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Debts, Credit and Inventory Costs

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Debits, Credits, and Inventory Costs

Part 1: Double-Accounting Method of Recording When using the double-accounting system, also known as the double-entry method, each transaction on the General Journal and associated account activity catalog must be recorded at least into two accounts. The debit account, often on the left, is denoted by ‘Dr’ while the credit account, often on the right side, is denoted by ‘Cr’. The entries are made depending on the account type, which may be an asset, a liability, an expense account etcetera, or depending on whether the transaction increases the account or decreases it (Lee, 1977). For instance, any transaction noted on the debit side would add to the assets account. Alternatively, a transaction would be entered on the debit side if it lowers the liabilities or the equity. On the other hand, all transactions that lower the assets account would be posted on the credit side. Any transaction that adds to the liabilities or the equity would similarly be entered on the credit side of the General Journal. Debits and credits have effects on particular accounts. A debit entry can increase either an asset account or an expense account, or decrease equity account or a liability account. A credit entry, on the other hand, either increases the liability account or the equity account, or conversely decreases the asset account or the expense account. Therefore, when assets rise, they are recorded in the debit account. However, when they decrease, they are recorded in the credit account. Similarly, when liabilities go up, they are recorded in the credit account and vice versa. When income or revenue increases, it is credited, but when it decreases, it is entered as a debit. An increase in expense is shown on the debit side, while a decrease is shown on the credit side. An increase in equity is noted as credit while...

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