REGLAS DEL CARGO Y DEL ABONO / PARTIDA DOBLE

Understanding the Rules of Debits and Credits in Double Entry Accounting

Introduction to Double Entry Accounting

• The principle of double entry accounting states that for every debit, there is a corresponding credit of the same amount. This foundational concept is crucial for maintaining balanced financial records.

Effects of Debits and Credits on Accounts

• Increases and decreases in asset accounts are influenced by debits and credits:

• A debit increases assets, while it decreases liabilities and equity.

• Conversely, a credit decreases assets but increases liabilities and equity. This reflects the inherent nature of each account type.

Rules Derived from Account Combinations

• Nine rules emerge from combinations of debits and credits across different account types:

• For example, an increase in assets can lead to various outcomes when combined with other accounts (e.g., decrease in assets or increase in liabilities).

• Understanding these combinations allows one to grasp the relationships between different accounts without memorizing all rules explicitly. Instead, knowing account nature suffices.

Practical Examples Illustrating Each Rule

Rule 1: Increase in Asset Corresponds to Decrease in Asset

• Example: Purchasing office furniture for $35,000 via bank transfer.

• Debit "Furniture" (asset) by $35,000; Credit "Bank" (asset) by $35,000 due to cash outflow. This illustrates how an increase in one asset results in a decrease in another asset.

Rule 2: Increase in Asset Corresponds to Increase in Liability

• Example: Buying delivery equipment worth $480,000 on credit.

• Debit "Delivery Equipment" (asset) by $480,000; Credit "Accounts Payable" (liability) by $480,000 as debt incurred reflects an increase on both sides.

Rule 3: Increase in Asset Corresponds to Increase in Equity

• Example: A partner contributes $700,000 cash as capital.

• Debit "Cash" (asset) by $700,000; Credit "Capital Stock" (equity) by $700,000 showing simultaneous growth of both asset and equity through investment.

Rule 4: Decrease in Liability Corresponds to Decrease in Asset

• Example: Paying off a supplier's debt of $55,000 via bank transfer.

• Debit "Accounts Payable" (liability) by $55,000; Credit "Bank" (asset) by $55,000 indicating reduction on both liability and asset sides upon payment completion.

Rule 5: Decrease in Liability Corresponds to Increase in Capital

• Example: A creditor converts a debt into equity contribution worth $60,000.

• The transaction shows how reducing liability can simultaneously enhance capital structure within the company’s financial framework as it transitions from owing money to gaining ownership stake through contribution.

Understanding Capital and Liability Adjustments

Adjusting Supplier Accounts and Capital Contributions

• The supplier account is being deactivated as it represents a liability; this will be recorded with a charge of 60,000 pesos, which will contribute to the social capital since the supplier becomes a partner.

• As the capital increases, it is recorded on the right side of the ledger. Thus, we credit 60,000 pesos to decrease liabilities while increasing capital. A reduction in capital corresponds with a decrease in assets.

Withdrawal of Partner Contributions

• When a partner withdraws, their contribution of 40,000 pesos is returned in cash. This results in a decrease in social capital through a charge of 40,000 pesos.

• The cash account (an asset account) decreases due to this withdrawal; hence an entry for 40,000 pesos is credited to reflect this reduction.

Distribution of Accumulated Earnings

• The general assembly decides to distribute accumulated earnings amounting to 32,000 pesos next month. This creates a corresponding liability under "dividends payable."

• A charge of 32,000 pesos is made against accumulated earnings (a creditor account), reflecting its decrease as it will be distributed among partners.

Capitalization of Accumulated Earnings

• Instead of distributing accumulated earnings totaling 240,000 pesos, partners opt to capitalize these funds by integrating them into social capital.

• To do this effectively, they will deactivate the accumulated earnings through a charge and subsequently credit the social capital account with 240,000 pesos as it increases.