Sign In

For the sake of quality, our forum is currently "Restricted" to invitation-only. In case if you wish to join our forum, please send an email seeking an invitation to "[email protected]".

Forgot Password

Lost your password? Please enter your email address. You will receive a link and will create a new password via email.

Captcha Click on image to update the captcha.

You must login to ask question.

Discy Latest Questions

  1. This answer was edited.

    Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more

    Purchase return is credited in the books of accounts.

    To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of accounting

    To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.

    Golden or the traditional rules of accounting

    Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:

    “Debit all expenses and losses,

    Credit all incomes and gains.”

    Example

    ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:

     

    Purchase a/c

     

    Debit

     

    60,000

    Debit all expenses and losses
     

    To cash a/c

     

    Credit

     

    60,000

    Credit what goes out

    (being goods purchased from the supplier)

     

    Cash a/c

     

    Debit

     

    30,000

    Debit what comes in
     

    To Purchase return a/c

     

    Credit

     

    30,000

    Credit all incomes and gains

    (being goods returned to the seller)

    Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)

    Modern rules of accounting

    The modern rule is as follows:

    Type of accountDebitCredit
    Expense accountIncreaseDecrease

    Example

    XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows

     

    Purchase a/c

     

    Debit

     

    40,000

    Debit the increase in expenses
     

    To Mr. A’s a/c

     

    Credit

     

    40,000

    Credit the increase in liability

    (being goods purchased on credit basis)

     

    Mr. A’s a/c

     

    Debit

     

    10,000

    Debit the decrease in liability
     

    To Purchase return a/c

     

    Credit

     

    10,000

    Credit the decrease in expenses

    (being goods returned to the supplier)

    Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)

    Hope this helps.

    See less
    • 0
  1. This answer was edited.

    Sales return is debited in the books of accounts. It is a contra revenue account. To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship. Rule of accounting Modern rules The modern rule is as followsRead more

    Sales return is debited in the books of accounts. It is a contra revenue account.

    To make the concept simpler, I would like to introduce you to the Modern rule of accounting, which is designed to explain the debit and credit relationship.

    Rule of accounting

    Modern rules

    The modern rule is as follows

    Type of accountDebitCredit
    Revenue accountDecreaseIncrease

    When a sale is made it is credited in the books of account as it leads to an increase in the revenue, however, when the goods are returned by the customer it has a debit effect because it leads to a decrease in the revenue.

    According to the modern rule of accounting, the sales return account has been debited because it leads to a fall in the revenue of the business. In case the sales were made on a credit basis the expected accounts receivable should be credited by the amount of sales returned as no amount shall be received.  However, if the sales were made on a cash basis then an accounts payable should be issued to acknowledge the liability of repaying the customer for the purchase.

    Example:

    The credit sales of 1,00,000 were returned by Mr. K to ABC Ltd. as the goods were defective. The journal entry in the books of ABC Ltd. is as follows

    Sales return a/cDebit1,00,000Debit the decrease in revenue
    To Mr. K’s a/cCredit1,00,000Credit the decrease in asset

    (being goods returned by the customer)

    Hope this helps.

    See less
    • 0
  1. This answer was edited.

    Retained Earnings is generally a credit. It will be "credited if its balance increases" and "debited if its balance decreases". To help you understand the statement given above, it is important for you to first interpret the meaning of retained earnings. Meaning of Retained Earnings Retained EarningRead more

    Retained Earnings is generally a credit. It will be “credited if its balance increases” and “debited if its balance decreases”.

    To help you understand the statement given above, it is important for you to first interpret the meaning of retained earnings.

    Meaning of Retained Earnings

    Retained Earnings is the accumulated net income of an entity at the end of an accounting period that is retained by it to meet any future contingencies, invest in the expansion activities, payment of dividends to its shareholders, etc.

    Retained Earnings = Opening Retained Earnings +/- Net Profit/(Loss) during the current period – Dividend paid in the current period +/- Prior period adjustments, etc.

    If the balance of retained earnings is negative, then it is referred to as accumulated losses/deficit, retained losses.

    Why is Retained Earnings generally credited?

    Retained Earnings are a part of “Shareholders Equity” presented on the “Liabilities side” of the balance sheet.

