According to accounting Dr and Cr rules, which was described by Luca Pacioli at 1494, who was Italian mathematician, should be denoted by Dr if assets, expenses and losses increase or should be denoted by Cr if those decrease. Another side should be denoted by Cr if capital, liabilities, income and profit increase or should be denoted by Dr if those decrease. Everybody knows this rule who are interested in accounting rule but they don’t know how this rule is made. If we look, here very carefully everybody gets confusion. Not only normal people, experts of accounting, professor of accounting also getting confused here because of increasing profit is a good condition for business should be credited. Other side increasing assets are good for business should be debited. Both are good condition for business but why we should be denoted by the different sign. To find out this reason I read so many books and so many articles all are described the wrong concept about it. Again, increasing assets are good condition for business or increasing loss is a bad condition for business but both are denoted by Dr why? I have learned so many books and article to find out the reason for this reason but all are explained about the wrong concept. All universities have been teaching the wrong concept of Dr and Cr rules. Nobody has given the right answer, why profit should be denoted by credit. All are explained that business and owner are different entities profit is liabilities of business should pay to the owner that’s why should be denoted by credit. Then why loss should be denoted by Dr? Is this asset of business to pay owner? No. Then nobody knows why they have been teaching the wrong explanation about these matters across the world. It simply nobody goes to its root of formation. They have explained about its with the wrong concept that’s why it is being so complicated to understand.
I am going to describe it in a new way, everybody can easily understand. Sign of Dr and Cr are not any relation with business loss and profit, those signs are used just for keeping transactions of business systematically. Here I want to use new sign Sr and Tr rather than complicated Cr and Dr. We should invest money to open any business called capital that capital I denoted by seeds of business for keeping transaction systematically. All businesses main purpose is that they want to increase their assets. Everybody wants to cultivate seeds for making trees. That’s why we should clear that Sr means seeds of business and Tr means tree of business.
To keep account perfectly we should always make Sr = Tr, means capital = assets. Another side to keep individual ledger perfectly. The ledger should be needed to increase and decrease possibility. That’s why every ledger has two sides Sr and Tr. Here everybody Should be cleared that Luca Pacioli has given sign denoted by Dr and Cr, I give Sr and Tr, anything we can give sign no matter just its purpose is that ledger should be increased or decreased. For example, I take a loan from bank Euro 5000 denoted by Cr, again I take a loan from same bank 2000 Euro should be added means now the total loan is euro 7000 both are denoted by Cr that’s why they added each other. Later I return the loan to the same bank Euro 4000 then should be denoted by the different sign for deduction otherwise we cannot keep account how much amount left to pay the bank. So, the return amount should be denoted by Dr then 7000 Cr –4000 Dr= 3000 Cr left to return. To maintain all individual ledger should be introduced two sign nonmatter whatever sign can be introduced that’s why I introduce here Sr and Tr.
When we start the business by investing owner's money into the business called capital same time, we assume that that money also assets of the business for example if we start the business by investing 100 euro called capital, I give name seeds denoted by Sr for accounting purpose. Same time those 100-euro also called assets; I give name tree denote by Tr for accounting purpose.
Now we have [capital Sr 100 = assets Tr 100] we assume that for accounting purpose capital side should be always equal to assets sides and to maintain individual ledger we can assume that if capital increases should be denoted by Sr or if capital decreases should be denoted by Tr. Another side if assets increases, should be denoted by Tr and if decreases, should be denoted by Sr. In shortcut increase capital Sr, decrease capital Tr, increase assets Tr, Decrease assets Sr. This is the fundamental rule of bookkeeping of accounting. Now we have this kind of format.
Capital [Seeds] [Sr] | Euro | Assets [Tree] [Tr] | Euro |
Capital | 100 | Cash | 100 |
If we buy some assets like computer euro 50 and some goods for sale purpose euro 25 and we pay for fuel expenses euro 5 then we have a new format.
Capital [Seeds] [Sr] | Euro | Assets [Tree] [Tr] | Euro |
Capital | 100 | Cash Computer Goods Fuel expenses | 20 50 25 5 |
Total | 100 | Total | 100 |
Journal Entry.
Computer Tr 50-euro
Goods Tr 25-euro Tr
To Cash Sr 75-euro
We already made a rule that if assets increase, we should denote by Tr and if decrease then should denote by Sr, so we did here. We did not make any rule about expenses so how we can denote to expenses. But we assume that all transaction should be Tr = Sr. Here when we pay for fuel expenses 5-euro our assets would be decreased so we should denote by Sr then to make equal expenses must be denoted by Tr.
Then Journal entry of fuel expenses.
Fuel expenses Tr 5 euro
To cash Sr 5 euro
Here everybody should clear that when we buying somethings on cash our cash will decrease if assets decrease, we should denote by Sr and to make equal another account should be denoted by Tr that’s why all three-account computer, goods and fuel expenses should be Tr. In business, a computer is an asset and fuel are expenses both are different but to the purpose of bookkeeping both natures are same, that’s why both are denoted by Tr if increases.
If we sale those goods to 35 euro on cash and closing the account then we get a new situation.
When we sale goods on cash then assets would be increased if assets increase then we should denote by Tr and make equal another must be denoted by Sr. So that new journal is following.
Cash Tr 35 euro
To sale/income Sr 35 euro
Here we should clarify that when our income is increased, our assets would be increased, when assets increase, we know that we should denote by Tr, then to make equal Tr to Sr, we must denote by Sr for sales and income.
Now we have a new format.
Capital [Seeds] [Sr] | Euro | Assets [Tree] [Tr] | Euro |
Capital
Profit [to make qual both side, we should put difference amount] | 100
5 | Cash. [20 + 35] Computer
| 55 50
|
Total | 105 | Total | 105 |
Here we should be clear that our assets side is more than capital side means our tree is bigger than our seeds then to make equal both side for keeping accounting purpose we should add some amount in the capital side that called profit. We know that if our assets side is bigger than capital side then we get profit so that we should put some amount in capital side to make equal Sr = Tr That’s why profit must be denoted by Cr according to Luca Pacioli and according to me denote by Sr but look in whole world books of accounting you cannot find such a simple fact of bookkeeping rules. Amazing world.
Again, if those goods sale on 20 euro then
The new journal is following
Cash Tr 20
To Sale/Income Sr 20
Then we have a new condition.
Capital [Seeds] [Sr] | Euro | Assets [Tree] [Tr] | Euro |
Capital | 100 | Cash [20+20] Computer loss | 40 50 10 |
Total |
| Total | 100 |
When we get lost, our assets side is less than the capital side so that to make equal for bookkeeping purpose we should add some amount in assets side which called loss. That’s why loss denoted by Dr according to Luca Pacioli. Such simple fact nobody can understand yet but they made the rule as describing the wrong concept that’s why the whole accounting system is complicated to understand.
Again, if we take a loan from bank our assets will increase that’s why we should denote by Tr to cash then we must denote by Sr for liabilities.
So, I would like to replace Cr and Dr by Sr and Tr, means seeds and tree we invest seeds on business and want to make the tree. which makes so simple to understand who are a beginner of accounting.
By taking the above explanation we can make the simple formula for every transaction.
Capital, Liabilities, Income, profit [seeds] [Sr] if increase, denote by Sr, if decrease, denoted by Tr
Assets, expenditure, loss [Tree]. [Tr] if increase, denoted by Tr, if decrease, denoted by Sr.
Thank you for reading.
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