Rules of Debit and Credit Based on Types of Accounts - Assignment Example

Finance and Accounting Number: Paper: Finance and Accounting Exercise 2-4 Rules of debit and credit based on types of accounts Under double-entry system, account can be classified into main three types. They are known as the real account, personal account and nominal account. These different types of account have three separate rules of debiting and crediting transactions. The rules that are considered, according to the different types of account, are as follows: 1. Personal Account The personal account determines the account which is held by a person. The person can be a natural person or artificial, like, organisation, institutions and even, representatives of the person, such as, creditors or debtors. The person, whether it is natural or representatives or artificial, has the right to benefit or provide it to others. The rule attached to these account can be elaborated as: Debit Receiver of the benefits Credit Giver of benefit The rule indicates that when a person receives the benefit, his account is debited by the amount of the benefit that is received by him. When a person provides others with the benefits, then his account is credited by the amount, which is given by him. B. Real Account The real account records the asset that is possessed by an individual. The asset is divided into two groups: current and fixed. The current asset includes cash, receivables and more. However, fixed asset includes intangible assets (i.e. goodwill), buildings and such (Ingram 51) The assets (fixed, current or intangible) are purchased for the business or are sold out, which denotes that the asset is decreasing for the individual or company. The rule of debiting and crediting for this account indicates the following: Debit What comes in Credit What goes out The rule indicates that whenever there is a purchase for business, the account gets debited. However, when assets are getting out of the business through sales, then the account is credited at the same time. Example: When cash is invested in a particular business, cash (the current asset) account is debited by the respective cash amount. If equipments and furniture are purchased for running the business with the help of cash, the equipment and furniture account is debited, since it falls under the current asset account, which is credited, since amount of cash is going out of the business account in exchange of furniture and equipment. C. Nominal Account The nominal account records the loss or expense or income or gain. The expense or loss is forfeit of the benefit that is exchanged for services used. The income or gain is the profit that is earned in exchange of services that are rendered. The following are the rules of debiting and crediting: Debit Expenses and loses Credit Incomes or gains The rule indicates that when some benefit is forfeited in exchange of services, then the expense account is debited. However, the reverse happens when some benefit is incurred after rendering a service. Example: When a business pays salary to its employees, the expense is made in books of the company and therefore, the salary account of employees is debited. However, when interest is received by the company, it is an income for the same and hence, the interest account is credited. The process of accounting takes into consideration recording of transactions or all economic events, during a particular accounting period. Results of the accounts are communicated to the external and internal users. Debits and credits are the main tools of recording transactions that are taking place in day to day life. The debit side is termed as Dr. and the credit side is denoted as Cr. The rules related to both form the backbone of the accounting process. The rules were formulated in 1494 and have been the foundation of the accounting process, which is used by companies and individuals, since then. The rules are integral part of the double entry system, that had its origin long before, in the book-keeping era. For transactions, it is noted that credit and debit are equal. The assets are equivalent to the liabilities and stockholder’s equity (Edwards 76). Thus, by applying the same rules, the following table can be filled up with their respective answers.   Increase Decrease Normal Balance Balance sheet accounts:         Asset Debit   _________________   Credit   Credit _________________     Liabilities Credit   Debit _________________   Debit _________________     Stockholder equity:           Capital Stock Credit Debit  _________________   Credit _________________       Retained Earnings   Credit _________________   Debit Credit     Dividends Debit   Debit _________________     Debit _________________   Income statement accounts:         Revenue Credit   Debit _________________    Credit __________   Expense   Debit _________________   Credit Debit Exercise 2-13   Account Debited Account Credited Transaction Type Effect Type Effect (1) Cash   - Real account _________________   Decrease  _________________   _________________   ________________ (2) Equipment – Real account ____________    Increase _________________     _________________     _________________   (3)  Dividend _ Real Account _________________   Increase  _________________     _________________     _________________           _________________     _________________   (4) ______________     ________________  Accounts Receivables - Real account _________________    Increases ____________ _____   (5)   Accounts Payable – Real account _________________     Decrease _________________     _________________     _________________   (6)  _________________     _________________    Service Revenue – Real Account _________________   Increase  _________________   (7)  Supplies – Real account _________________   Decrease  _________________     _________________     _________________   (8)  _________________     _________________    Capital Stock – Nominal account _________________     Increase _________________   (9)   Operating Expenses – Nominal Account _________________    Decrease _________________     _________________     _________________   a) For the debit and credits, following are the effect for the nine transactions: 1) Cash: The cash balance of SW Exploring Co. has decreased, since there have been few transactions and cash is utilized to make payment of the transactions. The suppliers are paid $ 2,000; dividends are paid to the investors of an amount of $ 4000. Equipments are purchased for the agency which amounts to $ 18000. The accounts of $ 14,400 are paid as accounts payable. 2) Equipment was brought in for the agency after spending $18000. This amount is paid in cash, so while the cash decreased, the asset increased. 3) Dividend is paid to investors, which amount to $ 4000 and this amount is paid from the cash of the agency. Thus, cash decrease with the increase in asset. 4) Accounts receivables have affect on the cash balance of the agency. $18,500 is added to the cash balance of the company. Therefore, it is noticed that the cash is increasing. 5) Accounts payable, which amounts to $ 9000, is paid from the cash, which indicates that there has been a decline in cash as well as in liability of the agency. 6) Service revenue is received and it has increased cash balance of the agency; thus, is debited in the accounts receivables account. 7) Supplies account denotes that $ 2000 cash has been paid for the supplies and operating expense of $ 1050 is credited. Here, cash is decreasing. 8) Capital Stock account is credited $40000 and the cash is debited with the same amount. The capital account is created with help of the cash, which is obtained from the cash account. 9) Operating Expenses account is debited, since $2700 is paid through cash. b) The following are effects on the account: 1) Cash account is decreasing. 2) Equipment account is increasing. 3) Dividend account is increasing. 4) Account payable is decreasing with the payment of liabilities. 5) Service revenue account is increasing as revenue is received in form of cash. 6) Suppliers account is increasing. 7) Capital stock account is increasing, since $40000 is added to the account, which is received in form of cash. Exercise 2-14 Journal entries are transactions that are lodged as transactions in the journal which comprise final accounts. The journal entry comprises different transactions, which are either debit or credit. The first step of the accounting cycle is recording the transactions in the journal. It is done at the beginning of a particular accounting period and recording is done throughout the period of the year. Analysis of the transactions denotes the process that establishes a particular event of business, which has economic effect on liabilities, assets or equity of business. It also evaluates the amount of transactions i.e. currency value. After analyzing the transactions, accountants record and classify the economic effects, through the journal entries, in accordance with debit and credit rules. The important journal entries are recorded frequently in the specialized journals, such as, the purchase and sales journal. The rest of the transactions are recorded in general journals. One of the utility of trial balance is that it considers all transactions in a simplified manner, which helps an accountant to evaluate performance of the finance for a particular period of time. Debit Credit  (1)        Equipment Dividend Accounts Payable Operating Expenses Supplies Account Receivables 18000 4000 9000 3750 2000 18500        Cash 55250  (2)          Equipment 3600        Cash 3600  (3)         Dividends 4000 Cash 4000 (4)        Cash 18500  Accounts Receivables 18500 (5)        Accounts Payable 9000 Cash 9000  (6)        Cash 18500        Service Revenue 18500  (7)         Supplies 2000        Cash 2000  (8)         Capital Stock 40000 40000       Cash  (9)         Operating Expenses 2700        Cash 27000   Note: (1) An amount of cash is paid to purchase equipments, payout the dividend, pay liabilities and pay supplies. The amount paid in cash is $50,000. (2) Purchased equipment for the agency for $3600. (3) Paid out dividend of $4000 to the investors. (4) An amount of $18500 is received from customers after rendering them their service. (5) An amount of $9000 was paid for the equipment, which costs $18000. (6) An amount of $18500 is received as services rendered. (7) $2000 is paid for supplies. (8) An amount of $40,000 is deposited in the capital account from the cash account. (9) Operating expense of $1050 is spent by the agency. Problem 2-1A T accounts Cash (1) 30000 (8) 8150 (3) 3500 (2) 5000 (12) 1200 (4) 9000 (5) 1200 (6) 2400 (7) 300 (9) 2500 (10) 400 (13) 1800 (14) 600 Balance 26700 Capital (1) 30000 Balance 30000 Rent (3) 3500 Balance 3500 Automobile (2) 25000 Balance 25000 Office and Computer Equipment (4) 9000 Balance 9000 Supplies (5) 1200 Balance 1200 Insurance (6) 2400 Balance 2400 Accounts Receivables (9) 8150 Balance 8150 Miscellaneous expenses (7) 300 Balance 300 Accounts Payable (2) 2500 (2) 400 (15) 1200 Balance 4100 Service Revenue (16) 1200 Balance 1200 Salary (13) 1800 Balance 1800 Repair (4) 600 Balance 600 Trial Balance is defined as the list of transactions, which are provided in a general ledger. The accounts contain both capital and revenue transactions. The trial ledger consists of the list of nominal ledger accounts and their respective values. The value of the nominal ledger is either recorded as debit or credit. It is used as a proof of arithmetical accuracy of the transactions, which are lodged in the general ledger. The unadjusted trial balance lists accounts from the general ledger, at the end of a particular accounting period. To arrive at the financial statement, entries are adjusted to the balances. The adjusted trial balances are prepared at the beginning of analyzing the accounts. This helps accountants to get an idea of accounts, where adjustments should be made. The debit and credit side of the trial balance does not match in this particular case and needs to get adjusted, since both sides need to be matched (Kimuda 123). After checking the adjustments, that are to be made, modifications are made accordingly to the ledger.  Leila Durkin, Architect, P.C.   Unadjusted Trial Balance   May 31, 2012  Transactions  Debit Balances   Credit Balances        Cash  26700         Capital    30000       Rent    3500       Automobile  5000         Office and Computer Equipment  9000         Supplies  1200         Insurance  2400         Accounts Receivables  8150       Accounts Payable  4100       Miscellaneous Expenses  300         Service Revenue    1200       Salary  1800         Repair  600         Free delivery    12900       Suspense account    3450  55150  55150 The net income for May is $3450. Problem 2-2A Journal Entries Debit Credit  (1)        Capital 20000        Cash 20000  (2)        Rent 3750        Cash 3750  (3)        Supplies   1100 Cash 1100 (4)        Creditors 400 Cash 400 (5)        Cash 16750 Sales Commission 16750  (6)        Automobile Expenses 1000       Cash 1000  (7)         Miscellaneous Expenses 700        Cash 700  (8)         Salary 2150       Cash 2150  (9)         Cost of Supplies 600        Cash 600 (10) Dividend 1000 Cash 1000 Trial Balance  Heavenly Realty Company  Trial Balance  October 1, 2012  Transactions  Debit Balances   Credit Balances        Cash 38650         Capital   20000       Rent    3750       Supplies  1100         Creditors  400         Sales Commission    16750       Automobile Expenses 1000         Miscellaneous Expenses 700       Salary 2150  4100       Cost of Supplies  600   44600  44600 T- Account Cash (1) 20000 (8) 8150 (2) 3750 (3) 1100 (12) 1200 (4) 400 (5) 1000 (6) 700 (7) 2150 (8) 600 (9) 1000 Balance 10700 Capital (1) 20000 Balance 20000 Rent (2) 3750 Balance 3750 Supplies (3) 1100 Balance 1100 Creditors (4) 400 Balance 1200 Sales Commission (10) 16750 Balance 16750 Automobile Expenses (5) 1000 Balance 1000 Miscellaneous Expenses (6) 700 Balance 700 Salary (16) 1200 Balance 1200 Cost of Supplies (8) 600 Balance 800 Dividend (9) 1000 Balance 1000 Unadjusted Trial Balance  Heavenly Realty Company Unadjusted  Trial Balance  October 1, 2012  Transactions  Debit Balances   Credit Balances        Cash 10700         Capital   20000       Rent    3750       Supplies  1100         Creditors  400         Sales Commission    16750       Automobile Expenses 1000         Miscellaneous Expenses 700       Salary 2150  4100 Dividend 1000       Cost of Supplies  600   Suspense Account 26950 44600  44600 a. Amount of total revenue recorded in the ledger. $   __________16750_______   b. Amount of total expenses recorded in the ledger. $   _______1700__________   c. Amount of net income for October. $   ________26950_________   5.  Determine the increase or decrease in retained earnings for October. $   _________________ Increase by $1000    _________________   Works Cited Edwards, John. Financial accounting. New York: Routledge. 2008. Print. Ingram, Robert. Financial accounting. New York: South-Western Cengage Learning. 2007. Print. Kimuda, Daniel. Financial accounting. Kampala: East African Publishers ltd. 2008. Print. Read More