DEBIT AND CREDIT RULES

BOOKKEEPING COURSE: THE DEBIT AND CREDIT RULES

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THE DEBIT AND CREDIT RULES



  Type of Account To Debit the Account To Credit the Account
1. Personal When the person whose in whose name the account is kept is in debt to us When the person in whose name the account is kept is in credit with us
2. Real When the account received money/the equivalent When the account gives us money/the equivalent
3. Profit and Loss Any account that ends with the words 'Expense Accounts'. Any account that ends with the words 'Revenue Account'


Comprehensive Example:

1. 1.1.xx We bought goods from Waterman for an overall sum of $ 1,000 (Invoice No. 123).
2. 2.1.xx We sold part of the goods for $ 600 cash (Receipt No. 1950)
3. 3.1.xx We paid $ 200 cash for electricity expenses (Expense Voucher 001).
4. 4.1.xx We bought a store from Max for $ 20,000 (Invoice No. 953).
5. 5,1,xx We rented the store out for $ 700 cash (Invoice No.001)


We will practice making the bookkeeping records that are the subject of the above table (Comment: In the first part of the solution, the records will be presented in the form of a T account, and they will be presented textually in the second part. This will be explained more fully later on.


T ACCOUNTS



Goods   Account
   Debit Credit   
 (1) 1,000 600 (2) 
 
Waterman Account
   Debit Credit   
  1,000 (1) 
Cash   Account
   Debit Credit   
 (2) 600
 (5) 700
200 (3) 

 
Electricity Expe nses Account
   Debit Credit   
 (3) 200  
Store   Account
   Debit Credit   
 (4) 20,000  
 
Max   Account
   Debit Credit   
  20,000 (4) 
Store Ren tal Account
   Debit Credit   
  700 (5)  
 




Textual Records (Journal Entries)

  Debit Credit
(1) Debit Goods Account
     Credit: Waterman Account
1.1.xx Purchase on credit Invoice 123
1,000



1,000

(2) Debit: Cash Account
     Credit: Goods Account
2.1.xx Cash Sale, Receipt 1950
  600



600

(3) Debit: Electricity Expenses
     Credit: Cash
3.1.xx Cash payment, Expenses Voucher 001
  200



200

(4) Debit: Store Account
     Credit: Max Account
4.1.xx Purchase of Store, Account 953
20,000



20,000

(5) Debit: Cash
Credit: Income from Rental
5.1.xx Cash Rental Account 001
  700



700

  22,500

22,500



Let's go over the entries together:

Event 1:

The Goods Account (a real account) is debited - because an account was received (Rule 1 in the table).

The Waterman Account, (a personal account) is credited - as it is due to receive money (Rule 2 in the table).


Event 2:

The Cash Account (a real account) is debited - because the cash was received (Rule 2 in the table)
The Goods Account (a real account) is credited - because the warehouse issued goods (Rule 2 in the table).


Event 3:

The Electricity Expenses - (A profit and loss account) is debited - as every expense account is debited (Rule 3 in the table).

Event 4:

The Store Account (a real account) is debited - the transaction received a monetary value (Rule 2 in the table).
The Max Account (a personal account) is credited - according to Rules 1 or 2.


Event 5:

The Income from the Rental Account (a profit and loss account) is a credit - as all receipts are a credit (Rule 3 in the table).
The Cash Account is debited - according to Rule 2 in the table.

Comment: It is easy to remember that every expense account is debited (the expense is a negative matter from an economic point of view and it is a debt of the business).Similarly, all receipts are a credit (a credit is something positive from an economic point of view and it is to the credit of the business). An additional stage that should be emphasized is that the first part (the T - Accounts) in fact serve us as a draft for the purpose of illustrating the records. In actual fact, the bookkeeping records are only inwords, the professional term for each record being a "Journal Entry: (or a "journal voucher").




The Development of Bookkeeping The debit & credit rules Journal Entries Nominal Ledger Trial Balance Annual Statements (Profit & Loss/Balance Sheet) The Balance Sheet
Bank Reconciliation Salaries Tax Deduction at Source Value added tax





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