Accounting for Managers Introduction to Accounting Accounting Equation and Rule of Debit and Credit

Accounting Equation and Rule of Debit and Credit

Learning Objective: This Chapter would enable you to understand:
Meaning of an Accounting Equation
Effect of Transactions on an Accounting equation
Meaning of an Accounts
Meaning of Debit and Credit
Classification of Accounts
Balancing an Account
Significance of Debit and Credit in Account
Significance of Various Balance

Accounting Equation

Quick Review: Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity).Assets = Capital + Liabilities

An Accounting Equation is a mathematical expression which shows that the assets and liabilities of an enterprise are equal. An accounting equation is based on the Dual Aspect Concept of accounting meaning; every transaction has two aspects – debit and credit. It holds that for every debit there is a credit of equal amount and vice versa. It means, total claims (those of outsiders and the proprietors) will always equal the total assets of the firm. The claim also known as equities, are of two types:

Owner’s Equity or capital and
Liabilities or amount due to outsiders (i.e., Outsiders Equity)

We can express it as follows

Capital = Assets – Liabilities

Liabilities = Assets – Capital

Assets = Equities (Total Claims)

Assets = Liabilities + Capital

Since, the accounting equation depicts the fundamental relationship among the components of the balance sheet, it is also sometimes called the Balance Sheet Equation. As the name suggests, the balance sheet is a statement of assets, liabilities and capital.

Determine the missing amounts on the basis of the Accounting Equation: Assets = Liabilities + Capital
(a) Rs. 20,000 = Rs. 15,000 + ?
(b) ? = Rs. 5,000 + Rs. 10,000
(c) Rs. 10,000 = ? + Rs. 8,000

At this stage, an introduction to a simple Balance Sheet shall be appropriate for appreciating the accounting equation. It is as follows:

Balance Sheet of Rahul & Co.

as at …………

Liabilities	Rs.	Assets	Rs.
Capital	4,00,000	Fixed Assets	3,00,000
Secured Loan From Bank	2,25,000	Land and Building	2,00,000
Current Liabilities	75,000	Machinery	50,000
Creditors	25,000	Computer	50,000
Expenses Outstanding	–	Current Assets	–
		Stock	1,00,000
		Debtors	25,000
		Cash and Bank Balances	–
Total	7,25,000	Total	7,25,000

A transaction whenever entered into will change the accounting equation but, the Accounting Equation will stand the test that it can change but will not break. It will always hold true with every change that occurs due to a transaction entered into. It is because of the reason that it is based on the dual aspect concept of accounting.

Attention Required: A transaction can change the accounting equation but cannot break it.

A transaction may affect either both sides of the equation by the same amount or one side of the equation only, by both increasing and decreasing it by equal amounts.

Transactions from the Accounting equation viewpoint, can be divided into two, i.e.,

Transaction Affecting Two Items and
Transactions Affecting More Than Two Items.

Let us discuss them in detail.

Transactions Affecting Two Items: As the title suggests, these are those transactions that affect two items of the accounting equation or Balance Sheet.

Transactions affecting opposite sides are:

Increase in Asset, Increase in Liability: Transaction such as credit purchases increase asset (stock) and also increase liability (creditor). Similarly, loans form bank increase asset (cash) and also increase liability (loan).
Decrease in Liability, Decrease in Assets: Transaction of payment to a creditor decreases liability (creditors) and also reduces assets (cash or bank).
Increase in Asset, Increase in Owner’s Equity: Introduction of capital by the proprietor increase asset (cash or bank) and also liability (capital).
Decrease in Owner’s Capital, decrease in Asset: Drawings By the proprietor decreases liability (capital) and also asset (cash or bank).

Transactions affecting same side but in opposite direction are:

Increase in Asset, Decrease in Another Asset: Transactions such as cash purchases or receipt from debtors increase one asset (goods and cash or bank, respectively) and decrease another asset (cash or bank and debtors).
Decrease in Liability, Increase in Another Liability: Settlement of creditor by issue of bill of exchange decreases a liability (creditor) and increases another liability (Bill of Exchange).
Transactions Affecting More Than Two Items: some transactions affect more than two items of the accounting equation or a balance Sheet. For Example, when a sale is made in cash for Rs. 30,000, it is made at cost (Rs. 25,000) plus profit (Rs. 5,000). Cost of goods (Rs. 25,000) reduces asset (stock of goods); cash increases by Rs. 30,000 and the owner’s capital increases by the profit (Rs. 5,000).

Attention Required: It should be noted that profit increases the owner’s capital and loss decreases it.

Effect of Transactions on Accounting Equation

The procedure to work out an Accounting Equation is:

Analyse the transaction in terms of such variables as assets, liabilities, capital, revenues and expenses.
Decide the effect of the transactions in terms of increase or decrease on variables mentioned in 1 above.
Record the effect on the relevant side of the equation.

Example – (To understand the Accounting Equation)

Suppose, Paresh starts business and the following successive transactions are entered into:

He commences his business with Rs. 20,000 as Capital.

Effect: The money put into a business by its owners (proprietors) is capital. A proprietor invests capital the business with the intention to earn profit. Business is a separate entity from its owner. Thus, it owes this amount to the proprietor, Paresh. It means that the firm has assets totalling Rs. 20,000 in the form of cash and also claims against the firm Rs. 20,000 in the form of capital. It means if Paresh changes his mind and decides not to do business the business will have to repay the amount to Paresh.

When Paresh set up his business:

He invested Capital = Rs. 20,000; Cash received by business = 20,000

Capital is a form of liability, because it is an amount owed by the business to its owner(s). Cash is an asset that is received by the business.

As liabilities and assets are always equal amounts, we can state the accounting equation as follows.

	Assets	=		Liabilities	+	Capital
	Cash
Cash Received From Rakesh	20,000	=	Owed to Rakesh			20,000

Purchases furniture for Rs. 500 in cash.

Effect: It means cash in hand is reduced by Rs. 500 but a new asset (furniture) of the same amount has been purchased. Thus, total of assets remains unchanged. The equation will now appear as follows:

	Assets					Liabilities		Capital
	Cash	+	Furniture	=
Old balance	20,000	+	0	=	Old balance	0	+	20,000
New Transaction	-500	+	500	=		0	+	20,000
New Balance	19,500	+	500	=		0	+	20,000

It may be noted that the total assets remain equal to liabilities plus capital.

Purchase goods for Rs. 1,000 in cash.

