No topic Assignment Example | Topics and Well Written Essays - 500 words - 4

No topic - Assignment Example Debits and credits provide a systematic method of recording transactions to enhance consistency and matching principles of accounting. If transactions are recorded in their respective accounts and in the right manner, consequently, financial statements will be consistent. In accounting, debits and credits are a systematic way of recording different financial transactions in books of account. Credits and debts represent two sides of the same account. When a transaction occurred, financial accountant must record this transaction in two respective accounts. In one account, the financial accountant record on the left side of that account, this is called a debit (Kieso, 2010, p. 178) In the other account, a record is made on the credit side of that account to meet standard accounting requirements. For example, if the company purchases a machine for $100,000 on credit from General motor company then recording made will have both a credit and a debit entry as follows: When the business makes payment for this asset, then debit entry on the asset account must be made to reflect the payment. Assuming payment was done in cash, then transaction will be recorded as follows. Debits and credits have no effects on accounting equations since each entry balance either one side or both sides of accounting equation. Debits do not always increases; it as well decreases in some books of account such as capital and liabilities. Credits as well do not only decreases, but also increase revenues, liabilities and capital books of account. In companies, investors are the key external users of financial statement. This statement provides a summary of financial performance of the company for a certain accounting period. Very importantly, financial statement determines the financial position of the business. Investors extract important information from financial statement that helps them in drawing important investment decision