Wednesday, November 27, 2013

Method of calculating debit & credit for different accounts

1. Asset: Due to transactions, asset may increase or decrease. For example, purchase of furniture increases asset and selling the same decreases asset. Increase of an asset is debit while a decrease of the same is credit.

2. Liability: Like asset, liability can also be increased or decreased. For example, taking loan from bank increases liability while paying installment of it decreases. The relation of liability is opposite to asset. Therefore, increase of liability is credit while decreases the same is debit.

3. Owners Equity: For starting the business, the owner brings capital. Owner’s equity increases.
     Again, if the owner withdraws cash from the business the owner’s equity decreases. Owner’s equity is a kind of liability to the business. Because according to the principle of accounting the owner and the business have separate identity. Therefore, like liability if owner’s Equity increases it is credit while decreases the same is debit.

4. Income: The only objective of business is to earn profit and the owner alone has the sole interest over it. Actually, profit is the portion of income, which is more than expense. Therefore, we can say that income increases owner’s equity. Therefore, increase of income is credit while decreases of the same are debit.

5. Expense: Expense is opposite to income. Since income increases owner’s equity, so increase of expense is debit and decrease of the same is credit.