Effect: It means cash in hand is reduced by Rs. 1,000 and another asset, i.e., stock has come into existence but the total of assets remain unchanged. The equation now will be as follows:

	Assets						Liabilities		Capital
	Cash	+	Furniture	Stock	=				Paresh’s
Old balance	19,500	+	500	0	=	Old balance	0	+	20,000
New Transaction	-1,000	+	0	1,000	=		0	+	20,000
New Balance	18,500	+	500	1,000	=		0	+	20,000

Purchase goods for Rs. 2,000 on credit.

Effect: It means the stock has increased by Rs. 2,000 making the total assets Rs. 22,000. A liability of Rs. 2,000 towards the supplier of the goods (creditor) has arisen.

The equation now will be:

	Assets						Liabilities		Capital
	Cash	+	Furniture	Stock	=				Paresh’s
Old balance	18,500	+	500	1,000	=	Old balance	0	+	20,000
New Transaction	0	+	0	2,000	=		2,000	+	20,000
New Balance	18,500	+	500	3,000	=		2,000	+	20,000

Sold goods costing Rs. 2,500 on credit for Rs. 4,000

Effect: It means a debtor has come into existence to the extent of Rs.4,000. The stock will be reduced only by Rs. 2,500, being the cost of goods sold.

Attention Required:
It is important to note that Sale is Revenue and the Cost of Goods sold is expense that is expended to earn the revenue.

The total stock is Rs. 3,000, however only Rs. 2,500 will be taken to calculate profit, because of the Matching Concept of Accounting.

Purchase of goods is not an expense at the time of its purchase but once we sell these goods we recognise the cost of goods that are sold as expense.
Profit = Revenue – Expenses. Therefore, profit is Rs. 4,000 – Rs. 2,500 = Rs. 1,500.

Revenues always increase the assets and expenses always decrease the assets. Net effect of these is added or deducted from the capital.

Profit is excess of revenue over expenses, therefore we add it to the capital. And loss is excess or expenses over revenue, therefore we deducted it from the capital.

In this transaction the increase in assets is in the form of ‘Debtors’.

The position now will be shown as:

	Assets							Liabilities		Capital
	Cash	+	Furniture	Stock	Debtors	=				Paresh’s
Old balance	18,500	+	500	3,000	0	=	Old balance	2,000	+	20,000
New Transaction	0	+	0	– 2,500	4,000	=		0	+	1,500
New Balance	18,500	+	500	5,00	4,000	=		2,000	+	21,500

Paid Rs. 1,000 for rent and Rs. 5,000 for salaries.

Effect: Since expense is paid in cash therefore cash is reduced; also we know that expense is charged against revenue that decreases the profit of the firm/business. Decrease in profit or losses are deducted from the capital.

The new accounting equation will be as follows:

	Assets							Liabilities		Capital
	Cash	+	Furniture	Stock	Debtors	=				Paresh’s
Old balance	18,500	+	500	500	4,000	=	Old balance	2,000	+	21,500
New Transaction	-6,000	+	0	0	0	=		0	+	-6,000
New Balance	12,500	+	500	5,00	4,000	=		2,000	+	15,500

Paresh withdraws Rs. 2,000 for personal use.

Effect: Cash in hand is reduced by Rs. 2,000 and capital will also reduce by the same amount. The new accounting equation will be as follows:

	Assets							Liabilities		Capital
	Cash	+	Furniture	Stock	Debtors	=				Rakesh’s
Old balance	12,500	+	500	500	4,000	=	Old balance	2,000	+	15,500
New Transaction	-2,000	+	0	0	0	=		0	+	-2,000
New Balance	10,500	+	500	5,00	4,000	=		2,000	+	13,500

It will be observed form above that the total assets will always be equal to the total liabilities, including capital. The last equation stated above can also be presented in the form of a statement, i.e., Balance Sheet. It is given below:

Liabilities		Rs.	Assets	Rs.
Capital Less: Drawings	15,500 2,000	13,500	Cash Furniture	10,500 500
Creditors		2,000	Stock	500
			Debtors	4,000
		15,500		15,500

The Balance Sheet shows the sources form which funds have been obtained – the left hand side does that; in the above case, Rs. 2,000 have been obtained from outsiders and Rs. 13,500 havbe been contributed by the proprietor. The other side known as assets side shows how the funds stand invested.

A conclusion apparent form the transactions given above is that every transaction has a double sided effect. In other words, the Dual Aspect Concept will always hold good, a reduction or increase in an asset will have a corresponding effect on liabilities or capital. This is because of the rule that for every receiver there is a giver and for every giver there is a receiver.

How will you deal with the following items in Accounting Equation: Interest due but not received Rs. 500,Rent received in advance Rs. 1,000,Insurance premium paid in advance Rs. 1,500 and Salaries due but not paid Rs. 2,000?

Illustration 1. Prepare the Accounting Equation on the basis of the following transactions:

Sachin started business and introduced capital Rs. 1,00,000 in cash.
Purchased goods in cash Rs. 50,000.
Purchased from M/s. Samrat Furnitures Rs. 20,000.
Sold goods costing Rs. 25,000 for Rs. 35,000.
Paid M/s. Samrat Furnitures in cash.

Solution:

New Equation

No.	Transaction	Assets (Rs.)	=	Liabilities (Rs.)	+	Capital (Rs.)
1.	Sachin started business with cash	1,00,000	=	0	+	1,00,000
2.	Purchased goods in cash	+ 50,000		0	+	0
		– 50,000
	New Equation	1,00,000	=	0	+	1,00,000
3.	Purchased goods from M/s. Samrat Furnitures	+ 20,000	=	20,000	+	0
	New Equation	1,20,000	=	20,000	+	1,00,000
4.	Sold goods costing Rs. 25,000	– 25,000		0	+	0
	for Rs. 35,000 (Note)	+ 35,000	=	0	+	10,000
	New Equation	1,30,000	=	20,000	+	1,10,000
5.	Paid M/s. Samrat Furnitures	– 20,000	=	– 20,000	+	0
	New Equation	1,10,000	=	0	+	1,10,000

Note: Sale of goods has resulted in a profit of Rs. 10,000. It has been added to capital because net profit increases the capital.

Illustration 2: Prepare the Accounting Equation on the basis of the following transactions:

Started business with cash Rs. 70,000.
Credit purchases of goods Rs. 18,000.
Payment made to creditors in full settlement Rs. 17,500.
Purchase of machinery for cash Rs. 20,000.

