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  1. This answer was edited.

    What is Debit balance? While preparing a ledger account (T-account), if the sum of the debit side is greater than the sum of the credit side, then we say that the account has a "debit balance". Debit side > Credit side Assets have debit balance Let me help you understand this concept correlatingRead more

    What is Debit balance?

    While preparing a ledger account (T-account), if the sum of the debit side is greater than the sum of the credit side, then we say that the account has a “debit balance“.

    Debit side > Credit side

    Assets have debit balance

    Let me help you understand this concept correlating it with the golden and modern rule & with an example.

    1. Golden rule of accounting for real account (ie. assets like plant & machinery, furniture & fixtures, etc) is-

    Debit what comes in, Credit what goes out

    2. Modern rule of accounting states-

    Debit the increase in asset, Credit the decrease in asset

    Keeping this in mind, we will move forward to an example.

    Example for Asset A/c

    Samsung Inc. acquired 2 plant & machinery for 2,50,000. Out of the 2, it sold 1 for 1,00,000. Also, 20,000 depreciation was charged. So, the ledger account for plant & machinery will be presented as follows in the books of Samsung Inc.-

    Plant & Machinery A/c
    To Bank A/c2,50,000By Bank A/c1,00,000
    By Depreciation A/c20,000
    **By Balance c/d1,30,000
    Total2,50,000Total2,50,000

    With the purchase of 2 plant & machinery, there will be an increase in the overall assets of Samsung Inc. So, we will have to debit the purchase/increase in the asset. And on the sale of any asset purchased before, you need to credit the asset account.

    Therefore, in general, the debit side of an asset account will be > than the credit side, resulting into a debit balance.

    So, in this example, the above ledger shows the debit balance (debit side > credit side) in plant & machinery A/c (By Balance c/d – 1,30,000).

    What is Credit balance?

    While preparing a ledger account (T-account), if the sum of the credit side is greater than the sum of the debit balance, then we say that the account has a “credit balance“.

    Credit side > Debit side

    Liabilities have credit balance

    Again, let just interpret this concept correlating it with the rules along with an example.

    1. Golden rule of accounting for personal account (eg. creditors) is-

    Debit the receiver, Credit the giver

    2. Modern rule of accounting states-

    Credit the increase in liability, Debit the decrease in liability

    Keeping these rules in mind, let me help you know why liabilities have a credit balance with an example.

    Example for Liabilities A/c

    ABC Ltd purchased raw materials from its supplier XYZ Ltd for 5,00,000. During the month it could only make payments of 25,000 and 40,000 to the supplier. The remaining amount is still outstanding. So, the ledger account for XYZ Ltd (Creditors A/c) in the books of ABC Ltd will be presented as follows-

    XYZ Ltd A/c
    To Bank A/c25,000By Purchase A/c5.00,000
    To Bank A/c40,000
    **To Balance c/d4,35,000  
    Total5,00,000Total5,00,000

    XYZ Ltd has been credited with 5,00,000 because he is the supplier of raw materials (credit the giver). Also, ABC Ltd is now liable to pay 5,00,000 (credit the increase in liability). Then as and when we pay XYZ Ltd, there will be a decrease in the liability, therefore debit. The liability account will show a credit balance until we discharge the dues completely.

    So, in general, you will always see the credit side of the liability account to be > than the debit side.

    In this example, the above ledger shows the credit balance (credit side > debit side) in XYZ Ltd A/c (To Balance c/d – 4,35,000).

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  1. This answer was edited.

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulRead more

    Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulfil your requirements.

    Short-Term Liabilities

    Meaning

    The term short-term liabilities refers to the short- term financial obligations of companies, firms or enterprises to make the payments to these loans within one accounting period(i.e., within a year). These loans are generally taken to meet day to day working capital requirements of an organization such as the purchase of raw materials. Short-term liabilities are also known as current liabilities.

    Exclusive List of Items

    1. Bills payable/Trade payable
    2. Sundry creditors
    3. Accrued liabilities
    4. Term debt
    5. Advances and deposits received
    6. Short-term obligations
    7. Unearned revenue
    8. Salaries and wages payables
    9. Sales tax payable
    10. Bank loan
    11. Outstanding expenses
    12. Merchandise accounts payable
    13. Deferred revenue
    14. Commercial paper
    15. Credit-card debt
    16. Bank overdraft
    17. Dividends payable
    18. Customer deposits
    19. Current portion of long-term debt
    20. Short-term provisions and reserves
    21. Accrued payroll
    22. Notes payable to banks
    23. Short-term loans and advances
    24. Rent payable
    25. Other short-term debts

     

    Long-Term Liabilities

    Meaning

    The term long-term liabilities refers to the long-term financial obligations of the firms, companies or enterprise which remains due for more than one accounting period. Generally, such loans are either taken to acquire fixed assets or to make payment to a long-term debt such as payments to debenture holders. Long-term liabilities are also known as long-term debt or non-current liabilities.

    Exclusive List of Items

    1. Long-term borrowings/debts
    2. Specific loans for purchasing fixed assets
    3. Deferred tax liabilities
    4. Derivative liabilities
    5. Pension obligations
    6. Capital leasing
    7. Car payments
    8. Convertible debt
    9. Long-term provisions and contingencies
    10. Bonds payable
    11. Pension liabilities
    12. Debentures
    13. Mortgages payable
    14. Public deposits
    15. Long-term warrants
    16. Long-term notes payable
    17. Loans from shareholders
    18. Lease contracts
    19. Post-retirement benefits reserve
    20. Deferred long-term liability charges
    21. Deferred compensation
    22. Other non-current liabilities

     

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  1. This answer was edited.

    Bad Debts In layman's language, Bad Debt is an expense incurred by a business, which is not repaid by the debtor, in the due course of time for reasons such as fraud, insolvency of the debtor, etc. We can also refer to it as Uncollectible Accounts Expense and Irrecoverable Debts. Meaning of LiabilitRead more

    Bad Debts

    In layman’s language, Bad Debt is an expense incurred by a business, which is not repaid by the debtor, in the due course of time for reasons such as fraud, insolvency of the debtor, etc. We can also refer to it as Uncollectible Accounts Expense and Irrecoverable Debts.

    Meaning of Liability

    Liabilities refer to the financial obligations of a business. In simple words, it is a sum of money owed by a debtor to a creditor under an agreement and repayable on a specified period. For example, Bank Loans, Accounts Payable, Bank Overdrafts, etc.

    Bad debts are an expense or a liability?

    Bad Debts are an expense to the business and not a liability as the amount that was expected to be received from the debtor is irrecoverable and has a negative effect in the books of accounts by way of reduction from the accounts receivable.

    It is recorded on the asset side of the balance sheet however, it is entered in the balance sheet as a contra asset account i.e. as a reduction from the accounts receivable. It is also recorded under operating expenses in the Income Statement as well as in the profit and loss a/c on the debit side.

    Therefore, we can easily conclude now that bad debts are an expense and not a liability.

    This concept is further explained with an example stated below.

    Example

    XYZ Ltd sells machinery to ABC Ltd. for 10,000 at 60 days credit. However, ABC Ltd is declared bankrupt and therefore can no longer pay the specified amount. This amount of 10,000 is an expense for XYZ Ltd and leads to a fall in the accounts receivables. Hence, it is not a liability for the company but an expense.

    Bad debts as shown in the Income statement

    (Extract of Income statement)

    Income statement

    Hope this helps.

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