c.
2. In the above analysis you can observe:
(a) There are two persons of which one is the entity.
(b) Something (i.e. cash, property, goods, service or benefits) is given & in return something else is taken.
(c) These both the arrows indicating give & take may take place at the same point of time (known as cash transaction) or at different point of time. (known as credit transactions).
(d) Irrespective of whether both give & take is done at same time or at different point of time (i.e. indicating only one arrow at a time), there are always two accounts involved in a transaction (dual aspect concept).
(e) These accounts can be classified according to function into Real, Nominal & Personal a/c or according to nature into Expense, Income, Asset or liability.
1.3 Meaning of Events
- Event is happening of something, which has financial effect on the entity.
- Ex. A fire destroys furniture, Stock Balance at the end of the year etc.
Student should not be confused with the dictionary meaning of goods (i.e. any tangible item).
- Goods in accounting specifically includes only those items which are purchased for resale or consumption in the process of production.
- Whether it is goods or not should be viewed from entities view point.
- Ex. Table-chair for a furniture dealer is goods but for others it will be fixed Asset.
- Sales account & Purchase account are of goods only.
- Assets is what belongs to entity, what it owns, and which is valuable.
- It may be in the nature of property like Land, Building, Goodwill etc. or
- In the nature of rights (right to receive money or money’s worth) like debtors, Bills receivable etc.
- Liability is what the entity owes to others i.e. liable to give/pay something to others.
- Capital & Reserves though appears on liability side of Balance Sheet but are part of owners equity & are commonly viewed distinctly from liability towards outsiders.
- Liabilities are like creditors, Loans taken, expense payable, advance received etc.
1.7 Expense/Revenue expenditure
- The value/price/charges of goods, services & other benefits received by an entity is an expense.
- These are the charges benefit of which is usually enjoyed or consumed within an accounting year.
- Ex.: Salary paid, Purchases, Discount allowed, Rent expense etc.
- The value/price of goods, services & others benefits which entity gives/provides to others is the income.
- Income is earned from the usual activity (ordinary activity) by the enterprise.
- Ex.: Fees received, Sales, Discount received, Interest income etc.
- It has already been stated above that every transaction must be recorded in two accounts in the ledger which is done after proper classification of all transactions.
- Complete records are also to be made by posting the transactions in different accounts which, in other words, supply all information to the management.
- Therefore, it may be stated that account is the code or language of the accountant, and that is why it has been rightly said, an account is the code or language in which accountancy records and supplies information.
- An account has two sides, viz. debit — the left hand side and credit — the right hand side.
|In simple words if we record one type/one nature of information at one place it is called an account. So an account gives information about one particular item of asset, liability, expense, loss, income etc.|
2.1 Classification of Accounts
- Traditionally all accounts are broadly classified into two heads :
(a) Personal Account and
(b) Impersonal Account.
- The Impersonal Account may further be sub-divided into
(i) Real Account, and
(ii) Nominal Account.
- So, accounts can be classified into Personal, Real and Nominal.
2.1.1 Personal Account
- It deals with the accounts relating to persons and takes the following forms-
1. Natural Person: e.g. the name of an individual, the suppliers and buyers, say, Ram, Shyam etc.
2. Artificial Person or legal or Notional Person: e.g. Bank, Firm, Association, Company etc.
3. Representative Personal Account: e.g. Outstanding liabilities for Rent, Salary etc., i.e. Rent Payable a/c etc.
|Capital a/c is also a personal a/c. It is the account of owner. Similarly Drawings a/c is also a personal a/c of owner.|
2.1.2 Real Account
- It stands for properties and assets which are broadly classified as tangible and intangible
- e.g. Plant, Cash, Land, Building etc. are tangible real a/c
- whereas goodwill, patent, trade mark etc. are intangible assets.
2.1.3 Nominal/Fictitious Account
- It relates to items which exist in name only.
- This account incorporates items relating to ‘Expenses and Losses’, and ‘Income and Gains’.
- e.g. Rent, Salary, Dividend, Bad Debts etc.
