Question

Describe how accounts are used to record information about the effects of transactions.

Answer 1

All accounts are divided into five categories for the purpose of recording the transactions.

(i) Asset (ii) Liability (iii) Capital
(iv) Expenses/ Losses (v) Revenues / Gains

Two fundamental rules are followed to record the changes in these accounts

(i) For recording changes in Assets/Expenses (Losses)

(a) "Increase in the asset is debited and the decrease in asset is credited."

(b) "Increase in expenses/ losses is debited and the decrease in expenses/ losses is credited. "

(ii) For recording changes in Liabilities and Capital/ Revenues (Gains)

(a) "Increase in liabilities is credited and the decrease in liabilities is debited."

(b) " Increase in the capital is credited and the decrease in the capital is debited."

(c) "Increase in revenue/gain is credited and the decrease in revenue/gain is debited."