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.

What is Accounting Cycle & its step

 Accounting cycle: According to ongoing concept, it is expected that the business will go on forever. The continuous cycle of keeping accounts is known as Accounting cycle.

Accounting Cycle

1.   Identifying Transactions: Analyzing each event, transactions are identified in the first stage of Accounting cycle.

2.     Analyzing Transactions: In this stage, each transaction is analyzed and accounts are identified. For example Machineries bought for Taka 5,000. Here two accounts are involved. One Machinery Account and the other cash Account.

3.      Journalizing: Analyzed accounts record into the primary Book of Accounts as Debit and credit chronologically and the journalizing is done. 

4.      Transfer to Ledger: In this stage, transactions recorded in journal are recorded into the separate heads of accounts. Different ledgers are prepared for each heads of accounts and the balance of which is determined on a certain date.

5.      Preparing Trial Balance: Trial balance is prepared to testify whether the transactions are recorded accurately to their concerned head of accounts and with the balances of debit and credit of ledger, a trial balance is prepared. 

6.      Adjusting Entries: To identify the actual financial condition of a business the receivable income, accrued expense, expenses paid in advance and unearned income these items of a particular accounting period are adjusted through adjusting entries.

7.      Prepare Worksheet: For the objective of preparing the financial statement easier, an optional multi column statement is prepared. It is known as worksheet. 

   8.   Preparation of Financial Statement: With the financial statement, the amount of profit-loss, assets, liability, and owner’s equity of a business is determined. 

   9.  Closing Entry: The balance of the revenue income, revenue expense, and drawings of a business need to be closed at the end of the year. The income and expense of a business remain closed with the remaining asset, liability, and owner’s equity the next year starts. Therefore, trial balance after accounting year or opening journal is prepared.

 

    10.  Post closing Trial balance or Opening Journal: Income, Expense & Drawing accounts are being closed by closing entry. Next accounting period starts with the remaining balance of Asset, Liability & Owner’s Equity accounts. Post closing trial balance or Opening journal is prepared for this.  

Relation of accounting system with society and environment:

Accounting is not merely used for obtaining profit. Apart from making profit, it also contributes towards society and environment so that it is not affected by that. From the following illustrations, some contribution of accounting towards society and environment can be determined:

1. Organizations will contribute towards the resistant of environment pollution and accountant will keep its records. This record will tell us about the consciousness and contribution of that owner towards the society and environment. Especially the oil refinery companies contribute generously towards environment from being polluted.

2. Smoke emitted from industry and factories are injurious towards human and environment. The owner and the accountant spent a lot of money for protecting the environment issues. For this, governments’ rules and regulations must be followed.

3. While producing a product hygiene raw materials are used, less electricity is consumed, the sound of electricity must be at a tolerable limit, and garbage should be dumped in proper places. To ensure these some expenses are to be made. Besides allocating this fund, an accountant must also make proper records of those expenses.

4. Every Business organizations have to spend for society as a part social commitment, such as providing scholarship among poor and meritorious students. For this, accounts are to be kept for proper fund allocation.

Who is Accountant?

The person in charge of accounting is known as an accountant, and this individual is typically required to follow a set of rules and regulations, such as the Generally Accepted Accounting Principles.