Why assets have debit balance?

PLAY ROLES and FIND RULES-PART-3 (Read previous ones) A rather unscientific method that I used to understand debits and credits.

Let us have a small recap. Whoever contributes/gives money/goods to OUR business are treated as creditors/lenders. The list of CREDITORS are –FIRSTLY WE-capital, OTHERS/ BANKS-loans and SUPPLIERS OF GOODS-sundry creditors. So ‘our business keeps their contributions as credit balances. In short ALL BALANCES (ON LIABILITIES side of balance sheet) are to be repaid to these people (creditors) during the course of business.

Think of ‘Assets’ side of BALANCE sheet! They are usually on the right side! Remember we post debit transactions on the LEFT side of LEDGERS.

ASSETS AND REAL ACCOUNT RULE:

Now you are a banker! Your cash balance is Rs.500000; you receive cash Rs.100, 000 for deposit in to Lalu’s account.

After this receipt your cash balance gets increased to 600000=! Isn’t it?

Now it’s your cash. When another cheque drawn by Shiela for Rs.125000 comes, you pay and now your balance is Rs.475000. Okay? IT IS YOUR BANK’S/business’ ASSET and that is why you can use this cash to pay another party’s cheque.

If you purchase some LAND and construct a BUILDING it is bank’s asset.

If you purchase COMPUTERS, it is again an asset.

WITH the same money if a business-say-hardware business- buys some STOCK, it becomes business’s asset.

Why are they called asset?

 They can help our business. They have a value. If sold later, they fetch some money for business. IN A WAY THEY ARE DEBTORS; BUSINESS HAS INVESTED MONEY IN THEM AND THE assets, WHEN SOLD, get back money. (Even otherwise they have a value-E.g.: land and building- always appreciating)

These assets are DEBTs to business. Business has lent/SPENT MONEY ON them. So we have them as DEBIT BALANCE in our balance sheet.

Let us see the transactions:

1. When you received cash- DEBIT CASH                              100000  

        (Result: This debit increased the debit balance of cash to DR.600000)

                                               Credit Lalu’s current account with 100000         

Result: your cash increase. RULE: DEBIT what comes in for REAL accounts

2. Then you paid Shiela Rs.125, 000. Debit Sheila’s current account Rs125, 000

                                                        CREDIT CASH                        Rs125, 000

(Your credit transaction decreased the debit balance of cash to DR.475000.

Rule: CREDIT WHAT GOES OUT)

 Debit transaction in an asset account always increase debit balance.

 Credit transaction in an asset account always decrease debit balance.