Debit & Credit
What is Debit & Credit ?
The terms Debit & Credit give an accounting explanation of the mathematical changes is the individual accounts.As a matter of convention an increase in an assets is taken as Debit and in increase in a liability or owners equity is taken as credit.
Rules of Debit and Credit
While discussing the “Double Entry System”,it was said that the relationship”Capital+Liabilities=Assets”was satisfied after every transaction. There are two approaches for deciding when to write on the “Debit” side of account In order to understand the rules of debit and credit according to his approach transaction are divided into following three categories,
for example,Accounts regarding land,buildings,investment,fixed deposit will be real accounts.Cash in hand and bank accounts are also real.
like salary account, paid account,commission received account.The net result of all revenue accounts is profit or loss.
The rules of debit and credit in relation to these accounts are stated as under:
For any personal accounts
Debit the receiver
Credit the giver
For any real account
Debit what comes in
Credit what goes out
For any revenue account
Debit all losses and expenses
Credit all gains and incomes
What is journal ?
Where the day to day transactions of a business are recorded firstly.As transactions occurs they are recorded first in the journal.For this reason Journal is called the Book of original entry.Amounts shown in the journal are subsequently recorded in to respective accounts,As transactions are journalized with details in chronological order,it becomes easy to trace a particular transactions subsequently,if so required.journal is often subdivided into cash journal,Purcahse journal,General journal or journal proper.
Before we can journalise transactions,one must think,on the basis of the rules of debit and credit,about effects of the transactions on assets,liabilities,expenses,gains,etc.of the firm,On this basis,the accounts to be debited or credited will be determined.Some individual transactions:
- Mohan commences buisness with Rs.5000.This means that the firm has Rs.5000 cash.
- Out of the above,Rs.500 is deposited in the bank.By the transaction-the cash balance is reduced by Rs.500 and a another assets,bank account,comes into existence.Since increase in assets is debited and decrease credited,the journal entry will be:
Bank account -Dr.Rs.500
To cash Account Rs.500
- Paid to M/s Ram Narain Bros.Rs.1000.The liabilty to Ram Narain Bros,has been discharged,therefore,this account should be debited.The cash balance has decreased and therefore,the cash account has to be credited.The entry is:
Ram Narain Bros. -Dr.Rs.1000
To cash Account Rs.1000
- Paid Rs.500 to the clerk as salary.Cash balance has decreased and therefore,the cash account should be credited.No assets has come into existence because of the payment,the payment is for service enjoyed and is an expense.Expenses are debited Therefore the entry should be:
Salaries Account -Dr.Rs.500
To cash Account Rs.500
According to the rules given above,the increase in an assets has to be debited to it.The firm also now owes Rs.5000 to the propritor,Mohan,as capital.The rules given above also show that increase in capital should be credited to it.Therefore,the journal enrty will be:
Cash account -Dr.Rs.5000
To Capital Account Rs.5000