    This is because it indicates the company’s liability to the owners or shareholders. The company cannot utilize the retained earnings until it is approved by its shareholders.

    Also, the modern approach of accounting for liabilities states-

    Credit the increase in liability, Debit the decrease in liability.

    Therefore, considering it as a liability and following the modern approach of accounting, we can conclude that retained earnings will be generally credited.

    It will generally show a credit balance.

    Now, moving forward let me help you understand the instances in which retained earnings are credited or debited.

    When is Retained Earnings credited or debited?

    1. Retained Earnings are credited with the Net Profit earned during the current period. Crediting the retained earnings will increase its balance.

    Example

    Samsung Inc. earned a net profit of 500,000 during the accounting period Jan-Dec 20×1.

    Journalizing this transaction for transferring the net profit earned to retained earnings will be-

    Net profitDebit500,000Transferring net profit earned to retained earnings
     To Retained EarningsCredit 500 ,000Credit the increase in the balance of retained earnings

    2. Some instances which reduce the balance of retained earnings are-

    a. Net loss during the current period
    b. Dividend payable
    c. Bonus Shares issued, etc.

    Retained Earnings will be debited with these transactions.

    Example

    Shareholders of Apple Inc. approve the dividend declared by the board of directors amounting to 100,000. So, the journal entry for the dividend payable by Apple Inc. will be-

    Retained EarningsDebit100,000Debit the decrease in the balance of retained earnings
     To Dividend PayableCredit 100,000Credit the increase in liability
    See less
    • 0
  1. This answer was edited.

    Prepaid Insurance is debited. But before directly diving into the question, let me help you interpret the meaning of Prepaid Insurance, as this will help you understand the nature of this accounting term. Meaning of Prepaid Insurance Prepaid Insurance is the amount of insurance premium which has beeRead more

    Prepaid Insurance is debited.

    But before directly diving into the question, let me help you interpret the meaning of Prepaid Insurance, as this will help you understand the nature of this accounting term.

    Meaning of Prepaid Insurance

    Prepaid Insurance is the amount of insurance premium which has been paid in advance in the current accounting period. However, the related benefits corresponding to the insurance amount prepaid will be received in the next accounting period. In other words, the insurance premium is paid before it is actually incurred.

    Prepaid Insurance is an example of Prepaid Expenses. It is presented as a “current asset” in the balance sheet.

    Why is Prepaid Insurance debited?

    To make you understand this question, it is important to familiarize you with both the Golden rules and Modern rules of accounting.

    1. Modern rules of accounting

    First, we will ascertain the reason why prepaid insurance is debited considering the modern rules along with the help of an example.

    Prepaid insurance is an asset to the entity. Therefore, as per the modern rules of accounting for assets-

    An increase in assets will be debited.

    Example

    HP Inc. paid the insurance premium for its equipment’s amounting to 50,000 on 10/12/20×1. However, the amount of premium relates to the month of Jan 20×2 (Accounting period-Jan to Dec 20×1).

    Journalizing this transaction in the books of HP Inc. on 10/12/20×1-

    Prepaid Insurance A/cDebit50,000Debit the increase in asset
     To Cash A/cCredit 50,000Credit the decrease in asset

    2. Golden rules of accounting

    Now, let me help you interpret why prepaid insurance is debited correlating it with the golden rules and with the help of an example.

    Prepaid Expenses are referred to as representative personal accounts (accounts which represent a certain person or group of person). Therefore, we need to follow the golden rules for personal accounts which states-

    Debit the receiver, Credit the giver

    Example

    J P Morgan Inc. paid the insurance premium for all its furniture amounting to 100,000 on 15/03/20×2. However, the entire amount of premium paid relates to the month of April 20×2. (Accounting period-April 20×1 to March 20×2).

    Journalizing this transaction in the books of J P Morgan Inc. on 15/03/20×2-

    Prepaid Insurance A/cDebit100,000Personal A/c (Representative)Debit the receiver of advance premium
     To Cash A/cCredit 100,000Real A/cCredit what goes out

    Conclusion

    Prepaid Insurance will always be debited and not credited in the year of actual prepayment.

    See less
    • 0
  1. This answer was edited.

