What is integrated Accounting System

What is integrated accounting System

In integrated accounting system one set of books of account are kept for both financial reporting and cost accounting. The profit is not required to be reconcile instead the cost accounting profit is adjusted for some non cost items like investment income, interest charges.

Advantages of Integrating Accounting System

1. Time Saved

Double set of account require a huge amount of time of finance department. The time can be saved by adopting integrated system

2. Cost Saved

Keep one book of account instead of two definitely save a lot of cost like cost of an additional staff required to maintain the cost accounting record cost of books and stationary and other cost and resources utilized by the staff maintaining the record like lightening and heating.

3. Duplication is avoided

In integrated system the duplication of record is avoided. Duplicate record creates many confusion within organization.

4. Space is saved

Book of accounts preservation require a lot of space. Due to statutory requirement record are to be saved for couple of year. The integrated system less space is required as only one set of book of account is being maintained.

What is interlocking accounting System

What is interlocking accounting System

In interlocking system two set of books of accounts are kept for financial accounting and cost accounting. The results of two books of account may be reconciled by the management.

What is purpose of Interlocking System

1. Detailed Reporting is possible

The management require the more detail reporting regarding the cost of production. These report can be prepared from separate books of accounts maintained for cost purposes.

2. Detailed Analyses

The more information is available under this system about the production cost and therefore more detailed cost analyses can be performed by the management.

3. Timely Reporting

Financial account department carry out the basic accounting work therefore there is not worry to meet the management needs and timely reporting of financial result can be prepared.

Double Entry System

What is Double Entry System?

Double entry system based on the principal that every transaction has two aspects one is debit and other is credit. The amount debited in a transaction will be equal to amount credited and vice versa.  Therefore it is commonly said that every debit has credit and every credit has a debit.

Can there be two credits against one debit

Technically the debited amount in a transaction must be equal to credit amount in total. Therefore it is possible that against one debit there are two or more credit which it totality equal to amount of debit.

Example of two credits against one debit

For example a fixed asset purchased for 20,000 and cash paid 10,000 and $ 10,000 is still payable, this is a situation where one amount will be debited and two amounts will be credited but total of debit side of transaction will be equal to credit side.

Date	Particulars	Debit	Credit
	Fixed Assets A/c	20,000
	Cash A/c		10,000
	Account Payable		10,000

Advantages of Double entry System

There are number of advantages of double entry systems. Some of them has described below

1.Universal Acceptance

The double entry system is based in rules of debit and credit and therefore this system is universally accepted around the globe. This system can easily be understood at any part of the world with a reasonable knowledge of basic rules of accounting.

2.Consistency and Comparability

This system produce consistent result and therefore the results of different period can be compared without any difficulty..

3.Accurate Financial statement

This system is really helpful in preparation accurate financial statement. This system ensures that effect of every transaction is reflected in the financial statements.

4.Built in control for many mistakes

This system provides built in control for many types of mistakes. The mistakes will be identified at the trial balance stage when the debit and credit side of trial balance will not be equal.

Limitations of Double entry system

1.Not Easy

This system is not easy to apply and require special skill and deep understanding of rules of debit and credit. There are number of situation where it is not easy to pass the journal transactions. The wrong entry can bring terrible results.

2.Some mistakes remain Undetected

There are some mistakes which cannot be identified by double entry system. For example mistake of omission, mistake of principal and counter balance mistakes.  

Transaction which is not recorded in the books of accounts is known as mistake of omission. Transaction that is charges to wrong head are mistakes of principals. Similarly counter balance transaction can also be not detected by double entry system.

3.Costly

This system requires a number of books and proper account department especially for large organizations. An experience and skillful accountant is also cost you a lot and it is not possible for a small scale business to bear such costs.

Trial balance

What is Trial Balance

Pu. Trial balance is basically a summary of different account activities and therefore this summary is provide the required information for the preparation of balance sheet and profit and loss.

