Thursday 24 January 2013

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Applying the rule of debit and credit- Example 8


Example-7   Sold goods worth £4000 to Mr. Ambar on credit

Step 1- Identify the two accounts involved in this transaction

1.   Asset Account (Goods are assets)

2.   Asset Account (Mr. Ambar is an asset account (Trade Debtors/Receivable) because, as a result of the above transaction the business has the right to receive £4000 from Mr. Ambar)

      When goods are sold we credit “Sales Account” not “Goods Account”

Step 2- Understand the nature of the impact of the transaction on the two accounts [goods (Asset) and Debtors- Mr. Ambar (Asset)]

     Sale of goods decrease the asset by £4000     
           
   The amount owed by others to business is termed as Debtors/Receivables. So such amount receivable is arisen/increases as the result of credit sales- that is the value of asset  is increased

Step 3- Decide which account is to be debited and which is to be credited.

            We know that;

When asset account (goods-termed as sales) decreases it is to be Credited and,

When Asser account (Debtors- Mr. Ambar) increases it is to be debited

So, entry is:


Debit Mr. Ambar Account with £4000
Credit Sales Account with £4000

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