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Lesson-
ACCOUNTING CYCLE/PROCESS
*(Continued) 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. 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.
*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: o When an asset is created or purchased, value / benefit is transferred to that account, so it is Debited
I. Increase in Asset is Debit
o 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 Credited
II. Decrease in Asset is Credit
*Rules of Debit and Credit for Liabilities
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.
o When a liability is created the benefit is provided to business by that account so it is Credited
III. Increase in Liability is Credit
o When the business returns the benefit or repays the liability, the liability account benefits from the business. So it is Debited
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IV. Decrease in Liability is Debit
*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.
o Now we can lay down our rule for Expenditure:
V. Increase in Expenditure is Debit
o Reversing the above situation, if we 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
VI. Decrease in Expenditure is Credit
*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
VII. Increase in Income is Credit
VIII. Decrease in Income is Debit
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PPuurrcchhaasseedd llaanndd ffoorr ccaasshh ffoorr RRss..1 1441 1,,0 00000 Date Explanation Ref Dr. Cr. 3-Jul Land Account 141, Cash Account 141, Purchased Land for Rs. 141,
PPuurrcchhaassee ooff bbuuiillddiinngg ppaarrttllyy oonn ccaasshh ((RRss..1^15 5,,0^0000 0)) aanndd ppaarrttllyy oonn ccrreeddiitt ((RRss..2 21 1,,0 0000 0)) Date Explanation Ref Dr. Cr. 5-Jul Building Account 36,
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Accounts Payables 21, Purchased Building partly for cash and partly on credit
10-Jul Accounts receivables 11,
Land Account 11, Sold a portion of land for Rs. 11,000.
14-Jul Office equipment 5,
Accounts Payables 5, Purchased Equipment on credit
20-Jul Cash account 1,
Accounts receivables 1, Collection of accounts receivables
31-Jul Accounts payables 3,
Cash account 3, Payment of liability
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