Accounting - Basics - Deloitte. 1
Accounting - Basics - Deloitte. 1
Accounting - Basics - Deloitte. 1
Recording
• Process in which the financial transactions and
events that are identified are recordedin Books
• These typically would be
– Cash Book/ Bank Book
– Purchase and Sales Books
– Bills Receivable and Bills Payable Books
– Purchase and Sales Return Books
– Journal Book (other than above)
Classifying
• Process where transactions or entries ofone
or similar nature are grouped.
• The book containing classified informationis
called “Ledger”.
• For Example, there may be separate account
heads for Sales, Purchases, GST,Salaries,
Rent, Office Expenses, Taxes Paid,
Advertisement expenditure etc.,
Summarizing
• Involves preparation and presentation of the
Classified Data in a manner useful to various
internal and external users.
• Leads to the preparation of the following
financial statements
o Trial Balance
o Profit and Loss Account
o Balance Sheet
o Cash-Flow Statement
Analysis & Interpretation
Accounts
Debit/Credit Rule Applied
Involved
• Mitra Agencies • Debit • Personal a/c-
A/c Debit the
Receiver
• To Bank a/c • Personal a/c-
• Credit Credit the
Giver
Real Accounts
• All assets of a firm, which are tangible or intangible,fall
under the category “Real Accounts“.
Accounts
Debit/Credit Rule Applied
Involved
• Salaries a/c • Debit • Nominal a/c-
Debit all
expenses
• To Cash a/c • Credit
• Real a/c-
Credit what
goes out
Basic Accounting Rules
Credit Debit
Expenditure
Income
Liability Asset
25
Rules of Accounting
Type of Account Debit Credit
Voucher Entry
Posting
Balancing
Trial Balance
Credit Debit
P & L Account
Balance Sheet 30
Ledger Grouping
Income Expenditure
Groups Groups
Asset Group
Liability
Group
Profit and Loss Account(P&L)
Incom Expenditure
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Debit and credit are related to the terms used in Italy 500 years ago to record business transactions using the double-
entry system of accounting. Today, you should memorize the following meanings:
An amount recorded on the left side of an account is said to have been debited to the account, or that the amount
was a debit (or debit entry) in the account. An amount recorded on the right side of an account is said to be a
credit entry, a credit, or that the account was credited.
It is important that you do not think that a debit is “good” or “bad”. Similarly, you should not think of a credit as
being “good” or “bad”.
Account
An account is a record in which the amounts from a company’s transactions are posted (or recorded) in order to
sort and store similar amounts. The following are common account titles: Cash, Accounts Receivable, Accounts
Payable, Loans Payable, Sales, Advertising Expense, Rent Expense, Interest Expense, and perhaps hundreds more.
When we use the term accounts, we are referring to the general ledger accounts. In the past, the general ledger
was a ledger book with paper pages, but today it is likely to be a computer file ordatabase.
A simple listing of the general ledger account titles and account numbers that are available for use is the chart of
accounts.
The double-entry system requires that the amount(s) in a transaction must be entered in the general ledger
accounts as a debit and as a credit in another account(s). In other words, every transaction will involve:
Example #2.
When a company pays $1,000 for a loan payment consisting of $100 of interest and $900 of principal the company
will record a debit of $100 in the account Interest Expense, a debit of $900 to Loans Payable, and a credit of
$1,000 in the account Cash.
It is common for inexpensive, yet sophisticated accounting software to use the double-entry system, however, it
may prompt you for only one account name or number. For example, if the software prepares a check, it will
automatically credit the account Cash when the check is written. Therefore, the software requires that you enter
only the account or accounts to be debited.
Stockholders’ equity accounts, which also appear on the right side of the accounting equation, will usually have their
account balances on the right side.
• Cash
• Accounts Receivable
• Inventory
• Prepaid Expenses
• Investments
• Land
• Buildings
• Furniture and Fixtures
• Vehicles, and more
Generally, asset accounts will have debit balances and their account balances will be increased with a debit entry.
Therefore, a credit entry will decrease the asset’s normal debit balance.
There are a few asset accounts that are expected to have credit balances. These are known as contra-asset
accounts. Two examples of contra-asset accounts include:
• Allowance for Doubtful Accounts (which relates to the debit balance in Accounts Receivable)
• Accumulated Depreciation (which relates to the debit balances in the accounts Buildings, Equipment,
Vehicles, etc.)
These contra-asset accounts will be credited instead of crediting the related asset accounts.
