1 ACCOUNTING STEP BY STEP THE LANGUAGE OF DEBIT AND CREDIT Dr' R'G'A' Boland FCA, CPA, DBA BRIEF LEC

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1ACCOUNTING STEP BY STEPTHE
LANGUAGE OF DEBIT AND CREDITDr. R.G.A. Boland
FCA, CPA, DBABRIEF LECTURES TO REINFORCE THE
KEY PROGRAM LEARNING ACTIVITY- LEARNING BY
DOING!
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CHAPTER I - INTRODUCTION TO BOOKKEEPING In
2006 all the hard work of bookkeeping is now done
by computer. But ... We must
understand the language of "debit and
credit", so that we can use the computer
data to produce RELIABLE accounting reports
in accordance with IAS (International
Accounting Standards).
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3No matter what the form of the
record, the basic rule of bookkeeping remains the
same the concept of debit and credit.The five
key steps are ...
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Book-keeping and AccountingThe process of
book-keeping and accounting may be summarized
into the following five steps A.
BOOK-KEEPING
4A. BOOKKEEPING I. Translate transactions
into debits and credits in a journal. 2.
Post the debits and credits to ledger
accounts.3. Balance the ledger accounts to
summarize the net effect of the entries.4.
Extract a trial balance to check the
arithmetical accuracy of the postings.
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5B.
ACCOUNTING5. From the trial balance prepare
the accounting reports, balance sheet and income
statement (profit and loss account) with IAS!
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Accounting LanguageAccounting has been called
the language of business. Like any language, it
can never express our thoughts with absolute
precision and clarity.
6Our task of learning this language is
complicated by the fact that many of the words
used in accounting mean almost, but not quite,
the same as they mean in every-day life. We
must learn to think of words in their accounting
rather than their popular meaning. In this
program, we have used a standard set of English
and American accounting terms, although certain
other terms are also of accounting terms
reinforces your basic grasp of the language.
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Accounting PeriodThe basis of all
profit is the period (accounting period) during
which the profit is realized. Thus 10 a week is
not the same as 10 for a whole year. Again,
the financial position of a business must relate
to a particular date. Thus the picture at January
1st may not be the same as the picture at June
3oth. Therefore, the accounting period and the
date, is vital information which affect the
significance of the accounting reports.
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8A glossary of common bookkeeping
words is provided at the end of the
program.The following list indicates some
of the major differences between English and
American terminology
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English Term American
TermDebtors Accounts receivable
Creditors Accounts payable Stock
of goods InventoryShare capital
Capital stockProfit
IncomeAccumulated profits Retained earnings
Profit and loss account Income statement
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Debit Credit 10
Some textbooks teach
the application of debit and credit as
(a) Credit the giver (b) Debit the
receiver
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However this has certain logical
limitations. So, in this program we use a
different approach. We first define(a)
Debit, as the left-hand side(b) Credit, as the
right-hand side(c) Basic debits as, assets,
costs and expenses(d) Basic credits, as
liabilities, owners' equity and sales
This facilitates very rapid assimilation of the
bookkeeping technique, while the computer does
all the hard work!
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CHAP TER II - ACCOUNTING
REPORTSSET I - INCOME STATEMENT (PROFIT AND
LOSS ACCOUNT) SUMMARYThe
income statement (profit and loss account) of a
business relates to a specific accounting period.
It matches sales against cost of ales and
expenses, to compute a figure of profit for the
accounting period.Profit realized is NOT the
same as cash received.Cash is more important than
profit!
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13Sales, less cost of sales and less
expenses, equals profit.Sales equals cost
of sales, plus expenses, plus profit.
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14IMPORTANT NOTEIn the front of
each set is a summary (as above) of technical
terms and ideas to be learned from the set. Read
it quickly.If you already understand all of the
summary do not complete the set, pass on to the
next one.If you do not completely understand
every technical term and idea in the summary, do
the whole set. Do not attempt to do only parts of
a particular set.
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15CHAPTER II SET 2 - BALANCE SHEET
SUMMARYThe balance sheet presents a
financial picture of a business and lists the
assets, liabilities and owner's equity of the
business at a specific date. It is not the same
as an income statement.Valuable things owned by
a business such as cash, debtors, inventory
(stock), prepaid expenses and car are assets.
Creditors are liabilities.
