Describe how debits and credits are used to analyse transactions.
Debit originated from the Italian word debito, which in turn is derived from the Latin word debeo, which means ‘owed to proprietor’ and credit comes from the Italian word credito, which is derived from the Latin word credo, which means belief, i.e., ‘owed by proprietor’.
According to the dual aspect concept, all the business transactions that are recorded in the books of accounts, have two aspects- debit and credit. The dual aspect can be better understood by the help of an example; bought goods worth Rs 500 on cash. This transaction affects two accounts with the same amount simultaneously. As goods are brought in exchange of cash, so the cash balances in the business reduce by Rs 500, i.e. why the cash account is credited. Simultaneously, the amount of goods increases by Rs 500, so purchases account will be debited. Debit and credit depend on the nature of accounts involved; such as assets, expenses, income, liabilities and capital. There are five types of Accounts.
1. Assets- These include all properties or legal rights owned by a firm for its operations, such as cash in hand, plant and machinery, bank, land, building, etc. All assets have debit balance. If assets increase, they are debited and if assets decrease, they are credited.
For example, furniture purchased and payment made by cheque. The journal entry is:
Payment worth Rs 1,200 through bank, supported by cheques
Deposits into bank worth Rs 500, supported by pay-in slips.
Out of the above events, only those events that can be expressed in monetary terms, are recorded in the books of accounts. However, the non-monetary events are not recorded in accounts; for example, promotion of manger cannot be recorded but increment in salary can be recorded at the time when salary is paid or due.
Source document in accounting is important because of the below given reasons.
1. It provides evidence that transaction has actually occurred.
2. It provides information about the date, amount and parties involved and other details of a particular transactions.
3. It acts as an evidence in the count of law.
4. It helps in verifying the transaction during the auditing process.
| Furniture A/c | Dr. |
| To Bank A/c |
2. Expense− It is made to run business smoothly and to carry day to day business activites.Here, furniture and bank balance, both are assets to the firm. As furniture is purchased, so furniture account will increase, and will be debited. On the other hand, payment of furniture is being made by cheque that reduces the bank balance of the business, so bank account will be credited.
All expenses have debit balance. If an expense is incurred, it must be debited.
For example, rent paid. The journal entry is:
| Rent A/c | Dr. |
| To Cash A/c |
3. Liability− Liability is an obligation of business. Increase in liability is credited and decrease in liability is debited.Here, rent is an expense. All expenses have debit balance. Hence, rent is debited. On the other hand, as rent is paid in cash that reduces the cash balances, so cash account is credited.
For example, loan taken from bank. The journal entry is:
| Bank A/c | Dr. |
| To Bank Loan A/c |
4. Income− Income means profit earned during an accounting period from any source. Income also means excess of revenue over its cost during an accounting period. Income has credit balance because it increases the balance of capital.Here, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan from bank has been credited because it increases the liabilities.
For example, rent received from tenant. The journal entry is:
| Cash A/c | Dr. |
| To Rent A/c |
5. Capital− Capital is the amount invested by the proprietor in the business. Capital has credit balance. Increase in capital is credited and decrease in capital is debitedHere, rent is an income; hence, rent account has been credited and cash has been debited, as rent received increases the cash balances.
For example, additional capital introduced by owner. The journal entry is:
| Cash A/c | Dr. |
| To Capital A/c |
As additional capital is introduced, so the amount of capital will increase, i.e. why, capital account is credited. On the other hand, as capital is introduced in form of cash, so the cash balances decrease, i.e. why, cash account is debited.
Popular Questions of Class 11 Accountancy
- Q:- Explain the qualitative characteristics of accounting information.
- Q:-
Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.
From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner. - Q:- Describe the role of accounting in the modern world.
- Q:- What do you mean by an asset and what are different types of assets?
- Q:-
Differentiate between source documents and vouchers.
- Q:-
Complete the following sentences with appropriate words:
(a) Information in financial reports is based on .....................
(b) Internal users are the ..................... of the business entity.
(c) A ..................... would most likely use an entities financial report to determine whether or not the business entity is eligible for a loan.
(d) The Internet has assisted in decreasing the ..................... in issuing financial reports to users.
(e) ..................... users are groups outside the business entity, who uses the information to make decisions about the business entity.
(f) Information is said to be relevent if it is ......................
(g) The process of accounting starts with ............ and ends with ............
(h) Accounting measures the business transactions in terms of ............ units.
(i) Identified and measured economic events should be recording in ............ order. - Q:-
What is a journal? Give a specimen of journal showing at least five entries.
- Q:-
Define accounting and state its objectives.
- Q:-
Enumerate informational needs of management.
- Q:-
Complete the following work sheet:
(i) If a firm believes that some of its debtors may ′default′, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept.
(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept.
(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept.
(iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.
(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________.
(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________.
(vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of ________ concept.
Recently Viewed Questions of Class 11 Accountancy
- Q:-
Give four examples each of ‘provision’ and ‘reserves’.
- Q:-
As an accountant of a company, you are disappointed to learn that the totals in your new trial balance are not equal. After going through a careful analysis, you have discovered only one error. Specifically, the balance of the Office Equipment account has a debit balance of 15,600 on the trial balance. However, you have figured out that a correctly recorded credit purchase of pendrive for 3,500 was posted from the journal to the ledger with a 3,500 debit to Office Equipment and another 3,500 debit to creditors accounts. Answer each of the following questions and present the amount of any misstatement :
(a) Is the balance of the office equipment account overstated, understated, or correctly stated in the trial balance?
(b) Is the balance of the creditors account overstated, understated, or correctly stated in the trial balance?
(c) Is the debit column total of the trial balance overstated, understated, or correclty stated?
(d) Is the credit column total of the trial balance overstated, understated, or correctly stated?
(e) If the debit column total of the trial balance is 2,40,000 before correcting the error, what is the total of credit column. - Q:-
What kinds of errors would cause differences in the trial balance. Also list examples that would not be revealed by a trial balance?
- Q:-
What is contra entry? How can you deal this entry while preparing double column cash book?
- Q:- What do you mean by an asset and what are different types of assets?
- Q:-
What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?
- Q:-
Who are the external users of information?
- Q:-
The accounting concepts and accounting standards are generally referred to as the essence of financial accounting. Comment.
- Q:-
If suspense account does not balance off even after rectification of errors it implies that:
(a) There are some one sided errors only in the books yet to be located.
(b) There are no more errors yet to be located.
(c) There are some two sided errors only yet to be located.
(d) There may be both one sided errors and two sided errors yet to be located. - Q:-
Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.
From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.
- NCERT Chapter