Rules of Debit & Credit

> By Dr. Priyanka Pradhan

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 Types of Account and rules of
Debit & Credit
e An account is a summary of the relevant
transactions at one place relating to a particular
head. It records a group of simular transactions
relating to one person, one kind of property or any
class of expenses or incomes.
¢ In accounting, the left hand side is known as
‘Debit’ side of an account and the right hand side
is known as ‘Credit’ side of an account.
¢ Debit & Credit simply additions to or subtraction
from an account.
 Types of Accounting
¢ Personal Account
¢ Real Account
¢ Nominal Account

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 Types of Accounting
¢ Personal Account:
It includes an accounts of customers/debtors or
suppliers/creditor, moneylender, banks & owner.
¢ Real Account :
This includes accounts of Assets & Properties
such as Land, Building, Plant, Machinery, Cash,
Investment, Stock, Inventory, etc.
¢ Nominal Accounts :
includes accounts of incomes & expenses and
ams & losses.
 Types of Account

[ Personal |
——_ |
Natural }( oui } [Representative]
or Legal
 Impersonal

[ Real | [ Nominal _|
Tangible Expenses & Losses

Intangible Revenue Income & Gain

 Rules of Debit & Credit
¢ Personal A/C
Debit the Receiver
Credit the Giver
¢ Real A/C
Debit what comes in
Credit what goes out
¢ Nominal A/C
Debit all Expenses and losses
Credit all incomes and gains
 Rules of Debit & Credit
Debit Signifies Credit Signifies
¢ Increase in assets ¢ Decrease in assets
accounts accounts
¢ Decrease in liability ¢ Increase in liability
accounts accounts
e Decrease in Owner’s ¢ Increase 1n owners
equity accounts equity accounts
 Balance Sheet
[Liabilities Account) [ Assets account |
Ly | no |

[For decreases| [ For increases | [ For increases | [For decreases|

[ Owner's Equity Accounting |

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For decreases For increases
 What is a journal entry in
Accounting?
Journal entry is an entry to the journal.
Journal is a record that keeps accounting transactions in
chronological order, i.e. as they occur.
Ledger is a record that keeps accounting transactions
by accounts.
Account is a unit to record and summarize accounting
transactions.

All accounting transactions are recorded through

journal entries that show account names, amounts, and
whether those accounts are recorded in debit or credit
side of accounts.
 T-Account
This form looks like a letter ""T", so it is called
a T-account.
T-account is a convenient form to analyze
accounts, because it shows both debit and
credit sides of the account.

Account

Debit Credit
Dr. Cr.
Transaction 1:
Company A sold its products at Rs.1200 and received the full amount in cash.
Steps Self-Questions Answers

What did Company A receive? Cash.

If Company A received cash, how Receiving cash increases

would this affect the cash balance? the cash balance of the
company.
Which side of cash account represents | Debit side (Left side).
the increase in cash?

What is the account name to record the | Sales.

sales of products.
Which side of sales account represents Credit side (Right side).
the increase in sales?
Does the sum of debit side amounts Yes.
equal to the sum of credit side 1200 = 1200
amounts? In other words, does this
journal entry balance?
 Journal entry to record transaction |
¢ Transaction 1: Company A sold its products at
1200 and received the full amount in cash.

¢ Cash A/C Dr. Rs.1200

To Sales A/C Rs.1200
Transaction 2:
Company A purchased supplies and paid Rs.5000 in cash.

Steps Self-Questions Answers

] What did Company A receive? Supplies.
2 If Company A received supplies, how | It increases supplies
would this affect the supplies balance.
balance?
3 Which side of supplies account Debit side (Left side).
represents the increase in cash?
4 What did Company A pay? Cash.
Which side of cash account Credit side (Right side).
represents the decrease in cash?
6 Does the sum of debit side amounts | Yes.
equal to the sum of credit side Rs.5000 = Rs. 5000
amounts? In other words, does this
journal entry balance?
[Journal entry to record transaction 2]
- Supplies A/C Dr. Rs.5000
To Cash A/C Rs.5000

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 Transaction 3

Owner invested Rs.10,000 in the company.

