Tuesday, 3 June 2014

How to differentiate accounting entries: Which Account to be Debited or Credited?

You must have understood the Double Entry System. Every transaction has two sides. One account to be debited and the other one to be credited. So when you make some, say 10 entries, there will be 10 debit entries and 10 credit entries. The total of Debits and the total of Credits will be tallying at any point of a time. If they do not tally, it means the entries are wrong and you will have to check each entry to verify that each Debit received a corresponding Credit.

Now coming to Debit and Credit, how to know which account should be debited or credited? If you would have gone through my previous articles, you could have realized one simple point. Can you locate it?

The simple rule is Debit all payments and Credit all receipts. Are you able to realize this point?

Let me clear this point through these simple steps:

DEBITS (Payments)

  • Assets: You are making payment and receiving some asset. Payment may be whole or in parts. But you are making payment. So, debit the Asset a/c like Land, Building, Plant & Machinery, Computer, etc. or advances a/c with the amount paid.
  • Purchases of Stock: Here also paying for stock items. So debit Stock a/c.
  • Expenses: Here you are paying for the travel and tour bills, stationery items, postage and courier charges, etc. So, Debit the relevant account heads.
  • Adhoc or Advances: Sometimes you pay an amount as advance for any job or contract for executing some work or supplies. Here, you will debit the advances a/c either in the party name or by the Work name.

CREDITS (Receipts)
  • Capital or Equity: Your business receives capital or share capital for starting and running of the business. So you Credit the Capital/ Equity a/c or Share Capital a/c.
  • Liabilities: You take loans for your business. Your business receives loan. So Credit Loan a/c.Say SBI loan a/c, ICICI loan a/c, IDBI loan a/c. etc. Further, your business receives money from customers against supplies. So Credit Customer a/c by his name. 
  • Income/Revenue: You sell items or provide services and in return, receive income for those services. So Credit the Sales a/c or other income against services a/c. Or if some interest is received on FDRs or Savings A/C, etc. Credit those income accounts.
So, from the above study, you are able to see that as a beginner of accounts, it is sufficient that you remember the basic fact to Debit all payments and Credit all Receipts.

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