Rules of debit and credit

There is no standard definition for Debit & Credit. If we go into history we would find that the word Debit had been derived from the Latin word “Debere” which means “To owe” which ultimately was shortened to “Dr.” Similarly, Credit had been derived from the Latin word “Credere” meaning “On which one believes” and it finally turned into “Cr.” In spite of all discussion, we can also say that these (Debit & Credit) are the operators of accounting which operate the subject of accounting.

Debit and Credit represent two sides (columns) of an account i.e. Debit column and Credit column. Debit (Dr.) is to make an entry on left side and Credit (Cr.) is to make an entry on the right side. Now a day’s accountants have adopted such ways of keeping records which are not only used on a long-term basis but are also useful for the management in making important decisions.

Rules of Debit and Credit

The financial transactions result in increasing or decreasing the values of various individual accounts in the ledger. The following rules of debit and credit are applied to record these increases or decreases in individual ledger accounts.

Rules for asset accounts

Assets are recorded on the debit side of the account. Any increase to an asset is recorded on the debit side and any decrease is recorded on the credit side of its account. For example, the amount of cash in hand at the first day of the accounting period is recorded on the debit side of cash in hand account. Whenever an amount of cash is received, an entry is made on the debit side of cash in hand account. Whenever an amount of cash is paid out, an entry is made on the credit side of cash in hand account.

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Rules for liability accounts

Liabilities are recorded on the credit side of the liability accounts. Any increase in liability is recorded on the credit side and any decrease is recorded on the debit side of a liability account. For example, the amount payable to United Traders on the first day of the accounting period is recorded on the credit side of the United Traders Account.

If more goods are bought from United Traders (thereby incurring an additional liability to United Traders), an entry would be made on the credit side of United Traders Account. If an amount is paid to United Traders (thereby reducing the liability to United Traders), an entry is made on the debit side of United Traders Account.

Rules for capital accounts

Capital is recorded on the credit side of an account. Any increase is also recorded on the credit side. Any decrease is recorded on the debit side of the respective capital account. For example, the amount of capital of Mr. John on the first day of the accounting period will be shown on the credit side of John’s Capital Account.

If he introduces any additional capital, an entry will be made on the credit side of his capital account. If he takes any money or goods from the business for his personal use, that will reduce his capital and therefore an entry will be made on the debit side of his account.

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Notice that the rules of debit and credit for asset accounts are exactly opposite to the rules of debit and credit for liability and capital accounts.

Rules for expense accounts

An expense is a loss and therefore results in a decrease in capital. Since a decrease in capital is recorded on the debit side of an account, all expenses are also recorded on the debit side of the relevant account. Hence, when salaries is paid to workers, we make an entry on the debit side of salaries account. Usually, but not always, there will be no entries made on the credit side of the accounts kept for expenses.

Rules for income or revenue accounts

An income or revenue results in an increase of capital. Since increases in capital are recorded on the credit side of capital account, all incomes are also recorded on the credit side of the relevant account. Hence, when we receive any rent from a tenant, we make an entry on the credit side on the rent income account. Usually, but not always, there will be no entries made on the debit side of the accounts kept for incomes and revenue.

Summary

We can now summarize the rules of debit and credit for various ledger accounts as follows:

rules of debit and credit

Examples

Mr. John made the following transactions during January, 2016:

January 04: Received cash $1,350 from Sam (a debtor).
January 10: Bought a new delivery van for $6,000 from Deluxe Motors Inc. on credit.
January 15: Paid cash $1,520 to United Traders (a creditor).
January 21: Mr. John introduced an additional capital $1,400.

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Required: How the rules of debit and credit would be applied to record the above transactions in ledger accounts?

Solution

Receipt of cash from Mr. Sam who is a debtor:

  1. An increase in cash (an asset); it must be recorded on the debit side of cash account.
  2. A decrease in amount due from Mr. Sam (an asset); it must be recorded on the credit side of Mr. Sam account.

Purchase of new delivery van from Deluxe Motors Inc:

  1. An increase in delivery van (an asset); it must be recorded on the debit side of delivery van account.
  2. An increase in amount payable to Deluxe Motors (a liability); it must be recorded on the credit side of Deluxe Motors account.

Payment of cash to United Traders:

  1. A decrease in amount payable to United Traders (a liability); it must be recorded on the credit side of United Traders account.
  2. A decrease in cash (an asset) and should therefore be recorded on the credit side of cash account.

Cash taken by John for his personal use:

  1. An increase in John’s capital; it must be recorded on the credit side of John’s capital account.
  2. An increase in cash (an asset); it must be recorded on the debit side of cash account.

1 thought on “Rules of debit and credit”

  1. Payment of cash to United Traders:

    A decrease in amount payable to United Traders (a liability); it must be recorded on the “””DEBIT””” side of United Traders account.
    A decrease in cash (an asset) and should therefore be recorded on the credit side of cash account.

    Reply

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