DEFINITION – “Debits and Credits” is a classification system that is unique to
accounting. The “Debits and Credits” system captures and records the flow of
economic resources from a source (credit) to a destination (debit). It also ensures
that the accounting equation remains in balance after each transaction is entered.
They impact
here:
Built on principle
DUALITY OF FINANCIAL
TRANSACTIONS: Finance is a closed
system. Money does not just appear
from nowhere. So,money into and out
of a business must have both a source
and a destination. "Debits and Credits"
ensures that this duality of financial
transactions is appropriately reflected in
the accounts of the business.
All financial transaction must
involve at least 2 accounts.
SEPARATE ENTITY: A business is formed
as a separate entity, initially without any
assets. So, every asset that the business
comes to control is claimable by others:
i.e. (creditors , funders) or owners.
"Debits and Credits" ensures that these
claims over the assets of the business
are accurately recorded in the accounts
of the business.
For every transaction: the total
of the debits must equal the
total of the credits.
Rules of
"Debit and
Credit"
The Debit or Credit allocation is
initially determined by the group
that each account belongs to and
then whether the account is
increasing or decreasing in value.
"Debit and Credit" captures and
records the flow of economic
resources from a source (Credit)
to a destination (Debit).