Accounting rules require a book-keeper to record corporate transactions by debiting and crediting financial accounts, such as asset, liability, revenue and expense. These rules include United States generally accepted accounting principles (U.S. GAAP) and international financial reporting standards (IFRS). U.S. GAAP and IFRS also require a company to issue financial data at the end of each quarter or year.
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An asset is an economic resource that a firm owns and uses in operating activities in the short and long term. Examples include cash, inventories and customer receivables (short-term assets) or property, plants and machinery (long-term assets). To record an asset transaction, debit the account to increase its amount and credit it to reduce the account balance. For example, a small department store receives £6,500 in customer payments at the end of the month. To record the transaction, debit the cash account for £6,500 and credit the accounts receivable account. In accounting parlance, debiting an asset means increasing it, unlike in the banking industry.
A liability is a debt that a firm or an individual must repay at maturity or over a specified number of instalments. Examples include accounts payable (short-term debt) and bond payable (long-term debt). To record a debt transaction, debit the liability account to decrease its amount and credit it to increase the account balance. To illustrate, you pay £1,300 to the mortgage company at the end of the month, with £975 in principal amount and £325 in interest. To record the transaction, debit the mortgage payable account and the interest expense account for £975 and £325, respectively. Then, credit the cash account for £1,300.
An expense is a cost or charge that a company incurs through operations. For individuals, expenses include bills, loan interest, groceries and insurance. To record an expense transaction, debit the expense account to increase its amount and credit it to reduce the account balance. To illustrate, a small company pays the monthly rent and the utilities bill for £3,250 and £487, respectively. To record the transactions, debit the rent expense account and the utilities charge account for £3,250 and £487, respectively. Then, credit the cash account for £3,737 ($5,000 plus £487).
Revenue is income that a company earns by selling goods or providing services. For individuals, a revenue item indicates earnings from a labour contract or financial market investments. To record a revenue transaction, credit the revenue account to increase its amount and debit it to reduce the account balance. As an example, a firm delivers £1.0 million worth of inventories at a customer's warehouse. To record the transaction, credit the sales account for £1.0 million and debit the accounts receivable account for the same amount.
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