Hermanson, Edward and Salmonson in their “Accounting Principles” said, “An account is an element in an accounting system that is used to classify and summaries measurements of business activity”.
From the above discussion it can be said that, recording of transactions of similar nature relating to income, expenditure, assets and liabilities at the end of an accounting period of a particular business under appropriate heads as per principles and rules of accounting in condensed and classified statement is called account.
Every transaction effects the accounting equation of a business. Dual change may take place between two assets.
Accounts must be properly credited and debited for following Double Entry System.
For determining debit and credit of transactions two methods are in practice.
- GOLDEN RULES
- Equation Method or Modem Method.
They are described below;
Identifying the two accounts of a transaction, it is to be determined to which classes they do belong. There after debit and credit of each account are to be determined according to the following rules;
- Personal account: The person or institution who receives benefit is to be debited and the person or institution who gives benefit is to be credited.
Receiver of the benefit – Debit
Giver of the benefit – Credit
- Asset account: The asset that comes to the organization through a transaction is to be debited and the asset that goes out of business through a transaction is to be credited.
Asset incomes in – Debit
Asset goes out – Credit
- Nominal or income – expenditure account: Accounts relating to expenses and losses are to be debited and accounts relating to income are to be credited.
Expenses and losses – Debit
Gain and incomes – Credit
According to the opinion of modem accountant on the basis of accounting equation debit and credit of each transaction are determined.
On the basis of increase or decrease of the elements of accounting equation debit and credit accounts are determined. Details of accounting equation have been discussed in the proceeding chapter.
Accounting equation is as follows;
Assets = Equity
Or, Assets = Liability + Owner’s Equity
Or, Assets = Liabilities + (Capital + Income – Expenses)
Therefore, in brief the elements of accounting equation are A, L, C, I, and E For every transaction one or more elements of accounting equation are changed i.e. someone increases or someone decreases. According to this change or increase – decrease of elements debit and credit are determined.
Under this method the determining rules of debit and credit are as follows;
- Assets (A) = increase is debit – decrease is credit
- Expenses (E) = increase is debit – decrease is credit
- Liabilities (L) = increase is credit – decrease is debit
- Capital (C) = increase is credit – decrease is debit
- Income (I) = increase is credit – decrease is debit
It should be kept in mind that, capital increases or decreases due to increase or decrease of income and expenses i.e. increase of income increases capital and increase of expenditure decreases capital. Rules for determining debit and credit under accounting equation can be shown in the following manner.