What are Types of Trial Balance

There are mainly three types of trial balance

1. Un- Adjusted Trial Balance

There are number of adjustment which are entered at the year end. Therefore a trial balance prepared before those adjustment is known as Un adjusted trial balance. This trial balance is just an initial summary of the all account balances.

2. Adjusted Trial Balance

The Trial balance which is prepared after the year end adjustment is known as adjusted trial balance.

3.Post Closing Trial Balance

The adjusted trial balance many account which related to income and expense are closed and only assets and liabilities account are left. This trial balance which contains only the asset and liabilities account summary is known as post closing trial Balance.

Advantages of Trial Balance

There are some advantages of preparing the trial balance.

1. Missing Head of Account 

The first review of trial balance may detect any missing items in the trial balance because the both side of trial balance must be equal and therefore in case of inequality something is missing.

 2. Mistake Detection

The other important advantage of trial balance that it identify a number of possible error in the recording process. those error include the errors like single entry , transposition errors, double impact on one side, and casting error.

Trial balances however is unable to detect the error of principle, omitted error and compensating errors.if the trial balance is tele mean when the debit side is equal to credit side it gives us surety that there is no transposition error , single effect error or double entry of same aspect error.

What is Suspense Account

There is a situation where the trial balance is imbalance but we are unable to locate the error then we may create a suspense account and put the difference in the suspense account. However, the suspense account is only a temporary solution for the preparation of financial statement.It is highly recommended that difference must be worked out and corrected.

Control Account

What are Control Accounts

Control Accounts basically are the summary of transaction entered in different primary books.The control account are maintained from the  primary books in totality where the individual accounts are maintained from individual entry.

Control accounts is maintained as general Led memorandum record and updated on periodical bases . Concept of control account is more related to manual books of accounts and it has little use in computerized environment.

Advantages of Control Account

1.Preparation of Financial statement

Control accounts are really helpful to update the trial balance and preparation of financial statement. The information is readily available for the preparation of financial statement at any point of time.

2.Accuracy of Individual Account

The balance of control account must agree with the individual account. if there is any difference then the individual account must be checked for error.


3. Better control over Receivable and payable

The information is available about the receivable and payable account and therefore management can  manage the working capital in a better way.


4. Manageable Size of Trial Balance

Control account keep the trial balance with manageable size unlike the subsidiary ledger accounts which make the trial balance to large to manage.

Example of Control Account

Books of Accounts

What are books of accounts

The books of account are mainly consist of books of primary entry and ledger which contains the individual account. The primary books enter the transaction in first place where the ledger are used to classify the information.

Purpose of Primary books of accounts

The primary books of account are  maintained for the following advantages

1. Sequential Check

 Primary books of account are important sequential check that all transaction has been recorded in the books of accounts. The books can be checked any time with source document to detect unrecorded transaction.

2. facilitate Classification

Primary books of account make it easier to classify the transaction. Direct classification require special skill and experience.

Types of Prime entry books

Mainly there are two types of journal i.e General Journal and Special Journal. The first type is used in small organization where volume of transaction is not higher and therefor all Journal transaction are recorded in a single book.

 Special  journal is used where volume of  some transactions are very high like sales and purchase. Therefore separate Journals are used to record those transactions. The special journal facilitate the management in many ways. 

How many books will be maintained by the management mainly depends on the volume of transaction and nature of business. The below is primary books of entries also known as special Journals.

1. Sales Day book record the credit sales only
2. Sales Return Day book record the sales return by the customer
3. Purchase Day Book record the credit purchases
4. Purchase Return Day book record the purchases return to supplier 
5. Cash Book record all the cash transaction
6. Petty cash book is used for small cash payments
7. Journal is used for adjustment and correction

Column of Sales Day Book and other books

The typically the sales day book have six columns that includes the date, invoice number , customer name, net amount , sales tax and Gross amount. The purchase day book also contains the same column number of column and customer column is replaced by supplier column. Similarly the sales return and purchase return books contains the same information.

