Rules of Debit and Credit


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Rules of Debit and Credit

  1. 1. Assignment :01 Course Name:Principal of Accounting Course code:ACT141 Submitted by: Name:Tanjia Akter ID :12510033 Sec :A Dept : BBA Submitted to:
  2. 2. Definition of 'Accounting' The systematic and comprehensive recording of financial transactions pertaining to a business. Accounting also refers to the process of summarizing, analyzing and reporting these transactions. The financial statements that summarize a large company's operations, financial position and cash flows over a particular period are a concise summary of hundreds of thousands of financial transactions it may have entered into over this period. Accounting is one of the key functions for almost any business; it may be handled by a bookkeeper and accountant at small firms or by sizable finance departments with dozens of employees at larger companies. Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in makingeconomic decisions, in making reasoned choices among alternative courses of action.
  3. 3. Accounting is also defined as the process of identifying, measuring and communicatingeconomic information to permit informed judgment and decision by users of the information. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character and interpreting the results thereof. Rules of Debit and Credit Personal accounts either receive something or give something in the business. When goods are sold to them or amount paid to them, they are the receiver. In the same way, personal accounts are giver, when goods are purchased from them or amount is received from them. According to this nature of personal account, the rule of ‘debit and credit’ in the personal account are as under: Debit the receiver Credit the giver Illustration. Goods sold to Kunal. Here, in this transaction, Kunal is a personal account as being the name of human beings. He is receiving goods because it has been sold to him: He will be debited in the entry as receiver. In the same way, in case of goods purchased from Kishore, the giver of goods i.e., Kishore will be credited. Bank Ale will be debited in case of deposits into the Bank, because Bank will be the receiver of the deposit. If the amount is withdrawn from Bank, the amount will be given by the Bank. The Bank will be the giver, as such credited in the book. It shows that we have to identify the personal account, which will be in the name of persons, firms, companies and institutions. After that, it should be verified, whether the account is a receiver or giver in the transaction. If it is a receiver, it should be debited and in case of giver, it should be credited. Examples: Transactions (i) Goods sold to Kunalfor $ 10,000 Kunal A/c Dr. 10,000 To Sales A/c 10,000 (Being goods sold to Kunal) Note. Here Kunal’s A/c has been debited as per rule of personal A/c. (Debit the Receiver) (ii) Goods purchased from Kishore for $ 8,000
  4. 4. Purchases A/c Dr. 8,000 To Kishore A/c 8,000 (Being goods purchased from Kishore) Note. Here Kishore’s Ale has. been credited as per rule of personal A/c. (Credit the Giver) (iii) Amount deposited into the Bank $ 20,000 BankA/c Dr. 20,000 To Cash Ale 20,000 (Being amount deposited into the bank) Note. Here Bank Ale has been debited as per rule of personal A/c. (Debit the Receiver) (iv) Amount withdrawn from the Bank $ 4,000 Cash A/c Dr. 4,000 To Bank A/c 4,000 (Being amount withdrawn from the bank) Note. Here Bank Ale has been credited as per rule of personal A/c. (Credit the Giver) We should also take into consideration the following rule in case of Personal Accounts. Debit the debtor Credit the creditor The traditional rule of debiting and crediting personal accounts may sometimes prove to be incorrect. It is, therefore, advised that learners should develop an attitude for applying the modern American Accounting equation approach for journalising transactions. In order to debit or credit representative personal accounts, the rule of debiting the Debtor and Crediting the Creditor is applied. For example, in case of outstanding salaries, salaries will be payable to those employees, whose salaries for the current year is due. They are our creditors, so outstanding salaries A/c, representative of such employees will be credited. In the same way, prepaid expenses, representing those parties who have been paid expenses in advance will be debited, because they are our debtors. As prepaid expenses represent the debtors, so prepaid
  5. 5. expenses Ale will be debited. According to American approach prepaid expenses are assets, so it will be debited, because it is increasing (Debit the increase in assets). Examples: Transactions (i) Goods sold to Vijay for cash $ 10,000 Cash A/c Dr. 10,000 To Sales A/c 10,000 (Being goods sold to Vijay for cash) Note. Here Vijay’s A/c has not been debited because we have sold goods to him for cash and Vijay is not our debtor, though he is the receiver of the goods. (ii) Goods purchased from Fernandes for cash $ 8,000 Purchases A/c Dr. 8,000 To Cash A/c 8,000 (Being goods purchased from Fernandes for cash) Note. Here Fernandes’s Ale has not been credited because he has made cash purchases and is not our creditor. though he is the giver or’ the goods. It should be noted that if any prefix or suffix i.e. outstanding, due, unpaid, owing, prepaid, unexpired, accrued, unearned etc. is added to nominal account, it becomes personal A/c as commission accrued A/c, unearned rent Ale, unexpired insurance and wages owing A/c. IMPERSONAL ACCOUNTS All those accounts, which are not personal accounts are termed as impersonal accounts. These accounts may be related to assets, losses, expenses, incomes and gains. In other words, impersonal account may be classified as Real and Nominal Accounts. Real Accounts: It is classified as (a) Tangible and (b) Intangible.
