Accounting as language of business has its own vocabulary. There are certain rules for recording increase or decrease in assets, liabilities and capital in the books of accounts, which are known as rules for debit and credit.
Definition of Accounts, Debit and Credit:
Separate records of transactions are known as accounts. Accounts are kept to show transactions of similar nature. Instead of using a plus or minus sign to indicate increase or decrease of an item. Each account has two sides (halves) out of which left hand half is called debit and right hand half is called credit. These rules are discussed below in order to fully understand the relationship between assets, liabilities and capital.
Explanation of Rules for Debit and Credit OR Use of “T” Account:
The nature of the assets is different from liabilities and capital as they are on the other side of the accounting equation. At the outset of the accountants had a choice to represent an increase in an asset account by either a debit or credit entry as this is solely arbitrary. Traditionally, the debit side has been chosen for this. It has been adopted universally. Once this convention established, increase in liabilities and capital accounts must be represented by credit entries in order to reflect the fact that these items are on the other side of the accounting equation.
These rules may be well related to the location of these items in the fundamental accounting equation. Assets are shown on the left side of the equation and all liabilities and equity items are located on the right side. As assets are located on the left hand side of the equation so increase in assets should also be recorded on the left side of their “T” accounts. Likewise entries to increase in capital or liabilities are recorded on the right side of their “T” accounts are these items are placed on the right hand side of the fundamental equation.
On the other hand, decrease in assets, liabilities and capital accounts require an entry on the opposite side of the “T” account from their location in the accounting equation. For example; assets which are found the left hand side of the equation require an entry on the right side of the “T” account to record decrease in their values. Similarly entries to decrease in liability or equity accounts are recorded on the left side of the “T” account.
Ledger Account, Definition and Uses:
A ledger is a book of accounts to maintain a classified record of all the financial (monetary) or business transactions of a business. Ledger is the book of second or final entry, used as raw information, on the basis of which accountants prepare trial balance and financial statements. In the ledger, one page or sometimes more than one page, contain a record of transactions relating to a particular item. This record is known as an account.