Illustration 5. Analyse the following transactions, state the nature of accounts and state whig ‘account will be debited and which account will be credited on the basis of Modes” Classification of Accounts: zm 1. Dinesh started business with cash 5,00,009 2. Borrowed from Naresh 1,00,009 3. Purchased furniture for cash from Raj Furniture House 20,009 4. Purchased furniture from Delhi Safe 40,009 5. Purchased goods for cash © 15,009 6. Purchased goods from Mahesh 30,009 7. Sold goods for cash to Karim 25,000 8. Sold goods to Shyam on credit 30,000 9. Cash received from Shyam 20,000 10. Cash paid to Mahesh 10,000 Solution: ANALYSIS OF TRANSACTIONS. Transactions ‘Accounts ‘Nature of How Debit Credit Invohved ‘Account Affected z z 1. Dinesh started business | Cash Asset Increased 5,00,000 with cash 7 5,00,000. Capital Capital | Increased 5,00,000 2 Borrowedtrom Naresh | Cash Asset Increased 1,00,000 2 1,00,000. Loan from Naresh | Liability Increased 1,00,000 @ Purchased umiture for | Furniture Asset Increased 20,000 % 20,000 in cash from | Cash Asset Decreased 20,000 Raj Furniture House. 4, Purchased furiture trom | Fumiture ‘Asset Increased 40,000 Dethi Safe for % 40,000. | Delhi Safe Liability increased 40,000 5. Purchased goods for Purchases Expense Increased 15,000 cash? 15,000. Cash Asset Decreased 16,000 6, Purchased goods trom | Purchases Expense Increased 30,000 Mahesh 7 30,000. Mahesh Liability Increased 30,000 7. Sold goods for cash Cash ‘Asset Increased 25,000 to Karim 2 25,000. Sales Revenue Increased 25,000 @, Sold goods to Shyam | Shyam Asset Increased "30,000 FD on credit & 30,000. Sales Revenue Increased 30K 9, Cash received from Cash Asset Increased 20,000 0 ‘Shyam 2 20,000, Shyam Asset Decreased 20 10, Cash paid to Mahesh Mahesh Liability Decreased) | 10,000 ) Scanned with CamScannereC ‘accounting Procedures—Rules of Debit and Crodit Illustration 6. ‘Analyse the following transactions, state the nature of accounts and state which 69 account will be debited and which account will be credited: im 1, Anuj started business with cash 1,00,000 2, Deposited cash into bank for opening an account 50,000 3, Withdrew cash for personal use 5,000 4, Withdrew cash from bank for office use 10,000 5. Received a cheque from debtor Shyam 5,000 6. Deposited Shyam’s cheque next day. 7, Paid to a creditor Mahesh by cheque 10,000 8, Paid salary to staff 20,000 9. Paid rent by cheque 6,000 10. Paid interest on loan 5,000 Solution: ANALYSIS OF TRANSACTIONS Transactions Accounts Nature of How Debit Credit Z Involved ‘Account | Affected z z | Ai Anujstarted business | Cash Asset Increased | 1,00,000 |. with cash & 4,00,000. | Capital Capital | Increased 400,000 | 2. Deposited cash into bank | Bank Asset Increased 50,000 | %50,000 for opening an | account. Cash Asset Decreased 50,000 3, Withdrew cash for Drawings Capital Decreased 5,000 personal use €5,000, | Cash Asset Decreased 5,000 4, Withdrew cash from bank | Cash Asset Increased 10,000 | foroffice use ® 10,000. | Bank Asset Decreased 10,000 5. Received a cheque from | Cash/Cheques in Hand | Asset Increased 5,000 debtor Shyam % 5,000. | Shyam. Asset Decreased 5,000 8, Deposited Shyam’s Bank Asset Increased 5,000 cheque next day. CastvCheques in Hand | Asset Decreased 5,000 7. Paid to a creditor Mahesh | Mahesh ibility Decreased 10,000 by cheque 10,000. | Bank Asset Decreased 10,000 8. Paid salary to staff Salary Expense | Increased 20,000 20,000, Cash Asset Decreased 20,000 9 Paid rent by cheque Rent Expense Incréased 6,000 6,000, Bank Asset Decreased 6,000 10. Paid interest on loan Interest Expense |. Increased 5,000 5,000, Cash Asset Decreased 5,000 Scanned with CamScannerB. Modern Approach Under this approach all the ace Modern Classification of Accounts Y Y + | Revenue Accounts Expense Accounts ounts are classified into the following five category y Y Asset Accounts Liability Accounts Capital Accounts 1. Asset Accounts. Asset accounts are those accounts which relate to the economic resources of an enterprise such as Land and Building, Plant and Machinery Furniture, Patents, Inventory, Bank and Cash, etc. [ute of Debit and Credit—Debit the increases and Credit the decreases. 2, Liability Accounts. Liability accounts are accounts of lenders, creditors for go outstanding expenses, etc. Rule of Debit and Credit—Debit the decreases and Credit the increases. 3 Capital Accounts. These are the accounts of proprietors/partners who have invested amount in the business. It includes both Capital and Drawings Account. [ Rule of Debit and Credit—Debit the decreases and Credit the increases. 4. Revenue Accounts. These are accounts of incomes and gains. Examples ave: Sales Discount received, Interest received, commission received, bad debts recovered, & [ute of Debit and Credit—Debit the decreases and Credit the increases. Scanned with CamScannerp procedures—Rules of Debit and Credit 6.7 courting pxpense Accounts. These are the accounts of expenses or losses incurred in 5 “Trying the business. Examples are: Purchases, Wages, salaries, Depreciation, piscount allowed and Rent, ete. [ Fuule of Debit and Credit—Debit the increases and Credit the decreases. rules for Debit and Credit (Modern Classification) at a Glance Types of Account Accounts to be Debited Accounts to be Credited ' 7 fssel Accounts Increase Decrease % liability Accounts Decrease Increase 7% Capital Accounts Decrease Increase ZF Revenue Accounts Decrease Increase Expense Accounts Increase Decrease Itshould be noted that an increase in assets is favourable to the firm but an increase in expenses may not be so, even though in both the cases, increase will be recorded on the debit side. Similarly, increase in liabilities is, of course, not favourable but an increase in revenue is favourable. Nonetheless, both will be recorded on the credit side. ‘Thus, the terms ‘debit’ and ‘credit’ should not be taken to mean respectively favourable and unfavourable—they merely describe the two sides of an account. In other words, both debit and credit may represent either increase or decrease depending upon the nature of an account. Scanned with CamScanner