Having looked into the basics of accounting for different class of items, now we have a basic understanding of how accounting works. The relative treatment of different transactions is always based on the double-entry method which means that every transaction will have two effects (Debit and Credit) which will always make both sides of the entry equal (Total of Debit and Credit for any transaction will always become equal).
For example, we purchased a car for business use.
The asset i.e. car will be debited because the rule for asset increase is debit. Whereas, we purchased the car on cash say 1000 $. Cash is also an asset for a business (it is a short term asset which is the current ability of the company to pay off its debts.) , so the payment of cash marks a decrease in an asset which you will remember means a credit of that asset.
The entry becomes:
Car a/c 1000 $ (Dr.)
Cash a/c 1000 $ (Cr.)
Now, as you can see the entry had two effects a debit and a credit and both were equal in worth. That is the double-entry method and this is the widely accepted and the basis for all acounting being done all over the place.
Some, transactions for your personal review are here:
1. The company purchased furniture worth 200 $ on credit.
2. Paid salaries to employees amounting to 1000 $.
3. Made sales worth 50,000 $ on cash.
The rules for the above mentioned entries will be based on the basic rules which I mentioned in my previous posts. The effects will be two and will be equal always!
For example, we purchased a car for business use.
The asset i.e. car will be debited because the rule for asset increase is debit. Whereas, we purchased the car on cash say 1000 $. Cash is also an asset for a business (it is a short term asset which is the current ability of the company to pay off its debts.) , so the payment of cash marks a decrease in an asset which you will remember means a credit of that asset.
The entry becomes:
Car a/c 1000 $ (Dr.)
Cash a/c 1000 $ (Cr.)
Now, as you can see the entry had two effects a debit and a credit and both were equal in worth. That is the double-entry method and this is the widely accepted and the basis for all acounting being done all over the place.
Some, transactions for your personal review are here:
1. The company purchased furniture worth 200 $ on credit.
2. Paid salaries to employees amounting to 1000 $.
3. Made sales worth 50,000 $ on cash.
The rules for the above mentioned entries will be based on the basic rules which I mentioned in my previous posts. The effects will be two and will be equal always!
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