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Rules of Debit and Credit:

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Rules of Debit and Credit When Accounts are Classified According to  Traditional Classification of Accounts:

Debit and credit are simply additions to or subtraction from an account. In accounting, debit refers to the left hand side of any account and credit refers to the right hand side. Asset, expenses and losses accounts normally have debit balances; liability, income and capital accounts normally have credit balances.

The term debit is derived from the latin base debere (to owe) which contracts to the "Dr" used in journal entries to refer to debits. Credit comes from the word credere (that which one believes in, including persons, like a creditor), which contracts to the "Cr." used in journal entries for a credit.

Personal Accounts:

Debit the account of the person who receives something and credit the account of the person who gives something.

Real Accounts:

Debit the account of the asset/property which comes into the business or addition to an asset, and credit the account which goes out of the business. When furniture is purchased for cash, furniture account is debited (which comes into the business) and cash account is credited (which goes out of the business).

Nominal Accounts:

Debit the accounts of expenses and losses, and credit the accounts of incomes and gains. When wages are paid, wages account is debited (expense) and cash account is credited (asset goes out).

Valuation Account:

Debit the account when the account is to be reduced and credit the account when the account is to be increased.

Rules of Debit and Credit at a Glance

Types of Account Account to be Debited Account to be credited
Personal account Receiver Giver
Real account What comes in What goes out
Nominal account Expense and loss Income and gain
Valuation account When account to be decrease When account to be increase

Example:

From the following transactions, state the nature of accounts and state which account will be debited and which account will be credited.

1. Mr. A started business with $50,000 5. Sold goods to B for $6,000.
2. Purchased goods for cash $10,000. 6. Purchased furniture for $4,000.
3. Sold goods for cash $15,000 7. Purchased plant or $10,000.
4. Purchased goods from X for cash $5,000 8. Paid wages $400

Solution:

SN. Accounts Involved Nature of Accounts Debit or Credit
       
1. Cash account Real Debit (incomings)
  Capital account Personal Credit (giver)
2. Purchases account Nominal Debit (expenses)
  Cash account Real Credit (outgoings)
3. Cash account Real Debit (incomings)
  Sales account Nominal Credit (income)
4. Purchases account Nominal Debit (expenses)
  Cash account Real Credit (outgoings)
5. B account Personal Debit (receiver)
  Sales account Nominal Credit (income)
6. Furniture account Real Debit (incomings)
  Cash account Real Credit (outgoings)
7. Plant account Real Debit (incomings)
  Cash account Real Credit (outgoings)
8. Wages account Nominal Debit (expenses)
  Cash account Real Credit (outgoings)

Rules of Debit and Credit When Accounts are Classified According to  Modern Classification of Accounts:

SN. Types of Account Account to be Debited Account to be Credited
       
1. Assets account Increase Decrease
2. Liabilities account Decrease Increase
3. Capital account Decrease Increase
4. Revenue account Decrease Increase
5. Expenditure account Increase Decrease
6. Withdrawal account Increase Decrease

Example:

From the following transaction, state the nature of accounts and state which account will be debited and which account will be credited:

1. Mr. A started business with $50,000 5. Sold goods to B for $6,000.
2. Purchased goods for cash $10,000. 6. Purchased furniture for $4,000.
3. Sold goods for cash $15,000 7. Purchased plant or $10,000.
4. Purchased goods from X for cash $5,000 8. Paid wages $400

Solution:

SN. Transaction Accounts Involved Nature of Account Debit ($) Credit ($) Reason
             
1. Mr. A started business with $50,000 Cash
Capital
Asset
Liability
50,000
50,000
Increased
Increased

2. Purchased goods for cash $10,000. Purchased
Cash
Expense
Asset
10,000
10,000
Increased
Decreased

3. Sold goods for cash $15,000 Cash
Sales
Asset
Revenue
15,000
15,000
Increased
Increased

4. Purchased goods from X for cash $5,000 Purchases
Cash
Expense
Asset
5,000
5,000
Increased
Decreased

5. Sold goods to B for $6,000. B
Sales
Asset
Revenue
6,000
6,000
Increased
Increased

6. Purchased furniture for $4,000. Furniture
Cash
Asset
Asset
4,000
4,000
Increased
Decreased

7. Purchased plant or $10,000. Plant
Cash
Asset
Asset
10,000
10,000
Increased
Decreased

8. Paid wages $400 Wages
Cash
Expense
Asset
400
400
Increased
Decreased
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More study material from this topic:

Classification of accounts
Rules of debits and credits
Journal
Ledger
Trial balance
Questions and answers

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
----------------------------------------------------------------------------
  Analysis of Business Transactions
----------------------------------------------------------------------------
  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
----------------------------------------------------------------------------
  Special Journals
----------------------------------------------------------------------------
  Cash Book
----------------------------------------------------------------------------
Bank Reconciliation Statement
----------------------------------------------------------------------------
  Final Accounts
----------------------------------------------------------------------------
  Work Sheet
----------------------------------------------------------------------------
  Capital and Revenue Items
----------------------------------------------------------------------------
  Valuation of Inventories
----------------------------------------------------------------------------
  Accounts of Non-profit Making Organizations
----------------------------------------------------------------------------
  Statement of Cash Flows
----------------------------------------------------------------------------
  Accounting Ratios Analysis
----------------------------------------------------------------------------
  Depreciation, Provisions and Reserves
----------------------------------------------------------------------------
  Accounting Dictionary
----------------------------------------------------------------------------
  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
----------------------------------------------------------------------------
  Cost Volume Profit Relationship
----------------------------------------------------------------------------
  Variable Costing System
----------------------------------------------------------------------------
  Materials and Inventory Cost Control
----------------------------------------------------------------------------
  Activity Based Costing System
----------------------------------------------------------------------------
  Standard Costing and Variance Analysis
----------------------------------------------------------------------------
  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 

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