First, be aware that these transaction can be divided into 2 account types - Profit and Loss accounts and Balance Sheet accounts.
Taking Balance Sheet accounts first:
A DEBTOR is a balance sheet account, and any transaction that creates a debtor or increases a debt to the business is a debit entry.
Anything that creates or increases an ASSET is also a debit entry. A DEBTOR is an asset, and so are things like plant and machinery, motor vehicles and prepayments. It also follows that anything that reduces an ASSETs value, must be a credit entry.
What is an asset, exactly?
According to the framework for international accounting standards, "an asset is any resource controlled by the entity as the result of past events, from which future economic benefits are expected to flow to the entity."
Drawings are funds withdrawn by the owners of the business and include dividends paid out to shareholders of limited companies as well as funds taken by sole traders.
On the other hand. . .
Anything that creates a CREDITOR or increases what is owed to outside interests is a credit entry.
Anything that increases a LIABILITY of the business is a credit entry. A CREDITOR is a liability, and other examples include loans to the company and accruals.
Where a liability is. . .
"An obligation the entity has as the result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits". (International Accounting Standards Framework).
CAPITAL is the fund introduced by the business owner. It is a credit entry because it represents a liability of the business.
Profit and Loss accounts:
In their pursuit of ever more precise definitions, the international accounting standards framework has this to say about EXPENSES. Expenses are "decreases in economic benefits during the accounting period in the form of outflows or depletions in assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants." Quite a mouthful, but all it's really saying is that expenses are those transactions that will reduce the net asset worth of the business. PURCHASES are one of these expenses because they reduce our bank balance (an asset).
INCOME has a definition that is the mirror image: "increases in economic benefit during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants." So SALES are an income because they increase economic benefit by enhancing assets (the bank balance),
Notice the rider to both of these definitions: "other than those relating to distributions to or from equity holders." In other words, money paid to shareholders (dividends) or proprietors (drawings) does not qualify as an expense, and additions to the capital balance by contributions from the owners, does not constitute income.
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