- Thus it represents the accounts of Goods/Services/benefits consumed or rendered to others.
Adjustment Accounts: Certain accounts do not have meaning on stand alone basis but they are adjustment to some other accounts like Provision for bad debt a/c, Depreciation provision a/c. etc.
2.2 Alternative Classification of Accounts
The basic accounting equation specifies those broad categories, which are as follows:
(i) Assets : These are resources controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise, namely cash, stock of goods, land, buildings, machinery etc.
(ii) Liabilities : These are financial obligations of an enterprise other than owners’ funds, namely long term loans, creditors, outstanding expenses etc.
(iii) Capital : It generally refers to the amounts invested in an enterprise by its owner(s), the accretion to it or a reduction in it. Since capital is affected by expenses and incomes of revenue nature, there are two more categories of accounts, namely expenses and incomes. The difference between incomes and expenses known as profit or loss are taken into capital account.
(a) Expenses : These represent those accounts which show the amount spent or even lost in carrying on operations.
(b) Incomes : These represent those accounts which show the amounts earned by the enterprise.
3. Forming Entry
Following are the four ways in which entry for a transaction or event can be made: Entry is simply “to decide which account is to be debited & which credited”.
3.1 Deciding Entry by using classification of Accounts
Golden Rule (rules for Ascertaining ‘DEBIT’ & ‘CREDIT’)
|Personal Account||** Debit the receiver/the person who takes the benefit/the person from whom something is receivable.
** Credit the giver/the person who sacrifices the benefit/the person to whom we are liable to give/pay.
|Real Account||** Debit What comes into the business.
** Credit What goes out of the business.
|Nominal Account||** Debit All Expenses/losses
** Credit All Incomes/gains
Analysis of Transaction and Entry made from it
3.2 Forming an entry using the Nature of an Account
|The following Principles can also be applied for Ascertaining ‘DEBIT’ & ‘CREDIT’
Here one should keep in mind that Asset, Expenses and Stock/goods a/c. have debit balance and liability, income and capital account have credit balance. And further remember that Debit – Debit figures in same account will be added, Credit – Credit figures will be added but debit and credit figures will be subtracted from each other just like (+) & (-) in mathematics.
Entries made on the basis of nature of Account
|Nature of A/c.||Type of A/c.||Balance in the Account||Effect of the transaction on it|
|Increases it||Decreases it|
|Assets||Real or Personal||Dr.||Dr.||Cr.|
While making entries remember the following
|(2) Cr. Cr.||(3) Dr. Cr.|
(will get added)
(will get added)
(will get subtracted from each other)
3.3 Transfer Entries
When an account is to be transferred (i.e. it is being reduced/nullified) to some other a/c, the entry can be formed as follows:
|If an account having debit balance is to be transferred. Then credit this account and debit the account where it is to be transferred. Ex. Salary Expense account `30,000 transferred to P&L account.
P&L A/c Dr.
To Salary Expense A/c
Similarly if an account having credit balance is to be transferred. Then debit this account and credit the account where it is to be transferred. Ex. Interest Income account ` 5,000 transferred to P&L A/c.
Interest Income A/c Dr.
To P&L A/c
3.4 Reversal Entries
When an information is just a reversal/cancellation of an earlier transaction, then its entry can be formed as follows:
|Sometimes a transaction is not a new transaction rather it is the cancellation of some earlier transaction. In such cases simply reverse the original entry.
For example – Cheque received from Satish deposited in Bank `10,000
Bank A/c Dr.
To Satish A/c
Later on we got the information that above cheque is dishonoured. Then simply reverse the above entry.
Satish A/c Dr.
To Bank A/c
|Entries for a transaction/event can be made by any one or more than one of the above listed 4 ways, but entry will be same.|
4. Accounting Process (Summarized)
- Opening balance : Last years balances of assets (Dr. balance) & liabilities (Cr.balance) as shown in the balance sheet, will be recorded 1st in Journal and then posted to respective accounts in the ledger.
- Transactions : Accounting starts with Transactions. Transaction means Receipts, Payments, Sale, Purchase etc.
