Accounting Lecture: 2
Accounting Equation: capital=assets-liabilities
Owners equity
Retained EARNINGS
ACCOUNT RECV
Account payable
A ( asset) is always dr.
L liability is Cr
Income cr.
capital cr.
ALICE
Asset owns hence dr.
Liability owes hence cr.
Capital is anything provided by owner or other 3rd party. Hence it is debited in owner’s acc and credited
in the business’s account or capital account. (When capital increases)
Income are earnings, which increases capital. All the incomes of business will increase the capital of
business. So, when we will credit the incomes, it means we are increasing business's capital. As increase
in capital is shown in credit side, that’s why income are always shown on the credit side.
Expense reduce capital, opposite to income. That’s why a decrease in capital must be shown on the
debit side.
If I purchase a machinery, I will show it on the debit side and bank credit.
If I am selling it, then the opposite occurs, machinery is credited and bank is debited. This shows how,
when we are selling off the machine, assets are decreasing, hence, asset account is credited according to
ALICE theory.
expense
dr.
Capital increase= credit side (theory)
Capital decrease= debit side (theory)
Asset increase: dr
Asset decrease=cr
Liability decrease: dr
Liability increase: cr
1st one: Since anees is investing in the business, cash is increasing hence, cash is debited and
capital is credited ( as capital is credit according to accounting theory).
2nd: since anees is purchasing/buying furniture, furniture is an asset, hence, furniture will be
debited and cash will be credited (as cash is going out of the business)
3rd: 2 transactions:
The purchase account will be debited by 2000, and bank will be credited for 2000 as money is
going out of the business. If it is on credit, then the name of the buyer will be mentioned in the account.
So in the second transaction, purchase will be debited by 1000, and khalid store will be credited by
1000, as the business will owe khalid store 1000.
4th one: as money is entering the business, the cash account will be debited and sales account
would be credited (as sales revenue is an income and incomes are always credited according to the
ALICE theory).
SOLD GOODS – 12000 , CASH WILL COME IN, CASH ASSET (INCREASE)