Rules of Debit And Credit

The rules of Debit and Credit are the Fundamental or basic Accounting Principles for a Business Transaction under Double Entry System. When an account increases or decreases, we debit it or credit  it depending upon the Types / Kinds of Accounts.

You Can Also Study, “What is the Difference Between Debit And Credit”

Rules of Debit And Credit For Assets, Liabilities, Capital or Owner's Equity or Equity, Revenues or Income, Gains and Expenses, Losses

As there are five types of accounts, so debit and credit rules affect on accounts differently. We will discuss about three main rules in below section.

1. First Rule, According To Characteristics of Accounts

1. For Assets, the Normal Balance is Debit and Unfavourable Balance is Credit. At the end of Accounting Period, assets are transferred to Balance Sheet or Statement of Financial Position.

Assets Increase = Debit

Assets Decrease = Credit

2. For Liabilities, the Normal Balance is Credit and Unfavourable Balance is Debit. Closing Balances of Liabilities shown in the Ledgers of Liabilities are transferred to Balance Sheet at the close of Accounting Cycle.

Liabilities Increase = Credit

Liabilities Decrease = Debit

3. For Owner’s Equity or Simply Equity or Capital, the Normal balance is Credit and Unfavourable Balance is Debit. Equity is also transferred to Balance Sheet Under Equity Section.

Owner’s Equity Increase = Credit

Owner’s Equity Decrease = Debit

4. Expenses have no balance as these are transferred to Income Statement / Profit & Loss Account.

Expenses Increase = Debit

Expenses Decrease = Credit

Note: The Rules are same for Losses.

5. Incomes / Revenues have no balance as these are transferred to Income Statement / Profit & Loss Account at the end of Accounting Period by passing Closing Entries.

                    Incomes Increase = Credit      Incomes Decrease = Debit

Note: The Rules are same for Gains.

2. 2^nd Rule, According To Equality

Under any Business Transaction, both Debit and Credit sides should be equal in monetary value.

This rule is the basic of Accounting Equation and focuses on Dual aspects of Business Transactions.

3. 3^rd Rule

In case of Contra Accounts such as Contra Asset Account which is the reversal of an Asset Account. It is considered as deduction from relevant Assets, so after preparing the Ledgers of a Contra Asset Accounts, the closing balance is deducted from closing balance of relevant Asset on Balance Sheet, otherwise, Accounting Equation doesn’t show true balances of Assets.

Example: Mr. A sold goods worth Rs. 5000 For Cash.

                                              Cash a/c    5000

                                                           Sales a/c    5000

                                                                (Goods Sold For Cash)

The above is a business transaction. Two accounts are involved in it. One is Cash account and other one is Sales. Cash as a Current Asset is increasing as it is coming into the business, so we debit it while Sales is the direct revenue which is the profitable activities of the business’ owner and it is also increasing as goods are going from business, so we credit it by considering the rules of Debit and Credit. Also Both Debit and Credit Side are equal in monetary value i.e., Rs. 5000.

So, these are 3 Rules of Debit And Credit that works under Double Entry System of Bookkeeping.