 Purpose of using several prime entry books

1. Control Account

The entry in the control account is facilitated with the help of special journals. it is really time consuming to collect required information from General journal to update control accounts.

2. Better Control

Number of primary book improve management control over transaction processing and the work load can be divided among different staff member . for example one person is responsible for maintaining the sales journal and other is for maintaining the purchase Journals.

Doubtful Debts

What are Doubtful Debts

The doubtful debt are those debts which carry some risk of non payment. However Management is hopeful that there are reasonable chances that customer will pay the debt. Therefore the bad debt are not write off immediately from the books of account instead a provision is created against doubtful debt.

How the Amount of Provision is determined

The provision is normally a percentage of amount receivable because it is technically not possible to perform risk assessment for each individual customer.

The Management determine the appropriate percentage  of provision from the historical data of the entity. The management previous experience of the business and industry practice are also important factor of determining the provision for doubtful debt

Purpose of Provision for Doubtful Debt

1.Prudence Concept

under the prudence concept the income must not be overstated and with the introduction of provision for bad debts is very much compliance of the prudence concept of accounting.

2. Tracking of Doubtful debt

The receivable are still appearing in the books of account and therefore can be effectively chased for recovery.

Accounting Treatment of Doubtful Debt

Unlike actual bad debt the doubtful debts are not immediately write off. However a reasonable provision is created for these bad debts. The accounting treatment can be broadly divided into three stages . creation of provision for the first time , writing off the bad debt against provision in next year and creating a new provision at the end of next year.

Example of Provision for Doubtful Debt

Example of Provision Creation


Company has receivable of amount 20,000 and decided to create a provision of 5%. The required entry would be as under


Income Statement                                        4000 Dr.
Provision for Bad Debts                              4000 Cr

Example of Bad debt against Provision

Company has a provision of 4000 against which a bad debt of amount 3000 is confirmed by credit department. What would be the entry


Provision for Bad Debts            3,000  Dr
Account Receivable                  3,000  Cr

Example of Decrease in provision level

Company has a provision of 10,000 a bad debt confirmed during the year is 2000 . The management decided to maintain a provision for 5000 for next year.


Provision for Bad Debt             2000  Dr
Receivables                               2000 Cr

Provision                                    3000 Dr
Income Statement                      3000 Cr

Actual Bad Debts

What are Account Receivables

The amount receivable against credit sales are known as account receivables or trade receivables. The receivable carry a great risk of not paying the debt which is technically known as bad debt.

How many Types of Bad Debts

There are basically two types of bad debt i.e actual bad debt and doubtful bad debts. The actual bad debt has little chance of recovery . The doubtful debt however has some chances of recovery.

What are the main reason for bad debt

The main reason for bad debt is financial constraint and liquidity problems facing by the customer.There are number of reason for financial constraint and liquidity problems i.e. customer incurring a heavy loses, fall in demand in the market, general industry recession , general economy recession.

Accounting Treatment of Actual Bad debts

According to prudent concept of accounts the assets are not to be overstated in the books of account. Therefore the debts which are not likely to be recover must not appear as an receivable in the books of accounts and must be written of in the books of accounts.

The bad debt will be charged to income statement as expenses and the receivable amount will be reduced accordingly . In technical term the bad debt will be debited and receivable a/c will be credited.

Example of Bad Debt Journal Entry

The company has a receivable amount of 40,000 out of which a customer owing 3000 is declared bankrupt. what would be the appropriate Journal Entry


Bad Debt                                3000 Dr
Account Receivables             3000 Cr

Adjusted Transactions

What are Adjusted Transaction

Adjusted transactions are those transaction which are passed to adjust the trial balance and prepare the final trial balance. There are number of transaction which are not entered in the books of account during the year for various technical entries.

When Adjusted Transactions entered

Adjusted transaction are entered in the books of accounts at the year end and it is an important process before finalizing the trial balance and preparation of financial statements.These adjusted transaction  are entered in the books of account and adjusted trial balance is extracted. The adjusted trial balance is final summary for the preparation of financial statement.

