Rules of Debit and Credit

Posted: October 10, 2012 in Education

Rules and Prnciples of Debit and Credit

Debits and Credits
When an amount is entered on the left side of an account, it is a debit, and the account is said to be “debited“. And, when an amount is entered on the right side, it is a credit, and the account is said to be “credited“. The abbreviations for debit and credit are ‘Dr.” and “Cr.”

Whether an increase in a given item is credited or debited depends on the category of the item. By convention, asset and expense increases are recorded as debits, whereas liability, capital, and income increases are recorded as credits. Asset and expenses decreases are recorded as credits, whereas liability, capital, and income decreases are recorded as debits.

Here are the basic debit and credit rule, in graphics:

Debit and Credit – Double Entry Accounting

An account has a debit balance when the sum of its debits exceeds the sum of its credits; it has a credit balance when the sum of the credits is the greater.

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What is Ledger?
The complete set of accounts for a business entry is called a “ledger“. It is the “reference book” of the accounting system and is used to classify and summarize transactions and to prepare data for financial statements. It is also a valuable source of information for managerial purposes, giving, for example, the amount of sales for the period or the cash balance at the end of the period.

What Is Chart of Accounts?
It is desirable to establish a systematic method of identifying and locating each account in the ledger. The chart of accounts, sometimes called the “code of accounts,” is a listing of the accounts by title and numerical description.

In designing a numbering structure for the accounts, it is important to provide adequate flexibility to permit expansion without having to revise the basic system. Generally, blocks of numbers are assigned to various groups of accounts, such as assets, liabilities, and so on. There are various systems of coding, depending on the needs and desires of the company.

What is Trial Balance?
As every transaction results in an equal amount of debits and credits in the ledger, the total of all debit entries in the ledger should equal the total of all credit entries.

At the end of the accounting period, we check this equality by preparing a two-column schedule called a trial balance, which compares the total of all debit balances with the total of all credit balances.

The procedure is as follows:
* List account titles in numerical order.
* Record balances of each account, entering debit balances in the left column and credit balances in the right column.
* Add the columns and record the totals.
* Compare the totals. They must be the same.
* If the totals agree, the trial balance is in balance, indicating that debits and credits are equal for the hundreds or thousands of transactions entered in the ledger.

For example:
If the purchase of equipment was incorrectly charged to Expense, the trial balance columns may agree, but theoretically the accounts would be wrong, as Expense would be overstated and Equipment understated.

In addition to providing proof of arithmetic accuracy in accounts, the trial balance facilitates the preparation of the periodic financial statements.

Generally, the trial balance comprises the first two columns of a worksheet, from which financial statements are prepared (I will post the worksheet procedure later in another other post.)

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