Accounting rules of debit and credit

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Saurabh Guptahttp://karekaise.in
नई तकनीक का आविष्कार, गैजेट्स, उपभोक्ता प्रौद्योगिकी और सॉफ्टवेयर के लिए आपका स्रोत. कंप्यूटर, स्मार्टफोन, इलेक्ट्रॉनिक गैजेट्स और इंटरनेट सामग्री पर नवीनतम रुझानों के लिए हमारी वेबसाइट देखें!

In this article you will get about the accounting rules of debit and credit it is very important in financial accounting.let me explain about it…

Meaning of an account 


Account is a record of transactions under a particular head. It records not only the amount of transactions but also their effect and direction. An account is divided into two parts, i.e., debit and credit. It is usually in a “T” form.

Following points about the layout of account should be noted:

•Name of the account is written at the top.

• Account is divided into two identical halves, separated by a thick vertical line.

• Left hand side is called the debit side (‘debit’ is abbreviated as ‘Dr.).

•Right hand side is called the credit side (‘credit’ is abbreviated as ‘Cr.).

• Date of the transaction is entered in the column for ‘Date’.

• In the ‘Particulars’ column, the name of the other account involved in the transaction is entered.

•The ‘folio’ or Journal Folio (J.F.) column is used as a referencing system where the original entry was recorded in the Journal Book.

•In the last column, the amount transacted is written.

It is illustrated below by taking imaginary amounts:

Meaning of debit and credit


Debit refers to the left side of an account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. An item recorded on the debit side of an account is said to be debited to the account. An item recorded on the credit side of an account is said to be credited to the account. Both debit and credit may represent either increase or decrease depending upon the nature of an account. The rules of debit and credit depend on the nature of account.

RULES OF DEBIT AND CREDIT


Accounting rules of debit and credit Under Double Entry System of accounting each transaction has two aspects. One aspect is debit, i.e., receiving or incoming aspect. Another aspect is credit, i.e.. giving or outgoing aspect. Debit and credit aspects of a transaction form the basis of Double Entry System.

Accounting rules of debit and credit

Rules of Double Entry or Rules of Debit and Credit are formed on the basis of these two aspects in each of the business transactions. There are two approaches for deciding when to write on the debit side of account and when to write on the credit side of an account, Le, which account is to be debited and which account is to be credited. The rules on the basis of which such decision is taken are called accounting Rules of Debit and Credit.

Classification of Accounts


Accounts can be classified in two ways; A. Traditional Classification.

B. Modern Classification.

A. Traditional Classification

Under this classification, accounts are classified into two groups as shown below:

Personal accounts

1. Personal accounts

Accounts which relate to persons, i.e., individuals, firms, companies, debtors or creditors, etc., are Personal Accounts. Examples of Personal Accounts are the account of Ram & Co., a customer (Debtor), or the account of Jhaveri & Co., a supplier of goods (Creditor), Capital Account and Drawings Account of the proprietor. The main purpose of preparing a Personal Account is to determine the balance due to or due from persons or organisations. Personal Accounts can be classified into three categories:

(i) Natural Personal Accounts

The term ‘Natural Persons’ means persons who are creations of God. Therefore, these will include accounts in individual name. For example, Ram’s Account, Asha’s Account, etc.

(ii) Artificial Personal Accounts

These accounts include accounts of corporate bodies or institutions which are recognised as persons in business dealings. For example, the account of a limited company, the account of a club or a cooperative society, etc.

(iii) Representative Personal Accounts

These are accounts which represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account will be opened in the books.The Outstanding Rent Account represents the amount of rent payable to the landlord. Other examples of the Representative Personal Accounts are Prepaid Rent Account, Accrued Commission Account, Unearned Interest Account, etc.

2. Impersonal Accounts

Accounts which are not personal such as Machinery Account, Cash Account, Rent Account, etc., are termed as Impersonal Accounts. These can be further sub-divided into two accounts:

(1) Real Accounts

Real Accounts are the accounts which relate to tangible or intangible assets of the firm (excluding debtors). Examples of tangible assets are: land, building, investments, plant and machinery, stock or cash in hand. Examples of intangible assets are: goodwill patents and trademarks.

(ii) Nominal (Revenue or Expense) Accounts

Accounts which relate to expenses, losses, gains, revenue, etc., are termed as Nominal Accounts. These are Salary Account, Purchases Account, Interest Paid Account, Sales Account and Commission Received Account. The net result of all the Nominal Accounts is profit or loss which is transferred to the Capital Account.

Accounting rules of debit and credit (traditional classification) at a glance

Account       to be debited    to be credited

Personal           receiver                  giver

Real           what comes in    what goes out

Nominal   expense and loss     income                                                                   and gain

B. Modern Classification

Under this classification, all the accounts are classified into the following five categories

Modern Classification of Accounts


•Asset Accounts

•Liability Accounts

•Capital Accounts

•Revenue Accounts

•Expense Accounts

1. Asset Accounts

Asset accounts are those accounts which relate to the economic resources of an enterprise such as Land and Building, Plant and Machinery, Furniture, Patents Inventory, Bank and Cash, etc.

2. Liability Accounts

Liability accounts are accounts of lenders, creditors for goods, outstanding expenses, etc

3. Capital Accounts

These are the accounts of proprietors/partners who have invested amount in the business. It includes both Capital and Drawings Account.

4. Revenue Accounts

These are accounts of incomes and gains. Examples are: Sales, Discount received. Interest received, commission received, bad debts recovered, etc.

5. Expense Accounts

These are the accounts of expenses or losses incurred in carrying the business. Examples are: Purchases, Wages, salaries, Depreciation, Discount allowed and Rent, etc.

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Rules of debit and credit (mordern classification) at a glance

Account       to be debited    to be credited

Asset               increase              decrease

Liability           decrease              increase

Capital            decrease              increase

Revenue         decrease              increase

Expense          increase              decrease

It should be noted that an increase in assets is favourable to the firm but an increase in expenses may not be so, even though in both the cases, increase will be recorded on the debit side. Similarly, increase in liabilities is, of course, not favourable but an increase in revenue is favourable. Nonetheless, both will be recorded on the credit side. Thus, the terms ‘debit’ and ‘credit’ should not be taken to mean respectively favourable and unfavourable-they merely describe the two sides of an account. In other words, both debit and credit may represent either increase or decrease depending upon the nature of an account.

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