Every accounting transactions has two parties involved : Debit and Credit.
I generally believe that the debit and credit concept should be introduced to the students along with the Accounting Equation:
Asset = Liability + Equity
Following are the pointers to be kept in mind before deep diving into the world of accounts:
Asset: Refers to any item which has a future benefit. We always look into the future standing at a point. The point is the date on which I am preparing the account. eg.fixed assets,investment etc.
Liability: Refers to any liabilty to the external world by the orgnization. To determine wether a particular item is a liability we stand on a particular date and look in the future. If there is an obligation as on that date we have a liability. Equity refers to the amount invested by the shareholders/partners/sole traders in the business. This is a class of people who invest to earn profit from a business. Hence whatever profit the company earns is added to the profit.
Owners Equity: Refers to the amount of money owed to the properitor/propertiors. Readers would recall that Profit = Income - Expense
Income is the amount of money earned in a given accounting period. Period could be of any duration depending on the purpose of analysis. It should be noted that the amount received and receivable for a particular accounting period is accounted as income.
Expense refers to economic costs that is made in order to earn revenue in a given period. The word expenses is restricted to cost incurred in meeting operational need. Period could be of any duration depending on the purpose of analysis
Now the rules:
Any increase in assets and expenses needs to be debited. Any increase in liability and income needs to be credited.
Any decrease in assets and expenses needs to credited. Any increase in liability and income needs to be debited.
Accounts is prepared on double entry accounting concept. Hence every debit should have a corresponding credit.
ILLUSTRATION:
Rent expenses paid Rs. 500
The two aspects of the transaction are Rent and Cash (assumed paid in cash).
Rent is an expense hence an increase in rent needs to be debited. Cash is an asset hence decrease in cash needs to be credited.
As the purpose of this blog is to connect the concept of accounts and finance rather than getting into the nitties and grities of account I am not getting into the details of " Debit and "Credit."
I generally believe that the debit and credit concept should be introduced to the students along with the Accounting Equation:
Asset = Liability + Equity
Following are the pointers to be kept in mind before deep diving into the world of accounts:
Asset: Refers to any item which has a future benefit. We always look into the future standing at a point. The point is the date on which I am preparing the account. eg.fixed assets,investment etc.
Liability: Refers to any liabilty to the external world by the orgnization. To determine wether a particular item is a liability we stand on a particular date and look in the future. If there is an obligation as on that date we have a liability. Equity refers to the amount invested by the shareholders/partners/sole traders in the business. This is a class of people who invest to earn profit from a business. Hence whatever profit the company earns is added to the profit.
Owners Equity: Refers to the amount of money owed to the properitor/propertiors. Readers would recall that Profit = Income - Expense
Income is the amount of money earned in a given accounting period. Period could be of any duration depending on the purpose of analysis. It should be noted that the amount received and receivable for a particular accounting period is accounted as income.
Expense refers to economic costs that is made in order to earn revenue in a given period. The word expenses is restricted to cost incurred in meeting operational need. Period could be of any duration depending on the purpose of analysis
- Expenses decrease profits; while, income increase profits .
- Profit is added to the owners equity. Profit is the reward for risk the owner takes.
- Hence income increases equity and expenses decrease equity.
Now the rules:
Any increase in assets and expenses needs to be debited. Any increase in liability and income needs to be credited.
Any decrease in assets and expenses needs to credited. Any increase in liability and income needs to be debited.
Accounts is prepared on double entry accounting concept. Hence every debit should have a corresponding credit.
ILLUSTRATION:
Rent expenses paid Rs. 500
The two aspects of the transaction are Rent and Cash (assumed paid in cash).
Rent is an expense hence an increase in rent needs to be debited. Cash is an asset hence decrease in cash needs to be credited.
As the purpose of this blog is to connect the concept of accounts and finance rather than getting into the nitties and grities of account I am not getting into the details of " Debit and "Credit."
Author: Abhishek Sinha
Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience.
At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +
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