It is any give & take which has financial effects. Which affects the concern. (Business Entity concept)
- Entry : Transaction is recorded by way of an entry in the Cash book/Journal/Purchase Register/Sale Register (books of entry) etc. as per Double Entry Principle i.e. Debiting some accounts & Crediting others with the equal amounts.
- Posting Ledgers : Above entries are posted in the ledger books in respective accounts.
Different accounts are prepared for each & every different nature of items. Each account will provide the complete details about the transaction of a particular nature for that accounting period. Accounts will have two sides known as Debit & Credit sides.
- Balancing : At the end of accounting year all accounts are totalled & balanced, some accounts may have Nil balance, other may have Debit balance (i.e. Debit total is more) & some other may have credit balance (i.e. credit total is more.)
- Trial Balance : The accounts having balances are listed in a statement known as Trial Balance giving Debit & Credit balances separately.
Total of debit & credit side must tally because accounting is done by double entry system.
If it doesn’t tally that means there are errors which will have to be located & rectified.
- Final a/c : With the help of this Trial Balance and other Adjustment/additional information the Final Statement of Accounts i.e. (a) Trading profit & loss Account and (b) Balance Sheet is prepared.
- This adjustment/additional information are the transactions which have not been recorded in the books of account so far, therefore double effect (i.e. debit & credit) has to be given for them.
- Closing entries : All the accounts (accounts of Income & Expenses) transferred to Trading profit & loss account gets closed & their net result i.e. the profit or loss is transferred to Capital Account.
- Whereas the accounts (accounts of Assets & Liabilities) shown in the Balance Sheet are carried forward to next year’s books of account as opening balances.
5. Books of Account
- Books of account can be classified into following two category:
1. Books of entry : (also known as Subsidiary book, book of original entry or prime book of entry)
2. Ledger : (also known as Principal book, book of 2nd entry)
5.1 Book of Entry
- It is book of 1st entry in which transactions are recorded date wise, in the chronological order of their happening.
- Every transaction will be recorded in any one book of entry.
- There are many books of entry which can be prepared.
- Which books of entry are to be prepared depends upon the size of the business, nature of business and volume of transactions.
- If it is very small business we may prepare only Journal or Cash book & Journal.
- If the size grows we may prepare other books of entry also. e.g. Sales book, Purchase book, Return books, Bills Payable book, Bills Receivable book.
- Whichever may be book of entry, double entry effect (i.e. debit & credit) will be always there, & it will be always same.
1. Every transaction must be recorded.
2. It must be recorded in any one book of entry depending upon which books of entry are being maintained.
3. It must be recorded by double entry principle.
4. Double entry for a transaction will be always same irrespective of the book of entry in which it is being recorded.
5. Concern must maintain at least one book of entry but there is no maximum limit.
5.2 Important Books of Entry are as follows
1. Cash Book
- All cash transactions i.e. receipts & payments will be recorded in the cash book.
- Cash book will be prepared in the form of an account having debit and credit side.
- Receipt will be recorded on the debit side and payments on the credit side.
- The cash book itself serves the purpose of cash A/c & hence we don’t have to prepare separate cash A/c in Ledger.
- The receipt side items will be posted on credit side in respective accounts in ledger.
- Payment side items will be posted on debit side in respective account in ledger.
- Only one posting is made because cash book itself is also a cash account & hence when we write an entry on receipt side it means cash a/c is debited
- When we write an entry on payment side it means cash a/c is credited &
- Balance of Cash a/c is cash balance & will be taken in Trial balance.
2. Cash-Cum-Bank Book:
- We can make cash book with two columns, one for cash transactions & other for Bank transactions.
- All deposits into & withdrawal from the bank will be recorded in bank column, & this itself is a bank a/c also.
- No need to prepare now Cash & Bank a/c in ledger.
- Posting from Bank column & cash column is made in the same way as explained in case of cash book.
