Understanding Debits and Credits Video Lecture - Commerce

In this session we are going to learn that
every transaction has two effects i.e.
Every Debit must have a corresponding Credit
effect & there are some rules of debit & credit
for personal, real & nominal accounts
Introduction
In our previous session we have seen how all
accounts are classified into real, personal
& nominal accounts.
We also have an idea about the dual aspect
concept or the double entry system of accounting
which states that every transaction has 2
equal effects.
Without recording both the effects or dual
effects in books of accounts our record will
be incomplete or imbalance & it will show
a wrong status
.
Lets go one step further and talk about what
are these two equal effects . one of these
two effects is always a Debit and the other
effect is always a Credit
So What are these terms debit and credit ?they
are just formal bookkeeping and accounting
terms that have opposite meanings .These are
like the pillarsof accounting on which the
entire accounting is based...
Now lets proceed further,
A few days ago I was at my friend Peters grocery
store and was checking to see how is He keeping
his records??
1.
Sold goods to Mr. Adam worth $500 on credIT
here peter has credited Adams Account & debited
goods account
2.
Purchased goods from Mr. Alfred worth $600
on credit here he has debited Mr. Alfreds
Account & credited goods account
3.
Furniture Purchased worth $200 from Mr. Roy
here peter has debited Roys account & credited
furniture account
4.
Salary Paid to the Joy worth $100 here peter
has debited joys account & credited cash account
5.
Commission received from Mr. Philip worth
$200 here peter has debited cash account & credited
commission account
Here we have picked 5 random transactions
from Peters book and we are going to analyse
each one of them.
(pause 5 secs) (on screen transactions with
entries will appear)
So the first transaction is
1.
Peter sold goods to Mr. Adam worth $500 on
credit.
& payment would be made in 15 days..
Peters entry:
Adams a/c Debit
Goods a/c credit
Now this is a sales transaction,
To analyze this , the Imp thing to do is to
find out which are the two accounts that will
be affected as per the dual aspect,
Here goods have been sold so the Sales a/c
will be affected & second would be Mr. Adams
account as the goods are sold on credit,
Next step is to classify these accounts into
Real, Nominal or Personal,
As we have discussed in our previous session,
all the incomes come under the nominal a/c.
therefore Sales is a nominal account (revenue).
Like this,
Sales Nominal Account Credit
&The accounts which relates to a person comes
under Personal account so Adams a/cis personal
a/c
(being a person)
Now the question is which account should we
debit & which should we credit?
So, whenever a person receives a benefit in
form of goods or cash , the account of the
Person is debited, by the amount of the benefit
received
In this case,
Mr. Adams account is debited since he is the
receiver of goods (benefit received)
Here we can say that,
So Person who is in debt (debtor) is debited
&
The second a/c affected, sales a/c.. which
is nominal a/c.It is like a revenue all revenues
, incomes, and gains increase the profit of
the business.
And so we credit them.
So like we had seen that every debit has an
equal and corresponding credit effect here
we have one debit and one credit effect.
So the correct entry is..
Mr. Adams account -Dr & Sales account -Cr
So now we will check every transaction in
this way
Lets look at the second transaction.(at dis
time following transaction will appear)
peter Purchased goods from Mr. Alfred worth
$600, on credit & payment would be made in
20 days..
Now this is a purchase transactionAnd this
is Peters entry lets analyse itAlfreds A/c
Debit
Goods A/c - Credit
Here peter has debited Mr. Alfreds Account
& he has credited goods account
1.
the 2 accounts affected ??
One is Mr. Alfred�s account (as the goods
are purchased on credit & second is Purchase
account as the goods are purchased�
2.now here, Purchases comes under nominal
accounts (as it�s our expense)
And Mr. Alfred -- personal account
3.
Now we�ll come to the third step.. debit
and credit
when a person gives benefit of goods or cash
.. i.e the creditor his a/c iscredited, by
the amount of benefits given.
