Accounting Concepts – Simplified
Rule No. 1: Assets and Expenses are debit in nature which means an increase in Asset and/or Expense leads to a debit while a decrease in Asset and/or Expense leads to a credit. Liabilities, Owners equity and Revenues are credit in nature which means an increase in Liabilities, Owners equity and/or Revenues leads to a credit while a decrease in Liabilities, Owners equity and/or Revenues leads to a debit.
Rule No. 2: Debits must equal to Credits
Rule No. 3: Revenue – Expenses = Profit (if positive) or Loss (if negative)
Rule No. 4: Profit is added to while Loss is deducted from Owner’s equity.
Rule No. 5: Assets = Liabilities + Owners equity
Rule No. 6:
Increase in debits = Increase in credits
Decrease in debits = Decrease in credits
Increase in debits = Decrease in debits
Increase in credits = Decrease in credits
Rule No. 7: Every transaction in accounting affects AT LEAST one debit and one credit account.
Lets understand the above rules by analysing certain transactions:
Transaction analysis : Account affected (Accounting element – Increase/Decrease – Debit/Credit)
1. Owner contributed cash into business.
Transaction analysis : Cash (Asset – Increase – Debit) and Capital (Owners equity – Increase – Credit)
2. Purchase stock on credit from a supplier.
Transaction analysis : Stock (Asset – Increase – Debit) and Creditor (Liability – Increase – Credit)
3. Sold goods for cash.
Transaction analysis : Cash (Asset – Increase – Debit) and Sales (Revenue – Increase – Credit)
and Stock (Asset – Decrease – Credit) and Cost of goods sold (Expenses – Increase – Debit)
4. Paid the supplier.
Transaction analysis : Cash (Asset – Decrease – Credit) and Creditor (liability – Decrease – Debit)
5. Purchased machinery with cash.
Transaction analysis : Cash (Asset – Decrease – Credit) and Machinery (Asset – Increase – Debit)