Solution:

No.	Transactions	Cash (Rs.)	+	Stock (Rs.)	+	Machinery (Rs.)	=	Creditors (Rs.)	+	Capital (Rs.)
1.	Started business with cash Rs. 70,000	70,000	+	0	+	0	=	0	+	70,000
New Equation: 70,000 + 0 + 0 = 0 + 70,000
2.	Credit purchases of goods Rs. 18,000	0	+	18,000	+	0	=	18,000	+	0
New Equation: 70,000 + 18,000 + 0 = 18,000 + 70,000
3.	Payment made to creditors in full settlement Rs. 17,500	-17,500	+	0	+	0	=	-18,000	+	500
New Equation: 52,500 + 18,000 + 0 = 0 + 70,500
4.	Purchase of machinery for cash Rs. 20,000	-20,000	+	0	+	20,000	=	0	+	0
New Equation: 32,500 + 18,000 + 20,000 = 0 + 70,500

Illustration 3: Mr. Rakesh started business as on 1st April 2012 with a capital of Rs. 1,50,000. During the year, the following transactions took place:

Furniture purchased in cash for Rs. 20,000.
Purchased goods from Mahesh on credit for Rs. 25,000.
Sold goods (costing Rs. 10,000) to Mohan in cash for Rs. 14,000.
Additional capital introduced Rs. 20,000.
Commission received in advance Rs. 2,000.
Paid to creditor (Mahesh) Rs. 22,500 in full settlement.
Sold goods (costing Rs. 15,000) for Rs. 18,000 out of which Rs. 5,000 received in cash.
Depreciation on furniture provided @ 10%.

No.	Transactions	Cash (Rs.)	+	Furniture (Rs.)	+	Stock (Rs.)	+	Debtors (Rs.)	=	Creditors (Rs.)	+	Commission Received in Advance (Rs.)	+	Capital (Rs.)
1.	Started business with cash Rs. 1,50,000	1,50,000	+	0	+	0	+	0	=	0	+	0	+	1,50,000
New Equation: 1,50,000 + 0 + 0 + 0 = 0 + 0 + 1,50,000
2.	Furniture purchased for cash Rs. 20,000	-20,000	+	20,000	+	0	+	0	=	0	+	0	+	0
New Equation: 1,30,000 + 20,000 + 0 + 0 = 0 + 0 + 1,50,000
3.	Purchased goods from Mahesh on credit Rs. 25,000	0	+	0	+	25,000	+	0	=	25,000	+	0	+	0
New Equation: 1,30,000 + 20,000 + 25,000 + 0 = 25,000 + 0 + 1,50,000
4.	Sold goods costing Rs. 10,000 for Rs. 14,000 in cash	14,000	+	0	+	-10,000	+	0	=	0	+	0	+	4,000
New Equation: 1,44,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,54,000
5.	Additional capital introduced Rs. 20,000	20,000	+	0	+	0	+	0	=	0	+	0	+	20,000
New Equation: 1,64,000 + 20,000 + 15,000 + 0 = 25,000 + 0 + 1,74,000
6.	Commission received in advance Rs. 2,000	2,000	+	0	+	0	+	0	=	0	+	2,000	+	0
New Equation: 1,66,000 + 20,000 + 15,000 + 0 = 25,000 + 2,000 + 1,74,000
7.	Paid to creditor Mahesh Rs. 22,500 in full settlement	-22,500	+	0	+	0	+	0	=	-25,000	+	0	+	2,500
New Equation: 1,43,500 + 20,000 + 15,000 + 0 = 0 + 2,000 + 1,76,500
8.	Sold goods (costing Rs. 15,000) for Rs. 18,000, Rs. 5,000 received in cash	5,000	+	0	+	-15,000	+	13,000	=	0	+	0	+	3,000
New Equation: 1,48,500 + 20,000 + 0 + 13,000 = 0 + 2,000 + 1,79,500
9.	Depreciation on furniture @ 10% on Rs. 20,000	0	+	-2,000	+	0	+	0	=	0	+	0	+	-2,000
New Equation: 1,48,500 + 18,000 + 0 + 13,000 = 0 + 2,000 + 1,77,500

3: Show the effect of the following transactions on the Accounting Equation: Rs. Rs. 1. Ram started business with cash 50,000 2. Purchased goods on credit 4,000 3. purchased goods for cash 1,000 4. Purchased furniture for cash 500 5. Withdrew for private use 700 6. Paid rent 200 7. Received interest 100 8. Sold goods on credit (cost Rs. 500) 700 9. Paid to creditors 400 10. Paid salaries 200

Illustration 4. Give an example for each of the following types of transactions:

Increase in one asset, decrease in another asset.
Increase in asset, increase in liability.
Increase in asset, increase in owner’s capital.
Decrease in asset, decrease in liability.
Decrease in asset, decrease in owner’s capital.
Decrease in liabilities, increase in owner’s capital.
Increase in one liability, decrease in another liability.
Increase in liabilities, decrease in owner’s capital.

Solution:

Purchase of furniture for cash–Increase in furniture and decrease in cash.
Purchase of furniture on credit–Increase in furniture and increase in liability.
Capital introduced by proprietor–Increase in cash and increase in capital.
Payment to creditors–Decrease in cash and decrease in creditors.
Cash withdrawn by proprietor–Decrease in cash and decrease in capital.
Conversion of partner’s loan into capital–Increase in capital and decrease in loan.
Bills payable accepted–Increase in bills payable and decrease in creditors.
Outstanding expenses provided–Increase in creditors for outstanding expenses and decrease in capital.

Illustration 5: If the capital of a business is Rs. 70,000 and liabilities are of Rs. 40,000, calculate the total assets.

Solution:

Total Assets = Capital + Liabilities

Total Assets = Rs. 70,000 + Rs. 40,000 = Rs. 1,10,000.

Illustration 7: From the following information, calculate the total assets of the business:

Capital Rs. 4,00,000; Creditors Rs. 3,00,000; Revenue earned during the period Rs. 7,50,000; Expenses incurred during the period Rs. 2,00,000 and Value of unsold stock Rs. 2,00,000.

Solution:

Total Assets = Liabilities + Capital + Profit

Total Assets = Creditors + Capital + Profit

= Rs. 3,00,000 + Rs. 4,00,000 + Rs. 5,50,000 (Rs. 7,50,000 – Rs. 2,00,000)

= Rs. 12,50,000 (including Rs. 2,00,000 Closing Stock).

