Financial Accounting (Mgt-101) o o
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VU
Goods sold on credit are recorded in the individual’s account only, When cash is received from the customer, to whom something was sold on credit, the receipt may just be recorded in the account of individual only.
o Double entry system records both the aspects of the transaction; o When good are sold on cash the two aspects of the transaction are – the seller has sold goods and received cash against them. The goods sold are benefit transferred to the purchaser (Credit) whereas the cash against the goods is benefit received (Debit). o When the goods are sold on credit the benefit given is the same i.e. goods sold but the benefit received is not cash but a right to receive cash from the customer. Therefore, in this case Debit is given to customer’s account instead of cash. o When cash is received from the customer the right to receive cash ceases. So, the benefit received is cash and benefit transferred is the right to receive cash. Here cash will be debited and customer will be credited. Adopting the double entry accounting system can, therefore, have following benefits: o Every transaction has equal Debit and Credit; hence the total of all Debit accounts will be equal to the total of all Credit accounts at any given time. This serves as a quick test of mathematical accuracy of book keeping. o Since all aspects of transactions are recorded, therefore, the books are more informative. In the example discussed, the trader, if he keeps double entry books, will know the exact figure of total sale, cash in hand and receivable from customers from their respective accounts at any desired time.
Debit and Credit • • •
We have used two terms in our above discussion Debit and Credit. What do these terms mean? Debit and Credit are two Latin words and as such it is difficult to say what do these mean. But we can develop an understanding as to what does these terms stand for.
DEBIT • It signifies the receiving of benefit. In simple words it is the left hand side. CREDIT • It signifies the providing of a benefit. In simple words it is the right hand side. Debit and Credit will be explained in details and with examples in our future discussions.
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