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Key Terms and Chapter Summary-6

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Key Terms and Chapter Summary-6

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om patel
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MEANING OF KEY TERMS USED IN THE CHAPTER

1. Account It is a summarised record of transactions at one place relating to a


particular head. It records not only the amount of transactions but
also their effect and direction.

2. Balancing It means totalling the two sides of an account and striking a balance.
(a) Debit Balance It is the difference between total of debit and credit sides of an
account, total of debit side being bigger.

(b) Credit Balance It is the difference between total of debit and credit sides of an
account, total of credit side being bigger.
3. Rules of Debit and
Credit

(A) Tradional Approach



(i) Personal Account Debit the receiver and credit the giver.
(ii) Real Account Debit what comes in and credit what gives out.
(iii) Nominal Account Debit all expenses and losses and credit all incomes and gains.

(B) Modern Approach


(i) Assets Assets are the financial resources of an organisation. Assets have a
debit balance. An increase in assets is debited and decrease credited.

(ii) Liabilities Liabilities are the claim against the financial resources (i.e., assets).
Liabilities have credit balance. An increase in liabilities is credited
and decrease debited.

(iii) Capital An amount or fund introduced in the business by the owner is


known as capital. Capital has a credit balance. An increase in capital
is credited and decrease debited.

(iv) Expenses Expense is a value which has expired during the accounting period.
Expenses have a debit balance. An increase in expenses is debited
and decrease credited.
(v) Revenue Revenue is amount earned on sales of goods, services
rendered or for use by others of enterprise’s resources. Revenue
has a credit balance. An increase in revenue is credited and decrease
debited.

1
CHAPTER SUMMARY

• An Account is a summarised record of relevant transactions at one place relating to a particular


head. It records not only the amount of transactions but also their effect and direction.
• Debit and Credit: Debit and Credit are simply additions to or subtraction from an account. In
accounting, debit refers to the left hand side of any account and credit refers to the right hand side.
In accounting the abbreviated form Dr. stands for debit and Cr. stands for credit.
Both debit and credit may represent either increase or decrease depending upon the nature
of an account.

• Traditional Classification of Accounts

Accounts

Personal Impersonal

Natural Artificial Representative Real Nominal (Revenue or Expense)

The Rule of debit and credit depends on the nature of an account.


Types of Account Account to be Debited Account to be Credited
1. Personal Account Receiver Giver
2. Real Account What comes in What goes out
3. Nominal Account Expenses and Losses Income and Gains

• Modern Classification of Accounts

Accounts

Asset Account Liability Account Capital Account Revenue Account Expense Account

The Rule of debit and credit depends on the nature of an account.

RULES FOR DEBIT AND CREDIT


Types of Account Account to be Debited Account to be Credited
1. Asset Account Increase ↑ Decrease ↓
2. Liability Account Decrease ↓ Increase ↑
3. Capital Account Decrease ↓ Increase ↑
4. Revenue Account Decrease ↓ Increase ↑
5. Expense Account Increase ↑ Decrease ↓

• Assets, expenses and losses accounts normally have debit balances; liability, income and
capital accounts normally have credit balances.

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