Accounting Concepts - Simplified

Rule No. 1: Assets and Expenses are debit in nature which means an increase in Asset and/or Expense leads to a debit while a decrease in Asset and/or Expense leads to a credit. Liabilities, Owners equity and Revenues are credit in nature which means an increase in Liabilities, Owners equity and/or Revenues leads to a credit while a decrease in Liabilities, Owners equity and/or Revenues leads to a debit.



Rule No. 2: Debits must equal to Credits



Rule No. 3: Revenue - Expenses = Profit (if obvious) or Loss (if negative)



Rule No. 4: Profit is added to while Loss is deducted from Owner's equity.



Rule No. 5: Assets = Liabilities + Owners equity



Rule No. 6:
Increase in debits = Increase in credits
Decrease in debits = Decrease in credits
Increase in debits = Decrease in debits
Increase in credits = Decrease in credits



Rule No. 7: Every transaction in accounting affects AT LEAST one debit and one credit myth.



Lets understand the above rules by analysing sure transactions:
Transaction analysis : memoir affected (Accounting element - Increase/Decrease - Debit/Credit)



1. Owner contributed cash into business.
Transaction analysis : Cash (Asset - Increase - Debit) and Capital (Owners equity - Increase - Credit)



2. grasp stock on credit from a supplier.
Transaction analysis : Stock (Asset - Increase - Debit) and Creditor (Liability - Increase - Credit)



3. Sold goods for cash.
Transaction analysis : Cash (Asset - Increase - Debit) and Sales (Revenue - Increase - Credit)
and Stock (Asset - Decrease - Credit) and Cost of goods sold (Expenses - Increase - Debit)



4. Paid the supplier.
Transaction analysis : Cash (Asset - Decrease - Credit) and Creditor (liability - Decrease - Debit)



5. Purchased machinery with cash.
Transaction analysis : Cash (Asset - Decrease - Credit) and Machinery (Asset - Increase - Debit)