It was necessary to mention something fundamental, which is the explanation of when an accounting account is of a debtor nature or when it is a creditor. Knowing this information is of vital importance when making an accounting record, since in this way we can understand why an account increases or reduces its balance.
Asset accounts:
Asset accounts are debtor in nature . This means that they increase their balance when they are given a debit and, on the contrary, their balance is reduced when they are credited. Let’s look at a practical example of this to make it even clearer …
We are going to suppose that a business sells cash goods for a value of $ 20,000.00 and we need to record that transaction in the General Journal book . When analyzing the transaction, we can see that two things are happening: 1) Money is entering the business. 2) That money is coming in for some reason, in this case for merchandise sales.
As money is entering us, then we give a debit of $ 20,000.00 to the cash account since it is increasing, and as I mentioned above, the asset accounts increase their balance with debit . In addition to that, we give a credit for the same amount to the merchandise sale account, thus complying with the double-entry principle of accounting .
Liability accounts:
Liability accounts are creditor in nature , which means that they increase your balance with credit and decrease when you give them a debit. Let’s look at another illustrative example …
A company buys a transportation equipment on credit for a value of $ 75,000.00, and we need to record that transaction also in the General Journal book. Now we are going to analyze what is happening: The business is acquiring an asset, which in this case is a transportation equipment, therefore it is given a debit. But you are not paying it off immediately, so now you have a debt or obligation to the seller – a liability. This debt is recorded by giving a credit to accounts payable . The reason why you are given a loan is because the company’s debts (liabilities) are increasing and, as I said before, liabilities increase its balance with credit.
Capital or equity:
The capital or equity account is of credit origin, and therefore, the account balance will increase each time it is credited to this account and will decrease each time a debit is made. Some of the capital accounts that decrease the same are: withdrawals and dividends, which are debited since, as I mentioned, the capital decreases with debit, and when it comes to withdrawals, it is obvious that the capital of the company is decreasing. Some of the accounts that increase capital are the net profits of the business or the contributions of the owners. When the accounting record is to be made, these are credited to indicate that the capital is increasing.
Income account:
The income is from credit origin , increases your balance when the account is credited and decreases when there is a debit. If a business works, this is one of the accounts with the most movements and the profits of the company go up every time there is a sale of merchandise (in case of being a commercial company), therefore these transactions are credited to indicate that the balance has increased. But it can also be the case in which a customer decides to return merchandise, and that return is considered as a reduction in income, so a debit must be given to indicate that the balance has decreased.
Costs and expenses:
Both costs and expenses are debit in nature and therefore increase your balance each time you are debited and decrease your balance when they are credited. It is not very common for expense accounts to be reduced, although the same does not happen with the cost accounts since in a commercial company, it may be the case that after buying merchandise , we decide to return a part. In a case like this, the accounting entry must be recorded giving a debit to the return of merchandise and a credit to the purchase of merchandise so that it is reduced.
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The ledger is very useful, since we can know the balance of a specific account, which allows us to prepare the Financial Statements in the next steps of the accounting cycle. The General Ledger includes the control accounts of Assets, Liabilities, Capital, Income, Costs, and Expenses. Detail or auxiliary accounts will be registered in what is known as Auxiliary Major, such as Accounts Receivable Auxiliary Ledger .