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:
- Transactions relating the owner, e.g. Capital and drawings. These are in the nature of Personal Accounts.
- Transactions relating to the other liabilities, e.g. Suppliers of goods. These are also usually in the nature of Personal Accounts.
- Asset-related transactions, e.g. land, building, plant, and machinery, cash, bank, stock, bills receivable, etc. These are in the nature of Real Accounts.
- Transactions relating to the expenses, e.g. salary, wages, rent, commission, freight, cartage, etc. These are in the nature of Nominal Accounts.
- Transactions relating to the revenues or incomes, e.g. interest, dividend, sale of goods, etc. These are also in the nature of Nominal Accounts.
Browse more Topics under Accounting Process
- Objectives of accounting
- Bookkeeping
- Accounting Cycle
- Classification of Accounting
- Accrual Basis and Cash Basis
- GAAP
- Basic Assumption of Accounting
- Modifying Principles
- Capital and Revenue Transactions
- Types of Accounts
- Double Entry system
- Accounting Equation
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
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
- Commenced business with capital.
- Purchased goods for cash.
- Paid wages.
- Sold goods for cash.
- Received commission
- 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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