Accounting Process

Accounting Process

We all know that in accounting we debit and credit accounts in order to record the transactions. Thus, Accounting Process refers to the process of deciding which account to debit and which to credit. There are two approaches that help us in deciding which account to debit and which to credit. One is the Modern Approach or the American Approach and the other one is the Traditional Approach or the British Approach. Generally, most of the organizations follow the British Approach for the recording of the transactions. Let us now discuss them in detail.

Accounting Process

Following are the two approaches for deciding which account to debit and which to credit:

A. American Approach or the Modern Approach

Under this approach, we divide the transactions into the following five categories:

  1. Transactions relating the owner, e.g. Capital and drawings. These are in the nature of Personal Accounts.
  2. Transactions relating to the other liabilities, e.g. Suppliers of goods. These are also usually in the nature of Personal Accounts.
  3. Asset-related transactions, e.g. land, building, plant, and machinery, cash, bank, stock, bills receivable, etc. These are in the nature of Real Accounts.
  4. Transactions relating to the expenses, e.g. salary, wages, rent, commission, freight, cartage, etc. These are in the nature of Nominal Accounts.
  5. Transactions relating to the revenues or incomes, e.g. interest, dividend, sale of goods, etc. These are also in the nature of Nominal Accounts.

Thus, as per this approach, we need to follow the following rules in order to decide which account to debit and which to credit:

I. For Assets Accounts

Debit Increase in Assets

Credit Decrease in Assets

II. For Liabilities Accounts

Debit Decrease in Liabilities

Credit Increase in Liabilities

III. For Capital Account

Debit Decrease in Capital

Credit Increase in Capital

IV. For Income Accounts

Debit Decrease in Income

Credit Increase in Income

V. For Expenses Accounts

Debit Increase in Expenses

Credit Decrease in Expenses

VI. For Stock Account

Debit Increase in Stock

Credit Decrease in Stock

Accounting Process

Source: freepik.com

B. British Approach or the Traditional Approach or the Double Entry System

Under this approach, we need to first identify the account that is getting affected by a transaction. After identifying the type of account, the next step is the application of the rules to decide which account to debit and credit.

These rules of Double-entry are known as the Golden rules. These are as follows:

I. Real Accounts

Debit what comes in

Credit what goes out

II. Personal Accounts

Debit the receiver

Credit the giver

III. Nominal Accounts

Debit all expenses and losses

Credit all incomes and gains

Examples of Accounting Process

From the following particulars ascertain the debit and credit using

A. Modern Approach

B. Traditional Approach

  1. Commenced business with capital.
  2. Purchased goods for cash.
  3. Paid wages.
  4. Sold goods for cash.
  5. Received commission
  6. Purchased furniture on credit from Ram.

Ans.

A. Modern Approach

S. No. Effect of transaction Account Debit or Credit
1. Increase in cash Cash Debit
Increase in capital Capital Credit
2. An Increase in stock Purchase Debit
Decrease in cash Cash Credit
3. Increase in expense Wages Debit
Decrease in cash Cash Credit
4. Increase in cash Cash Debit
Decrease in stock Sales Credit
5. Increase in cash Cash Debit
Increase in income Commission Credit
6. An Increase in asset Furniture Debit
Increase in liability Ram Credit

B. Traditional Approach

S. No. Step I Step II Step III Step IV
1. Cash A/c Real Comes in Debit
Capital A/c Personal Giver Credit
2. Purchase A/c Nominal Expense Debit
Cash A/c Real Goes out Credit
3. Wages A/c Nominal Expense Debit
Cash A/c Real Goes out Credit
4. Cash A/c Real Comes in Debit
Sales A/c Nominal Income Credit
5. Cash A/c Real Comes in Debit
Commission A/c Nominal Income Credit
6. Furniture A/c Real Comes in Debit
Ram A/c Personal Giver Credit

 

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