Types of Adjusted Transactions

The adjusted transaction can be classified on the following categories.

1. Adjusted Transaction for different provisions
2. Adjusted Transactions for accrual i.e unaccounted for expenses
3. Adjusted Transaction for prepayments of expenses
4. Adjusted Transaction for Depreciation
5. Adjusted Transaction for closing inventory 

Examples of Adjusted Transactions

The provision for different expenses specially doubtful debt is created at the year end. 

Date	Particulars	Debit	Credit
	Income Statment A/c	200
	Provision for doubtful Debt A/c		200

The different expense which are payable in next period but relate to this year are accounted for by adjusted transaction under the accrual concept of accounting. The salary is and utilities bill are the most common example of accrual expenditure.

Date	Particulars	Debit	Credit
	Salary A/c	200
	Salary Payable A/c		200

The prepayment for next year is also adjusted normally at the time of payment the whole amount is charged to the expense. At the year end an adjustment entry is passed to reverse the expense and current asset is created.

Date	Particulars	Debit	Credit
	Prepaid Rent A/c	200
	Rent A/c		200

The depreciation is normally deducted from the fixed asset at the year end.

Date	Particulars	Debit	Credit
	Depreciation	200
	Fixed Assets A/c		200

Depreciation

What is Depreciation

Depreciation is basically the wear tear of the asset. This is very common that an asset can only be used for a certain period of time and then it is disposed off. The reduction in value over the time is known as depreciation.

In accounting terminology Depreciation is systematic allocation of Depreciable amount of asset over its useful life.

Types of Depreciation of Methods

The most commonly used methods are as under

1.     Straight Line Method

2.     Reducing Balance Method

3.     Sum of Digit Method

1. Straight line Depreciation Method 

Straight line method is the easiest  method among all method of depreciation.Depreciation is calculated once in the first year and then apply in all period.

Straight line method provide a constant charge to the income statement. This method is used where the asset has relatively constant usage during its useful life. This method is called straight line method because when the depreciation put on a graph it will produce a straight line on the graph. 

Formula Straight line Depreciation Method

(Cost - Residual Value)/Useful life

Cost = The purchase price and installation and transportation charges.

Residual Value=  The amount expected to be released from the asset at the end of useful life.

Useful life = the period for which asset can be used or period during which the economic benefit will flow from the asset.

2. Reducing Balance Depreciation 

Reducing method used when asset has maximum usage in the early years life and then usage reduces over the period of time.The Information technology equipment is great example for this kind of equipment.

This method is relatively difficult than straight line method and each year depreciation amount is different from the last year.  The depreciation method is based on net book value of the asset and therefore it is called reducing balance method.

Formula for Reducing Balance Method

(Net book Value- Residual Value) X Depreciation Rate

Example of Net Book Value

A Computer has 22,000 and have residual value 2000 and have depreciation rate 40%

First year  22,000-2000    = 20,000X40%    = 8,000

2nd Year  12,000              =  12,000X 40% = 4,800

3rd Year    7,200               =  7,200 X 40%  = 2,880

3. Sum of Digit Depreciation Method 

This method used when there is a high usage of asset in the early year and then the usage reduces over the period of time. The depreciation is more like reducing balance but in reducing depreciation method you required a rate of depreciation and under this method there is no such requirement.

Formula of Sum of Digit Method

5+4+3+2+1 = 15 sum of digit is calculated

first year charges is 5/15 * Decipherable amount

Example of Sum of Digit Method

A machinery is purchased for 20,000 and useful life of five year.

5/15 * 20,000= 6,667  (first year)

4/15 * 20,000 = 5,333 (2nd Year)

3/15* 20,000 = 4,000  (3rd Year)

2/15 * 20,000 = 2,667 ( Fourth Year)

1/15* 20,000=  1,333 (Fifth Year)

Purchase Return and Sales Return

 Purchase Return and Sales Return

The organization usually maintain separate account for the purchase and sale return. The separate accounts provide more detail information about sales and purchase return and this information is useful for management in many ways.

