Which Of These Accounts Has Its Own Register?

A cursory history

It'due south tricky to explicate debit sides and credit sides without a little history which nosotros're going to embrace in our bookkeeping tutorials. Initially, debit and credit side refers to the parts on the page in a book called the ledger. And a ledger was a book that had many pages that looked something like this

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Everything to the left of the centre was the debit side and everything to the right was called the credit side.

Accountants would assign a page in the book to each account (eg. a page for Rent, one for bank charges etc.). Each Ledger Account had a debit side and a credit side.

So imagine that you have just made an EFT to pay your landlord. To update your ledger you'll find the rent folio and record the payment y'all made.

Then you would become to the bank account page and too record the same transaction there.

Nosotros plain don't do this anymore. But the software nosotros apply today for accounting has largely been built around this image.

So this begs the question, on which side would you have put the transaction in the Hire Account? And on which side would you take put the transaction in the Bank Account?

A rule to commit to retentiveness

To be able to answer the question of which side on the ledger we place these transactions, nosotros demand to follow the rules of accounting. Here'southward the rule:

Assets increase on the debit side. Liabilities and Equity increment on the credit side.

Memorise this dominion and it volition assistance you to figure out it would exist helpful.

Step by step to understand

At present permit us walk through a few examples to help yous understand how this works. While doing this I will highlight some questions you should be asking that volition prove a useful framework for solving debit and credit questions.

Hither'south our get-go transaction:

The owner deposits R50,000 of his ain money into the business concern' banking concern account. This is his contribution to the business.

Get-go Question: What are the two accounts involved?

The two accounts are Banking company Account and Owners Contribution Business relationship.

2nd Question: What kind of Accounts are these?

The Banking concern Account contains cash so it'south an Asset. And Owners Contribution is an Equity Account.

3rd Question: What'southward the event on these accounts? (ie. are they increasing or decreasing)

Bank increases with R50,000. The business has R50,000 more cash than earlier this transaction. Since avails increase on the debit side according to bookkeeping rules, the bank business relationship of the business will have a debit of R50,000. Owners Contribution (an Equity account) volition also increase.

The question nosotros have to enquire ourselves is whether Owners Contribution is more or less after the transaction in question. Or, another way of putting it, has the owner contributed more or has he withdrawn his contributions.

In this case, the account chosen Owner'due south Contribution has increased past R50,000.

If nosotros were doing accounting the old way, our ledger would await something similar this for the banking company business relationship.

And like this for the owner'south contribution business relationship.

Let's expect at some other transaction for this business

The owner buys Equipment for the business to the value of R5,000. He paid via EFT from the concern depository financial institution account.

Remember that, when analysing these transactions, we will answer those 3 questions again:

What are the accounts affected?
What kind of accounts are they (ie Avails, Liabilities or Equity)
How are they affected? (increasing or decreasing)

The answer to the showtime question is Equipment Account and Bank Business relationship.

To answer question 2, they are both Asset accounts

How are these accounts affected? Well, nosotros spent some of the R50,000. Since bank is an nugget and assets increase on the debit side, we need to credit the bank account with R5,000 so that the account decreases.

Here'south another look at our old ledger business relationship for the bank account. Notice the R50,000 in debit and R5,000 in credit.

Every bit a side note. At whatever given fourth dimension if you want to know the remainder in the account you would subtract debit and credits from each other and this volition give yous the residual. In the case above it is Dr of 45,000.

The 2nd part of this transaction is the effect on the equipment account. Since the equipment is an asset and with this transaction, we've increased the value of Equipment the business has, will be a debit the equipment account with R5,000.

The most important items to have away from this article is the accounting rules effectually debits and credits and the also the 3 question framework for dealing with transactions. Master these and you are well on your way to being able to quickly assign debits and credits to accounts.

Let's take information technology one footstep farther by working through transactions that involve income and expenses.

Before we go along, let'southward review the ii components of the previous article. In guild to solve any debit and credit question you lot demand to remember the post-obit:

Assets increment on the debit side and Liabilities and Equity increase on the credit side.
The 3 question framework:
- What are the accounts involved?
- What kind of accounts are they? (Assets, Liabilities or Equity?)
- How are they afflicted? (Increase or subtract?)

