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.
Differentiate between source documents and vouchers.
What is a journal? Give a specimen of journal showing at least five entries.
Voucher is prepared from:
(i) Documentary evidence
(ii) Journal entry
(iii) Ledger account
(iv) All of the above
A purchase of machine for cash should be debited to:
(i) Cash account
(ii) Machine account
(iii) Purchase account
(iv) None of these
The journal entry to record the sale of services on credit should include:
(a) Debit to debtors and credit to capital.
(b) Debit to cash and Credit to debtors.
(c) Debit to fees income and Credit to debtors.
(d) Debit to debtors and Credit to fees income.
Select Right Answer:
Voucher is prepared for:
(i) Cash received and paid
(ii) Cash/Credit sales
(iii) Cash/Credit purchase
(iv) All of the above
Should a transaction be first recorded in a journal or ledger? Why?
Cash withdrawn by the Proprietor should be credited to:
(i) Drawings account
(ii) Capital account
(iii) Profit and loss account
(iv) Cash account
What entry (debit or credit) would you make to:
(a) increase revenue
(b) decrease in expense,
(c) record drawings
(d) record the fresh capital introduced by the owner.
Choose the Correct Answer :
The ledger folio column of journal is used to:
(a) Record the date on which amount posted to a ledger account.
(b) Record the number of ledger account to which information is posted.
(c) Record the number of amounts posted to the ledger account.
(d) Record the page number of the ledger account.
Name any two types of commonly used negotiable instruments.
Why is it necessary to record the adjusting entries in the preparation of final accounts?
State the meaning of incomplete records?
What is ‘Depreciation’?
Briefly state how the cash book is both journal and a ledger.
State the meaning of a trial balance?
State the four basic requirements of a database applications.
Define accounting.
State the different elements of a computer system.
Why is it necessary for accountants to assume that business entity will remain a going concern?
What is Accounting Information System?
Describe the purpose for the preparation of trial balance.
State the relationship between information and decision.
‘An organisation is a collection of interdependent decision-making units that exists to pursue organisational objectives’. In the light of this statement, explain the relationship between information and decisions. Also explain the role of the Transaction Processing System in facilitating the decision-making process in business organisations.
Name any two types of commonly used negotiable instruments.
Explain the concept of cost of goods sold?
Explain the development and role of accounting.
List any five users who have indirect interest in accounting.
You are a senior accountant of Ramona Enterprises Limited. What three steps would you take to make your company’s financial statements understandable and decision useful?
1. ——————————————————————————————
2. ——————————————————————————————
3. ——————————————————————————————
[Hint : Refer to qualitative characteristics of accounting information]
Enumerate informational needs of management.