Liability Accounts Will Likely Have CreditBalances
• Accounts Payable
• Loans Payable (or Notes Payable)
• Interest Payable
• Wages Payable
• Income Taxes Payable
• Accrued Expenses Payable (or Accrued Liabilities)
• Deferred Revenues, and others
Generally, liability accounts are expected to have credit balances and their account balances will be increased with a
credit entry. To decrease a liability account’s balance a debit entry is needed.
• Common Stock
• Paid-in Capital in Excess of Par
• Retained Earnings
• Accumulated Other Comprehensive Income
• Mary Smith, Capital
Generally, these accounts are expected to have credit balances and their account balances will be increased with a
credit entry. To decrease one of these accounts a debit entry is needed.
Note: Treasury Stock and Mary Smith, Drawing are two contra-equity accounts that are expected to
have debit balances.
• Sales
• Service Fees Earned
• Fee Revenues
• Interest Income
Revenue accounts will have credit balances and their account balances will be increased with a credit entry. Revenue
accounts have credit balances because revenues increase stockholders’ (or owner’s) equity.
There are a few revenue accounts that will have debit balances. Two examples are:
• Sales Discounts
• Sales Returns and Allowances
Revenue accounts that are expected to have debit balances are know as contra-revenue accounts. These accounts
are debited because they cause a decrease in the expected credit balances of the stockholders’ (or owner’s) equity
accounts.
The following are just a few of the many general ledger accounts for expenses:
• Salaries Expense
• Rent Expense
• Utilities Expense
• Repairs and Maintenance Expense
• Advertising Expense
• Depreciation Expense
• Interest Expense
• Income Tax Expense
The accounts for expenses will have debit balances and will almost always be debited. Expenses have debit balances
because they decrease the normal credit balances of stockholders’ (owner’s) equity.
Since many business transactions involve cash, a good place to begin learning debits and credits is with the general
ledger account Cash. Since Cash is an asset account:
• Cash will be debited when cash is received. (Recall that a debit will increase an asset account’s balance.)
• Cash will be credited when cash is paid out. (Recall that a credit will decrease an asset account’s balance.)
In our earlier examples, a company borrowed money from its bank. The account Cash has to be debited because
the company is receiving Rs. 5,000 of cash from its bank. Because of double-entry accounting, another account will
be credited for Rs. 5,000. In this case, the company should credit Loans Payable or Notes Payable. This credit
makes sense because the balance in a liability account needs to be increased.
In our other example, when a company pays a bill, the asset account Cash needs to be credited for
Rs. 1,000 in order to reduce this asset’s normal debit balance. Therefore, one or more accounts will need to be
debited. Since Rs. 100 of the payment was for interest, the account Interest Expense will be debited. The Rs. 900
principal repayment will be debited to the liability account Loans Payable. (Recall that liability accounts are
decreased with a debit entry.)
If a company makes a cash sale of Rs. 500, the company will debit Cash for Rs. 500 because the company is
receiving cash and needs to increase the balance in the asset account Cash. The double-entry system requires that
another account be credited. In this situation, the account to be credited is Sales. (Recall that revenue accounts
are almost always credited. Also recall that revenue accounts are credited since they increase the normal credit
balance in the equity accounts.)
If a company buys a new machine at a cost of Rs. 20,000 by writing a check for Rs. 12,000 and promising to pay
Rs. 8,000 in six months, the company will debit the asset Machinery for Rs. 20,000; credit Cash for
Rs. 12,000; and credit Loans Payable or Notes Payable for Rs. 8,000.
You might think of the acronym DEAL when learning which accounts will be increased with a debit
entry. Use the first letter from the following four types of accounts to spell D-E-A-L:
DividendsExpensesAssets Losses
You could think of the acronym GIRLS when learning which accounts will be increased with a credit
entry. Use the first letter from the following five types of accounts to spell G-I-R-L-S:
Gains
Income
Revenues
Liabilities
Stockholders’ (or owner’s Equity)
Trial Balance
If each transaction is recorded with debits equal to credits, and there are no math errors in calculating the account
balances, then the accounts will be in balance. A trial balance is an internal report that lists all of the account
balances in the respective debit or credit column. The amounts in each column should sum to the same total.
(Today’s popular accounting software is programmed
to require debits to be equal to credits and the account balances will be computed without error.
Therefore, the trial balance should never indicate a difference.)
However, a balanced trial balance does not guarantee that the records are free of errors. For example, an entry
could be completely omitted or could be entered twice and the trial balance will be in balance. Also, the monthly
rent payment could be coded incorrectly as a debit to an asset account instead of a debit to Rent Expense and the
trial balance will be in balance.
One revision of Golden rules
Accounting animations and video links