Basic Records or Documents Needed for Building Your Accounts

Some fundamental basic records are to be maintained for building any type of Accounts, whether it is your Individual Account, Business Account, or any other fields that attract income-tax. You cannot create or maintain an account from the air without having any basic record that supports your transaction. These basic records or papers are the most essential and important foundations for an accountant or auditor to create or maintain accounts and verify their authenticity.

Some of the essential documents are being discussed below.

Purchase Bills
Bills of any purchases, whether cash or credit purchase, are to be safely maintained as your primary record. You make entries from these bills by preparing vouchers. So these bills should be kept safely either pinned to the vouchers or in separate files. If kept in files, you need to maintain various files according to the nature of transactions and the account head of that purchase. In that case, you may pin the duplicate copies or xerox of the bills along with those vouchers.

Sales Bills

When you make sales, you will be preparing bills for providing to your customers. There may be cash and credit bills. One copy of the bill is to be safely maintained by you for a record and for preparing your accounting entries. Cash bills may be enclosed with your sale vouchers. But credit bills are to be kept separately in files and copies of them may be enclosed with the voucher if possible. Because, if transactions are too many, you cannot enclose all bills with vouchers. In that case, you can give the bill number and date in your vouchers and keep the bills in files.

Assets Purchase and Sale Records

You need to maintain these bills also for calculating the value of assets that are of significant value in your possession. If you sell any of them, keep the record of sale value and date of sale with evidence.

Vouchers

Vouchers can be Cash voucher or Bank voucher or Journal voucher according to the nature of transactions.

• Cash vouchers are made for cash transactions when you purchase in cash or sell against cash. You can keep the cash bills enclosed with the vouchers. But if you make any big purchase like assets or equipment, you need to maintain the bills in secured files and only copies may be attached with vouchers.
• Bank vouchers are prepared for entering bank transactions. If you purchase by giving cheques or sell by receiving cheques or drafts, these bank vouchers are prepared. Here also, tiny payment bills may be enclosed with the vouchers and big payment bills need to be kept in relevant files for a safe record.
• Journal vouchers are prepared for transactions other than cash or bank payments. These can be prepared for monthly total entries against sales or purchase day books or for any internal transfer accounts and adjustments or for salaries and wages sheets and depreciation accounting, etc.

Business Property Documents

Whatever property you hold in the name of your business requires proof of the holder, its authenticity, and valuation. You should be able to justify your property and its valuation and its holdings duly certified or verified by some legal authority.

Passbook

If you are holding Bank or Post office accounts, you should keep the passbooks properly updated from time to time for verifying and making entries in your account books. Your entries should always be tallied with the passbook entries and keep everything updated.

What is a liability? Nature and Classification of Liabilities

Liability is something which a person owes to another. It is an obligation which can be the result of some activity or transaction entered into by the two parties.

Sometimes, a liability can be merely a responsibility or sense of feeling shown by one person to another in lieu of sheer love or gratitude. For example, performing the marriage of a daughter or donating money to some social cause periodically or even frequently can be felt as a liability.

But, for the accounting purpose, a liability can be defined as an obligation or responsibility of a person or any business entity to the other party to any transaction or contract. It is some unavoidable obligation to be fulfilled by the party concerned to his creditors or other parties on the maturity of some period or on an occurrence of some event or on the achievement of some goal or target.

Classification of Liabilities

Liabilities are generally treated as of three major types:

1) Current Liabilities

2) Long-term Liabilities

3) Contingent Liabilities

Now let us have a look at the nature and identification of these three classes of liabilities.

Current Liabilities
Current liabilities are also known as short-term liabilities due to its short period nature. A current liability signifies the priority involved in clearance of the liability. Such liability is considered to be cleared within some short period, say within 3 months or 6 months. You will have to clear them within that short range of period. Some of them may even become due within days, say within 3 days, 7 days, or a month like that. Any type of borrowing or credit taken to meet your daily requirements of business fall under this category and they require being cleared first. Salaries and taxes payable are such urgently payable short-term liabilities. Besides, Bank overdraft, short-term credits like credit cards, credit purchases are also examples for this category.