Illustration 6: A commenced his cloth business on 1st April, 2011 with a capital of Rs. 30,000. On 31st March, 2012 his assets were Rs. 50,000 and liabilities were Rs. 10,000. Find out his closing capital and profits earned during the year.

Solution:

Total Assets = Capital + Liabilities

Rs. 50,000 = Capital + Rs. 10,000

Closing Capital = Rs. 50,000 – Rs. 10,000 = Rs. 40,000

Profit = Closing Capital – Opening Capital

= Rs. 40,000 – Rs. 30,000 = Rs. 10,000.

Illustration 8: X has the following assets and liabilities as on 31st March, 2012. Ascertain his capital.

Cash Rs. 25,000; Bank Rs. 47,500; Debtors Rs. 18,000; Creditors Rs. 22,000; Plant and Machinery Rs. 80,000; Building Rs. 2,00,000; Furniture Rs. 24,000; Bills Receivable Rs. 56,500; Bills Payable Rs. 23,500.

Solution:

Assets = Liabilities + Capital

Capital = Assets – Liabilities

Capital = (Cash + Bank + Debtors + Plant and Machinery + Building + Furniture + Bills Receivable) – (Creditors + Bills Payable)

= Rs. (25,000 + 47,500 + 18,000 + 80,000 + 2,00,000 + 24,000 + 56,500) – Rs. (22,000 + 23,500)

= Rs. (4,51,000 – 45,500) = Rs. 4,05,500.

Illustration 9. Calculate the total equity if:

1. Owner’s equity in the beginning is Rs. 60,000. 2. Equity of creditors at the end is Rs. 50,000. 3. Revenue during the period is Rs. 70,000. 4. Expenses during the same period are Rs. 65,000.

Also calculate the amount of owner’s equity at the end.

Solution:

Total Equity = Owner’s equity + Creditors’ equity

= (Opening Owner’s equity + Revenue – Expenses) + Creditors’ equity

= (Rs. 60,000 + Rs. 70,000 – Rs. 65,000) + Rs. 50,000.

= Rs. 65,000 + Rs. 50,000 = Rs. 1,15,000.

Owner’s Equity at the end = Rs. 65,000.

Illustration 10: X started a business on 1st April, 2011 with a capital of Rs. 50,000 and a loan of Rs. 25,000 borrowed from Y. During 2011 – 12, he had introduced additional capital of Rs. 25,000 and had withdrawn Rs. 15,000 for personal use. On 31st March, 2010 his assets were Rs. 1,50,000. Find out his capital as on 31st March, 2012 and profit made or loss incurred during the year 2009-10.

Solution:

Closing Capital = Closing Assets – Closing Liabilities (i.e., Y’s Loan)

= Rs. 1,50,000 – Rs. 25,000 = Rs. 1,25,000

Profit = Closing Capital + Drawings – Additional Capital – Opening Capital

= Rs. 1,25,000 + Rs. 15,000 – Rs. 25,000 – Rs. 50,000 = Rs. 65,000.

Meaning of Accounts

Quick Review: An account is a summarised record of transactions at one place relating to a particular head

An account is a summarised record of transactions at one place relating to a particular head. It records not only the amount of transactions but also their effect and direction.

An account is divided into two parts, i.e., debit and credit. It is usually in a ‘T’ form and the commonly used layout of an account is as follows:

Dr. NAME OF THE ACCOUNT, e.g. WAGES ACCOUNT Cr.

Date	Particulars	J.F.	Amount (Rs.)	Date	Particulars	J.F.	Amount (Rs.)
Date of the Transaction	Name of the Other Account	Page or Reference Number of the Subsidiary Book	Amount of the Transaction	Date of the Transaction	Name of the Other Account	Page or Reference Number of the Subsidiary Book	Amount of the Transaction
		where the entry was first recorded,				where the entry was first recorded,
		e.g., Cash Book				e.g., Cash Book

Note the following points about the layout of this account:

The name of the account is written at the top.
The account is divided into two identical halves, separated by a thick vertical line.
The left hand side is called the debit side (‘debit’ is abbreviated as ‘Dr.’).
The right hand side is called the credit side (,credit’ is abbreviated as ‘Cr.’).
The date, i.e., the date of the transaction is entered in the ‘Date’ column.
In the ‘Particulars’ column, the name of the other account involved in the transaction is entered.
The ‘folio’ or Journal Folio (J.F.) column is used as a referencing system where the original entry was recorded in the Journal Book.
In the last column, the amount transacted is written.

This is illustrated below by taking imaginary amounts:

Dr. CASH ACCOUNT Cr.

Date		Increase	JF	Rs	Date		Decrease	JF	Rs
2012					2012
April	1	Opening Balance		10,000	April	2	Payments for Purchases		5,600
April	3	Cash Sales of Goods		5,000	April	4	Payments to Creditors		2,000
April	10	Receipts from Debtors		7,000	April	7	Wages and Salaries		1,600
April	14	Receipts from Commission		2,000	April	28	Rent		1,000
April	21	Sale of Fixed Assets		3,000	April	29	Postage		200
April	27	Rent		500	April	29	Cartage		100
									10,500
							Closing Balance		17,000
				27,500					27,500

What we have to do is to place the increases in cash on the left hand side and the decreases on the right hand side. It can also be said that the receiving account is debited and the giving account is credited. The closing balance has been ascertained by deducting the total of payments, Rs 10,500 from the total of the left hand side, Rs 27,500.

Meaning of Debit and Credit

To show increases and decreases in account amounts, plus (+) and minus (–) signs could be used. For several reasons, however, the accounting profession has discarded this alternative. Instead, each account is divided into a left-hand side and a right-hand side; increases are recorded on one side and decreases are recorded on the other. For all account debit refers to the left side of an account and credit refers to the right side of an account. In the abbreviated form ‘Dr.’ stands for ‘debit’ and ‘Cr.’ stands for ‘credit’. For accountants, debit and credit have no meanings other than left and right, respectively. We should not be confused with the literal meaning of the debit and credit.

An item recorded on the debit side of an account is said to be debited to the account and a balance resting on this side is said to be a debit balance. An item recorded on the credit side of an account is said to be credited to the account and the balance resting on this side is said to be a credit balance.

Classification of Account

Account may be classified in two ways.