¢ Analysis of Transaction
Step 1. Debit or Credit?
Increase in Assets (Cash) by Rs.10,000 Debit
To Increase in Owner's Equity by Rs.10,000 Credit
Journal Entry
Debit Credit
Cash A/C Dr. 10,000
To Capital A/C 10,000
Description of Journal Entry
Owner invested Rs.10,000 in the company.
 Results of Journal Entry

Cash balance increases by Rs.10,000. --> Increase in Assets

Owner's Equity balance increases by Rs.10,000.
--> Increase in Owner's Equity
 Transaction 4.
The company borrowed Rs.20,000
from a bank.
¢ Analysis of Transaction
¢ Steps Debit or Credit?
1.Increase in Assets (Cash) by Rs.20,000 Debit
2.Increase in Liabilities (Borrowings) by Rs.20,000 Credit
Journal Entry
Debit Credit
Cash A/C 20,000
To Borrowings A/C 20,000
¢ Description of Journal Entry
Borrowed Rs.20,000.
Results of Journal Entry
Cash balance increases by Rs.20,000. --> Increase in
Assets
Borrowings balance increases by Rs.10,000. --> Increase
in Liabilities
 Protorma or Journa

DATE: The date on which the transaction was entered is recorded here.
PARTICULARS: The two aspects of transaction are recorded in this colu
L.F.: It means Ledger Folio. The transactions entered in the journal are
later on posted to the ledger.
DEBIT: The amount to be debited is entered.
CREDIT : The amount to be credited is shown.
 Journalize the following transactions. Also state the
nature of each account involved in the journal entry
¢ 1% Dec 2023, Ajit started business with cash Rs.40,000.
¢ Dec.3, he paid into the bank Rs.20,000.
¢ Dec.5, he purchased goods for Rs.15,000.
¢ Dec.8, he sold goods for cash Rs.6000.
¢ Dec.10, he purchased furniture and paid by cheque
Rs.5000.
¢ Dec.12, he sold goods to Arvind Rs.4000.
¢ Dec.14, he purchased goods from Amrit Rs.10000.
Dec.15, he returned goods to Amrit Rs.5000.
 Contd.

Particulars Nature of
Account
Dec.l Cash A/C Dr. Real A/C 40000
To Capital A/C Personal A/C 40000
(Being commencement of
business with 40000)
Dec.3 Bank A/C Dr. Personal A/C 20000
To Cash A/C Real A/C 20000
(Being cash deposited in the
bank)
Dec.5 Purchase A/C Dr. Real A/C 15000
To Cash A/C Real A/C 15000
(Being purchase of goods
for cash)
Dec.8 Cash A/C Dr. Real A/C 5000
To Sales A/C Real A/C 5000

at
(Being goods sold for cash)
 Contd.

Particulars Nature of
Account
Dec. 10 Furniture A/C Dr. Real A/C
To Bank A/C Personal A/C
(Being purchase of furniture)
Dec. 12 Arvind A/C Dr. Personal A/C 4000
To Sales A/C Real A/C
(Being sales of goods)

Dec. 14 Purchase A/C Dr. Real A/C 10000

To Amrit A/C Personal A/c 10000 -
(Being purchase of goods from
Amrit)
Dec. 15 Amrit A/C Dr. Personal A/C 5000
To Purchase returns A/C Real A/C 5000
(Being goods returned to

at
Amrit)
 Journalize the following Transactions in the
books of ABC ltd.
1.Started business with a capital of Rs.7500.
¢ 2.Opened a bank account with state bank of India for
Rs.2000.
¢ 3.Paid commission to X for Rs.300.
¢ 4.Purchased goods from K &co. for cash Rs.1000.
¢ 5.Purchased goods from Mr.Z for Rs.2000.
¢ 6.Goods returned to Mr.Z. for Rs.500.
¢ 7.Paid to Mr.Z in full settlement of Rs.1400.
- Rs.2000
¢ Rs.500
* Rs.1500 - Rs.1400 = Rs.100 (Discount
Received)

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 Journal Entries in the books of ABC vid ~~
Particulars Effects of Transaction

1. Cash A/C Dr. Increase in Assets(Cash) 7500

To Capital A/C Increase in Capital 7500
(Being Cash taken to
start business.)
Bank A/C Dr. Increase in Assets(Bank) 2000
To Cash A/C Decrease in Assets(Cash) 2000
(Being Cash
deposited into Bank.)
Commission A/C Dr. Increase in expenses 300
To Cash A/C Decrease in Assets(Cash) 300
(Being Commission
paid in cash)
Purchase A/C Dr. Increase in Assets(Stock) 1000
To Cash A/C Decrease in Assets(Cash) 1000
(Being Goods
purchased from K &
Co. for cash)
Contd.
Particulars Effects of Transaction

