Accounting Principles of Debits and Credits

Financial Accounting > Debits and Credits

Universal principles of debit or credit.—The following are the universal principles in the science of accounts which govern all business transactions to which debits and credits apply:

ACTIVE OR DEBIT SIDE.
(a) Debit whoever owes the business or firm.
(b) Debit whatever is bought at cost value.
(c) Debit cash received.
(d) Debit notes receivable account, for others’ notes
received.
(e) Debit notes payable account, for our own notes
redeemed.
(f) Debit profit and loss account for all losses.
(g) Debit proprietorship account or accounts for
withdrawals as well as for debit balances carried forward from the profit and loss account. REASONS.
(a) All parties who owe the firm should be debited,
in order that the firm may know how much other persons owe it.
(b) All property bought should be debited, under ap
propriate titles, that the firm may know how much it cost.
(c) Cash received is debited, in order to show how
much cash has been received.
(d) Bills or notes receivable account should be
debited for all notes received by us, in order to show the amount received.
(e) Bills or notes payable account should be debited
for all notes previously issued by us and now redeemed, in order to show the amount of our notes redeemed.
(f) All losses should be charged to the profit and
loss account, in order to show the amount lost.
(g) Proprietorship account or accounts should be
debited in order to adjust losses and withdrawals against capital contributed. Another and potent reason why all these accounts
should be debited is, as explained before, because they
receive the benefit of the exchange.

PASSIVE OR CREDIT SIDE.
(a) Credit whomever the business owes.
(b) Credit whatever is sold and produces value.
(c) Credit cash paid out.
(d) Credit notes receivable account for others’ notes,
redeemed by makers thereof.
(e) Credit notes receivable discounted account for
others’ notes, discounted by the firm.
(f) Credit notes payable account for our notes is
sued.
(g) Credit profit and loss account for all gains.
(h) Credit the proprietorship account or accounts
for capital invested, for interest on capital invested, and also for credit balances carried forward from the profit and loss account.

REASONS.
(a) All parties whom the firm owes should be cred
ited, in order that the firm may know how much it owes to other parties.
(b) All property sold should be credited under ap
propriate titles, that the firm may know how much was sold.
(c) Cash disbursed is credited, in order to show how
much has been paid out.
(d) Bills or notes receivable account is credited for
all notes paid by the respective makers or indorsers thereof, in order to show the amount of notes redeemed by others.
(e) Notes receivable discounted account is credited
for others’ notes discounted by us, in order to show the contingent or doubtful liabilities created by us.
(f) Bills or notes payable account is credited for all
notes issued by us, in order to show amount of our notes issued and outstanding.
(g) All gains should be credited to profit and loss
account, in order to show amount gained.
(h) Proprietorship accounts should be credited, in order to adjust profits against withdrawals and thus show present worth. All these accounts are credited because they yield the benefit of an exchange.

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