Below is my re-digest of the credit and debit from Wikipedia.
Each transaction that takes place within the economic agent, a business, will consist of at least one debit to a specific account and at least one credit to another specific account, as these accounts are created/opened when the need arises for whatever purpose or situation the business may have.
A debit to one account can be balanced by more than one credit to other accounts, and vice versa. For all transactions, the total debits must be equal to the total credits and therefore balance.
Economic value is a measure of the benefit provided by a good or service to an economic agent, where value for money represents an assessment of whether financial or other resources are being used effectively in order to secure such benefit.
Double-entry book contains a record of an amount in a debit column of a specific account and record the same amount in another specific account's credit column.
Alternatively, debits and credits columns can contain entries in one column, indicating debits with the suffix "Dr" or writing them plain, and indicating credits with the suffix "Cr" or a minus sign.
Typical accounts that relate to almost every business are: Cash, Accounts Receivable, Inventory, Accounts Payable and Retained Earnings. Each account can be broken down further, to provide additional detail as necessary. For example: Accounts Receivable can be broken down to show each customer that owes the company money.
All accounts for a company are grouped together and summarized on the balance sheet in 3 sections which are: Assets, Liabilities and Equity: Assets - Liabilities - Equity (of shareholders) = 0.
All accounts are classified one of the five elements:
- Assets
- Liability (or Debt or Loan)
- Equity (or Capital of shareholders)
- Income (or Revenue or Gain)
- Expense (or Loss)
ASSET ACCOUNTS are economic resources which benefit the business/entity and will continue to do so.
The definition of an asset according to IFRS is as follows, "An asset is a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity". Assets are accounts viewed as having a future value to the company (i.e. cash, accounts receivable, equipment, computers).
They are Cash, bank, accounts receivable, inventory, land, buildings/plant, machinery, furniture, equipment, supplies, vehicles, trademarks and patents, goodwill, prepaid expenses, prepaid insurance, debtors (people who owe us money, due within one year), VAT input etc.
Two types of basic asset classification:
- Current assets: Assets which operate in a financial year or assets that can be used up, or converted within one year or less are called current assets. For example, Cash, bank, accounts receivable, inventory (people who owe us money, due within one year), prepaid expenses, prepaid insurance, VAT input and many more.
- Non-current assets: Assets that are not recorded in transactions or hold for more than one year or in an accounting period are called Non-current assets. For example, land, buildings/plant, machinery, furniture, equipment, vehicles, trademarks and patents, goodwill etc.
LIABILITY ACCOUNTS record debts or future obligations a business or entity owes to others.
Liabilities include items that are obligations of the company (i.e. loans, accounts payable, mortgages, debts). When one institution borrows from another for a period of time, the ledger of the borrowing institution categorises the argument under liability accounts.
- Current liability, when money only may be owed for the current accounting period or periodical. Examples include accounts payable, salaries and wages payable, income taxes, bank overdrafts, accrued expenses, sales taxes, advance payments (unearned revenue), debt and accrued interest on debt, customer deposits, VAT output, etc.
- Long-term liability, when money may be owed for more than one year. Examples include trust accounts, debenture, mortgage loans and more.
EQUITY ACCOUNTS record the claims of the owners of the business/entity to the assets of that business/entity. The Equity section of the balance sheet typically shows the value of any outstanding shares that have been issued by the company as well as its earnings.
Capital, retained earnings, drawings, common stock, accumulated funds, etc.
INCOME/REVENUE ACCOUNTS record all increases in Equity other than that contributed by the owner/s of the business/entity. Services rendered, sales, interest income, membership fees, rent income, interest from investment, recurring receivables, donation etc.
EXPENSE ACCOUNTS record all decreases in the owners' equity which occur from using the assets or increasing liabilities in delivering goods or services to a customer – the costs of doing business.[30] Telephone, water, electricity, repairs, salaries, wages, depreciation, bad debts, stationery, entertainment, honorarium, rent, fuel, utility, interest etc.
Note:
All Income and expense accounts are summarized in the Equity Section in one line on the balance sheet called Retained Earnings, which, in general, reflects the cumulative profit (retained earnings) or loss (retained deficit) of the company.
Profit and Loss Statement is an expansion of the Retained Earnings Account. It breaks-out all the Income and expense accounts that were summarized in Retained Earnings. The Profit and Loss report is important in that it shows the detail of sales, cost of sales, expenses and ultimately the profit of the company. Most companies rely heavily on the profit and loss report and review it regularly to enable strategic decision making.
Examples
1. A business pays rent with cash: You increase rent (expense) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
2. A business receives cash for a sale: You increase cash (asset) by recording a debit transaction, and increase sales (income) by recording a credit transaction.
3.A business buys equipment with cash: You increase equipment (asset) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
4. A business borrows with a cash loan: You increase cash (asset) by recording a debit transaction, and increase loan (liability) by recording a credit transaction.
5. A business pays salaries with cash: You increase salary (expenses) by recording a debit transaction, and decrease cash (asset) by recording a credit transaction.
6. The totals show the net effect on the accounting equation and the double-entry principle, where the transactions are balanced.
Account Debit (Dr) Credit (Cr)
1. Rent (Ex) 100
Cash (A) 100
2. Cash (A) 50
Sales (I) 50
3. Equipment (A) 5200
Cash (A) 5200
4. Cash (A) 11000
Loan (L) 11000
5. Salary (Ex) 5000
Cash (A) 5000
6. Total (Dr) 21350
Total (Cr) 21350
Account type Debit Credit
Assets Increase Decrease
Liability Decrease Increase
Equity of shareholders Decrease Increase
Revenue Decrease Increase
Income Decrease Increase
Expense Increase Decrease
Loss Increase Decrease
Common shares Decrease Increase
Retained earnings Decrease Increase
Inventory Assets Dr +#
Wages expense Dr +#
Accounts payable Cr -#
Retained earnings Cr -#
Revenue Cr -#
Cost of goods sold Dr +#
Accounts receivable Dr +#
Allowance for doubtful accounts Cr -#
Common share Dividends Cr -#
Accumulated depreciation Cr -#
Investment in shares Dr +#
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