wae LEARNING OBJECTIVES This Chapter would enable you to understand: Q Meaning of an Account © O Meaning of Debit and Credit D Rules of Debit and Credit Q Classification of Accounts Balancing an Account Q Significance of Debit and Credit Balance in Accounts Transactions are recorded in the books of account on the basis of evidences, i.e., source documents, such as invoices for purchases, invoices for sales, debit and credit notes, etc. Rules of debit and credit are applied to each transaction and recorded in the book of original entry, i.e., Journal or Special Purpose Books in a chronological order. The transactions recorded in the books of account are transferred (posted) to the specific account maintained in the Ledger. At this stage, it is appropriate to define and understand the term ‘account’. RT BEDE Account is a record of transactions under a particular head. It records not only the amount of transactions but also their effect and direction. An account is divided into two parts, i.e., debit and credit. It is usually in a ‘T’ form and the commonly used layout of an account is as follows: Dr. NAME OF THE ACCOUNT, e.g, WAGES ACCOUNT Gr. Date" ]IPatiouars JF. ‘Amount ‘Date Particulars JF. | Ariount Date of | Name ofthe Pageor | Amountof [Dateof | Nameofthe | Page or | Amount of the other account Reference © | the the other account | Reference |the ‘transaction Number of transaction | transaction ‘Number of | transaction’ j the Subsidiary ‘the Subsidiary) Book, Book, where where the entry the entry was first was first rf fecorded, recorded G Cash 2.95 Cash, | Book Book ii Scanned with CamScannerq \% What has been done is piace? 6.2 Double Entry Book Keeping—CAse y Paowine points stout ine layout of acrount should be noted: ritten at the top. « Account is divided into two identical halves, separated by a thick vertical lin « Left hand side is called the debit side (‘debit’ is abbreviated as ‘Dr.’). : « Right hand side is called the credit side (credit’ is abbreviated as ‘Cr.). « Date of the transaction is entered in the column for ‘Date’. « Inthe ‘Particulars’ column, the name of the other account involved in the transaction is entered. « The ‘folio’ or Journal Folio (J.F.) column is used as a re! nal entry was recorded in the Journal Book. dis written. ferencing system where the origi « In the last column, the amount transacte It is illustrated below by taking imaginary amounts: Dr. CASH ACCOUNT G Date _| Increase ar] © [date Decrease JFL 2018 2018 ‘April 1} Opening Balance 4,00,000 April 2 | Payments for Purchases ‘April 3| Cash Sales of Goods '50,000| Apri! 4 Payments to Creditors | ‘April 10} Receipts from Debtors 70,000 | April 7 | Wagesand Salaries | ‘April 14) Receipts from Commission 20,000 April 28 | Rent ‘April 21| Sale of Fixed Assets 0.000 | April 29] Postage | ‘April 27] Commission 5,000 | April 29] Cartage April 30 | Closing Balance ses in cash on the left hand side (ie., Receipts side or Debit side) and the ‘decreases on the right hand side (i.e. Payments side or Credit side). The closing balance is ascertained by deducting the total of payments, Z 1,05,000 from the total of the left hand side, % 2,75,000. Nein aedz DEBIT/AND) CREDIT, he increa: ie of an account and credit refers to the right side of an account. In the abbreviated form Dr. stands for debit and Cr. stands for credit. An jtem recorded on the debit side of an account is said to be debited to the account. An item recorded on the credit side of an account is said to be credited to the account. Both debit and credit may represent either increase or decrease dependin: the F 5 1g upon nature of an account. The rules of debit and credit depend on the nature of account: Debit refers to the left sid RULES OF DEBIT AND CREDIT Une Oe ae of ‘accounting each transaction has two aspects. One aspect ei oH L is aed eae ae aspect. Another aspect is credit, i.e., giving or outgoing spect. spects of a transaction form the basis of Double Entry System. Scanned with CamScannerEE EE EEE OL Accounting Procedures—Rules of Debit and Credit 63 Rules of Double Entry or Rules of Debit and Credit are formed on the basis of these two aspects in each of the business transactions. There are two approaches for deciding when to write on the debit side of account and when to write on the credit side of an account, i.e., which account is to be debited and which account is to be credited. The rules on the basis of which such decision is taken are called ‘Rules of Debit and Credit’. GLASSIFICATION/OF/ACCOUNT: Accounts can be classified in two ways: 1. Traditional Approach (English Approach); and 2. Modern Approach (Accounting Equation Approach or American Approach). 