Page 138 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 7: Accounting for Banking Companies

In accounting, debit means one thing: left-hand side. Credit means one thing: right-hand side. notes
When you receive cash – a “good” thing – you increase the Cash account by debiting it. When
you use cash – a “bad” thing – you decrease Cash by crediting it. On the other hand, when you
make a sale, which is nice, you credit the Sales account; when someone returns what you sold,
which is not nice, you debit sales.

“Good” and “bad” have nothing to do with debit and credit.
Debit = Left; Credit = Right. That’s it. Period.

Accrual vs. Cash Basis Accounting: As we’ve seen, deciding when an economic event occurs and
an accounting transaction should be recorded is a matter of judgment. Accrual accounting looks
to the economic reality of the business, rather than the actual inflows and outflows of cash.
Although cash basis statements are simpler and make good sense for many individual taxpayers
and small businesses, it results in misleading financial statements. Consider a Halloween
costume maker: it conceives, produces and sells costumes throughout the year, but gets paid for
its costumes mostly in October. If sales were recognised only when cash was received, October
would show an enormous profit while all other months would show losses. Accrual accounting
seeks to match the revenues earned during a period with the expenses incurred to generate them,
regardless of when cash comes in or goes out.

rules for ‘Debit’ and ‘credit’

l z Personal Account: Debit the receiver (on sale of goods on credit to a person, his account
would be debited). Credit the giver (on purchase of furniture on credit, the seller’s account
is credited).

l z Real Account: Debit what comes in (when cash is received, cash account is debited). Credit
what goes out (when furniture is purchased for cash, the cash account is credited).

l z Nominal Account: Debit all losses and expenses (when salary is paid to an employee
instead of his personal account, the salary expenses account is debited). Credit all gains and
income (when commission is received, the commission account is credited rather than the
person, from whom the commission is received) below is given Table 7.1 and 7.2 showing
the summary of debit and credit to various accounts and journal entries, respectively.
table 7.1: summary of effect of Debit & credit to various accounts

Name of the account Effect on balance when Effect on balance when
account is debited account is credited
Asset accounts Balance Increases Balance Decreases
Liability Accounts Balance Decreases Balance Increases
Capital Account Balance Decreases Balance Increases
Expenses Account Balance Increases Balance Decreases
Income or revenue a/c Balance Decreases Balance Increases

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