DEBIT AND CREDIT AS APPLIED TO ASSET AND LIABILITY ACCOUNTS
=Student’s Use of Working Rules.=—In order to indicate the more
usual types of transactions which affect the asset, liability, and
proprietorship accounts, a set-up of the various groups of accounts
will be given, under which will be shown transactions recorded as
debits and those recorded as credits. Accounts will be shown in the
order in which they appear in the balance sheet. The accounts under
each group will, of course, bear their own individual titles and not
the title of the group. Only such entries as are more frequently met
with will be given. Since in the group accounts given as guides only
those entries appear which affect these group accounts, it is deemed
impracticable to attempt to show the contra, or other side of each
entry arising out of the transactions. However, the student should
always supply mentally the contra of each entry shown in the group
reference account. For the sake of clarity, the personal pronouns “we”
and “us” will be used instead of the impersonal name.
=Accounts with Cash and Notes Receivable.=—Entries to the Cash and
Notes Receivable accounts are comparatively simple and are shown in the
following schedule:
(NAME OF ACCOUNT)
===================================================================
_Debit_: | _Credit_:
(1) For all receipts | (a) For all disbursements
or incoming items. | or outgoing items.
Transactions with cash are self-explanatory.
The accounts representing transactions with notes require some
explanation. When, in the course of business, we receive a note, Notes
Receivable is debited and the person who gives it is credited, because
our asset Notes Receivable is increased and the claim against the open
account of the person giving the note is decreased. Similarly, when
that note is disbursed by us, i.e., goes out of our possession, the
asset is diminished and therefore Notes Receivable is credited.
A note receivable can be disposed of in several ways:
1. Through its release on payment by the maker,
2. Through its transfer by us to another person
in settlement of a claim against us, or
3. Through its sale to the bank.
In all of these cases the credit goes to Notes Receivable. In cases 1
and 3, the asset increased, viz., Cash, is debited; and in case 2 the
liability canceled or decreased is debited. It may be stated, however,
that in cases 2 and 3, instead of making the credit direct to the asset
account Notes Receivable, it is better carried to a supplementary
account, Notes Receivable Discounted, in order to show the liability
arising from the fact that, through our indorsement, we guarantee to
pay the note at its maturity in case the maker fails to do so. This is
later explained in detail.
Accounts with Customers
(NAME OF CUSTOMER)
====================================================================
_Debit_: | _Credit_:
(1) For amount he owes us | (a) For money he pays us on account.
at beginning. | (b) For notes he gives us on account.
(2) For goods we sell him | (c) For goods he returns to us.
on account. | (d) For discounts we give him.
| (e) For claims we allow him.
The balance owing us by a customer is an asset, and therefore a debit
item.
Goods sold on account are charged to the customer because our claim
against him constitutes an asset; at the same time the income account,
Sales, is credited.
When a customer pays us on account, his account is credited and Cash
is debited, showing an increase of the asset Cash and a decrease of the
asset Accounts Receivable. Such an entry is simply a transfer from one
account to another, an increase of one asset offset by a decrease of
another asset.
When a customer gives us his note, his account is credited and Notes
Receivable is debited, usually, with the face of the note.
When a customer returns goods to us, he is credited to decrease
the original charge to his account and Sales or Returned Sales is
debited to reduce the income originally credited to Sales. It is not
necessary to make any other record of the returned goods, because, as
was explained in Chapter VI, no day-to-day record is kept to show the
decrease of the asset Merchandise through Sales. So, when goods are
returned by a customer, the increase of the asset Merchandise will be
shown at the end of the fiscal period when the merchandise inventory is
taken, and no other record than that indicated is necessary.
When a customer is allowed a discount for the early payment of his
bill, he is credited to reduce the original charge by the amount of the
discount, and some temporary proprietorship account, as Discount on
Sales, is debited to show the decrease in proprietorship resulting from
the allowance of the discount.
When a customer is allowed a claim for reduction in his bill on account
of damaged goods or the like, the entry is similar to the one next
above—debit Claims and Allowances and credit the customer.