Reasons for maintains Separate accounts

1. Control Cost

This is important to note that purchase and sales  involves many cost like ordering cost , transportation and handling cost, Moreover, order processing is a time consuming job. Therefor organization would like to reduce those cost,

2. Identify Product Fault

 Regular sales return will identify the product faults to the management and management can take appropriate action to resolve the product related issues in time.

3. Identify Control Weakness 

 Regular Sales return also identify the internal control weakness in the order processing and purchase processing department and management can take appropriate corrective measure to improve those controls.

4. Individual Performance

 Regular wrong order processing by sales and purchase departments also helpful to evaluate the  performance of the individual and the manager in the sales and purchase department.

5. Reputation at Stake

Regular sales return is a great damage to the organization reputation of organization and management would take appropriate steps to maintain the its Goodwill in the market.

6. Warranty Policy Review

Regular sales return would provide the useful information to the management for warranty related decision making.

7. Provision for Maintenance

Sales return record will also provide useful information to account department for determining the amount of provision is required for repair and maintenance.

Purchase Journal Entries

Purchase Journal Entries 

The purchases are inventory and therefore the purchase a/c debited at the time of purchase and the cash account or account payable is credited as case may be.

When the purchases are made in cash the purchases a/c is debited and cash account is credited and when purchases are made on credit then payable account is credited in place of cash a/c.

 When Purchases Charged as Expense

The purchase are charged as expense account at the time of sale of inventory. 

Example of Cash Purchases

Purchases of 2000 is made on cash.

Purchases A/c  2000 Dr.
Cash        A/c   2000 Cr.

Example of Credit Purchases

Purchases are made on credit for 3000.

Purchases A/c         3000 Dr.
Account payable     3000 Cr.

Example of partly paid Purchases

Purchases are made of 2000 and only paid 1000 to Mr. A

Purchases A/c    2000 Dr.
Cash         A/c    1000 Cr.
A             A/c     1000 Cr.

Example of deferred payment with interest

The purchases are made for 2000 the market value of goods are 1800. The 200 are charged as deferred payment charges.

Purchases A/c            1800 Dr.
Interest     A/c              200 Dr.
Account payable        2000 Cr.

Why Accounts are prepared

Why Accounts are prepared

Accounts or financial statements are prepared to meet the different information need of different stakeholder. The financial statement is an important source of information for decision making . There are number of user of financial statement.

Accounts or Financial statement are also the statutory requirement in many countries specially in case of public companies which are listed in stock exchange.

User of Financial Statements

Investor

The investor want to decide about the future pay out of dividend . The investor is also interested in expected rate of return on the investment in long run.

Lender

The lender is interested in financial statement to find out whether or not the entity would be able to pay back its amount and interest.

Employees

The employee are interested to know the financial position to know about their career prospect in the organization and ability of organization to pay high remuneration.

Govt

Govt closely look into the financial statement to collect the tax.

Qualitative Aspect of Financial Staments

The following are the important qualitative aspect of financial statements

1.Reliable

 Financial statement must be reliable . The reliability is important factor because financial statements are used by many stakeholder for the decision making purposes. The entity conduct external audit to improve the reliability of the financial statement. The reliable financial statement means that it can be trusted for decision making.

2.Relevance

The financial statements must project the relevant information only. The relevant information mean the information which reflects the financial position and performance of the entity.The quality financial statement provides only relevant information .

3.Understand ability

The financial statements must be understandable by the user. The understand ability concept takes into account the fact that user has reasonable knowledge of business and accounting.

4.Completeness

The financial statements must be complete in all aspect. The incomplete information is of no use and the financial statement is a major source for decision making. The complete financial statement means that financial statement reflects all the transaction entered into by the organization.