On to our beginning example:

Income and Expenses

Paid monthly Rent to Landlord via EFT.

Let's run this transaction through the 3 question framework.

Q1. What are the accounts involved?

Depository financial institution Account and Rent Paid Account. Banking concern because the amount of cash in our account is affected, and the corporeality nosotros spent on Rent is also affected.

Q2. What kind of accounts are they?

Bank is the easy i; information technology is an Asset.

Rent Paid? What kind of business relationship is this? Permit's run into. It's non an Asset; we don't have something that has value in itself, information technology can't be sold for cash, nor is it greenbacks itself.

It'due south not a Liability; we aren't increasing the amount of greenbacks owed to people outside of the business like banks, suppliers or SARS.

Past way of emptying, it must then be Disinterestedness. As we explained previously: Equity is a combination of money and/or assets that the possessor invests into the business, equally well as the profits of the concern' activities.

A Brief Look at Business organisation Activities: Profits or Losses

All businesses exercise something to make a profit. Profit is what you have left when you take the coin you made in a certain venture and subtract the money you spent to arrive. Eg. If yous made R10,000 in selling shoes and information technology cost you R6,500 to make those sales, it means you've made a turn a profit of R3,500.

Here are a few more examples of business activities:

A bakery buys flour, saccharide, butter and other ingredients and sells cakes and bread.

A property company has properties and spends coin on Repairs & Maintenance, rates, security etc. and in return they receive a Hire Income.

A plumber has tools, and so buys in parts and supplies and uses his expertise to brand an income from charging customers to repair and install baths, toilets and showers.

Nominal Accounts

If nosotros take that Rent Paid is an Equity Business relationship we can go on to respond the 3rd question.

Q3. How are these accounts afflicted?

Bank decreases considering we at present accept less cash than before. So we credit Banking company.

Take care as we motility along here; at that place is a common error to avoid:

The wrong approach

Rent Paid belongs to Equity. Disinterestedness increases on the credit side. Therefore Rent Paid is credited. Just it would be incorrect to simply say Rent Paid is Equity.

The right approach

Rent Paid falls into the category of Disinterestedness because forms part of calculating profit or losses made by the business.

Think of Turn a profit & Loss as a unmarried ledger business relationship but instead of having a debit and a credit side only, both the debit and credit sides have their own sub-debit and credit sides.

(This is, in fact, why accounts like Sales, Interest, Income, Bank Charges, Accounting Fees, Postage Expenses etc are referred to every bit Nominal Accounts. ie Non a existent business relationship.)

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So all expenses volition have debit balances and all income volition have credit balances. This makes sense since sales and other income increases profits while expenses decrease it.

Expenses increase on the debit side and income on the credit side.

At present information technology's fourth dimension to work through a few examples.

Example 1

Received interest on banking company eolith of R50.

Q.1 What are the two accounts involved?

Bank and Involvement Received.

Q.2 What type of accounts are these?

Banking concern is an Nugget and Interest is an income (Equity).

Q.3 How are they afflicted?

Bank is increasing. This means a Dr of R50 in the depository financial institution account. Income (Equity) is increasing. This means a Cr of R50 to the Involvement Account (Equity).

Example 2

Paid R500 cash for materials used in the manufacturing procedure

Q.1 What are the two accounts involved?

Banking concern and Cost of Sales.

Q.2 What type of accounts are these?

Bank is an Asset and Cost of Sales is Disinterestedness.

Q.3 How are they affected?

Bank is decreasing. This means a Cr of R500 in the Banking concern Account.

Cost of Sales (Equity) is increasing. This ways a Dr of R500 to the Price of Sales Account (Equity).

Example iii

Sold goods for on credit to a customer, R1,200. The client will pay usa in 30 Days.

Q.i What are the ii accounts involved?

Sales and Debtors.

Q.two What blazon of accounts are these?

Debtors is an Asset and Sales is an income (Equity).

Q.3 How are they affected?

Debtors are increasing because we are owed more money than before. This means a Dr of R50 in the bank account. Income (Disinterestedness) is increasing. This ways a Cr of R50 to the income account (Equity).

Decision

Understanding that Expenses and Income Accounts are office of Equity is key in being able to bargain with debit and credit bug.

Again, continue going over the examples in this article and the previous one to brand sure that you understand the concepts beingness taught.