(1) Traditional Classification of Accounts (2) Modern Classification of Account

1. Traditional Classification of Accounts

Quick Review:
Personal Account: It relate to the (1) Natural Person (2) Artificial Person and (3) Representative person. You can easily recognise it as liability to the organisation except ‘debtors’ and ‘Bank A/c’.
Real Account: It represents the assets (tangible or intangible) owned by the enterprise.
Nominal Account: These accounts are Revenue and Expenses of the enterprise.

This is a very old system of classifying accounts. Under this system, accounts are classified into two groups as shown in Figure 1.

Fig. 1

Personal Accounts. Accounts which relate to persons,i.e., individuals, firms,companies, etc., debtors or creditors are personal accounts. Examples of personal accounts are the account of Ram & Co., a credit customer, or the account of Jhaveri & Co., a supplier of goods. A capital account is the account of the proprietor and, therefore, is also personal but adjustments on account of profits and losses are made in it. Similarly, a Drawing Account is also a personal account it is the account to which withdrawals by the proprietor are debited. The main purpose of preparing a personal account is to ascertain the balance due to or due from persons or organisations.

Personal Accounts can be classified into three categories:

(i) Natural Personal Accounts: The term ‘Natural Persons’ means persons who are creations of God, means human beings. For example, Ram’s Account, Asha’s Account, etc.

(ii) Artificial Personal Accounts: These accounts include accounts of corporate bodies or institutions which are recognised as persons in business dealings. For example, the account of a limited company, the account of a club or a cooperative society, etc.

(iii) Representative Personal Accounts: These are those accounts which represent a certain person or a group of persons. For example, if rent is due to the landlord, an Outstanding Rent Account is opened in the books. The Outstanding Rent Account represents the amount of rent payable to the landlord.

Rule of Debit and Credit—Debit the receiver, Credit the giver.

Attention Required: At the time of deciding whether a personal account is giver or receiver, you have to see the person other than organisation to whom you are preparing accounts. For example: – You are maintaining the account of X Ltd. Consider the transaction ‘payment to the ‘Ram’ Rs. 2,000’. In this case you have to see that whether ‘Ram’ is receiver or giver not the X Ltd. Here X Ltd. is giver and ‘Ram’ is receiver. Because ‘Ram’ is the receiver ‘Ram’ should be dabited.

Impersonal Accounts. Accounts which are not personal such as machineryaccount, cash account, rent account, etc., are termed as ‘Impersonal Accounts’. These can be further sub-divided into two accounts:

Real Accounts. Real Accounts are the accounts which relate to tangible or intangible assets of the enterprise (excluding debtors). Examples of tangible assets are: land, buildings, investments, plant and machinery, stock or cash in hand. Examples of intangible assets are: goodwill, patents and trademark.

Rule of Debit and Credit—Debit what comes in, Credit what goes out.

Nominal (or Revenue/Expense) Accounts. Accounts which relate to expenses, losses, gains, revenue, etc., are termed as Nominal Accounts. These include salary account, purchases account, interest paid account, sales account and commission received account. The net result of all the nominal accounts is profit or loss which is transferred to the capital account. The balance of nominal account is never taken to next year’s book.

Rule of Debit and Credit—Debit all expenses and losses, Credit the incomes and gains.

Note: When some prefix or suffix is added to a Nominal Account, it becomes aPersonal Account. They are classified as personal accounts because instead of naming the person to whom the amount is payable, the term ‘Outstanding’ or ‘Prepaid’ is used. The table given below explains the above:

#	Nominal Account	Personal Account
1.	Interest A/c	Outstanding Interest A/c, Interest Received in Advance A/c, Prepaid Interest A/c
2.	Rent A/c	Outstanding Rent A/c, Prepaid Rent A/c
3.	Salary A/c	Outstanding Salaries A/c, Prepaid Salaries A/c
4.	Commission A/c	Outstanding Commission A/c, Prepaid Commission A/c

3. Rules of Debit and Credit (Traditional) at a Glance
Types of Account	Account to be Debited	Account to be Credited
1. Personal A/c	Receiver	Giver
2. Real A/c	What comes in	What goes out
3. Nominal A/c	Expense and Loss	Income and Gain

Illustration 11: State the nature of account (Personal, Real or Nominal) and showwhich will be debited and which will be credited:

#	Accounts	Nature of Accounts	Debited/Credited
(i)	Rent Paid A/c	Nominal	Debited
(ii)	Rent Received A/c	Nominal	Credited
(iii)	Interest Received A/c	Nominal	Credited
(iv)	Machinery A/c	Real	Debited
(v)	Building A/c	Real	Credited
(vi)	Purchases A/c	Nominal	Debited
(vii)	Discount Allowed A/c	Nominal	Debited
(viii)	Capital A/c	Personal	Credited
(ix)	Sales A/c	Nominal	Credited

#	Account	Type of Account
(i)	Capital Introduced	Personal
(ii)	Drawings A/c	Personal
(iii)	Cash Received	Real
(iv)	Interest Paid	Nominal
(v)	Discount Received	Nominal
(vi)	Bank A/c	Real
(vii)	Bank Overdraft	Personal
(viii)	Bad Debts Written Off	Nominal
(ix)	Outstanding Salaries	Personal
(x)	Prepaid Rent	Personal
(xi)	Purchases A/c	Nominal
(xii)	Sales A/c	Nominal
(xiii)	Carriage Inward	Nominal
(xiv)	Bad Debts Recovered	Nominal
(xv)	Interest Accrued A/c	Personal
(xvi)	Goodwill	Real
(xvii)	Plant and Machinery	Real
(xviii)	Leasehold Property	Real

Illustration 12: From the following transactions, state the nature of accounts and

#	Transactions	Accounts Involved	Nature of Account	Debit (Rs.)	Credit (Rs.)	Reason
1.	Mr. Mohan started business with Rs. 5,00,000 in cash.	Cash	Real	5,00,000		Incoming
		Capital	Personal		5,00,000	Giver
2.	Purchased goods for cash Rs. 1,00,000.	Purchases	Nominal	1,00,000		Expenses
		Cash	Real		1,00,000	Outgoing
3.	Sold goods for cash Rs. 1,50,000.	Cash	Real	1,50,000		Incoming
		Sales	Nominal		1,50,000	Income
4.	Received interest from Ram in cash Rs. 500.	Cash	Real	500		Received
		Interest	Nominal		500	Income
5.	Sold goods to Ashok for Rs. 60,000.	Ashok’s	Personal	60,000		Receiver
		Sales	Nominal		60,000	Income
6.	Purchased furniture for cash Rs. 50,000.	Furniture	Real	50,000		Incoming
		Cash	Real		50,000	Outgoing
7.	Paid wages Rs. 20,000.	Wages	Nominal	20,000		Expenses
		Cash	Real		20,000	Outgoing

2. Modern Classification of Accounts

Quick Review
1. Assets: Debit when increase, Credit when decrease. 2. Liabilities: Credit when increase, Debit when decrease. 3. Capital: Credit when increase, Debit when decrease. 4. Revenue: Credit when increase, Debit when decrease. 5. Expense: Debit when increase, Credit when decrease.