5.Timely

The financial statements must be presented within reasonable time to user. it must not take too much time to publish the financial statement after the year end. The delayed financial statement not only of no use but also create doubt about the reliability.

Ledger

What is Ledger 

Ledger basically a book which contain all accounts . Ledger is more like a register of accounts. For example ledger contains the sales accounts ,purchases account, salary account.  Ledger and accounts are two different things .

 Accounts are the appropriate heads of the transaction and ledger is a book which contains those accounts. In simple words the accounts are pages of the book and the book is ledger.

What are Types of Ledgers

Ledger can be classified into two types General Ledger and Subsidiary ledger. 

1.General Ledger 

General Ledger contains individual accounts and also control account of individual like account receivable and account payable. General Ledger is form the basic part of books of account of the entity.

2. Subsidiary Ledger

 Subsidiary ledger basically memorandum records and contains the individual accounts detail transactions. Subsidiary ledger are updated on real time bases

Advantages of Ledger

1. Facilitate Classification

 ledger is first classification of accounting transaction into the appropriate accounting heads. Ledger give you a details analyses of activity in a accounting heads.

2. Fast Tracking of Transaction

  Ledger is also provide a fast tracking of transaction. for example if you want to track a sales transaction then you would prefer to open sales account form the ledger to find out the transaction details.

3. Trial Balance Preparation

 Trial balance is basically a summary of transaction of ledger accounts that is prepared from the closing balance of General Ledgers accounts. In absence of ledger it is technically not possible to prepare Trial Balance.

Purpose of Journal Entry

Purpose of Journal Entry

The Journal entry is the first step of accounting cycle. The journal entry provide bases for classification. it is possible to classify without journal entry but it requires deep knowledge and experience. The direct classification does not provide us a sequential control of transaction. The surety that all transaction have been recorded in books of account can only be traced from Journal entry.

The journal entry also enables management for fast tracking of voucher. The journal entry is basically entered in chronological order therefore management can easily directly go to the relevant section. The journal entry is the foundation of whole accounting system . The Journal entry can be broadly classified into two categories i.e entries involve cash and entries does not involve cash. This is very important classification for filing structure of the organization.

The books contains the Journal entry is know as Journal . The entries are recorded in the journal date wise . The organization may opt for maintain some special journals when the volume of transaction in a specific head is larger. The examples of special Journal include the Sales Journal and Purchase Journal.

Filing Structure of Accounts Deparment

Filing Structure of Accounts Department

The filing structure of accounts department mainly depends on the organization operations and nature of operations. The typical filing system of accounts department contains below mentioned  five files . The basic purpose of classification of file is to facilitate the tracking of voucher. The organization is require to track the voucher for number of reason  for example audit purposes etc.

1. Cash Receive Voucher
2. Cash paid voucher file
3. Bank receive voucher file
4. Bank payment voucher file
5. Journal entry voucher File

If the organization  have the policy to make payments through cheque and receive all payment through banking channel then the number of file are reduced to only three i.e bank receipt file , bank payment file and Journal entry file.Similarly if the organization has a very small operation and have limited number of transaction then only one file can be maintained with name of voucher file.

Concept of Voucher

Concept of Voucher

Voucher is basically provide a bases of transaction entry in the books of accounts. The transaction must be supported by a documentary evidence for fair and transparent accounting system.

Voucher Documents

The transaction must be supported by an voucher . The voucher is basically a documentary evidence of transaction  .A voucher is an internally generated document and prepared by the finance department. A number of supporting document may be attached to a voucher. The supporting documents vary transaction to transaction. The sales traction voucher will have different supporting document than a purchase voucher.

Voucher Numbering

 The vouchers is then issued a number and filed . There are number of organization using pre numbered voucher system in this case there is no need of numbering the voucher manually. The computer software also automatically issue a number to voucher. The number is very important for tracking the relevant voucher later on.

Voucher Authorization

The voucher is normally authorized by a senior manager of finance department before it is entered in books of accounts. The typical voucher preparation procedure contains the three level prepared by checked by and approved by.