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16The owner's equity is the
original investment of the owners (share
capital) in the business plus the profits
earned and left to accumulate in the
business.
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17Assets are generally recorded at
cost or lower and NOT at higher resale
prices - very conservative!.
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18Assets less liabilities equals
owner's equity or net worth.Assets equals
liabilities plus owner's equity.
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19Note. (a) In our balance sheets we shall
(for bookkeeping) always record assets
on he left side, and liabilities and
owner's equity on the right side.Note
In some countries they may present the balance
sheet in many different ways ... but in
bookkeeping ... debit (left) and credit (right)
are always the same... hooray!
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20(b)
Remember Debtors are receivables
Creditors are payables Stock is inventory
Accumulated profit is retained earnings
Profit is income
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21CHAPTER II - SET 3 - BUSINESS
TRANSACTIONSTransactions may be for cash or
for credit. In a credit transaction liability is
incurred but cash is transferred later as a
separate transaction.All transactions have a
"dual aspect" (debit credit) and thereby affect
two items on the balance sheet.
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22Accounting
conventions recognize transactions at particular
times. For exampleSales transactions are
generally recognized when the goods leave the
seller's premises, whereas Purchase
transactions arc normally recognized when the
goods are received by the buyer.
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23CHAPTER III - BOOK-KEEPING TECHNIQUESET
4 - DEBIT AND CREDIT
SUMMARYDebit means "left-hand side".
Credit means "right-hand side". In
bookkeeping debit and credit have NO significance
as being "good" or "bad" as is implied by the
popular use of the same words.
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24Each
item in the balance sheet and income statement
is, by convention, either a basic debit or a
basic credit 1. The items on the left-hand
side assets, costs and expenses are
basic debits. 2. The items on the right-hand
side liabilities and owner's equity and
sales are basic credits.
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25A basic
debit is increased by debits and decreased by
credits. Conversely a basic credit is increased
by credits and decreased by debits.Each
business transaction has a debit aspect and a
credit aspect of the same amount. Thus in a set
of books the total debits always equal the total
credits."Dr" means debit. "Cr" means credit.
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26IMPORTANT NOTEAt this point we
must unlearn something about the words debit and
credit, which is current in every-day life but
does NOT apply to bookkeeping!!Repeat aloud the
following sentences"Credit means right side,
It does not mean good or bad." "Debit means
left side. It does not mean good or bad."
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CHAPTER III SET 5 ACCOUNTS AND
BALANCESUMMARYFor each basic debit item and
each basic credit item in the accounting reports
there is an "account" in the books of the
business. An account is simply a page in the
books. In a series of accounts in the books we
analyze and summarize each aspect (Dr and Cr) of
a large number of business transactions.
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29The balance brought down
summarizes the net amount of the transactions
recorded in the account to date. Each
account may have a debit or credit balance
according to the net total of debit and credit
postings.
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30CHAPTER
III SET 6 - CASH AND CREDIT
SUMMARYIn bookkeeping the word "credit" has
two meanings Credit means NOT for cash
Credit means right side of the account, the
opposite of debit.
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31Transactions
may be either for cash or credit Cash
transactions are either cash receipts or cash
payments, which increase or decrease the cash
balance.Credit transactions increase either
receivables or payables, but NOT cash ... until
they are paid with a cash transaction!.
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32Cash is
an asset and therefore a basic debit.
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33In
terms of debit and credit, cash sales and
purchases are recorded thusCash receipts

Cash account Dr.
Sales account Cr.Cash
payments.
Purchases account Dr.
Cash
account Cr
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34Credit transactions do not affect the
balance of cash but they do increase debtors
(basic debits) or creditors (basic credits).
Remember - debtors - receivables - basic
assetCreditors - payables - basic credit
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35Credit
transactions for sales and purchases are recorded
thusCredit sales Debtor (receivable)
account Dr. Sales account
Cr
Credit purchases Purchases account
Dr Creditor account
Cr.
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36CHAPTER III SET 7 - JOURNALIZING
TRANSACTIONS SUMMARYThis is a revision
set to give you practice in journalizing
transactions by translating them into debits and
credits.The journal of a business is the book
in which any transaction may be recorded in the
following form of entry.
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37FORM OF
GENERAL JOURNAL ENTRYDateAccount name
Dr 1000 Account name Cr
1000Plus an explanation of the
transaction for future reference.