In Modern approach the account is classified into five categories.

		Accounts
Assets Accounts	Liabilities Accounts	Capital Accounts	Revenue Accounts	Expense Accounts

Assets Accounts. These accounts are accounts of assets and properties such as land and building, plant and machinery, furniture, patents, inventory, etc.
Liabilities Accounts. These accounts are accounts of lenders, creditors for goods, creditors for expenses, etc.
Capital Accounts. They refer to the accounts of the proprietor/partners who invested money in the business.
Revenue Accounts. These are accounts of incomes and gains. Examples are: sales, interest received, etc.
Expense Accounts. The accounts which show the amount spent or even lost in carrying on business operations. Examples are: purchases, wages paid, depreciation, rent, etc.

RULES FOR DEBIT AND CREDIT

#	Types of Account	Accounts to be Debited	Accounts to be Credited
1.	Assets A/c	Increase	Decrease
2.	Liabilities A/c	Decrease	Increase
3.	Capital A/c	Decrease	Increase
4.	Revenue A/c	Decrease	Increase
5.	Expense A/c	Increase	Decrease

Attention Required: It should be noted that an increase in assets is favourable to the firm but an increase in expenses may not be so, even though in both the cases, the fact remains that the increase will be recorded on the debit side.

Similarly, increase in liabilities is, of course, not favourable but an increase in revenue is favourable. Nonetheless, both will be recorded on the credit side.

Thus, the terms ‘debit’ and ‘credit’ should not be taken to mean respectively favourable and unfavourable—they merely describe the two sides of an account.

In other words, both debit and credit may represent either increase or decrease depending upon the nature of an account.

One way to understand the rules of debit and credit may be as follows:

RULES OF DEBIT AND CREDIT Assets = Liabilities + Capital + Profits – Losses
(1) Assets		(2) Liabilities
Debit Increase (+)	Credit Decrease (–)	Debit Decrease (–)	Credit Increase (+)
(3) Capital
Debit Decrease (–)		Credit Increase (+)
(4) Expense (Loss)		(5) Revenue
Debit Increase (+)	Credit Decrease (–)	Debit Decrease (–)	Credit Increase (+)

Do it yourself

5. On which side will the increase in the following accounts be recorded?Also, mention the nature of the account on the basis of Modern Classification of Account

(i) Machinery A/c. (ii) Creditors A/c (iii) Mohan (Proprietor) (iv) Sales A/c

(v) Carriage Outward A/c (vi) Cash A/c (vii) Debtor’s A/c (viii) Rent A/c

(ix) Interest Payable A/c (x) Bills Payable A/c

Illustration 13: On which side the decrease in the following accounts will be recorded? Also, mention the nature of account on the basis of Modern Classification of Accounts:

(i)	Mohan (Proprietor)	(ii)	Freight A/c
(iii)	Cartage A/c	(iv)	Bank A/c
(v)	Furniture A/c	(vi)	Machinery A/c
(vii) Bills Payable A/c		(viii)	Salary Outstanding A/c
(ix)	Ram (Supplier)	(x)	Sohan (Customer)
Solution:
(i)	Debit—Capital	(ii)	Credit—Expense
(iii)	Credit—Expense	(iv)	Credit—Asset
(v)	Credit—Asset	(vi)	Credit—Asset
(vii) Debit—Liability		(viii)	Debit—Liability
(ix)	Debit—Liability	(x)	Credit—Asset

Example 14. Analyse the following transactions, state the nature of accounts andstate which account will be debited and which account credited according to the traditional approach:

Dinesh started business with cash Rs. 5,00,000.
Borrowed from Naresh Rs. 1,00,000.
Purchased furniture for Rs. 20,000 in cash from Raj Furniture House.
Purchased furniture from Delhi Safe for Rs. 40,000.
Purchased goods for cash Rs. 15,000.
Purchased goods from Mahesh Rs. 30,000.
Sold goods for cash to Karim Rs. 25,000.
Sold goods to Shyam on credit Rs. 30,000.
Cash received from Shyam Rs. 20,000.
Cash paid to Mahesh Rs. 10,000.
Deposited cash into bank Rs. 50,000 for opening an account.
Withdrew cash for personal use Rs. 5,000.
Withdrew cash from bank for office use Rs. 10,000.
Received a cheque from Shyam Rs. 5,000.
Paid Mahesh by cheque Rs. 10,000.
Paid salary to staff Rs. 20,000.
Paid rent by cheque Rs. 6,000.
Paid interest on loan Rs. 5,000.

