Understanding Debit And Credit Accounting

Understanding Debit and Credit Accounting by npaul on Tue Oct 03, 2006 6:20 pm Understanding Debit and Credit in Accounting Debit and Credit has been discovered in 1494 in Italy. The father of this concept is Luca Paciolio. The old concept of debit and credit is “give and take”. Modern concept of debit and credit is accounting equation. Every transaction must have two sides. One side must be debit and another side must be credit. Debit amount must equal to credit amount. This double entry concept is explained by accounting equation in contemporary accounting. The accounting equation is: Assets = Liabilities + Owners’ Equity The extended accounting equation formula is: Assets = Liabilities + Owners’ Equity + (Revenue - Expenses) By rearranging the formula: Assets + Expenses = Liabilities + Owners’ Equity + Revenue When accounting equation is balanced it means accounting records are correct. 1. Debit means an increase in one of the accounts with a normal balance of debit or a decrease in one of the accounts with a normal balance of credit. A debit is recorded on the left hand side of a 'T' account 2. Credit means an increase in one of the accounts with a normal balance of credit or a decrease in one of the accounts with a normal balance of debit. A credit balance is recorded on the right hand side of a 'T' account 3. Debit accounts means Asset and Expenses 4. Credit accounts means Gains and Liabilities Examples of accounts, which have normal debit balance: • Assets • Accounts receivable or Debtors • Drawings • Expenses • Losses Examples of accounts, which have normal credit balance: • Liabilities • Accounts payable or Creditors • Revenue • Profit Debit and credit formula for accounts type: Assets: 1. Assets are always debit 2. If assets are increased also debit 3. If assets are decreased is credit Liabilities 4. Liabilities are always credit 5. If Liabilities are increased also Credit 6. If Liabilities are decreased is Debit Owner’s Equity 7. Owner’s Equity are always credit 8. If Owner’s Equity are increased also Credit 9. If Owner’s Equity are decreased is Debit Income 10. Income are always credit 11. If Income are increased also Credit 12. If Income are decreased is Debit

Expenses 13. Expenses are always debit 14. If expenses are increased also debit 15. If expenses are decreased is credit Examples of debits and credits: Rules: • Decide two accounts name. • Decide accounts type. • Decide debit and credit by using accounting equation. Example: 1 Transaction Accounts name Accounts type Increase and decrease Debit and Credit Purchase computer in cash Computer Assets Increase Debit Cash Assets Decrease Credit Example 2: Sales goods on credit Sales Income Increase Credit Accounts Receivable Assets Increase Debit Example: 3 Rent paid in Cash Rent Expenses Increase Debit Cash Assets Decrease Credit Example: 4 Loan paid in cash Loan Liability Decrease Debit Cash Assets Decrease Credit

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