Purchase A/C Dr. Increase in Assets(Stock) 2000

To Mr.Z A/C Increase in Liability
(Being Goods
purchased from Mr.Z
on credit)
Mr.Z A/C Dr. Decrease in Liability 500
To Returns Decrease in Assets(Stock) 500
outward A/c
(Being Goods returned
to Mr.Z)
Mr.Z A/C Dr. Decrease in Liability 1500
To Cash A/C Decrease in Assets(Cash) 1400
To Discount 100
Received A/C
(Being cash paid to
Mr.Z and received
dierniunt)
Contd.
8. Received interest on investments for Rs. 400.
9. Paid rent to landlord Mr.Y for Rs.500.
10. Withdrew cash for household expenses amounted to
Rs.600.
11. Sold goods to Mr.L for cash Rs. 2500.
12. Sold goods to Mr.D on credit for Rs.1000.
13. Goods returned by Mr.D for Rs.250.
14. Received cash from Mr.D in full settlement for Rs.700.
15. Paid carriage on goods purchased for Rs.350.
16. Paid carriage on goods sold for Rs.800.
 Particulars

8. Cash A/C Dr. 400

To Interest on investment A/C 400
(Being Interest received in cash)

Rent A/C Dr. 500

To Cash A/C 500
(Being rent paid in cash)

10. Drawings A/C Dr. 600

To Cash A/C 600
(Being cash withdrawn for household
expenses.)

11. Cash A/C Dr. 2500

To Sales A/C 2500
(Being goods sold for cash)
 Contd.
Particulars

12. Db A/C Dr.

To Sales
(Being Goods sold to D on credit)
13. Returns Inward A/C Dr. 250
To D A/C 250
(Being Goods returned by D)
14. Cash A/C Dr. 700
Discount Allowed A/C iODrr. 50
To D A/C 750
(Being cash received from D and
allowed him discount)
15. Carriage Inward A/C Dr. 350
To Cash A/C 350
(Being carriage paid for goods
purchased)
Carriage Outward A/C Dr. 800
To Cash A/C 800
(Being Carriage paid for goods sold)
 Compound Journal Entry
Sometimes there are number of transactions on the same
date relating to one particular account or one particular
nature. Such entries can be passed by one single journal
entry instead of passing an individual journal entry.
It may be recorded in any of the following three ways:
One particular account may be debited while several
accounts may be credited.
One particular account may be credited while several
accounts may be debited.
Several accounts may be debited and several accounts
may be credited.
 A compound entry:
¢ Pass the opening entry on 01.01.2009 on the basis of the
following information taken from business of
Mr.Shubham.
Amt.(Rs.)
1. Cash in hand 20,000
2. Sundry Debtors 60,000
3. Stock in Trade 40,000
4. Plantand Machinery 50,000
5. Land and Building 1,00,000
6. Sundry Creditors 1,00,000
 Contd.
Particulars

01.01.09 Cash A/C Dr. 20,000

Sundry Debtors A/C Dr. 60,000
Stock in trade A/C Dr. 40,000
Plant and Machinery A/C Dr. 90,000
Land and Building A/C Dr. 1,00,000
To Sundry Creditors A/C 1,00,000
To Capital A/C 1,70,000
(Being the balance brought
forward from the last year)
 Journal Entries in the books of Roy
Itd.
Date Particulars
1. January 1 Mr. Roy started his business with Rs.50000
which he brought as his capital in cash.

2. January 10 He purchased goods worth Rs.30000 in cash

and Rs.20000 on credit.

3. January 12 He paid Rs.500 as wages for sorting and

packing the goods.
 Contd.
Particulars
Jan. 01 Cash A/C Dr.
To Capital A/C
(Being cash taken to start business.)
Jan. 10 Purchase A/C Dr. 50,000
To Cash A/C 30,000 |
To Creditors A/C 20,000
(Being goods purchased on cash & credit
both.)
Jan, 12 Wages A/C Dr. 500
To Cash A/C 500
(Being wages paid for sorting and
packaging of goods.)
4. January 15 He sold goods originally purchased at
Rs.35000 for Rs.20000 in cash and
Rs.25000 on credit to several customers.

5. January 16 He paid Rs.8000 in cash to his suppliers

for goods purchased earlier on credit.
He received Rs.15000 from his debtors
6.January 20 for goods sold.

