-This question was submitted by a user and answered by a volunteer of our choice.
The answer to the question asked is “Liability is credited”.
Now, let me help you determine the reason behind why and how is liability credited & not debited.
Why and How is Liability credited?
The amount payable by a business entity to others is referred to as liability. Liabilities such as creditors, outstanding expenses, income received in advance, loans are taken, etc are classified as personal accounts. So, it is important for us to know both the golden rules for personal accounts and modern rules for the treatment of liability.
1. Golden rules
First, we will interpret why liability is credited correlating it with the golden rules with the help of an example.
Golden rules of accounting states,
Debit the receiver & Credit the giver.
Lenovo Inc. acquired computer spares from its supplier XYZ Inc. for 5,00,000. The amount is still payable by Lenovo Inc. (i.e. liability). As XYZ Inc. is the supplier of computer spares (ie. the giver of products & services), it is to be credited as per the golden rules.
Journalizing this transaction in the books of Lenovo Inc. will be-
|Purchase A/c||Debit||5,00,000||Expense A/c||Debit all expenses and losses|
|To XYZ Inc. A/c||Credit||5,00,000||Personal A/c||Credit the giver|
The above journal entry shows that XYZ has been credited because he is the supplier and also a liability for Lenovo Inc.
2. Modern rules
Now, we will determine the reason why liability is credited correlating it with the modern rules along with an example.
Modern rules of accounting states,
Credit the increase in liability
During the accounting period Jan-Dec 20×2, Mr Alex has already paid rent 10000 each month for 10 months. But he could not pay the rent for 2 months until the end of the period. So, rent 20000 is still payable (ie. liability) by Mr Alex.
The journal entry for outstanding rent will be as follows;
|Rent A/c||Debit||20,000||Debit the increase in expense|
|To Outstanding Rent A/c||Credit||20,000||Credit the increase in liability|
The above entry shows an increase in liability of Mr Alex as the amount of rent 20000 is payable by him.