Question

You and your fellow classmates are discussing the recording process in accounting. One of the students is having difficulty understanding the what debit and credit means in accounting and the rules for applying debit and credit analysis to transactions being recorded. In your posting, you should explain your understanding of the definition of debit and credit and the rules and how they apply to assets, liabilities and the components of stockholders' equity. You should give at least one example of a transaction and how the rules of debit and credit would apply.

Answer 1

The process of recording starts with transactions origin and their identification and then after it is recorded in Journal and then it is posted into ledger and then after trail balance is prepared and at last financial statement is prepared.

In Accounting, every transaction affect two or more accounts and one of that side is called Debit and another is called Credit. In every transaction one account affect Debit side and another account affect Credit side. It is also called Double Entry Book Keeping and according to this concept the total of debit and credit would always be same.

Rule of Debit and Credit:

As per modern approach accounts are classified into five major head:

1. Assets Accounts:

#Rule: Debit means Increase and Credit means Decrease

Example: When we buy Fixed Assets by paying Cash then one side our Fixed Assets increases therefore we debit Fixed Assets on the other side our Cash Decreases therefore we credit Cash.

2. Liabilities Accounts:

#Rule: Debit means Decrease and Credit means Increase

Example: When we pay to Creditors then our liabilities get decrease therefore we debit Credetors.

3. Capital Accounts or stockholder's equity:

#Rule: Debit means Decrease and Credit means Increase

Example: When additional capital is introduce into business then capital increases therefore we credit Capital account

4. Income Accounts:

#Rule: Debit means Decrease and Credit means Increase

Example: When we receive revenue then we credit the sales accounts since at that time revenue is increases in the same way when we receive rent then it increases our income therefore we credit rent income

5. Expense Accounts:

#Rule: Debit means Increase and Credit means Decrease

Example: Whenever we made expenses then it increase our expense therefore we debit expenses.

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