Rules of Debit and Credit in Accounting

Under the Double Entry System of accounting, each business transaction is recorded with dual aspects that mean debit and credit aspects. Debit or credit also implies an increase or decrease in an account, depending on their nature (i.e. Personal, Real or Nominal). After going through this lesson you will be able to understand the rules of Debit and Credit.

Rules of Debit and Credit

The rules for debit and credit depend upon the classification of accounts. These are mentioned below.

Rules of Debit and Credit When accounts are classified on a Traditional basis

When accounts are classified into personal, real, and nominal accounts then the following three rules of accountancy are followed:

  • Personal Accounts: “Debit the Receiver, Credit the Giver”
  • Real Accounts: “Debit what Comes in, Credit what Goes out”
  • Nominal Accounts: “Debit All Expenses and Losses, Credit all Incomes and Gains”

Rules of Debit and Credit When accounts are classified on a Modern basis

Under the Modern classification of accounts following rules of accounting are used:

Assets Accounts: The increase in assets is debited to the respective asset account while a decrease in assets is credited to the respective asset account. Suppose, a piece of machinery is purchased for Rs 5,00,000 in cash. Here, as machinery is being purchased for cash, machinery is increasing while cash is decreasing. So, an increase in machinery will be debited to Machinery Account and the decrease of cash will be credited to Cash Account.

Liabilities Accounts: The decrease in the number of liabilities is debited, while an increase is credited. For example, purchasing goods from XYZ Ltd. on credit for Rs 20,000. Here, liability is arising as payment is to be made, and accordingly, XYZ Ltd. will be credited by Rs 20,000.

Capital Accounts: When capital is brought in or introduced by the owner or partner of the firm, the Capital Account will be credited and for withdrawing from the business it will be debited. In simple terms, a decrease in Capital is debited, and an increase in the same is credited.

Revenue Accounts: When any amount is received or receivable, the respective income account will be credited. It means for an increase in income the respective income account will be credited and for a decrease, the respective income account will be debited. For example, the sale of goods for cash of Rs 10,000. In this case, the Sales Account will be credited by Rs 10,000 and Cash Account will be debited by an equal amount as an increase in an asset is debited.

Expenses Accounts: Expenses are the costs of running a business. The increase in expenses is debited, whereas, a decrease is credited. In case salaries of Rs 5,000 are paid to staff, here Salary Account will be debited as salary being expenditure is increasing and Cash Account will be credited by Rs 5,000.

Also, Read

What is Account?

An account is a summarised form of all the transactions relating to a particular head at one place in chronological order. An account not only records the amount of the transaction but also its effect and direction.