Accounting – Meaning of Balances
We tried to articulate what the ledger balances would imply. A reader responded back to us with this note:
- an entry in the right hand column of an account; credits increase liability, income, and equity accounts and decrease asset and expense accounts
- an entry in the left hand column of an account to record a debt; debits increase asset and expense accounts and decrease liability, income, and equity accounts”
So truly mentioned by Mr. Rajesh Maheshwari.
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If you recall, I said there can be exceptions as well. Let us look at an example. A vendor supplied some goods, and our company made the full payment of the invoice. Now the vendor passed a discount for prompt payment and sent a credit note to our company. Once the accounting has adjusted this amount to the vendor account, the account shows a debit balance. Ideally a vendor has a credit balance, that is an amount payable to the vendor.
So what will be the treatment of this account?
By nature the vendor would be classified as a creditor. So ideally when we summarize all creditors, the amount would be reduced from the total creditors on the liability side of the account. Theoretically, since this account had a debit balance, it should have reflected on the asset side, as the amount is receivable from the vendor.
It will actually be adjusted against future purchases eventually.
Do you now understand why such differences will crop up?
A chartered accountant or CPA would bill its client’s for printing and stationery charges sometimes. Ideally this billing should be income. But some professionals like to reduce the recoveries from the expenses. Sometimes the net balance of the expense account would be a credit balance. This would be another exception. Again, it would be on the business owner to either show this as a net income, or to treat this as being a reduction on the expenses, due to the nature of the ledger account.
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