Debits and Credits

Topic:  Debit (Dr.) and Credit (Cr.)
Speaker: M. Ray Gregg

Main Points of Session:

• Each business transaction is firstly recorded in Journal Book (book of original entries) after that these transactions are classified and posted in a book called Ledger Book (book of accounts).

• In Ledger each account has its own page for the purpose of classification, these separate accounts are known as T Account, because of  its shape.

• In T Account, the horizontal line is for the name of account and the vertical line is to separate the Debit (Dr.) side from Credit (Cr.) side. Left side is known as Debit (Dr.) and the right side is known as Credit (Cr.)

• Nature of Accounts:

Accounts	Nature
Asset	Debit
Liabilities	Credit
Capital/ Owner’s Equity	Credit
Revenue	Credit
Expenses	Debit

• If anyone of the account increases will be recorded in the side of its nature and if decreases will be recorded in opposite side. 

           For Example:

Asset increase = Debit
Asset decrease = Credit
Capital increase = Credit
Capital decreases = Debit
Revenue increases = Credit

Revenue decreases = Debit

• Reasons of Change in Capital:

• Investment by the owner 
• Withdrawal by the owner 
• Revenue 
• Expenses

• Classification of Accounts

• 5 Ways:     Assets, Liabilities, Capital, Revenue and Expenses. These are the 5 major accouts and every other account is the sub account of any one of these Major Accouts.

For Example, Cash is the sub account of Assets, other examples are listed below

Sub Account	Major Accounts
Cash	Asset
Accounts Payable	Liability
Rent Expense	Expense
John’s Equity	Owners Equity
Income	Revenue

2 Ways:     Accounts can also be classified on the basis of  Balance Sheet (BS) and Income statement (IS). For example, Revenue and Expenses are showed in Income Statement (IS) but not in Balance Sheet (BS) so these are the accounts of Income Statement( IS), same way Assets and Liabilities are showed in Balance Sheet (BS)  but not in Income Statement (IS) so these are the accounts of Balance Sheet (BS).

2 Ways:     Real Accounts and Nominal Accounts, Real Accounts are those which we carry on or in simple words those are permanent accounts. For example Account Receivables, Account Payable

Nominal Accounts are those we don’t carry on and stop at the end of every fiscal year  and start again at the start of a new fiscal year. In simple words these accounts are temporary for example revenue accounts, expense accounts