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Rules for Debit and Credit in Accounting

Debit and Credit rules in accounting guide how to record transactions. Debits increase assets/expenses or decrease liabilities/equity; credits do the opposite. Learn their impacts here
authorImageShruti Dutta8 Aug, 2024
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Debit and Credit

Understanding the rules for Debit and Credit is essential for accurate financial record-keeping in accounting. These rules guide how transactions are recorded in various accounts to ensure that the accounting equation remains balanced. These terms, often misunderstood by non-accountants, are the fundamental building blocks of financial record-keeping.

They dictate how transactions are recorded, ensuring accuracy and balance in a company's books. In this article, we will unravel the mysteries of debit and credit, explaining their roles, how they interact, and why they are essential for any business.

Debit and Credit in Accounting

Debit and credit are fundamental accounting tools used to record business transactions. They facilitate the recording of financial events that have a monetary impact on a company's financial system. Each transaction involves two accounts: one debited and one credited.

Balancing Transactions

In accounting, a transaction is considered "in balance" when the total debits equal the total credits. If debits and credits do not match, it creates issues with financial statements. Every business transaction, measurable in monetary terms, must be recorded using the debit and credit system. This system ensures accurate recording by documenting these events through separate accounts.

Commonly Affected Accounts

  1. Assets : Items of value owned by the business.
  2. Expenses : Costs incurred in the course of business operations.
  3. Liabilities : Obligations or debts owed by the business.
  4. Equity : The owner's interest in the business, calculated as assets minus liabilities.
  5. Revenue : Income earned from business operations.
Accurate accounting treatment is achieved by properly using debit and credit, reflecting the business's financial state.
Account Type Increases in the Account Decreases in the Account
Assets Debit Credit
Liabilities Credit Debit
Equity Credit Debit
Revenue Credit Debit
Expenses Debit Credit

Difference between Debit and Credit

In accounting, debit and credit are fundamental concepts that record and track financial transactions. Each transaction affects at least two accounts, ensuring the accounting equation remains balanced. Below is a detailed table that highlights these differences across various aspects:
Aspect Credit Debit
Meaning Credit is passed when there is a decrease in assets or an increase in liabilities and owner’s equity. Debit is passed when there is an increase in assets or a decrease in liabilities and owner’s equity.
Personal Account Credit the giver (e.g., person or entity giving value). Debit the receiver (e.g., person or entity receiving value).
Nominal Account Credit all incomes and gains (e.g., revenue, interest income). Debit all expenses and losses (e.g., salaries, utilities).
Real Account Credit what goes out (e.g., the sale of an asset). Debit what comes in (e.g., purchase of an asset).
Appears on Which Side of a T-format Ledger Account The right side of the T ledger account. Left side of the T ledger account.
Effect on Asset Accounts Decreases (e.g., reducing cash or inventory). Increases (e.g., adding cash or inventory).
Effect on Liability Accounts Increases (e.g., adding to accounts payable or loans). Decreases (e.g., paying off accounts payable or loans).
Effect on Equity Accounts Increases (e.g., additional investments, retained earnings). Decreases (e.g., withdrawals or losses).
Effect on Revenue Accounts Increases (e.g., sales revenue, interest earned). Decreases (e.g., refunds or discounts given).
Effect on Expense Accounts Decreases (e.g., reimbursement of expenses). Increases (e.g., recording of expenses such as rent or utilities).
Accounting Equation Impact Balances equation by increasing liabilities or equity and decreasing assets. Balances equation by increasing assets and decreasing liabilities or equity.
Example Credit a sales account when a sale is made. Debit an expense account when recording an expense.

The Three Golden Rules of Accounting

Accounting principles are guided by fundamental rules that ensure accuracy and consistency in financial reporting. These rules help accountants record transactions systematically and maintain the integrity of financial statements. Among these principles, the "Three Golden Rules of Accounting" are essential for understanding how to account for various transactions properly. Each rule pertains to a specific type of account and provides a clear guideline for recording debit and credit. Here's a brief overview of these rules: 1. Debit the Receiver and Credit the Giver This rule applies to personal accounts which pertain to individuals or organisations. When you receive something, you debit the account; when you give something, you credit the account. Example 1: If you purchase $1,000 worth of goods from Company ABC, you will debit your Purchase account and credit Company ABC. Since Company ABC provides the goods, you credit their account and debit your account as the receiver.
Date Account Debit Credit
XX/XX/XXXX Purchase 1,000 -
- Accounts Payable - 1,000
Example 2: If you pay $500 cash to Company ABC for office supplies, you will debit the Supplies account (the receiver) and credit your Cash account (the giver).
Date Account Debit Credit
XX/XX/XXXX Supplies 500 -
- Cash - 500
2. Debit What Comes In and Credit What Goes Out This rule is relevant for real accounts, also known as permanent accounts, which do not close at year-end. Real accounts, including asset, liability, or equity accounts, carry their balances over to the next accounting period. When an asset comes into your business, debit the account; when something goes out, credit the account. Example: If you purchase furniture for Rs. 2,500 in cash, you will debit your furniture account (what comes in) and credit your cash account (what goes out).
Date Account Debit Credit
XX/XX/XXXX Furniture Rs. 2,500 -
Cash - Rs. 2,500
3. Debit Expenses and Losses, Credit Income and Gains This rule pertains to nominal accounts, which are closed at the end of each accounting period. Nominal accounts include revenue, expense, and gain/loss accounts. For nominal accounts, debit the account if there is an expense or loss, and credit the account if there is income or a gain. Example: Expense or Loss If you purchase $3,000 worth of goods from Company XYZ, you will debit the purchase account for the expense and credit your cash account.
Date Account Debit Credit
XX/XX/XXXX Purchase Rs. 3,000 -
- Cash - Rs. 3,000
Example: Income or Gain If you sell Rs. 1,700 worth of goods to Company XYZ, you credit the Sales account for income and debit the Cash account.
Date Account Debit Credit
XX/XX/XXXX Cash 1,700 -
- Sales - 1,700

Rules for Debit and Credit in Accounting FAQs

How Does a Bank Account Debit Work?

When your bank account is debited, it means that money is being withdrawn from the account. This reduces the balance in your account.

How Does a Debit Relate to Credit?

A debit and a credit are paired entries ensuring the accounting equation is balanced. A debit increases assets or expenses and decreases liabilities or equity, while a credit does the opposite, increasing liabilities or equity and decreasing assets or expenses.

Is a Debit an Inflow or Outflow?

In accounting, a debit typically signifies an outflow or reduction. For example, money is withdrawn or removed when you debit a bank account.
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