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CHAPTER IV - SPECIAL
TRANSACTIONSSET 8 ACCRUALS
SUMMARYAccruals are credit transactions. They
record a liability not yet paid for. The
liability may be for the purchase of a fixed
asset, or a cost or an expense incurred. Thus
the books and the accounting reports must show
the full liabilities of a business. Settlement of
the accrual in cash, is a subsequent cash
transaction.
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39To
record an accrual we journalize Asset (basic
debit Dr. Creditor (basic
credit) Cr. OR Cost (basic
debit) Dr. Creditor (basic
credit) Cr. OR Expense
(basic debit) Dr. Creditor (basic
credit) Cr.
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40To record the
cash settlement of the accrual we journalize
Creditor (basic credit) - decreased Dr.
Cash (basic debit) - decreased Cr.
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41CHAPTER IV SET 9 - FIXED ASSETS AND
DEPRECIATION
SUMMARYFixed assets, such as land, buildings,
machinery, plant, furniture, trucks, cars, etc.,
are normally purchased for use in the business,
and not for resale.The process of
"depreciation" allocates the cost of each fixed
asset to "depreciation expense" proportionally
over its working life. It is a process of
allocation not valuation of the fixed asset,
Depreciation expense" (basic debit) is shown in
the income statement.
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42Fixed assets (basic debits) are shown
in the balance sheet at cost, less accumulated
depreciation (basic credit). Exception Land
is not depreciated - shown at cost until revalued.
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43The
amount charged to depreciation expense for the
accounting period may be journalized in one of
two waysI.Directly against the cost of the
fixed asset Depreciation expense (basic
debit) Dr
Fixed asset (basic debit)
Cr OR
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2.Through an intermediate account
deducted from the cost of the fixed asset in the
balance sheet Depreciation expense (basic
debit) Dr Accumulated depreciation
(basic credit) Cr.Note Accumulated
depreciation is deducted from the total of fixed
assets (basic debits) on the left side of the
balance sheet. It is therefore a basic credit
(not basic debit).
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45CHAPTER V
RECORDSSET 10 - JOURNALS AND LEDGERS
SUMMARYBooks of
account may be divided into books of. Prime
entry (journals) Second entry (ledgers)
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46In the
journal each transaction is translated into
debits and credits, Only one journal is
essential but in practice we have separate
journals for each main source of transactions.
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The cash book (journal) records
cash receipts and payments. The sales journal
records credit sales. The purchases journal
records credit purchases. The
general journal records all types of transactions
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48The sales journal and the
purchases journal summarize one side of
transactions so that the debit to purchases and
the credit to sales may be made in total
figures, instead of in detail for each
transaction.
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49Posting
to the ledger accounts is made from the journals.
Each ledger includes a series of accounts to
record the debit and credit aspects of the
transactions.
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50Three
separate ledgers are usually kept. The sales
ledger contains an account for each debtor.
The purchases ledger contains an account for
each creditor, In the general (private) ledger
are all the other accounts for assets,
liabilities, owner's equity, sales, costs and
expenses
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CHAPTER V - SET 11 - TRIAL
BALANCE SUMMARYBookkeeping
is the process of keeping books of account. The
bookkeeping records analyze, classify and
summarize transactions to provide the basic data
for accounting reports.In the books the total
debit postings equals the total credits.The
arithmetical accuracy of the books is verified by
making a "trial" or test by listing the balances
of the accounts in the form of a trial balance,
to check that total debits and credits agree.
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52CHAPTER VI -
SET 12 SUMMARYThis is a revision set on the
whole process of BOOKKEEPING and accounting which
involves Journalizing transactions into
debits and credits Posting to accounts in the
ledger Balancing ledger accounts Extracting
a trial balanceand .. the ACCOUNTING work of
preparing an income statement and a balance sheet
with IAS!.
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53The set includes the routine for
recording the following types of
transactionsStarting a business with
cashPurchases for cash and creditPurchase and
depreciation of fixed assetsSales for cash and
creditTransfer to cost of sales (cost of goods
sold)Accrual and payment of expensesSettlement
of debtors and creditors
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54... and so ends ... And begins
...
THE LANGUAGE OF DEBIT AND CREDIT
...
... on we go together . with a quiz
...... to give YOU feedback on how well YOU
have learned ... bye for now ...
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