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Logic of debiting and crediting Q.1 Write reply for this friend article(Lagat)
The logic of debiting and crediting is related to the accounting equation, which expressed as “Assets = Liabilities + Owner’s Equity.” Accounting is based on the double-entry system, which means a dual effect on every business transaction recorded. A debit side must have a corresponding credit side entry and vice versa. Total debits must always equal the total credits.
Do debits always increase an account? Do credits always decrease an account?
No. The account type determines how increases and decreases in it are recorded. Increases in assets are recorded as debits, while decreases are recorded as credits. Conversely, increases in liabilities and owner’s equity are recorded by credits and decreases are entered as debits. The rules on income and expenses are based on their relationship to the owner’s equity. Income increases the owner’s equity, and expenses decrease owner’s equity. Therefore, increases in income are recorded as credits and decrease as debits. Increases in expenses are recorded as debits and decreases as credits.
Examples:
Purchase of asset on account- Increases assets (debit) and increases liability (credit)
Purchases of building by issuing stocks- Increases assets (debit) and increases owner’s equity (credit)
Payment of liability- Decreases assets (credit) and decreases liability (debit)
Payment of rent expenses- Increases expense (debit) and decreases assets (credit)
Q.2 Write reply for this friend article(wendy) Logic of debiting and crediting
The Conservatism Concept recognizes expenses and liabilities as soon as they occur. This recognition and recording of expenses/liabilities will take place regardless of the certainty of the outcome. Conversely, revenues and assets are only recorded and recognized if it certain that they will be received by the organization. This principle errs on the side of caution, ensuring expenditures are paid regardless, while waiting for certainty before adding any assets to accounts until it is a sure thing.
The Materiality Concept allows for circumvention of generally accepted accounting procedures if an amount is so small as to be financially insignificant. This determination would differ depending on the size and revenues of an organization. For example, a multi-national, multi-billion dollar organization may choose to “ignore” an expense or liability in the $10K to $50K range. For a small family owned business with revenues of $500K, that amount would be significant and would have to be accounted for.
The Realization Concept recognizes revenue when it is earned regardless of whether actual payment is received or not. Once the sale is completed, under the Realization Concept, the revenue is recognized as earned by the organization.
Q.3 Write reply for this friend article (h0well)
The materiality principle states that an accounting standard can be ignored if the net impact of doing so has such a small impact on the financial statements that a reader of the financial statements would not be misled.
The materiality concept is used frequently in accounting, especially in the following instances:
- Application of accounting standards. A company need not apply the requirements of an accounting standard if such inaction is immaterial to the financial statements.
- Minor transactions. A controller who is closing the books for an accounting period can ignore minor journal entries if doing so will have an immaterial impact on the financial statements.
- Capitalization limit. A company can charge expenditures to expense that would normally be capitalized and depreciated over time, because the expenditures are too small to be worth the tracking effort, and capitalization would have an immaterial impact on the financial statements. Logic of debiting and crediting