The Merchandise Account
MERCHANDISE
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_Debit_: | _Credit_:
(1) For merchandise on hand at the | (a) For sales of merchandise.
beginning. | (b) For returns of merchandise
(2) For purchases of merchandise. | purchased.
(3) For all costs necessary to |
bring the merchandise from |
its place of purchase to its |
place of sale. |
(4) For goods returned by customers.|
Entries in the Merchandise account require no explanation excepting
the debit entry (3). The value of the asset Merchandise is not the
price paid for it at the point where purchased, for it is of no value
to the business until it is placed on the shelves ready for sale.
Accordingly, the value of the asset Merchandise is not determined
merely by the price paid the vendor, but by this price plus all of the
costs necessary to bring the merchandise to the store. Inasmuch as the
merchandise is sold normally for more than it cost, the credit entry
in the Merchandise account includes two items: (1) the decrease of the
asset, as indicated by the cost price of the goods sold; and (2) the
amount of profit on the sale, that is, the amount of the increase in
proprietorship.
The record of merchandise transactions is thus seen to be rather
complex and will be explained fully in Chapter XIII. The above schedule
is simply an indication of the types of transactions recorded in the
Merchandise account and will be sufficient for the present. It will
be seen that the sale of goods results in a debit to the customer’s
account and a credit to Merchandise.
=Accounts with Fixed Assets.=—Accounts with fixed assets are those with
land, buildings, and equipment of all sorts.
(NAME OF ACCOUNT)
=========================================================
_Debit_: | _Credit_:
(1) For full cost to the business | (a) For sale or loss,
in position ready for use. | at cost price.
The debit to this account is not for invoice or first cost only,
but should include all expenditures necessary to secure full title
or to place the equipment in position for use by the business, such
as abstract of title costs, freight, drayage, and, in the case of
machinery, setting-up and placement costs. The corresponding credit is
usually to Cash, or to Notes or Accounts Payable.
The account is credited for the sale of all or a portion of the
asset at the same price at which it was originally charged, so that
the balance in the account shows the pro rata cost of the part left.
A loss from fire or otherwise is treated similarly. If the asset is
sold at a profit (an unlikely occurrence), the account is credited
with its cost price, while the excess of the sale price over the cost
price is credited to a proprietorship account, such as Profit on Sale
of Machinery. The debit corresponding to these two credits is usually
to Cash or some other asset received in payment. Where the asset is
sold at a loss, the account is credited with: (1) the sum received, and
(2) the difference between this sum and the cost of the asset, which
difference represents a loss. The loss or deficiency is debited to a
proprietorship account, such as Loss on Sale of Machinery, and the
additional debit is to Cash or some other asset received. This latter
debit amount plus the debit to Loss on Sale of Machinery must, of
course, equal the two amounts credited to the fixed asset account and
representing the cost of the asset sold.
Fixed asset accounts are further considered in Chapter XIII, where the
manner of recording loss through depreciation is shown.
=Accounts with Notes Payable.=—When we issue our own note, the credit
is to Notes Payable and the debit is either to the liability account
reduced or to the asset account increased. When we call the note in,
either by paying it or by canceling our claim against the person
returning the note, Notes Payable is debited and Cash or the person
returning the note is credited.
Accounts Payable
(NAME OF CREDITOR)
=================================================================
_Debit_: | _Credit_:
(1) For money we pay him on account. | (a) For amount we owe him
(2) For notes we give him on account. | at beginning.
(3) For goods we return to him. | (b) For goods he sells us
(4) For discounts he gives us. | on account.
(5) For claims he allows us. |
As will be noted by reference to the customer’s account, the entries
to the creditor’s account, being viewed from the opposite standpoint,
are exactly the reverse of the entries to the customer’s account.
=Other Liability Accounts.=—Accounts with other liabilities, such as
Mortgages, Bonds, Expenses Payable, and the like, follow in the main
the general principles laid down (pages 81 to 83). Specific treatment
will be given them as they are met in the discussion. In the case of
long-time notes payable supported by mortgages, record should be made
under the title “Mortgages Payable” rather than “Notes Payable.”