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anuj jain

161 Points Joined May 2009

IN 11TH CLASS ACCOUNTS BOOK I HAVE READ THAT DEBIT MEANS DECREASE IN OWNERS EQUITY AND CREDIT MEANS INCREASE IN OWNERS EQUITY..........THIS STATEMENT APPLIES ON EXPENSES AND INCOME AS WE DEBIT EXPENSES BECAUSE EXPENSES REDUCES PROPRIETORS EQUITY SIMILARLY INCOME IN BUSINESS INCREASES PROPRIETORS EQUITY SO WE CREDIT INCOME IN OUR BUSINESS. BUT I WANT TO KNOW HOW THIS STATEMENT APPLIES ON ASSETS AND LIABILITIES BEACUSE WE DEBIT INCREASES IN ASSETS IN OUR BUSINESS , SO ACCODINT TO THE ABOVE STATEMENT INCREAES IN ASSETS REDUCES OWNERS EQUITY...HOW DOES THIS POSSIBLE BECAUSE INCREASE IN ASSETES EITHER REDUCES OTHER ASSET OR INCREASE S A LIABILITY BUT THE OWNERS EQUITU REMAIN UNAFFECTED........SIMILARLY AS CREDIT MEANS INCREASES IN OWNERS EQUITY SO WHEN A BUSINESS TAKES A LOAN FROM BANK HOW DOES THIS LOAN AMOUNT AMOUNT INCREASES OWNERS EQUITY ..PLEASE EXPLAIN IT CLEARLY

Replies (2)

GOPAL AGGARWAL

DOING NOTHING

1339 Points Joined October 2009

Anuj JI

You are right about DEBIT MEANS DECREASE IN CAPITAL CREDIT MEANS INCREASE IN CAPITAL. BUT Appling this rule in all the cases is not correct.Because there are three types of Accounts which have there own rule

1. Personal (Capital or Loan A/c may be Cr or Dr. or in the name of any person)

2. Real (Sales purchase)

3. Nominal (Income & Exp.)

I donot think to explain these because in my opinion aboe examples will clear you the whole position. And every accounts has its own rule which are as under

1. "DEBIT THE RECEIVER AND CREDIT THE GIVER" (FOR Personal)

2. DEBIT WHAT COMES IN CREDIT WHAT GOES OUT ( FOR REAL)

3. DEBIT ALL EXPENSES AND LOSSES CREDIT ALL INCOME AND GAINS ( FOR NOMINAL)

Now come to your query that raising of loan is how a increase in capital. please refer the above rule and you will get that it is personal account. means "DEBIT THE RECEIVER AND CREDIT THE GIVER". as per this rule we will credit the bank (Our creditor) because he is the loan giver

I hope you the clarification will satisfy If some more help is needed just contact me