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 |
|