- Balance of Cash and Bank columns will come in Trial balance as cash and bank balances.
a. Double column cash book can be of the following three types
(i) Cash & Bank column
(ii) Cash & discount column
(iii) Bank & discount column.
b. The discount columns are opened when the transactions involving discount allowed & discount received are frequent.
c. Discount allowed will be entered on debit side and discount received on credit side. Posting to other accounts will be the cash/bank amount plus discount.
d. Unlike Cash & Bank column, discount column is not treated as an account & hence total of discount column is posted in Discount account in ledger.
3. Triple Column Cash Book:
- It will have three columns on both sides for cash, bank & discount.
- Entry in this book & posting to ledger accounts will be same as mentioned above.
|Cash column i.e. Cash account will always have debit balance but Bank column i.e. bank account can have either debit or credit balance.|
4. Petty Cash Book:
- This is to be prepared to record the petty (small) expenses, which are incurred frequently.
- On the payment side the amount is classified into various columns depending upon the account to which it has to be debited.
- The columns can be for conveyance expenses, postage, repairs & maintenance, printing & stationery, salary, wages and so on.
- It is also known as analytical cash book.
- In petty cash book receipt will be from main cash book.
- The total of this column is debited to respective expense accounts in the ledger after a specific period may be monthly, weekly etc.
- The Balance of petty cash book (i.e. receipts (-) payments) shows the balance of cash in hand which will be shown in Trial balance.
|Posting of total amount will be made to respective expense account in ledger.|
5. Imprest System:
- An amount is fixed which is given to petty cashier who meets expenses out of it & periodically or when the amount is spent, he takes reimbursement from main Cashier exactly equal to amount spent hence his cash balance again becomes equal to fixed imprest amount.
- This is the upper limit of cash which petty cashier can have.
- It is a version of Petty cash book only.
- Ex. Imprest amount is fixed at ` 1000. Petty cashier has spent ` 785 in that period, thus he has balance of ` 215. Now he will get reimbursement from main cashier ` 785, thus his balance will again become ` 1000.
6. Sales Book:
- The Sales Day-Book is a register specially kept to record credit sales of goods dealt in by the firm.
- Cash sales are entered in the Cash Book and not in the Sales Day Book.
- Credit sales of things other than the goods dealt in by the firm are not entered in the Sales day Book; they are journalised.
- For accounting, Goods means only those items in which the particulars concern is doing business i.e. purchasing & selling it.
- It is a subsidiary book/subsidiary journal & posting is made from it to the sales account and accounts of the customers.
- The total of sales register is credited to sales a/c periodically say monthly.
- And individual amounts are debited to respective parties (debtors) a/c.
|Sales Account is a final record and postings are made to it from Cash Book (Cash sales) and Sales Day Book (credit sales).|
|Sales Account is maintained in the ledger in the manner, the other accounts are maintained.|
|Sales Account is a nominal account and its balance is used for ascertaining gross profit or gross loss.|
7. Purchase Book:
- All credit purchases of goods are recorded in purchase book.
- Cash purchases are entered in the Cash Book and not in the Purchases Day Book.
- Credit purchases of things other than the goods dealt in by the firm are not entered in the Purchases day Book; they are journalised.
- It is a subsidiary book/subsidiary journal & posting is made from it to the purchases account and accounts of the suppliers.
- The total of purchase register is debited to purchase a/c periodically say monthly &
- Individual amounts are credited to respective parties (suppliers) a/c.
|Cash sales & Cash Purchases will be recorded in Cash Book and credit sales & credit purchase of Assets will be recorded in Journal. Comments for sales account made above equally apply to purchase account.|
8. Bills Receivable & Bills Payable Books:
- All Bills Receivables received are recorded in Bills Receivables book &
- Bills Payables issued will be recorded in Bills Payable book.
- The total of Bills Receivable register is debited to Bills Receivable a/c.
- Individual amounts are Credited to respective parties a/c.
- Similarly the total of Bills Payable register is Credited to Bills Payable a/c. and
- Individual amounts are Debited to respective parties a/c.
|Entry for Discounting, Payment, Receipt, Dishonour etc. will not be recorded in this registers but will be recorded in Cash book/Journal etc.|
Bills Receivable Endorsed book:
- If there are regular/frequent cases of endorsing the Bills Receivable then instead of recording the same in Journal, we can prepare a Bills Receivable endorsed Book.
