In article business transaction, we have explained that an event can be journalized as a valid financial transaction only when it explicitly changes the financial position of an entity. In accounting, a change in financial position essentially signifies an increase or decrease in the balances of two or more accounts or financial statement items. The rules of debit and credit determine how a change affected by a financial transaction can be updated in a journal and then applied to accounts in ledger. The basic principle is that the account receiving benefit is debited, while the account giving benefit is credited. For instance, an increase in an asset account is a debit.
Again, debit is on the left side and credit on the right. Normal balance, as the term suggests, is simply the side where the balance of the account is normally rules of debits and credits found. Understanding debits and credits—and the fact that debits are on the left and credits are on the right—is crucial to your success in accounting.
Recording payment of a bill
Credits actually decrease Assets (the utility is now owed less money). If the credit is due to a bill payment, then the utility will add the money to its own cash account, which is a debit because the account is another Asset. Again, the customer views the credit as an increase in the customer’s own money and does not see the other side of the transaction. Let’s use what we’ve learned about debits and credits to determine what this accounting transaction is recording. The first step is to determine the type of accounts being adjusted and whether they have a debit or credit normal balance. As a general overview, debits are accounting entries that increase asset or expense accounts and decrease liability accounts.
If he takes any money or goods from the business for his personal use, that will reduce his capital and therefore an entry will be made on the debit side of his account. Whenever an amount of cash is paid out, an entry is made on the credit side of the cash in hand account. Consumers are used to paying a surcharge for credit payments, but businesses now commonly charge one surcharge to cover all types of payments. Worthington said customers were probably noticing these surcharges at small and medium-sized businesses, as larger chains could negotiate package deals with their banks. Small and medium-sized businesses are also more likely to use independent card reader systems, like Square, which charge higher fees.
Aspects of transactions
As is commonly assumed, debit and credit do not mean increase or decrease. Throughout the recording process, the words “debit” and “credit” are frequently used to describe where entries are made in accounts. The journal entry “ABC Computers” is indented to indicate that this is the credit transaction.