Long-Term Liabilities 

From the name itself, you are able to see that these liabilities are of long-term or for longer durations. Normally such liabilities are cleared in many years and the terms of repayments are set forth at the time of obtaining the fund or during execution of the contract. Bank loans for long periods, mortgages, etc. fall under this category.

Contingent Liabilities 

This category of liability is dependant on some contingency. That is, its clearance is related to the occurrence of an event or incident. If a such and such event takes place, it becomes due to be paid immediately upon that happening. If the stated incident does not take place at all it will not be required to be cleared. So it is a contingent liability, meaning that it will be paid only on the occurrence of a certain incident which is not known or not certain when it may take place. Some other unexpected incidents like a breach of contract, damage due to accidents and/ or court cases are also cases of contingent liability.

For accounting purpose, only current liabilities and long-term liabilities are considered in the Balance sheets. Contingent liabilities are merely mentioned in the notes as a supplementary to the Balance Sheet for the information of Board of Directors and Share-Holders.

Assets : Definition and types of assets

What is an Asset?

Any goods of important value and are of durable nature and which are saleable in the market may be treated as Asset.

But sometimes, in an ordinary lay man's perspective, anything considered as very important for him can be treated as an asset to him. So he may regard his child as his asset. Or some gift received from his sweetheart can be a great asset for him. Or even his hands or limbs or brain can be treated as an asset by him which are of much importance for his earning and sustenance.

But, generally, for an accounting purpose, an asset is considered as some goods having significant importance with some monetary value and can last for a durable period and can be easily sold in a market or can be exchanged for other goods.

Definition of Asset

Different definitions are there for describing an asset. But the essence of all definitions is more or less the same.

"So an asset may be any goods or resource or property having value for some durable period and which generates income or aids in the production of other goods and services which generate income to the holder of that asset."

So from above definition, you are able to see that-

• An asset has to be of some value. 
• It should be marketable or exchangeable for other items in the market. 
• It should be of some considerable duration. 
• And finally, it can be anything that generates income for a certain duration of the period.

Types of Assets

From the above definition, you are able to see that assets have different qualities. So, assets have been classified according to their nature and tangibility.

1) Liquidity or Convertibility:

One classification of assets is into Current Assets and Fixed Assets based on their conversion capacity into easy money.

• Current Assets are more easily convertible into cash or other goods within a short span of time with no legal barriers and procedures. Goods in stock or trade, cash and bank balances and other sundry advances or deposits fall in this category of Current Assets. Current assets mostly are of shorter time span and may become obsolete after a certain period.
• Fixed Assets are more of a fixed nature and last for many years like Land, Road, Building, Plant, and Machinery, etc. Further, they can not be easily sold or converted. They require adequate legal formalities and considerable time to dispose of. 

2) Usage or Utility:

Another classification based on the utility or usage of assets divides the assets into Operating and Nonoperating.

• Operating Assets are those which are required for daily operations of the business as well as for use in the different production procedures so that the business can generate income. So naturally, the working capital like Cash and Bank balance, inventory in use, a stock of semi-finished and finished goods, Building, and Plant and machinery used for running the business all these items are termed as Operating assets.
• Non-Operating Assets are assets of not any importance for running the business but still held for future plans or disposal. The business production and activities do not get hindered by disposing of those assets. Such assets can include any excess land or buildings kept for future plans and extra cash or funds invested unnecessarily. Some inventory of old and obsolete items no longer used for production and inoperative dead balances lying since long can also be treated as non-operating assets.

3) Tangibility or Physical Nature:

According to the physical or non-physical existence of assets, they are classified into Physical assets and Non-physical assets.

• Physical or Tangible Assets are those which have physical quality and can be seen and felt. All fixed assets, cash, and bank balances, inventory items, debtors all these are tangible assets.
• Intangible Assets can be anything that can not be touched or felt like company's Brand name, patent, copyrights, logo, goodwill, and trademark, etc. Even though not physical, these are very useful and important as they promote business and help in increasing sales and profits.