![]() They pay the electricity bill of $200 by borrowing from the bank. But they sell 3 extra computers out of 10 for $900 each in cash. Procured 10 computers worth $800 each on credit from Mr. They purchase furniture for $500 in cash. They pay rent in cash for the office as $1000. Therefore, the total capital introduced in the business is $90,000. A invests cash of $60000, and B invests $30000. To make the picture clear, let us have an example and see how the transaction affects each of the above 5 accounting elements by following the rules of the “real, personal, and nominal” account as discussed above.Ī and B start a computer business. These accounts have a debit balance and payment of expenses will have a credit effect.Įach credit and debit entry requires a correct perception of the nature of a transaction. ![]() Expenses: Expense includes all expenditure items incurred such as rent, cartage, electricity, postage, travel, stationery, bank charges, salary, wages, etc.Any reduction in such accounts will lead to debiting the account. Income/Revenue: This group of accounts shows the income received by the company by way of the sale of goods or services or by any other form of interest received, profit on the sale of assets, commission, etc.And its effect on debit and credit is similar to that of a liability Again, we deduct the smaller one from the bigger one, account number two has a credit balance of 400. It has a credit total of 500 and total debits are 100. For account number two, it’s the opposite. In accounting, we call this a debit balance of 400. It is a liability because it has been taken from the owner/shareholders of the company. We deduct the smaller sum of credits from the bigger total of debits which gives us 400. This constitutes the company’s funds invested in the business. Equity/Capital: Capital refers to the paid-up capital of the company.While it debits the account when it releases or pays off its liabilities. When the company incurs any liability, its balance increases and is hence posted to the credit side of the account. ![]() In contrast, if the debt is not equal to the credit.
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