7. January 31 He paid Rs.1000 in cash towards rent.

 Contd.

Jan. Cash A/C Dr. 20000

15(a) Debtors A/C Dr. 25000
To Sales A/C 45000
(Being Goods sold, partly for cash
and partly on credit)
Jan Sales A/C Dr. 45000
15(b) To Purchase A/C 35000
To Profit & Loss A/C 10000
(Being profit earned by selling goods)
Jan.16 Creditors A/C Dr. 8000
To Cash A/C 8000
(Being Rs.8000 paid cash to
suppliers)
Contd.

Jan.20 Cash A/C Dr. 15000

To Debtors A/C 15000
(Being cash payment received from
customers.)
Jan. 31 Rent A/C Dr. 1000
To Cash A/C 1000
(Being rent for the month paid in
cash.)
 Ledger
- A Ledger is a book which contains all the
accounts whether personal, real or nominal,
which are first entered in Journal.
- According to L.C.Cropper, “The book which
contains a classified and permanent record
of all the transactions of a business is
called the Ledger."
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 Proforma of Ledger
Date | Particulars J.F. Amount Date Particulars J.F. Amount
(Rs.) (Rs.)

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 Ut ility of Ledger
1) It provides complete information about all
accounts in one book.
2) It enab es to ascertain what the main items of
revenues are.
- 3) It enab es to ascertain what the main items of
expenses are.
- 4) It enab es to ascertain which are the assets
and its va ues,
- 5) It enab es to ascertain which are the liabilities
and its va
ilitates the preparation of Final
 Ledger A/C
of
Cash A/C
Particulars Amount Particulars Amount
(Rs.) (Rs.)
1. To capital A/c 50,000 2. By Purchase A/C
4. To Sales A/C 20,000 3. By wages A/C
6. To Debtors 15,000 5. By Creditors A/C
A/C
7. By Rent A/C

Balance Carried Down

Balance Carried
@ Forward
 Capital A/C
Dr

Particulars J.F. Amount Particulars Amount

(Rs.) (Rs.)
1 By Cash A/C 50,000

Balance Carried down 50,000

Balance brought 50,000 ~

forward
 Purchase A/C
Particulars J.F. Amount Particulars J.F. Amount
(Rs.)
(2)To Cash A/C 30,000 (4b) By Sales A/C 35,000
(2)To Creditors A/C 20 000
Balance carried 15 000
down
50,000 50,000
Balance brought 15,000
forward
 Dr.
Sales A/C Cr.
Particulars Amount Particulars J.F. Amount ,
Rs.) Rs.) /
(4b) To Purchase A/C 35,000 (4a) By Cash A/C 20,000
We To Profit & loss 10,000 (4a) By Debtors A/C 25,000
A/C
 r.
Debtors A/C C r.

(Rs.) Rs.
(4) To Sales A/C 25,000 (6) By Cash A/C 15,000
Balance carried down 10,000
25000 25000
Balance brought 10,000
forward
 Creditors A/C
Particulars Amount. Particulars J.F. Amount
(Rs.) (Rs.)
(5) To Cash A/C 8000 (2) By Purchase A/C 20,000

Balance carried down 12,000 |

20,000 20,000
Balance brought 12,000
forward
 Protit & Loss A/c
Particulars J.F. Amount Particulars J.F Amoun
. , T
(Rs.) (Rs.)
By Sales A/C 10,000

Balance Carried 10,000

down

Balance brought 10,000

forward

3
 Wages A/C
Particulars J.F. Amount Particulars J. Amount
(Rs.) . (Rs.)

To Cash A/C 500

Balance carried 500

down

Balance brought 500

forward
 . Rent A/C
Particulars J.F. Amount Particulars J. Amount
(Rs.) (Rs.)

To Cash A/C 1000

Balance carried 1000

down

Balance brought 1000

forward
 Trial Balance
- Trial Balance is a statement, prepared with
the debit and credit balances of ledger
accounts to test the arithmetical of the
books.
- If the totals of the debit and credit
amount columns of the trial balance are
equal, it is presumed that the posting to
the ledger in terms of debit and credit
amounts is accurate.
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 Dr. Trial Balance
Particulars Amount Particulars Amount
(Rs.) (Rs.)
Cash 45,500 Capital 50,000
Purchases 15,000 Sales

Debtors 10,000 Creditors 12,000

Wages 500 Profit & Loss A/c 10,000
Rent