    Meaning of Fees Earned Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it chRead more

    Meaning of Fees Earned

    Fees earned signifies the revenue an entity that is generally engaged in rendering services to its clients generates during the reporting period. When an entity deals in both goods and services it charges fees for the part of services rendered and for the goods delivered it charges the predetermined price. It generally forms a major part of revenue in the service industry.

    Few Instances wherein an entity record the amount earned as fees:

    For Services Rendered –

    • Consultancy
    • Consultancy on Taxation Related Matters
    • Auditing and Assurance
    • Architectural Services
    • Accountancy and Other Legal Services.

     

    Both Goods and Services-

    • Manufacturing and repairs
    • Trading in goods and consultancy
    • Goods and transport

     

    When a combined amount is received for the cases wherein both goods and services are rendered one has to record fees earned proportionately.

    Whether it shall be Credited or Debited?

    Fees Earned shall be credited as fees form a part of the revenue and as per modern rule of accounting, the increase in an income should be “Credited”.

    Even if you follow the golden rule of accounting there will be no change in the answer this is because as per golden rule about a nominal account debit the expenses and losses and credit all incomes and gains.

    Accounting treatment

    If an entity follows Cash System of Accounting entire amount received shall form part of the fees earned. One need not distinguish fees based on actual earnings in the accounting period.

    Journal Entry for the same shall be:

    Bank A/cDebitDebit the increase in an asset.
    To Fees Earned A/cCreditCredit the increase in income.

    The accounting treatment in an income statement is given below-

    Fees received in income statement

    If an entity follows Accrual System of Accounting only that part of the receipts shall form a part of fees earned which has been accrued in the reporting period.

    The amount if received in advance shall be recorded as a liability and if received less then such a difference shall be recorded as sundry debtors under current assets.

    Journal Entry for the same shall be:

    Out of the total revenue, a part of fees is received in advance-

    Bank A/cDebitDebit the increase in an asset.
    To Advance Fees A/cCreditCredit the increase in liability.
    To Fees Earned A/cCreditCredit the increase in income.

    It appears in the income statement and balance sheet as –

    Advance Fees received in balance sheet

    Fees Earned in Income Statement

    In case if only part of fees earned is received in a reporting period:

    Bank A/cDebitDebit the increase in an asset.
    Sundry Debtors A/cDebitDebit the increase in an asset.
    To Fees Earned A/cCreditCredit the increase in income.

    It appears in the income statement and balance sheet as –

    Treatment of Fees in case of Accrual System

    Fees earned but not received

    As it can be seen in all of the cases above that fees earned being an income is credited.


    Aastha

    See less
    • 0
  1. This answer was edited.

    Capital is credited in the books of accounts as it is a liability for the business. To make the concept simpler, I would like to familiarize you with the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of Accounting For the application ofRead more

    Capital is credited in the books of accounts as it is a liability for the business.

    To make the concept simpler, I would like to familiarize you with the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

    Rules of Accounting

    For the application of rules, we first need to determine the type of account in question. An account is said to be personal when it is related to firms, companies, individuals, etc. As I mentioned earlier, capital is a liability for the firm/company/business because it is obliged to repay its owner, hence, it is a personal account.

    Golden Rules or The Traditional Rules

    Firstly, we shall consider the golden rules of accounting for personal accounts to determine why capital a/c has a credit balance. The rule is as follows:

    “Debit the receiver,

    Credit the giver”

    Example

    Mr. A is a sole proprietor. The capital invested by him accounts for 1,00,000. The journal entries in his books of accounts are as follows:

    Cash a/cDebit1,00,000Debit what comes into the business
    To Capital a/cCredit1,00,000Credit the giver

    (being cash invested into the business in the form of capital)

    Here we have credited the capital a/c as the business is liable to repay the invested amount to the proprietor in the form of profits.

    Modern Rules

    The modern rule is as follows:

    Type of accountDebitCredit
    CapitalDecreaseIncrease

    Example

    Mr. A commenced business with a capital of 5,00,00. The journal entry is as follows

    Cash a/cDebit5,00,000Debit the increase in asset
    To Capital a/cCredit5,00,000Credit the increase in capital/liability

    (being cash invested in the form of capital)

    Hope this helps.

    See less
    • 0