So Mr. Alfreds account will be credited
So person who gives Credit .. creditor..is
credited
The second a/c purchase a/c which is nominal
a/c is An expense Now all expenses &losses
decreases the profit of the business.
And hence they are debited.
Decrease profits debited increase profits
credited Here one trick is The words debtor
& creditor itself is giving the answer
i.e.
DEBTOR (receiver of goods/services) = DEBIT
CREDITOR (giver of goods and services) = CREDIT
Note that, only those purchase/sales transactions
where it is specifically mentioned that payment
was in cash, is considered to be a cash transaction..
If cash is not mentioned it is assumed to
be a credit transaction and so the debit or
credit effect will be given to the Partys
name mentioned ..
Lets move on to the next transaction 3.
Furniture Purchased worth $200 on cash from
Mr. Roy
Lets see what peter has done
Roys A/c Debit
Furniture A/c - Credit
So here do you think Roy�s account should
be affected No, because this transaction is
a cash transaction so, no party will be affected�
So in this case , furniture & cash are the
2 accounts affected.. and as we know assets
will come under real account ..both are real
okay
Now, whenever an asset comes into the business
through its or receipt, asset account is debited.
So here we have purchased furniture so furniture
will be debited, Conversely, whenever assets
goes out of the business through its sales
or payment, asset account is credited & here
we have paid cash so it will get credited
Now next is
4.
peter has paid salary to joy worth $100
Now here, the two accounts which are affected
are � salary a/c � & � cash a/c�
Salary is Nominal account as its an expense
of the business
So it will have debit effect right?..
& second is cash & it comes under real account
as its an asset of the business..
Asset going out of the business ..so it will
be credited.
So second part is correct
All okay so far
The last one
5.
Peter has received Commission from Mr. Philip
worth $ 200
Peters entry
Commission A/c Debit
Cash A/c - Credit
Now here ,Peter debited commission account
Now lets analyze this transaction,
Fist step which are the two accounts???
One is commission & second is cash account
2nd...is classification??
Commission will come under nominal account
as its income of the business
Cash will come under real account as it is
an asset
So here we will debit cash account as we have
received cash/asset
& we will credit commission as this is the
income of the business
With this we have finished checking Peters
book & rectified it we have also come across
through what is debit & Credit..
So far we have learned logical understanding
of debit & credit effect now here are some
rules of each type of account�
So if we notice,
So in first example we have debited the person
who is receiving the benefit (goods) & in
second example we have credited the person
who is giving the benefit (goods)
So when any transaction includes persons then
the rule of personal account is
DEBIT THE RECEIVER
CREDIT THE GIVER
In third example we have debited the benefit
(furniture) which is coming into the business
& we have credited the benefit (cash) which
is going out from the business
So when any transaction includes assets then
the rule of real accounts is
DEBIT WHAT COMES IN
CREDIT WHAT GOES OUT
& in fourth & fifth example we have debited
the expenses, & we have credited incomes,
When any transaction is of expenses, incomes,
losses & gains then the rule of nominal account
is,
DEBIT IS ALL EXPENSES & LOSSES
CREDIT IS ALL INCOMES & PROFITS
(Here we can conclude that, assets & expenses
have a debit balances as they are increasing
with the debit effect so the positive balance
of asset is debit balance & negative will
be the credit
Similarly, liabilities & incomes are having
a credit balance as they are increasing with
the credit effecti.. the positive balance
for liabilities & incomes is credit balance
& negative will bet the debit)
So now hope you guys have understood
This total process of accounting is driven
by
The dual aspect concept (two accounts affecting)
The nature of accounts (real, personal & nominal)
The effects of debit & credit
So here is a small exercise for you all
Column A Column B
Whenever we received something Personal Account
Whenever we give something DEBIT
Debit the receiver CREDIT
Credit the giver
Debit all expenses & losses Real Account
Credit all incomes & gains
Debit what comes in & Nominal account
Credit what goes out
So thats all for todays session...I hope u
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