Assets and liabilities

ASSETS
Assets are the properties and possessions of the business to pay in future. Can
be amount payable for material purchased, expenses etc.
Properties and possessions can beof two types, one that have physical existence (ca
lled tangible) and the other that have no physical existence (called intangible)
LIABILITIES
Liabilities are the debts and obligations of the business.
Liability is the obligation of the business to provide a benefit or asset on a future date.
Asset isa right to receive and liability isan obligation to pay, therefore, these are opposit
e to each other.
INCOME
Income / Revenue is the value of goods or services that a business charges from its
customers. or
The reward / return received from the resources committed in the business
Expenses
Expenses are the costs incurred to earn the revenue
The resources spent and the efforts made to earn the income, when translated in mone
y terms are the expenses of the business
Rules of Debit and Credit
From our discussion up to
this point, we have established following rules for Debit and Credit:
Any account that obtains a benefit is Debit.
OR
Anything that will provide benefit to the business is Debit.
Both these statements may look different but in fact if
we consider that whenever an account
benefits as a result of a transaction, it will have to return that benefit to
the business then both the
statements will look like different sides of the same picture.
For credit
Any account that provides a benefit is Credit.
OR

Anything to which the business has a responsibility to return a benefit in future is Credit.
As explained in the case of Debit, whenever an account provides benefit to
the business the
business will have a responsibility to return that benefit at some time in future and so it
is Credit.
Rules of Debit and Credit for Assets
Similarly we have established that whenever a business transfers a value / benefit to
an account and as
a result creates some thing that will provide future benefit; the `thing' is termed as Asset
.
By combining both these rules we can devise following rules of Debit and Credit for Ass
ets:
o When an asset is created or purchased, value / benefit is transferred to that account,
so it is
Debited
i.Increase in Asset is Debit
o Reversing the above situation if
the asset is sold, which is termed as disposing off, for say
cash, the asset account provides benefit to the cash account. Therefore,
the asset account is
Credited
ii.Decrease in Asset is Credit
Rules of Debit and Credit for Liabilities
Anything that transfers value to the business, and in turn creates a responsibility
on part of the
business to return a benefit, is a Liability. Therefore, liabilities are the exact opposite of
the assets.
o When a liability is created the benefit is provided to business by that account so it is
Credited
iii.Increase in Liability is Credit
o When the business returns the benefit or repays the liability, the liability account bene
fits
from the business. So it is Debited
iv.Decrease in Liability is Debit
Rules of Debit and Credit for Expenses
Just like assets, we have to pay for expenses. From assets, we draw benefit for a long t
ime whereas

the benefit from expenses is for a short run.

Therefore, Expenditure is just like Asset but for a short run.
Using our rule for Debit and Credit, when
we pay cash for any expense that expense account
benefits from cash, therefore, it is Debited.
o Now we can lay down our rule for Expenditure:
v.Increase in Expenditure is Debit
o Reversing the above situation, if
we return any item that we had purchased, we will receive
cash in return. Cash account will receive benefit from that Expenditure account. Therefo
re,
Expenditure account will be credited
vi.Decrease in Expenditure is Credit
Rules of Debit and Credit for Income
Income accounts are exactly opposite
to expense accounts just as liabilities are opposite to that of
assets.
Therefore, using the same principle we can draw our rules of Debit and Credit for Inco
me
vii.Increase in Income is Credit
viii.Decrease in Income is Debit