Rules of Debit and Credit of Accounts
Each transaction has two aspects; one aspect is the receiving or the ‘debit’ aspect. Another aspect is giving or the ‘credit’ aspect. Debit and credit aspects of a transaction form the basis of double entry system. Rules of double entry are framed on the basis of these two aspects in each of the business transactions. The two sides are put together in “T” form. the left side is called the ‘debit’ side and the right side is called the ‘credit’ side. Rules can be obtained as;
1.Increase in assets (e.g.,, purchase of machinery
of Rs. 10,000 will be debited, because of
increase in the amount of asset),
2.Decreases in liabilities (e.g., if a firm borrows
from X and the loan is repaid),
3.Decreases in capital (e.g., withdrawal of money
from capital account) Increase in Expenses and Losses are debited
4.Decreases in revenues or incomes are debited.
1.Decrease in assets (e.g.,, sale of machinery)
2.Increases in liabilities (e.g.,, when a firm
borrows from Mohan his account will be
3.Increases in capital (e.g.,, introduction of capital by the proprietor)
4.Decreases in Expenses and losses are credited.
Increases in revenues or incomes (Profits) are
Since, incomes and gains increase capital, the rule is to credit all gains and incomes and since expenses and losses decrease capital, the rule is to debit all expenses and losses in the accounts concerned. If there is a reduction in any income or gain, the account concerned will be debited; similarly for any reduction in an expense or loss the concerned account will be credited.
Significance of Debit and Credit in
(1)Personal accounts- Whenever the business
sells goods on credit to a customer, the account of the customer is debited. Debit in personal accounts means that the person whose account is being debited becomes a debtor or that he owes a certain sum to the business. Whenever the business purchases goods on credit from suppliers the account of the suppliers is credited. A further credit in the account of supplier implies increase on the credit side. If the account of a debtor is credited, it implies decreases in the debt of customers.
(ii) Real accounts- Debit in a real account implies
purchase of an asset. Any further debit in real account means more acquisitions of the asset and this will increase the value.
Any credit in real account implies that some part or whole of the asset has been sold off.
(iii) Nominal accounts-Debit implies that expenditure has been incurred or some loss has taken place. When any expenditure on account of salary, rent, interest, commission is incurred, these nominal accounts will be debited. Credit in a nominal account signifies that income or profit has taken place or some expenditure or loss has decreased by the amount of credit.