  6. 6. (a) Tangible Real Accounts. This account is related to property. In other words tangible real accounts .lie generally those accounts which are concerned with the things which really exist. All those things which can be seen, touched and have physical construction, shape, form and size are Real Accounts. In this way, Cash A/c, Building A/c, Plant A/c,Furniture A/c, Goods A/c, Machinery A/c etc. are real accounts. (b) Intangible Real Accounts. These real accounts are intangible i.e., they do not have any physical: construction, form, size, shape. They can neither be seen nor touched. The value of these accounts are measured in pecuniary terms. Goodwill, trade marks and patent rights are its example. Rules of Debit and Credit Real accounts are related to lifeless properties which cannot do anything at their will. They are either purchased or sold. They either come into the business or go outside the business. On the basis of this nature of real account, the following rules have been ascertained: Debit what comes in Credit what goes out According to this rule, whenever any property comes into the business i.e., owned by the business, it debited and property account is credited, when it goes outside the business. In case of purchasing furniture or cash, furniture will be coming under the ownership of the f1rm, therefore, furniture account will be debited out cash account will be credited because cash is going outside the business against the payment for furniture. Examples: Transactions (i) Furniture purchased for cash $ 15,000 Furniture A/c Dr. 15,000 To Cash A/c 15,000 (Being furniture purchased for cash)
  7. 7. Note. Here furniture Ale has been debited and cash Ale has been credited as per rule of Real Account. (ii) Machinery sold for $ 5,000 Cash A/c Dr. 5,000 To Machinery Ale/c 5,000 (Being amount received from the sale of machinery) Note. Here cash Ale has been debited and machinery Ale credited as per rule of Real Account. Rules of Debit and Credit Nominal accounts are expenses or losses and incomes or gains. According to this nature of Nominal accounts, the following rules for their debit and credit have been determined: Debit all expenses or losses Credit all incomes or gains According to the above rule, wages A/c, salaries A/c, insurance A/c and interest A/c etc. are when these expenses are met. Discount A/c, commission A/c, interest A/c, etc. are credited, whenever they received. In case of payment of salaries to workers, salaries are an expense, so salaries account will be debited. While receiving rent from the tenant, rent will be gain and thus credited in the books of accounts. Examples: Transactions (r) Salaries paid $ 25,000 Salaries A/c Dr. 25,000 To Cash A/c 25,000 (Being salaries paid) Note. Here salaries A/c has been debited as per rule of Nominal Account. (Expenses are debited) (ii) Rent received $ 5,000 Cash A/c Dr. 5,000 To Rent A/c 5,000
  8. 8. (Being rent received) Definition: Owners Equity is owner's ownership (equity) in the business, or the amount of the business assets owned by the business owners. The calculation for owners equity is assets minus liabilities. In a simplified example, if the value of the business assets is $3,500,000 and the total business liabilities are $2,500,000, the owners equity is $1,000,000. These values are expressed on the business balance sheet, which shows assets on the left and liabilities and owners equity on the right. Owner's equity is expressed differently in each type of business: •In a sole proprietorship or partnership, it is expressed as the owner's or partner's capital account •In a corporation, it is expressed as retained earnings. Owner's equity is increased by (a) increases in owner capital contributions, or (b) increases in profits of the business. This is oversimplified, but basically the only way an owner's equity/ownership can grow is by investing more money in the business, or by increasing profits through increased sales and decreased expenses. If a business owner withdraws money from owners equity, the withdrawal is considered a capital gain and the owner must pay capital gains tax on the withdrawal.