Debits and Credits Determination Process
Debits and credits must follow specific process to ensure accurate recording of transactions. In double-entry system, each transaction consists of two aspects (debit and credit) and the following steps are followed to determine it correctly.
Steps for determining debit and credit:
Step 1: Identify the transaction
First the transaction needs to be identified and its financial nature understood. That is, identifying what kind of asset, liability, income or expense the transaction relates to.
Example: Let’s say you sold goods for $10,000 and received payment in cash.
Step 2: Identify the account
Accounts related to these transactions should be identified. In the example:
Cash Account: This is the asset, because the business has increased cash.
Sales account: This is the income (revenue), because the income of the business has increased through the sale of products.
Step 3: Determine the Effect
The effect of the transaction on each account must be determined.
Cash Account: Cash account is increasing in cash, so it will be debited.
Sales Account: Sales being income, income is increasing, so it will be credit.
Step 4: Apply Debit-Credit Rules
Now assign debits and credits as per double-entry system rules.
|
Account Type |
Debit |
Credit |
|
Assets |
Increases |
Decreases |
|
Revenue |
Decreases |
Increases |
Step 5: Creating Journal Entries
Journal entries are made after determining the debits and credits as per the accounts identified above.
Debit Credit Determination Process with Examples:
Example 1: Sale of goods
You sold goods for $10,000 and received payment in cash.
Step 1: Identify the transaction
Income is generated by the sale of goods and cash is received.
Step 2: Identify the account
Cash Account (Assets)
Sales Account (Revenue)
Step 3: Determining Impact
Cash account is increasing (will be debited).
Sales account is increasing (will be credited).
Step 4: Apply the rules
Assets in the cash account increase, so it will be debited.
Revenue in the Sales account increases, so it will be a credit.
Step 5: Journal Entry Date Particulars Debit ($) Credit ($)
—————————————————————————————————————————————————
10/10/2024 Cash A/C Dr. $10,000
To Sales A/C Cr. $10,000
(Narration: Sold goods for cash)
Example 2: Payment of electricity bill
You paid electricity bill of $5,000 in cash.
Step 1: Identify the transaction
Electricity bill is paid, which is an expense, and payment is made in cash.
Step 2: Identify the account
Electricity Consumption Account (Expense)
Cash Account (Assets)
Step 3: Determining Impact
Electricity consumption is increasing (will be debited).
Cash flows decrease (will be credited).
Step 4: Apply the rules
Electricity consumption increases, so it will be debited.
Cash decreases, so it will be credit.
Step 5: Journal Entry Date Particulars Debit ($) Credit ($)
—————————————————————————————————————————————————
08/10/2024 Electricity Expense A/C Dr. $5,000
To Cash A/C Cr. $5,000
(Narration: Paid electricity bill in cash)
Example 3: Purchase of goods on credit
You have purchased goods worth $30,000 and will pay within 15 days (purchase on credit).
Step 1: Identify the transaction
Goods are purchased and money is paid later, which remains as a liability.
Step 2: Identify the account
Purchase Account (Expense)
Accounts Payable Accounts (Liabilities)
Step 3: Determining Impact
Expenses are increasing (debited) in Purchases account.
Accounts Payable Accounts are increasing liabilities (will be credited).
Step 4: Apply the rules
Purchase account expense, which is increasing, will therefore be debited.
Accounts Payable is a liability, which is increasing, so it will be a credit.
Step 5: Journal Entry Date Particulars Debit ($) Credit ($)
—————————————————————————————————————————————————
12/10/2024 Purchases A/C Dr. $30,000
To Accounts Payable A/C Cr. $30,000
(Narration: Purchased goods on credit)
Main Objectives of Debit-Credit Determination:
Determining the debits and credits of each transaction correctly keeps the financial accounts of a business balanced and accurate.
More Resources
Thank you for visiting our site expartinaccounting.com and reading our resources on the Debits and Credits Determination Process for Accurate Accounting. Enhancing your knowledge more and progressing in your career, you may find the following guides helpful: