DEBIT AND CREDIT

Having looked into the basic classifications of items related to an enterprise i.e., ASSETS, LIABILITIES, INCOME, EXPENSES, and CAPITAL, I will now briefly mention the basic rules of accounting for all of these items. These basic rules are based on two things; DEBIT and CREDIT!

These are rather alien terms which have been in vogue in the subject of accounting and form the basis of all accounting. Before explaining these two terms let me say that the names don't matter here but the function does. Let's start from a simple example, Income and expenses are the exact opposites of each other, agreed? Good! So, while accounting for any new income earned by a company the treatment should be fundamentally opposite to the incurring of an expense.

Similarly, as I said before Assets and Liabilities are mirror images of each other. So, the acquisition of an asset should be accounted for, as the direct opposite treatment of liabilities. And this brings us to THE ACCOUNTING EQUATION! It goes like this:

ASSETS = CAPITAL + LIABILITIES

This equation signifies the fact that whenever, one element of the equation is affected it will affect some other element as well, and the equation will hold good.

For example, lets say I purchased an asset on credit worth 100 $. So, now the equation will be:

+ 100$ = 0$ + 100$

+ 100$ = + 100$

See, just like this the equation will always hold true. When we purchased the asset our asset increased by 100$ in value, but as we didn't pay the supplier so our liability also increased by 100$, and will remain there until we pay off the supplier in full. This is plainly the foundation of all accounting treatments.

And DEBIT and CREDIT is actually the phenomenon of these accounts being the opposites of each other. So, the increase of one is the dimunition of the other. The increase of ASSET is a DEBIT but contrary to that the increase in the LIABILITY is a CREDIT; THE EXACT OPPOSITE. I hope you got the idea. If not we can further discuss the issue.