Income and Deferred Income

Income and Deferred Income

The concept of income and deferred income basically relate to the time period. There is one of the important concept of accounting that income will be charged in a period where the relevant expenditure charged. This concept is called matching concept. Deferred income recognition is basically is implication of matching concept. The typically example of deferred income under this concept is Govt Grant for a specific purpose.

Example of Deferred Income

The Govt give 60,000 Grant for a School construction to an NGO the school will be constructed in three years.

The transaction will be recorded in first year as

Cash A/c                           60,000 Dr
Grant Income                    20,000  Cr
Deferred Grant income     40,000 Cr




The deferred income concept may also be explained that income must be charged in a period to which it relates. Therefore any excess amount will be recorded as liability in the and will be accounted for in next period.

Example of Deferred Income 

Rent received for three year @ 5000 per year.

Cash                                 15,000 Dr

Rent income                      5,000  Cr

Deferred Rent Income     10,000  Cr      

Debit and Credit Rules

1. Rule of Debit and Credit for Expenses

Expenses would be debited in case of increase and credited for decrease. for example an repair expenditure of $ 2000 would be recorded in books of accounts as under

 Repair  A/C   2000 Dr
Cash     A/C  2000 Cr

2. Rule of Debit and credit for asset

Rule for debit and credit in case of assets is similar to those are for expenses i.e increase in asset would be debited and decrease in asset would be credited. for example Mr. A Purchases  Furniture for 2,000/- on cash would be recorded in books of accounts as under

Furniture A/c  2,000  (Debit)
Cash A/c         2,000 (Credit)

3.Rule of Debit and Credit for Income

Income would be credited for an increase in income and will be debited in case of decrease.for example Rent receive of 2000 in cash would be recorded in books of accounts as under.

Cash A/c $  2000  (Debit)

Rent  A/c $ 2000  (Credit)

4.Rule of Debit and credit for Liabilities and equity

Rule of debit and credit for liability and equity is similar to those for income i.e increase in liability will be credited and decrease in liability will be debited.

What is debit side and credit Side

What is Debit Side and Credit side

In accounting the debit and credit is a very basic rule for classification. This rule provides bases for the classification and preparation of financial statement. The transaction after recording is posted into ledger and then a summary of ledger is reflected in trial balance. in trial balance the debit side represents either the asset or expenses and credit side represent either income or liability.

In balance sheet only asset and liability appears therefor the assets are also know as asset side and liabilities are known as credit side. The terminology of debit side and credit side is typically used for balance sheet. The financial position may be reflected by saying that a company has a very strong debit side. This means that company has a very good asset base.

The debit side concept must not be confused with the debit and credit rule . The asset may be debit or credit at transaction level but asset must be reflected on debit side of balance sheet and similarly the liability may be debit and credited at transaction level but will appear on credit side in balance sheet and trial balance.

Debit and Credit

What is Debit and Credit

The debit and credit basically are relative terms used in accounting. There is no literal meaning of those terms rather these terms are used as basic classification bases for accounting transaction. Each transaction has two aspects one is debit and other is credit. in simple words one can say that every transaction is break down into debit and credit.

This is important to remember that every debit has a credit with equal amount. This is very basic rule for the debit and credit and whole accounting reporting structure is based on this rule. if this rule is violated then it is impossible to prepare accurate financial statement.

The debit and credit can be written in short form as Dr. and Cr. respectively 

Example of Debit and Credit

Mr. A Purchased 200 sugar and paid the amount in cash.

The transaction will be recorded in books of accounts as under

Purchases A/C  (Debit)

Cash         A/C  (Credit)

What are Rules of Debit and Credit

Rules of Debit and Credit for Expenses and Assets
	Increase	Decrease
Expenses	Debit	Credit
Assets	Debit	Credit
Rules of Debit Credit for income and liabilities
	Increase	Decrease
Incomes	Credit	Debit
Liabilities	Credit	Debit
Equity	Credit	Debit