- All Bills Receivable endorsed will be entered in it.
- The parties account to whom bill is endorsed will be debited from here and
- Total of this book will be monthly credited to Bills Receivable a/c.
- Similarly Purchase Return Register, Sales Return Register, can be prepared if number of such transactions are large.
- The procedure of preparing such books & posting from them is exactly similar to that seen for sales book & purchase book.
Sales Return Book
|Date||Particulars||Credit Note No.||L.F.||Details||Amount
Purchase Return Book
|Date||Particulars||Debit Note No.||L.F.||Details||Amount
10. Journal Proper
If there is no special book meant to record a transaction, it is recorded in the Journal (proper).
(i) Opening entries: When books are started for the new year, the opening balance of assets and liabilities are journalised.
(ii) Closing entries: At the end of the year nominal accounts are transferred to the profit and loss account. This is done through journal entries called closing entries.
(iii) Rectification entries: If an error has been committed, it is rectified through a journal entry.
(iv) Transfer entries: If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
(v) Adjusting entries: At the end of the year the amount of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash. Such an adjustment is also made through journal entries. Usually, the entries relating to Outstanding expenses, Prepaid expenses, Interest on capital and Depreciation are necessary.
(vi) Entries on dishonour of Bills: If someone who accepted a promissory note (or bill) is not able to pay it on the due date, a journal entry will be necessary to record the non-payment or dishonour.
(vii) Miscellaneous entries: The following entries will also be shown in Journal proper:
(a) Credit purchase of things other than goods dealt in or materials required for production of goods e.g. credit purchase of asset will be journalised.
(b) An allowance to be given to the customers.
(c) Receipt of promissory notes or issue to them if separate bill books have not been maintained.
(d) On an amount becoming irrecoverable, because of the customer becoming insolvent.
(e) Effects of accidents such as loss of property by fire etc.
If any of the above books mentioned in (1) to (9) are not maintained then the entries related to that book will also be recorded in Journal.
From each entry debit and credit both will be posted into respective accounts in ledger.
11. If a Concern maintains only Journal as book of entry:
- Transactions are first entered in a book called ‘Journal’ to show which account should be debited and which credited.
- Journal creates preliminary records and is also called subsidiary book.
- All transactions are first recorded in the journal as and when they occur, the record is chronological, otherwise it would be difficult to maintain the records in an orderly manner.
- Journal gives details regarding any transaction. Thus Journal tells the accounts to be debited and credited and also the accounts involved.
5.3 Ledger (Principal Book)
- All accounts are opened in a separate register known as a ledger
- Only exception is cash & Bank a/c. which are not prepared in ledger because cash & Bank book itself is cash & Bank account also (when Cash cum Bank Book is prepared).
- All other books are only books of entry they are not ledger accounts.
- Hence when we enter a transaction in a book of entry, we decide/write which account should be debited & which account should be credited.
- But actual debit & credit gets completed only when we write the amount from this book to respective accounts in ledger on debit or credit side as the case may be.
- This process of writing the amount from books of entry to ledger account is known as ‘posting’.
- Each account will have two sides, left hand side is known as debit side & right hand side as credit side.
- If the amount is written on debit side that means that account is debited
- If written on credit side means that account is credited.
- All these accounts are then totalled & balanced.
- All the accounts which are having balances either debit or credit are listed on a statement known as Trial Balance &
- With the help of this Trial Balance, Final accounts namely Trading & P&L A/c and Balance sheet is prepared.
|Instead of one ledger, concern can maintain multiple ledgers like Debtors ledger, Creditors ledger, General ledger etc.|
|To To||By By|
6. Annual Financial Statement (Also Known as Final Accounts)
The end results of book-keeping & accountancy, comes in the form of following two statements:
(a) Profit & Loss Account: It shows result of the business (performance) for a particular period i.e. the profit earned or loss suffered by the concern.
(b) Balance Sheet: It shows the financial position at the end of the year i.e. Assets and properties of the concern and the liabilities of the concern.
|Certain enterprises prepares Cash Flows statement also. It is covered in your Intermediate syllabus, hence not covered in this book.
Details about Final Account is covered in Chapter 13 in this Book.
7. Other Special Points
7.1 Accrual basis of accounting (Mercantile System of Accounting) & cash basis of accounting
- A transaction is recognized when either a liability is created (i.e. when goods/services/benefits or properties are received) and/or an asset is created (i.e. when goods/services/benefits or properties are given).
- Whether payment is made or received is immaterial in accrual basis accounting.
- Accrual basis of accounting is also known as mercantile basis of accounting.
- On the other hand, cash basis of accounting is system of accounting by which a transaction is recognized only if cash is received or paid, no entry is being made when a payment or receipt is merely due.
- Accrual basis accounting is the only generally accepted accounting method for business entities which are supposed to operate for long period.
- Cash basis accounting is suitable for short duration ventures.
- All the chapters which you will study are on accrual basis only exception may be joint venture.
- Commission may be defined as remuneration of an employee or agent relating to services performed in connection with sales, purchases, collections or other types of business transactions and is usually based on a percentage of the amounts involved.
- Commission may be defined as remuneration of an employee or agent relating to services performed in connection with sales, purchases, collections or other types of business transactions and is usually based on a percentage of the amounts involved.
(i) Commission paid to selling or buying agents.
(ii) Commission paid to brokers and bankers for services rendered.
(iii) Commission paid to property dealers for assistance in renting out properties or for services in connection with purchases/sale of properties.
(iv) Commission to export import agent in foreign trade.
- Commission earned is accounted for as an income, by the party rendering such facility/services and
- Commission allowed or paid is accounted for as an expense by the party availing such facility or service.
- The term discount refers to any reduction or rebate allowed and is used to express one of the following situations:
(i) An allowance given for the settlement of a debt before it is due i.e., cash discount.
(ii) An allowance given to the wholesalers or bulk buyers on the list price or retail price, known as trade discount. A trade discount is not shown in the books of account separately and it is shown by way of deduction from purchases/sales value.
(iii) The excess of par or face value of shares or debentures over the amount paid by subscriber i.e. discount on issue of a security.
(iv) The amount charged by a bank on discounting of a bill of exchange.
7.4 Trade discount & Cash discount
- Trade discount is a discount on the selling price for bulk purchase or for purchasing above a minimum quantity or is offered generally to regular customers.
- It is also called quantity discount.
- This is a technique of sales promotion.
- It is generally determined at the stage of sale itself & is deducted from the sale/purchase value & hence doesn’t appear separately in the Books of a/cs & Final a/cs.
- Cash discount is the discount offered by the supplier in consideration of early or timely payment.
- It may vary with the period of payment.
- It is accounted as a separate item & appears in the Profit & loss a/c.
- Cash discount is usually given at the time of payment/receipt as against trade discount is given at the stage of sale/purchase.
7.5 Debit Note
- A debit note is a statement sent by one party to the other stating/informing him that his account has been debited with a specified amount and the reason for debit.
- A debit note is sent to the supplier when the goods purchased from him are returned (purchase return) or for discount to be received from him or for any expenses incurred for him.
|Entry:||In the books of sender of Debit note||In the books of receiver of Debit note|
|Party (to whom it is sent) a/c Dr.||Sales return/Discount allowed etc. a/c Dr.|
|To Purchase return/Discount received etc.||To Party (who sent it) a/c|
7.6 Credit Note
- A Credit note is a statement/letter sent by one party to the other stating/informing him that his account has been credited with a specified amount and the reason for credit.
- A credit note is sent to the customer when we receive good returned by them or for discount to be allowed to him or for any expenses incurred for us by him.
|Entry:||In the books of sender of Credit note||In the books of receiver of Credit note|
|Sales return/Discount allowed etc. a/c Dr.||Party (who sent it) a/c Dr.|
|To Party (to whom it is sent) a/c||To Purchase return/Discount received etc.|
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