How does a transaction travel from a source document all the way to the financial statements?

What the interviewer wants to hear

• Starts with a source document like an invoice or receipt
• Recorded as a journal entry or voucher
• Posted to ledger accounts
• Ledger balances form the trial balance
• Adjustments made, then statements prepared

Model answer

Every transaction starts with a source document, such as a sales invoice, a supplier bill, a bank advice or a payroll sheet. From that document we record a journal entry, which in Tally or Zoho Books is a voucher such as sales, purchase, payment or receipt. The entry is posted to the ledger accounts it affects, so each ledger shows all movements and a running balance. At period end, we extract a trial balance from the ledger balances to check that debits equal credits. Then we pass adjusting entries: accruals, prepayments, depreciation, provisions and inventory. The adjusted trial balance is mapped to the profit and loss statement and the balance sheet, in Schedule III format for Indian companies, and the cash flow statement and notes are prepared from it. Good software automates the posting, but the accountant still owns the adjustments and the review.

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