Financial Accounting for Managers

The Accounting Mechanism of Debit & Credit

By Anil Kshatriya
1 July 2015 [IMT Nagpur]
Rules of Accounts
Personal Account Debit the receiver
Credit the giver

Real Account Debit what comes in

Credit what goes out

Nominal Account Debit Expenses & Losses

Credit Incomes & Gains
 Rules of Accounts
Personal Account Debit the receiver (+Asset in B/S)
Credit the giver (+Liability in B/S)

Real Account Debit what comes in (+Asset in B/S)

Credit what goes out (-Assets in B/S)

Nominal Account Debit Expenses & Losses (+Exp in P&L)

Credit Incomes & Gains (+Income in P&L)
Category Debit Credit

Increase in asset e.g. Decrease in asset e.g.

Asset Purchase of Cash paid to vendor
machinery
Decrease in liability Increase in liability
Liability
e.g. Loan repayment. e.g. Borrowing loan
Repayment of capital Raising of capital
Capital

Payment of expenses Receipt of Income

Income/Expense e.g. salaries to staff e.g. Sale of goods or
services
Now let us put everything together.

Reliable Industries Ltd. [RIL] is a consumer durables

manufacturing company.
Company has provided us a snapshot of some of its
transactions for the month of March 2015. We are
expected to classify the accounts involved in each
transaction into Debit and Credit.
Our goal to show effects of transactions on Income
Statement and Balance Sheet of RIL for reporting as on
31st March 2015.
 The sales revenue generated from sale of stock during March was Rs.
15,00,000. The entire value is due from debtors in May 2015.
RIL invested Rs. 5,00,000 in mutual funds using funds in bank account.
The cash balance of company on 1st March was 10,00,000. 50% of this
was used to payoff debt towards SMS Ltd., a creditor for supply of raw
materials.
A new machinery worth Rs. 3,00,000 was purchased on 30 th March on
credit and depreciation was charged on existing machinery worth
4,00,000 @ 10%. Bills of creditor will be cleared in June 2015.
Tax dues are Rs. 1,00,000 for F.Y. 2014-15.
Company felt the need for bank overdraft of Rs. 2,00,000. Finance
Director had a meeting with Branch Manager of the bank on 31 st
March 2015.
 Practice Example

1. Company commenced business with cash 70,000

2. Purchased goods on credit from Mr. B 14,000
3. Paid wages 500 in cash
4. Paid to Mr. B 10,000 in cash
5. Purchased furniture 1,000 cash
6. Goods stolen from the store 2000
7. Received commission 1000 by cheque