Under double entry, every transaction is recorded with two effects. i.e. Debit (Dr.) and Credit (Cr.)such that the value of Debit and Credit is equal in every accounting entry.Below are examples of journal entries for injection of capital by owner and purchase of fixed assets:
In above example note that each accounting entry results in a Debit effect to one account and an equal Credit effect to another account.
The accounts in which transactions are recorded are divided into following 5 categories.
- Assets
- Liabilities
- Equity
- Income/Revenue
- Expenses
Brief description of these 5 categories is explained below:
Under double entry, every transaction is recorded with two effects. i.e. Debit (Dr.) and Credit (Cr.)such that the value of Debit and Credit is equal in every accounting entry. Below areexamples of journal entries for injection of capital by owner and purchase of fixed assets:
S.No. | Category | Description |
---|---|---|
1 | Assets | An asset is an economic resource/ valuable item controlled by entity and from which entity is deriving a benefit or is expected to derive a benefit in future.
Examples: |
2 | Liabilities | Liabilities are present or future obligation of the entity or the amount payable by the business to its finance providers, creditors, regulatory authorities.
Examples: |
3 | Equity | Equity is the residual interest of owners in the net assets(assets minus liabilities) of the entity at a particular time. It includes the capital injected by owners and any undistributed profits to date. |
4 | Income/Revenue | These are the amounts earnedfrom ordinary activities of the entity.
Example: It also includes gains from sale of any business asset. |
5 | Expenses | These are the amounts incurred during the course of ordinary activities of entity.
Examples: It also includes losses and provision as recognized under various circumstances. |
The table below summarizes the basic properties of above account types. In simple terms, DEBIT entry to a DEBIT account will increase its balance while a CREDIT entry will decrease its balance and vice versa.
S.No. | Account Type | Nature | Impact of Journal Entries |
---|---|---|---|
1 | Equity | CREDIT | DEBIT entry decreases the balance CREDIT entry increases the balance |
2 | Liabilities | CREDIT | DEBIT entry decreases the balance CREDIT entry increases the balance |
3 | Assets | DEBIT | DEBIT entry increase the balance CREDIT entry decreases the balance |
4 | Incomes/Revenues | CREDIT | DEBIT entry decreases the balance CREDIT entry increases the balance |
5 | Expenses | DEBIT | DEBIT entry increase the balance CREDIT entry decreases the balance |
For example, cash at bank is an “asset” and its nature is DEBIT. If business receives cash from any source, “cash at bank” account will be DEBITED and its value will increase. On the other hand, if business pays cash to any party, “cash at bank” account will be CREDITED and its balance will decrease.
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