1. Traditional Approach (English Approach) Under this approach, accounts are classified into two groups as shown below: ‘Traditional Classification of Accounts "2 Personal Accounts Impersonal Accounts Natural Personal Artifical Personal Representative Real Nominal ‘Accounts ‘Accounts Personal Accounts. Accounts Accounts Personal Accounts 1. Personal Accounts: Accounts which relate to persons, i.e., individuals, firms, companies, debtors or creditors, etc., are Personal Accounts. Examples of Personal ‘Accounts are the account of Ram & Co., a customer (Debtor), or the account of Jhaveri & Co,, a supplier of goods (Creditor), Capital Account and Drawings Account of the proprietor. The main purpose of preparing a Personal Account is to determine the balance due to or due from persons or organisations. Personal Accounts can be classified into three categories: () Natural Personal Accounts: The term ‘Natural Persons’ means persons who are creations of God. Therefore, these will include accounts in individual name. For example, Ram's Account, Asha’s Account, etc. (ii) Artificial Personal Accounts: These accounts include accounts of corporate bodies or institutions which are recognised as persons in business dealings. For example, the account of a limited company, the account of a club or a cooperative society, etc, (iii) Representative Personal Accounts: Thése are accounts which represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account will be opened in the books, The Outstanding Rent Account represents the amount of rent payable to the landlord. Other examples of the Representative Personal Accounts are Prepaid Rent Account, Accrued Commission Account, Uneared Interest Account, ete. Scanned with CamScanner6.4 2. Impersonal Acc Account, Cash Accoui ‘These can be further (i) Real Accounts: intangible asset: are: land, building, investments, les of intangible assets are: goodwill, patents Exampl Rule of Debit (ii) Nominal (Revenue or Exp revenue, etc., are terme losses, gains, Account, Purchases Account, ssion Received Account. Tl Commi: or loss which is transferrs Double Entry Book Keeping—CBSE y, vy ounts: Accounts which are not personal such as Machine, ‘nt, Rent Account, etc., are termed as ‘Impersonal Accounts. sub-divided into two accounts: j Real Accounts are the accounts which relate to tangible or 5 of the firm (excluding debtors). Examples of tangible asset plant and machinery, stock or cash in hand, and trademarks. and Gredit—Debit what comes in, Credit what goes out. | | .counts which relate to expenses, inal Accounts. These are Salary Sales Account and 1 Accounts is profit | ense) Accounts: Ac das Nomi Interest Paid Account, ‘he net result of all the Nominal ed to the Capital Account. If a prefix or suffix ( it becomes a Personal Rule of Debit and Credit— Outstanding, Prepaid or Accru Debit all expenses and losses, Credit all incomes ‘and_ gains. ed) is added to a Nominal Account, 1 Account. The table given below explains the above: Personal Account ‘Nominal Account 41. Interest Ac Outstanding Interest A/c, Inerest Received in Advance A/c, Prepaid Interest Ae 2. Rent Ac ‘Ouistanding Rent Alc, Prepaid Rent Ac 3 Salary Alc ‘Outstanding Salaries A/c, Prepaid Salaries A/c Commission Ale Ouistanding Commission Alc, Prepaid Commission Alo Rul les of Debit and Credit (Traditional Classification) at a Glance Types of Account “Account o be Debited ‘Aocount to be Credited 1. Personal Account Receiver Giver 2. Real Account What comes in What goes out “3. Nominal Account Expense and Loss Income and Gain Illustration 1. Classify the following into Personal, Real and Nominal Accounts: @® Cash (ii) Bank A/c (vii) Drawings A/c (xiii) Capital (viii) Discount Received (xiv) Interest (Paid) (iii) Outstanding Salaries (ix) Bad Debts Written off (xv) Bank Overdraft (iv) Sales Alc (x) Purchases Alc (evi) Prepaid Rent (v) Accrued Interest A/c (xi) Bad Debts Recovered (xvii) Carriag® Inwa (vi) Leasehold Property (vii) Plant and Machinery (xviii) Goodwill Scanned with CamScannerAccounting Procedures—Rules of Debit and Credit 65 Solution: Personal Accounts Real Accounts ‘Nominal Accounts (xi) Capital (i) Cash (xiv) Interest (Paid) (vi) Drawings Alc (xvi). Goodwill (vii) Discount Received (i) Bank Ne (xi) Plant and Machinery (ix). Bad Debts Written off (oa) Bank Overdraft (vi) Leasehold Property (() Purchases Ale (ii) Outstanding Salaries (id) Sales Ale (xvi) Prepaid Rent (evil) Carriage Inwards (v)_ Accrued Interest Alc (x)_ Bad Debts Recovered Each transaction involves two or more accounts. After ascertaining the accounts involved, it is decided which account is to be debited and which account is to be credited. Illustration 2. State the nature of account (Personal, Real or Nominal) and show which will be debited and which will be credited: (@® Rent received (vi) Interest received (ii) Machinery purchased (vii) Building sold (iii) Goods purchased (viii) Discount allowed (iv) Capital introduced (ix) Goods sold (v) Rent paid Solutio Accounts Nature of Accounts Debited/Credited (i) Rent Received Alo Nominal Credited (i) Machinery Alc Real Debited (ili) Purchases A/c Nominal Debited (id) Capital Nec Personal Credited (Rent Paid Ale Nominal Debited (i) Interest Received Alc Nominal Credited (vil) Building Nc Real Credited (vii). Discount Allowed Alc Nominal Debited (3), Sales Ne Nominal Credited Illustration 3. From the following transactions, state the nature of accounts and state which account will be debited and which account will be credited: 1. Mr. Mohan started business with % 5,00,000 in cash. . Purchased goods for cash ¥ 1,00,000. . Sold goods for cash % 1,50,000. . Received interest from Ram in cash % 500. . Sold goods to Ashok for & 60,000. . Purchased furniture for cash % 50,000. . Paid wages & 20,000. noone en Scanned with CamScannereee reer eee *% 1 66 Double Entry Book Keeping—case,V ee ANALYSIS OF TRANSACTIONS wunts | Natureot | Debit | Credit Reason on itvohed Account z z 5,00,000 Comes i 1. Mr. Mohan started business Cash Real : Pion lias in wih &5,00,000in cash Capital | Person 00 sed goods for cash Purchases | Nominal | 1,00,000 Expenses . Poot. Cash Real 1,00,000 | Goes out ‘Sold goods for cash & 1,50,000. Cash Real 1,50,000 Comes _o Sales Nominal 1,50,000 | Income Real 500 Comes in ae Receiver 000. | Ashok Personal 60,000 fe Sales Nominal 60,000 | Income Real 50,000 Comes in ‘ eae Gash | Roa 50,000 | Goes out Wages | Nominal 20,000 Expenses 7. Paid wages & 20,000 Wag Nea mon | ot odern Approach Under this approach alll the accounts are classified into the following five categories Modern Classification of Accounts { \ 5 x { 1 1 Asset Accounts _‘Liabilty Accounts «Capital Accounts «Revenue Accounts. Expense 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, ete. | L Rule of Debit and Credit—Debit the increases and Credit the decreases. 2, Liability Accounts. Liability accounts are accounts of lenders, creditors for good outstanding expenses, etc. ii Rule of Debit and Credit—Debit the decreases and Credit the increases. J 3. Capital Accounts. These are the accounts of i . Pproprietors/part: 0 have invested amount in the business. It includes both ee Capital and Drawings Account. Rule of Debit and Credit—Debit the decrecses and Credit the inereasts. J 4. Revenue Accounts. These are accounts of incomes and gains. Examplos are: Sall® Discount received, Interest received, commission received, bad debts recovered. et: Rule of Debit and Credit—Debit the decreases and Gredit the increast® h » Scanned with CamScannerEaso""_" ..}}}}}}§=©&=&=&©&°& Accounting Procedures—Rules of Debit and Credit 67 5. Expense Accounts. These are the accounts of expenses or losses incurred in carrying the business. Examples are: Purchases, Wages, salaries, Depreciation, Discount allowed and Rent, etc. Rule 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 4, Asset Accounts Increase Decrease 2, Liability Accounts Decrease Increase 3. Capital Accounts Decrease Increase 4, Revenue Accounts Decrease Increase 5, Expense Accounts Increase Decrease It should 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 n the debit side. Similarly, increase in liabilities is, of course, not ease in revenue is favourable. Nonetheless, both will be de. Thus, the terms ‘debit’ and ‘credit’ should not be taken urable and unfavourable—they merely describe the two her words, both debit and credit may represent either 1g upon the nature of an account. rules of debit and credit is as follows: recorded o1 favourable but an incr‘ recorded on the credit si to mean respectively favo sides