Rules Of Debit And Credit Pdf
A ledger account (also known as T-account) consists of two sides – a left hand side and a right hand side. The left hand side is commonly referred to as debit side and the right hand side is commonly referred to as credit side. In practice, the term debit is denoted by “Dr” and the term credit is denoted by “Cr”.
LEARN DEBITS AND CREDITS Learning about debits and credits requires a combination of memorization and application of the terms. Memorization of account types, as well as increase and decrease rules, is a good first step. Next, you must understand how transactions are.
Provided by Tutoring Services 1 When to Debit and Credit in Accounting Created November 2013 When to Debit and Credit in Accounting Journal entries show a firm’s transactions throughout a period of time; for example, when a company purchases supplies a journal entry will show the amount of supplies bought and money spent. Debits and Credits Every transaction (sentence in the story of what happened to the money) has to have a debit and a credit. Accounting professionals use T-accounts to help them think through transactions and journal entries to record.
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In the rest of the discussion we shall use the terms debit and credit rather than left and right. Tokyo ghoul free anime.
When a financial transaction occurs it affects at least two accounts. For example, purchase of machinery for cash is a financial transaction that increases machinery and decreases cash because machinery comes in and cash goes out of business. The increase in machinery and decrease in cash must be recorded in the machinery account and the cash account respectively. As stated earlier, every ledger account has a debit and a credit side. Now the question is that on which side the increase or decrease in an account is to be recorded. The answer lies in the learning of normal balances of accounts and the rules of debit and credit.
Normal balance of accounts
The understanding of normal balance of accounts helps understand the rules of debit and credit easily. If the normal balance of an account is debit, we shall record any increase in that account on the debit side and any decrease on the credit side. If, on the other hand, the normal balance of an account is credit, we shall record any increase in that account on the credit side and any decrease on the debit side.
The normal balance of all asset and expense accounts is debit where as the normal balance of all liabilities, and equity (or capital) accounts is credit. The normal balance of a contra account (discussed later in this article) is always opposite to the main account to which the particular contra account relates.
Rules of debit and credit
(1). Asset accounts:
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all asset accounts.
(2). Expense accounts:
Normal balance: Debit
Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all expense accounts.
(3). Liability accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all liability accounts.
(4). Revenue/Income accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all revenue accounts.
(5). Capital/Equity accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all equity accounts.
(6) Contra accounts:
Normal balance: Opposite to the normal account.
An example:Accounts receivable is an asset account that normally has a debit balance. The allowance for doubtful accounts is a contra account to the accounts receivable and normally has a credit (opposite) balance.
Other examples of contra accounts include:
- accumulated depreciation account – a contra asset account
- sales returns and allowances account – a contra revenue account
- sales discount account – a contra revenue account
- drawings account – a contra equity account
- treasury stock account – a contra equity account
- bonds discount account – a contra liability account
As the normal balance of a contra account is always opposite to the normal balance of the relevant main account, it causes a reduction in the reporting amount of the main account.
Rule: If the normal balance of the contra account is debit, the increase will be recorded on the debit side and the decrease will be recorded on the credit side. If, on the other hand, the normal balance of the contra account is credit, the increase is recorded on the credit side and the decrease is recorded on the debit side.
Debit And Credit Example
A summary of the whole discussion about rules of debit and credit is given below:
The following example may be helpful to understand the practical application of rules of debit and credit explained in above discussion
Example:
The following transactions are related to Small Traders:
- Started business with cash $95,000.
- Furniture purchased for cash to be used in business $8,000.
- Purchased goods for cash $40,000.
- Purchased goods on credit from Big Traders $57,000.
- Sold goods for cash $5,000.
- Purchased equipment for business $4,000.
- Sold goods on credit to John Retailers $1,500.
- Paid salary to employees $1,200
Accounting Rules Of Debit And Credit Pdf
Required: Identify the accounts involved in above transactions and state the nature of each account. Also mention how increases or decreases in accounts resulting from above transactions should be recorded.