Accounting – Meaning of Balances
We hope your concepts of Capital and Revenue are quite clear by now.
Let’s try to understand what debit and credit balances mean. The base of this lies again in the concept of Capital and Revenue. As we add entries, we keep summarizing the totals in the ledgers. This is called posting, From the original source entry, we pick up the amounts and put the same in a “T” format, in the ledger, keeping the debit amounts on the left of the “T” and the credits on the right. At the end of the period, say each month, and at the year end, we total the debits and the credits, and find a balance, which is carried forward to the next month.
Like I said, there are primarily two types of accounts, capital and revenue and two types of balances, debits and credits. This will give us the basic four (2X2) classifications.
For personal accounts, a debit balance will be a receivable and a credit will be a payable, thus making the debit balance an asset and the credit balance a liability. Most of the time, a customer balance will be an asset and a vendor balance will be a liability.
On the revenue side, a debit balance will be an expense or a loss and a credit balance will be an income or gain.
So this looks like the rules of accounting. Where is the third rule?
The third rule can be translated as amounts in hand or to be handed over, either in form of money or material. Thus debit balances will be assets and credit balances will be liabilities….
So you see how the balances take support of the rules of accounting to provide a rational reporting structure.
But there can be exceptions to this….. Next post..
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