of an account. In ot increase or decrease dependin, Another way to understand the Rules of Debit and Credit [Assets = Liabilties + Capital + Profits ~ Losses (1) Assets (2) Liabilities Debit Credit Debit Credit Increase (+) Decrease(-) Decrease (-) Increase (+) (3) Capital Debit Credit Decrease (-) Increase (+) (4) Expense (Loss) (6) Revenue Debit Credit Debit Credit Increase (+) Decrease (-) Decrease (-) Increase (+) I} Study the following Illustrations ‘and observe how increase and decrease in various accounts are debited and credited. Illustration 4. On which side will the increase in following accounts be recorded? ‘Also, mention the nature of the account on the basis of Modern Classification of Account: = (i) Buildings A/c (ii) Creditor’s Ale (iii) Abhishek (Proprietor) (iv) Purchases A/c (v) Carriage Inwards A/c (vi) Cash A/c (oii) Rent Received Ale (viit) Interest Payable Ale (ix) Bills Payable A/e Debtors Ale (ei) Accrued Commission A/c (xii) Bills Receivable A/c Scanned with CamScanner68 Solutio: @ Debit—Asset (iv) Debit—Expense (vii) Credit—Revenue (x) Debit—Asset (viii) Credit (ii) Credit—Liability (v) Debit—Expense (xi) Debit—Asset Double Entry Book Keeping—Case a (iii) Credit—Capital (vi) Debit—Asset (ix) Credit—Liability (xii) Debit—Asset _—Liability Illustration 5. Analyse the following transactions, state the nature of accounts ang state which account will be debited and which account will be credited on the basis of Modern Classification of Accounts: 1. Dinesh started business with cash % 5,00,000. 2, Borrowed from Naresh & 1,00,000. | 3, Purchased furniture for % 20,000 in cash from Raj Furniture House. | 4. Purchased furniture from Delhi Safe for € 40,000. 5. Purchased goods for cash 15,000. 6. Purchased goods from Mahesh 30,000. 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 Involved Account Mfected z t 1. Dinesh started business | Cash Asset Increased 5.00.0 00,000 s an = ; 5,00,000, Capital Capital increased soot Borrowed from Naresh | Cash ‘Asset increased = %1,00.000. Loan trom Naresh | Liability Increased a 4,00,000 ‘3. Purchased {furniture for | Furniture ‘Asset — %20,000 in cashfrom | Cash Asset incressed 20,000 Raj Furniture House. 2% Decreased 20,000 4. Purchased furniture from | Fumitur Delhi Sate for? 40,000. | Det Sate = Increased 40,000 5 Purcased pots or | Paha ly increased 40,000 cash 815,000. Expense increased ri Cash Asset De 5,000 @ Purchased goods om | Purchases ecreased 45,000 Mahesh & 30,000. Expense Increased Mahesh Liability 30,000 7. Sold goods for cash Cash Increased 230,000 to Kanm & 25,000. Sales Asset Incteased 25,000 Revenue i , 8. Sold goods to Shyam ‘Shyam increased 25,000 on cred ® 20,000 Sales fe Increased 30,000 9. Cash received from Cash mene Increased 30,000 Shyam & 20,000 Shyam he Increased 20,000 10. Cash paid to Mahesh | Mahesh abit essa 00 it z cae y Decreased 70,000 et Decreased SO Scanned with CamScannerAccounting Procedures—Rules of Debit and Credit Jilustration 6. Analyse the following transactions, state which account will be debited and which account will be credited: 1, Anyj started business with cash % 1,00,000. 69 state the nature of accounts and 2. Deposited cash into bank % 50,000 for opening an account. 3. Withdrew cash for personal use € 5,000. 4, Withdrew cash from bank for office use € 10,000. a7 ‘ 5. Received a cheque from debtor Shyam % 5,000. fhegs “ 6. Deposited Shyam’s cheque next day. Be 7, Paid to a creditor Mahesh by cheque % 10,000. 8, Paid salary to staff € 20,000. 9, Paid rent by cheque Z 6,000. 10, Paid interest on loan % 5,000. Solution: ANALYSIS OF TRANSACTIONS Transactions Accounts ‘Nature of How Debit Credit Involved Account Affected z g 1. Anuj started business | Cash Asset Increased 1,00,000 with cash & 1,00,000. Capital Capital Increased 1,00,000 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 for office 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 6. Deposited Shyam's Bank Asset Increased 5,000 cheque next day. CashiCheques in Hand | Asset Decreased 5,000 7. Paid to a creditor Mahesh | Mahesh ability Decreased 10,000 by cheque & 10,000. Bank Asset Decreased 40,000 8. Paid salary to staff Salary * Expense Increased 20,000 © 20,000. ‘Cash Asset Decreased 9. Paid rent by cheque Rent Expense | Increased % 6,000. Bank Asset Decreased 10. Paid interest on loan Interest Expense Increased 75,000. | Cash Asset Decreased Scanned with CamScanner