This document discusses the classification of accounts and rules of debit and credit in accounting. It explains that accounts are classified as assets, liabilities, income, and expenses. Assets are resources owned, while liabilities are obligations to provide resources in the future. Income represents revenue earned, and expenses are costs incurred to generate income. The document then outlines the rules of debit and credit for increases and decreases in each type of account. For example, increases to assets are debited and decreases are credited.

1. Financial Accounting
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Lecture – 05
Learning Objective
• This lecture will cover
 Classification of accounts into Assets, Liabilities, Income
and Expenses, and
 Rules of Debit and Credit for these classes.

2. Financial Accounting
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Lecture – 05
Account
• An accounting system keeps separate record of each item
like assets, liabilities, etc. For example a separate record is
kept for cash that shows increase and decrease in it.
• This record that summarizes movement in an individual
item is called an Account.

3. Financial Accounting
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Lecture – 05
Classification of Accounts
• We have to date studied following classification of accounts:
 Assets,
 Liabilities,
 Income,
 Expenses
o Expenses can be further divided into capital and
revenue expenses.
• We have already studied about these classifications in
different lectures but to refresh your memory we will gather
them at one place.

4. Financial Accounting
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Lecture – 05
Assets, Liabilities
ASSETS
• Assets are the properties and possessions of the business.
• Properties and possessions can be of two types, one that
have physical existence (called tangible) and the others
that have no physical existence (called intangible).
LIABILITIES
• Liabilities are the debts and obligations of the business.
• Liability is the obligation of the business to provide a benefit
or asset on a future date.
Asset is a right to receive and liability an obligation to pay,
therefore these are opposite to each other.

5. Financial Accounting
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Lecture – 05
Income, Expenses
INCOME
• Income / Revenue is the value of goods or services that a
business charges from its customers. or
• The reward / return received from the resources committed
in the business.
EXPENSES
• Expenses are the costs incurred to earn the revenue.
• The resources spent and the efforts made to earn the income,
when translated in money terms are the expenses of the
business

6. Financial Accounting
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Lecture – 05
Rules of Debit and Credit
• From our discussion up to this point we have established
following rules for Debit and Credit:
Any account that obtains a benefit is Debit.
OR
Anything that will provide benefit to the business is Debit.
• Both these statements may look different but in fact if we
consider that whenever an account benefits as a result of a
transaction it will have to return that benefit to the business
then both the statements will look like different sides of the
same picture.

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Lecture – 05
Rules of Debit and Credit
• For credit
Any account that provides a benefit is Credit.
OR
Anything to which the business has a responsibility to return
a benefit in future is Credit.
• As explained in the case of Debit, whenever an account
provides benefit to the business the business will have a
responsibility to return that benefit at some time in future
and so it is Credit.

8. Financial Accounting
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Lecture – 05
Rules of Debit and Credit for Assets
• Similarly we have established that whenever a business
transfers a value / benefit to an account and as a result
creates some thing that will provide future benefit; the
‘thing’ is termed as Asset.
• By combining both these rules we can devise following rules
of Debit and Credit for Assets:
 When an asset is created or purchased, value / benefit is
transferred to that account so it is Debited
i. Increase in Asset is Debit
 Reversing the above situation if the asset is sold, which is
termed as disposing off, for say cash the asset account
provides benefit to the cash account. Therefore, the asset
account is debit
ii. Decrease in Asset is Credit

9. Financial Accounting
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Lecture – 05
Rules of Debit and Credit for Liabilities
• And anything that transfers value to the business, and in turn
creates a responsibility on part of the business to return a
benefit, is a Liability. Therefore, liabilities are the exact
opposite of the assets.
 When a liability is created the benefit is provided to
business by that account so it is Credited
iii. Increase in Liability is Credit
 When the business returns the benefit or repays the
liability, the liability account benefits form the business
so it is Debited
iv. Decrease in Liability is Debit

10. Financial Accounting
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Lecture – 05
Rules of Debit and Credit for Expenses
• Just like assets we have to pay for expenses. From assets we
draw benefit for a long time whereas the benefit from
expenses is for a short run.
• Therefore Expenditure is just like Asset but for a short run.
• Using our rule for Debit and Credit, when we pay cash for
any expense that expense account benefits from cash
therefore it is Debited.
 Now we can lay down our rule for Expenditure:
i. Increase in Expenditure is Debit
 Reversing the above situation if return any item that we
had purchased we will receive cash in return. Cash
account will receive benefit from that Expenditure
account. Therefore Expenditure account will be credited
ii. Decrease in Expenditure is Credit

11. Financial Accounting
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Lecture – 05
Rules of Debit and Credit for Income
• Income accounts are exactly opposite to expense accounts
just as liabilities are opposite to that of assets.
• Therefore using the same principle we can draw our rules of
Debit and Credit for Income
iii. Increase in Income is Credit
iv. Decrease in Income is Debit