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Numerous transactions take place in business
concerns every day. For example, goods are sold to
various customers every day, purchases are made from
suppliers, cash is paid to creditors and is received
from debtors, expenses are paid etc. All these
transactions should be properly analyzed and
recorded. Again, the concept of double change in a
business transaction is important to keep in mind.
To record these changes different accounts are
maintained in the ledger (Read
our detailed article about ledger).
Definition and Explanation of
Account:
Account is the individual record of an asset, a
liability, a revenue, an expense or capital, in a
summarized manner. For example, the individual
record of sales is 'sales account'. In the same way
there are so many accounts which are opened in the
ledger like salary account, machinery account,
furniture account etc. How many accounts there
should be in the ledger of a business? It depends
upon the nature and size of the business.
Generally one full page is fixed in the
ledger for
each account. But it depends, how many times the
changes take place in that particular account. Some
accounts are very busy accounts like cash account,
bank account and sales account. Obviously for such
accounts one page for each will not be enough and
so, they need more pages in the ledger to be fixed.
In some accounts, changes take place only once or
twice in a year, so only one page will be enough.
e.g. machinery account, capital account, loan
account etc.
There
are two types of changes that may take place in an
account, e.g. either there will be increase or there
will be decrease. Take the example of cash (an
asset), either there is inflow of cash or there is
outflow of cash. To record these two types of
changes, every account (a page) is divided in two
sides. Increase is recorded on one side and decrease
is recorded on the other side. The specimen of an
account (a 'T' form of an account) is shown
below:
When a change takes place in an
account, either it will be recorded on the left side
(debit side) or on the right side (credit side).
Amounts recorded on the left side of an account,
regardless of the account title, are called debits,
and the account is said to be debited. Amounts
recorded on the right side of an
account are called credits, and the account is
said to be credited. Now keeping in mind the
concept of double change in every business
transactions, we can say that every business
transaction affects a minimum of two accounts and
every change (in a particular transaction) is
recorded in a separate account. Now question arises,
how the changes are recorded in different accounts?
It depends upon the rules of debiting and crediting
which have been discussed on
rules for debits and credits page.
Example:
For example,
furniture is purchased for $20,000 on cash basis.
This is a business transaction and it has brought
two changes.
- Increase in
furniture by $20,000 (an asset).
- Decrease in
cash by $20,000 (an asset).
These two changes
are recorded in two accounts: furniture account and cash account in the following way:
Furniture Account
Cash Account
When an amount
of $20,000 is recorded on the debit side
(left side) of
furniture account, it is said that furniture
account is debited and when an amount of
$20,000 is recorded on the credit side
(right side) of
cash account, it is said that cash account
is credited. When an asset increases the
account of that asset is debited and when an
asset decreases the account of that asset is
credited.
Click here to read a detailed article about
rules of debit and credit.
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