Traders are necessary to sustain diverse books for keeping accounts relating to small business which are as under:
(I) Journal
(two) Ledger (it shall be explained in a different article)
Journal
In order to study the journal, particular related terms along with the procedure of accounting should be studied, which are as follows :
The Account
Transactions involving receipts and payments of cash have an effect on the cash balance. Receipts increase the cash balance and payments reduce the money balance. Instead of escalating or decreasing the balance following every transaction we may put all increases together in one column and all decreases together in another column and obtain the balance only when necessary. It will be considerably hassle-free and time saving.
In accounting, the device called an account is applied for this purpose. The easy form of account is referred to as a T account is shown beneath. Increases of money have been listed on the left hand side and the decreases on the suitable hand side, the closing balance has been ascertained by deducting the total payments from the total of the left-hand side.
Debit and Credit in Accounting
As is clear from the form of account given above it is divided in two parts: Left-hand side is recognized as 'debit side' and perfect hand side is known as 'credit side'.
Amounts entered on the debit side (left hand side) are named debits and amounts on the credit side proper-hand side) are named credits. 'To debit' means to make an entity in the left-hand side of an account' and 'To credit' means to make an entry in the proper-hand side of an account.
The words debit and credit have no other meaning in accounting.
Abbreviation made use of for debit is Dr. and for credit Cr.
Rules of Debit and Credit (Equation Based)
Dual aspect concept in accounting implies that every single accounting transaction would be expressed by a debit amount and an equal and opposite credit quantity. Therefore, the rule that for every transaction debit quantity need to equal the credit quantity has totally no exception. The equality of debits and credits could be expressed in the form of an equation:
Debit = Credit
In the prior article we discussed accounting equation:
A-L = P
i.e., Assets-Liabilities = Proprietor's Funds or Capital
If every single account was to be considered in isolation it would make no distinction no matter if increases had been recorded on the debit side or on the credit side but since the accounts are inter-dependent hence a program of recording increases and decreases on the two sides had to be fixed. Traditionally or conventionally increases in asset accounts are recorded on the debit side although increases in liabilities and capital are recorded on the credit side. The above rule ensures that when account balances are totaled will confirm to the accounting equation discussed above.
It gives rise to the following guidelines: .
1. Increases in asset accounts are debits, decreases are credits.
two. Increases in liability accounts are credits, decreases are debits.
three. Increases in Owner's equity accounts are credits, decreases are debits.
Total classes of accounts maintained by any company will consist of the accounts relating to expenses, losses, revenues and profits in addition to assets, liabilities and proprietor's funds. Guidelines of debit and credit relating to assets, liabilities and capital have been stated above and the guidelines for expenses / losses and revenues/ profits can be derived from the exact same.
four. Increases in expenses/ losses accounts are debits.
Given that the expenses and losses when incurred and suffered lead to reduction in the capital and ecreases in owner's equity accounts are debits, so increases in expenditures and losses accounts are Debits.
5. Increases in revenues/ profit accounts are credits.
Because the revenues and profits when earned will lead to improve in the capital and raise in owner's equity accounts are credits, consequently increases in revenue and profits accounts are credits.
The rules of debit and credit discussed above are based on accounting equation strategy. Traditional rules of debit and credit are based on classification of accounts. These rules in practice give the identical
results and operate in the exact same manner. These merely stale the position in a unique way.