Solution

#	Transactions	Accounts Involved	Nature of Account	How Affected	Debit (Rs.)	Credit (Rs.)
1.	Dinesh started business with cash Rs. 5,00,000.	Cash Capital	Real Personal	Cash is coming in. Dinesh is the giver of cash.	5,00,000	5,00,000
2.	Borrowed from Naresh Rs. 1,00,000.	Cash Loan from Naresh	Real Personal	Cash is coming in. Naresh is the giver.	1,00,000	1,00,000
3.	Purchased furniture for Rs. 20,000 in cash from Raj Furniture House.	Furniture Cash	Real Real	Furniture is coming in. Cash is going out.	20,000	20,000
4.	Purchased furniture from Delhi Safe for Rs. 40,000.	Furniture Delhi Safe	Real Personal	Furniture is coming in. Delhi Safe is the giver.	40,000	40,000
5.	Purchased goods for cash Rs. 15,000.	Purchases Cash	Nominal Real	Goods come in. Purchase is an expense. Cash is going out.	15,000	15,000
6.	Purchased goods from Mahesh Rs. 30,000.	Purchases Mahesh	Nominal Personal	Goods come in. Purchase is an expense. Mahesh is the giver.	30,000	30,000
7.	Sold goods for cash to Karim Rs. 25,000.	Cash Sales	Real Nominal	Cash is coming in. Sales is an income.	25,000	25,000
8.	Sold goods to Shyam on credit Rs. 30,000.	Shyam Sales	Personal Nominal	Shyam is the receiver. Sales is an income.	30,000	30,000
9.	Cash received from Shyam Rs. 20,000.	Cash Shyam	Real Personal	Cash is coming in. Shyam is the giver.	20,000	20,000
10.	Cash paid to Mahesh Rs. 10,000.	Mahesh Cash	Personal Real	Mahesh is the receiver. Cash is going out.	10,000	10,000
11.	Deposited cash into bank Rs. 50,000.	Bank Cash	Personal Real	Bank is the receiver. Cash is going out.	50,000	50,000
12.	Withdrew cash for personal use Rs. 5,000.	Drawings Cash	Personal Real	Dinesh is the receiver. Cash is going out.	5,000	5,000
13.	Withdrew cash from bank for office use Rs. 10,000.	Cash Bank	Real Personal	Cash is coming in. Bank is the giver.	10,000	10,000
14.	Received a cheque from Shyam Rs. 5,000.	Bank Shyam	Personal Personal	Cash (in the form of a cheque) is coming in. Shyam is the giver.	5,000	5,000
15.	Paid Mahesh by cheque Rs. 10,000.	Mahesh Bank	Personal Personal	Mahesh is the receiver. Bank is the giver.	10,000	10,000
16.	Paid salary to staff Rs. 20,000.	Salary Cash	Nominal Real	Salary is an expense. Cash is going out.	20,000	20,000
17.	Paid rent by cheque Rs. 6,000.	Rent Bank	Nominal Personal	Rent is an expense. Bank is the giver.	6,000	6,000
18.	Paid interest on loan Rs. 5,000.	Interest on Loan Cash	Nominal Real	Lender is the receiver. Cash is going out.	5,000	5,000

Notes: 1.Purchases.It refers to purchase of goods for resale, and not the purchase of asset.

In cash purchases, the seller’s name is not considered. Similarly in cash sales, the purchaser’s name is not considered.

Sales. It refers to the sale of goods which forms a part of the stock-in-trade of the business firm. The sale of old assets are not ‘sales’ in the accounting meaning of that word.

Example 15. Analyse the transaction given in Illustration 14 using the Modern Approach for Classification of Accounts.

Solution: Analysis of Transactions
#	Transactions	Accounts Involved	Nature of Account	How Affected	Debit (Rs.)	Credit (Rs.)
1.	Dinesh started business with cash Rs. 5,00,000.	Cash Capital	Asset Capital	Increased Increased	5,00,000	5,00,000
2.	Borrowed from Naresh Rs. 1,00,000.	Cash Loan from Naresh	Asset Liability	Increased Increased	1,00,000	1,00,000
3.	Purchased furniture for Rs. 20,000 with cash from Raj Furniture House.	Furniture Cash	Asset Asset	Increased Decreased	20,000	20,000
4.	Purchased furniture from Delhi Safe for Rs. 40,000.	Furniture Delhi Safe	Asset Liability	Increased Increased	40,000	40,000
5.	Purchased goods for cash Rs. 15,000.	Purchases Cash	Expense Asset	Increased Decreased	15,000	15,000
6.	Purchased goods from Mahesh Rs. 30,000.	Purchases Mahesh	Expense Liability	Increased Increased	30,000	30,000
7.	Sold goods for cash to Karim Rs. 25,000.	Cash Sales	Asset Revenue	Increased Increased	25,000	25,000
8.	Sold goods to Shyam on credit Rs. 30,000.	Shyam Sales	Asset Revenue	Increased Increased	30,000	30,000
9.	Cash received from Shyam Rs. 20,000.	Cash Shyam	Asset Asset	Increased Decreased	20,000	20,000
10.	Cash paid to Mahesh Rs. 10,000.	Mahesh Cash	Liability Asset	Decreased Decreased	10,000	10,000
11.	Deposited cash into bank Rs. 50,000 for opening an account.	Bank Cash	Asset Asset	Increased Decreased	50,000	50,000
12.	Withdrew cash for personal use Rs. 5,000.	Drawings Cash	Withdrawal Asset	Increased Decreased	5,000	5,000
13.	Withdrew cash from bank for office use Rs. 10,000.	Cash Bank	Asset Asset	Increased Decreased	10,000	10,000
14.	Received a cheque from Shyam Rs. 5,000.	Bank Shyam	Asset Asset	Increased Decreased	5,000	5,000
15.	Paid Mahesh by cheque Rs. 10,000.	Mahesh Bank	Liability Asset	Decreased Decreased	10,000	10,000
16.	Paid salary to staff Rs. 20,000.	Salary Cash	Expense Asset	Increased Decreased	20,000	20,000
17.	Paid rent by cheque Rs. 6,000.	Rent Bank	Expense Asset	Increased Decreased	6,000	6,000
18.	Paid interest on loan Rs. 5,000.	Interest Cash	Expense Asset	Increased Decreased	5,000	5,000

BALANCING AN ACCOUNT

At the end of each month or year or in fact on any day, it may be necessary to determine the balance in an account. The process of balancing is as follows:

(i) Total the two sides (i.e., Debit and Credit) of the account.

(ii) Strike the difference in totals of the two sides. The difference is the balance.

(iii) Enter the difference in the side with shorter total. Now the total of two sides will match.

If credit side is shorter, then the amount is entered in the credit side writing ‘By Balance c/d’ in the Particulars column. It is carried forward by writing in the debit side ‘To Balance b/d,’ it being a debit balance.

If debit side is shorter, then the amount is entered in the debit side writing ‘To Balance c/d’ in the Particulars column. It is carried forward by writing in the credit side ‘By Balance b/d,’ it being a credit balance.

As an illustration, following account is given with imaginary amounts:

Dr. Ranjan’s Account Cr.

Date		Particulars		Rs.	Date		Particulars	Rs.
2012					2012
April	5	To	Cash Nc	10,000	April	7	By Purchases Nc	40,000
April	20	To	Return Outwards Nc	1,500
April	27	To	Bank Nc	20,000
April	30	To	Balance dd	8,500
				40,000				40,000
					May	1	By Balance b/d	8,500

The account shows that the firm has a liability towards Ranjan for Rs. 8,500.

