Accountancy · Ch 3 — Recording of Transactions - I
Using Debit and Credit
Using Debit and Credit
The Logic of Debit and Credit
Every transaction has two sides — a give and a take. In double-entry accounting, this means every transaction affects at least two accounts. The total amount entered on the left side must always equal the total amount entered on the right side. This is not a suggestion; it is the foundation of the entire system.
The words debit and credit are simply directional labels. Debit (abbreviated as Dr.) means the left side of an account. Credit (abbreviated as Cr.) means the right side of an account. To debit an account is to enter an amount on its left side; to credit an account is to enter an amount on its right side.
The T-Account
The simplest form of an account looks like the letter T. This is called a T-account. It has a left side and a right side, and it is used to record increases and decreases in the item the account represents.
| (Left Side) Debit (Dr.) | (Right Side) Credit (Cr.) |
|---|---|
The T-account helps in finding the final position of any item at the end of an accounting period. For example, in a customer's account, all goods sold to that customer appear on the left (debit) side, and all payments received from that customer appear on the right (credit) side. The difference between the totals of the two sides is called the balance, and it shows the amount due from or to the customer.
How Transactions Affect the Accounting Equation
The textbook illustrates this with an analysis table that tracks how each transaction changes the accounting equation (Assets = Liabilities + Capital). The table shows the cumulative effect after each transaction.
The accounting equation must always balance after every transaction. The analysis table proves this by showing that total assets always equal total liabilities plus capital.
The table tracks the following items:
- Cash
- Bank
- Debtors (amounts owed by customers)
- Goods (Stock)
- Furniture
- Plant and Machinery
And the two sides of the equation:
- Liabilities
- Capital
The table works through five transactions. Each row shows the change caused by the transaction, and the row below it shows the new position after that transaction.
Transaction 1: Cash of ₹4,80,000 is deposited into the bank.
- Cash decreases by ₹4,80,000.
- Bank increases by ₹4,80,000.
- Total assets remain unchanged at ₹5,00,000. Liabilities and capital also remain unchanged.
Transaction 2: Goods worth ₹60,000 are purchased on credit.
- Stock (Goods) increases by ₹60,000.
- A liability (creditors) of ₹60,000 is created.
- Total assets become ₹5,60,000; total liabilities and capital also become ₹5,60,000.
Transaction 3: Furniture worth ₹1,15,000 is purchased, and a payment of ₹10,000 is made in cash. The balance of ₹1,05,000 is on credit.
- Cash decreases by ₹10,000.
- Furniture increases by ₹1,15,000.
- A liability of ₹1,05,000 is created.
- Total assets become ₹6,15,000; total liabilities and capital also become ₹6,15,000.
Transaction 4: Goods worth ₹55,000 are sold on credit.
- Debtors increase by ₹55,000.
- Stock decreases by ₹55,000.
- Total assets remain unchanged at ₹6,70,000. Liabilities and capital also remain unchanged.
Transaction 5: Additional capital of ₹35,000 is introduced, and goods worth ₹25,000 are withdrawn for personal use.
- Cash increases by ₹35,000. …