Rules of Debit and Credit

Introduction

Debit and credit are indispensable tools in accounting. Without debit and credit, accounting will be a big mess. Every accountant knows this. In keeping the records of business, therefore, debit and credit play a very important role. However, understanding the two terms and how to use them is not quite easy. Non-accounting professionals often get miffed by these two terms and which one to use while expressing a certain activity in accounting. Financial statements are divided into the following accounts −

• Assets

• Expenses

• Liabilities

• Equity, and

• Revenue

This article discusses how debit and credit is applied to these accounts.

Debit and Credit in Accounting

Every transaction in businesses has to be recorded, for which debit and credit tools are facilitated. Therefore, it must be noted that it is impossible to record business transactions without the use of debit and credit. Whenever a business transaction has to be recorded, it is done via debit and credit.

There is a golden rule in accounting that credit items’ value must be equal to debit value. If there is an inequality between the two, there is some error that has crept into the accounting process. So, a financial statement cannot be created without unequal debit and credit. As mentioned previously, financial statements are divided into – Assets, Expenses, Liabilities, Equity, and Revenue.

The following table summarizes the debit and credit effective in the above-mentioned accounts −

Account	Increased by	Decreased by
Assets	Debit	Credit
Expenses	Debit	Credit
Liabilities	Credit	Debit
Equity	Credit	Debit
Revenue	Credit	Debit

So, a debit increases the expense account and a credit decreases it in the income statement. Liabilities, equity, and revenue have natural credit balances, if their balances are decreased, it will be a debit for them.

Difference between Debit and Credit

It is important to note that debit and credit are equal and opposite entries. When a debit increases an account, we have to credit it to increase the particular account. However, to get this done, opposite entries must be used.

In accounting, the left-side entry is usually demarcated by debit. Assets and expenses account is increased due to debit while equity, liabilities, and revenue accounts are decreased by debit. For example, suppose a company buys furniture for an office. Here the gain in assets (furniture) should be shown as a debit on the left side of the asset account.

The right-side entry is usually done for credit. In general, the credit increases equity, liabilities, and revenue accounts or decreases asset or expense accounts. In the above- mentioned case, the expense (spending on furniture) is credited on the right section of the expense account.

Rules of Debit and Credit

All debit and credit accounting practices are governed by three golden rules. The rules are −

First − Debit what comes in and credit what goes out.

Second − Debit all expenses and credit all incomes and gains.

Third − Debit the Receiver, Credit the giver.

In general debit, in short form, is represented by 'Dr' and the credit is represented by 'Cr'. So, there are two sides in a ledger account, also known as a T-account. As mentioned earlier, the right-hand side of the ledger consists of (Cr) credit transaction records, and the left-hand side records the (Dr) or debit transaction.

In the above mentioned example, when we buy furniture for cash, the transaction will increase assets or the furniture and decrease cash as furniture will come in and cash will go out of the business. Moreover, this increase in assets (furniture) and the decrease in cash should be recorded in the furniture account and cash account respectively. This recording should be detailed in the ledger account too.

On which side should the decrease and increase of the accounts appear? This is done according to the 'normal balance of accounts' and general 'rules of debit and credit.' Understanding the normal balance will accelerate the learning of the rules.

• In the normal balance, all expenditures and assets accounts are always debited. The increment of this account should be recorded on the debit side. When there is a need to decrease the account, this shall be recorded on the credit side.

• Next, the normal balance of all the equity (or capital) and liabilities accounts is always credited. When we need to increase the account, we must record it on the credit side, and when we need to decrease the account, we shall record it on the debit side.

• The opposing force or the vice versa factor is also followed by it.

• The Contra Account is the only one that is the opposite of the relevant accounts. The normal balance here can be both debit or credit. To neutralize the effects of extra debit and credit, a contra account should be used. To recall, the most important rule of debit and credit is that total debits must be equal to total credits which is applicable to all the totaled accounts.

Journal Entries of Debit and Credit

The debit and credit balances are found in a company’s journal entry. There may be numerous entries in a Journal, but they must be either Credit or Debit.

Here is an example of a Journal entry for five transactions of a business.

• Gaurav Starts a business with an investment of Rs 200,000.

Bank A/C …… Dr. 200,000

To Capital A/c 200,000

• Buys items from a vendor worth Rs 50,000

Purchase A/c Dr 50,000

To Venbdor’s A/c … 50,000

• Sold Goods to ABC worth Rs 50,000

Mr. ABC’s A/c Dr 50,000

To sales A/c 50,000

• Paid wages of Rs 5,000

Wages A/c Dr 5,000

To Bank A/c 5,000

• To carriages, Paid Rs 500

Carriage A/c ….. Dr. 500

To Bank A/c 500

Conclusion

Rules of debit and credit are unavoidable to learn if one needs to master the skills of accounting. As these rules govern the accounting practices, they are inevitable for every accountant. That is why so much weight is provided to commerce candidates to learn the golden rules of debit and credit.

FAQs

Qns 1. In which accounts are financial statements divided?

Ans. Financial statements are divided into the following accounts − Assets, Expenses, Liabilities, Equity, and Revenue.

Qns 2. In normal balance, which accounts are always debited and what rule for decrease is applied to it?

Ans. In the normal balance, all expenditures and assets accounts are always debited. The increment of this account should be recorded on the debit side. When there is a need to decrease the account, this shall be recorded on the credit side.

Qns 3. In normal balance, which accounts are always credited and what rule for increase and decrease is applied to it?

Ans. The normal balance of all the equity (or capital) and liabilities accounts is always credited. When we need to increase the account, we must record it on the credit side, and when we need to decrease the account, we shall record it on the debit side.