It is to be noted that Nominal Accounts are not balanced, they are totalled and transferred to the Profit and Loss Account. Balances in Real and Personal Accounts are transferred to the Balance Sheet.

Balancing of accounts is also discussed in a chapter on Ledger.

SIGNIFICANCE OF DEBIT AND CREDIT IN ACCOUNTS

1. Personal Accounts: Debit in Personal Accounts means that the person whose account is being debited becomes a debtor or that he owes the amount to the business. In case of credit sales, the account of customer is debited because he becomes the debtor of the business. If the account of the customer is already in existence, debit implies that the amount due from him has further increased.

If the account of a creditor is debited, the debit implies that the amount due to that person has decreased, e.g., on payment.

Credit in Personal Accounts means that the person whose account is being credited becomes a creditor of the business or that the business owes the amount to him. In case of credit purchases, the account of the supplier is credited. If the amount of a debtor is credited, it implies decrease in the amounts due from customers.

2. Real Accounts: Debit in Real Account implies purchase of an asset. Any further debit in Real Account means acquisition of more assets.

A credit in Real Account indicates that some part or whole of the asset has been sold. It reduces amount in Assets Account.

3. Nominal Accounts: Debit in Nominal Accounts implies that an expense has been incurred or some loss has taken place or some income has diminished by the amount of debit. Any expense on account of rent, salary, commission, interest is incurred, these accounts should be debited.

Credit in Nominal Account indicates that income or profit has been earned or some expenditure or loss has decreased by the amount of credit.

SIGNIFICANCE OF VARIOUS BALANCES

Some accounts show debit balances and some credit. These balances have special importance as follows:

Credit balance of the Capital Account is the amount due to the owner of the

business. In other words, the amount invested in the business by the owner.

Debit balance of Cash Account shows the cash in hand.
Credit balance of Discount Received Account shows discount received.
Debit balance of Discount Allowed Account shows discount allowed by the business

Debit balances of other expenses show the expenses incurred, e.g., salary, rent, etc.

Thus, we can briefly say that: (a) A debit balance is either an asset (cash, bank, etc.) or an expense (salary, rent, etc.); and (b) A credit balance shows the income earned or liability or the amount invested by the proprietor.

Illustration 16. Open a ‘T’ shape account for furniture and write the following transactions on the proper side:

1. Furniture purchased Rs. 50,000

2. Furniture sold-costing Rs. 10,000

3. Furniture purchased Rs. 15,000

4. Old furniture discarded Rs. 5,000

5. Depreciation on furniture Rs. 3,000

Solution:

Furniture Account
Dr.	Rs.	Cr.	Rs.
1. Cash – Furniture Purchased	50,000	2. Cash – Sale of Furniture	10,000
3. Cash – Furniture Purchased	15,000	4. Furniture Discarded	5,000
		5. Depreciation on Furniture	3,000
Total	65,000	Total	18,000
Balance	47,000

*Depreciation is a permanent and continuous decrease in the book value of fixed

assets due to use, effluxion of time, obsolescence etc.

Illustration 17. Open a ‘T’ shape account of a creditor, Mohan, and write the following transactions on the proper side:

Rs.

Purchased goods from Mohan on credit 50,000
Paid to Mohan 30,000
Goods returned to Mohan 3,000
Repurchased goods from Mohan on credit 10,000

Solution:

Dr. Mohan (Creditor’s Account)

Decrease (-)	Rs.	Increase (+)	Rs.
2. Cash	30,000	1. Purchases	50,000
3. Goods Return Outwards	3,000	4. Purchases	10,000
Total	33,000	Total	60,000
Balance	27,000
	60,000		60,000

Illustration 18. Write the following transactions in Debtor’s Account, Creditor’s Account and Cash Account:

Solution:

Dr. Cash Account Cr.

Increase (+)	Rs.	Decrease ( – )	Rs.
1. Sales	50,000	5. Y (Creditor)	30,000
3. X (Debtor)	56,000	6. Purchases	16,000
Total	1,06,000	Total	46,000
		Balance	60,000
	1,06,000		1,06,000

Dr. x (Debtor’s Account) Cr.

Increase (+)	Rs.	Decrease (-)	Rs.
2. Sales	80,000	3. Cash	56,000
		Balance	24,000
	80,000		80,000

Dr. Y (Creditor’s Account)

Decrease ( – )	Rs.	Increase (+)	Rs.
5. Cash	30,000	4. Purchases	44,000
Balance	14,000
	44,000		44,000

Illustration 19. From the following particulars, prepare the account of D. Budhiraja, the proprietor of a business:

Rs.

(i) Capital introduced Rs. 30,000

(ii) Drawings made by him Rs. 6,500

(iii) Further Capital introduced Rs. 22,000

(iv) Profit for the period Rs. 7,500

Balance the same and explain what the closing balance indicates.

Solution:

Dr. D. Budhiraja’s Capital Account Cr.

Particulars	Rs.	Particulars	Rs.
To Drawings Alc	6,500	By Cash Alc-Capital	30,000
To Balance cid	53,000	By Cash Alc-Capital	22,000
		By Profit and Loss Alc	7,500
	59,500		59,500
		By Balance bid	53,000

Note: Proprietor’s Capital Account has a credit balance of Rs. 53,000 which indicates that the business owes him this amount.

Chapter at a Glance

Accounting equation signifies that the assets of a business are always equal to the total of its liabilities and capital (owner’s equity).

Assets = Capital + Liabilities

An account is a summarised record of transactions at one place relating to a particular head
Traditional Classification of Account

Personal Account: It relate to the (1) Natural Person (2) Artificial Person and (3) Representative person. You can easily recognise it as liability to the organisation except ‘debotr’.
Real Account: It is assets of the firm.
Nominal Account: These are Revenue and Expenses of the firm.

Rules of Debit and Credit (Traditional) at a Glance

		Types of Account	Account to be Debited	Account to be Credited

	1.	Personal A/c	Receiver	Giver

	2.	Real A/c	What comes in	What goes out

	3.	Nominal A/c	Expense and Loss	Income and Gain

Modern Classification of Accounts

	Types of Account	Accounts to be Debited	Accounts to be Credited

1.	Assets A/c	Increase	Decrease

2.	Liabilities A/c	Decrease	Increase

3.	Capital A/c	Decrease	Increase

4.	Revenue A/c	Decrease	Increase

5.	Expense A/c	Increase	Decrease

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