Rules of Debit and Credit

Debit and Credit are the two sides of accounting.

Debit does not always mean increase.

Credit does not always mean decrease.

Simple line: Debit means left side. Credit means right side. The effect depends on the account.

For some accounts, debit means increase. For some accounts, credit means increase.

So first understand the account type, then apply the rule.

Every business transaction affects at least two accounts.

If cash comes in, something else also changes, such as capital, sales, or a debtor.

If cash goes out, something else also changes, such as rent, salary, purchases, furniture, or a creditor.

That is why every journal entry has a debit side and a credit side.

The total debit amount must always equal the total credit amount.

Asset: if an asset increases, debit it. If an asset decreases, credit it. Cash received means Cash A/c Dr. Cash paid means Cash A/c Cr.

Liability: if a liability increases, credit it. If a liability decreases, debit it. Goods bought on credit from Amit means Amit A/c Cr. Paid Amit means Amit A/c Dr.

Capital: if capital increases, credit it. If capital decreases, debit it. Owner starts business with cash means Capital A/c Cr. Owner withdraws cash means Drawings A/c Dr.

Expense or Loss: expenses and losses are debited. Paid rent means Rent A/c Dr.

Income or Gain: incomes and gains are credited. Received commission means Commission Income A/c Cr.

A personal account is connected with a person, business, customer, supplier, debtor, creditor, or owner.

If a person receives value, debit that person's account.

If a person gives value, credit that person's account.

Example: Paid cash to Amit Rs.5,000.

Amit receives money, so Amit A/c is debited.

Cash goes out, so Cash A/c is credited.

A real account is connected with assets such as cash, bank, furniture, machinery, and building.

If an asset comes into the business, debit it.

If an asset goes out of the business, credit it.

Example: Bought furniture for cash Rs.10,000.

Furniture comes in, so Furniture A/c is debited.

Cash goes out, so Cash A/c is credited.

A nominal account is connected with expenses, losses, incomes, and gains.

Expenses and losses are debited.

Incomes and gains are credited.

Example: Paid salary Rs.8,000.

Salary is an expense, so Salary A/c is debited.

Cash goes out, so Cash A/c is credited.

Riya runs a small stationery shop.

Day 1: she starts business with cash Rs.50,000. Cash comes into business, so Cash is debited. Owner's capital increases, so Capital is credited.

Day 2: she buys notebooks for cash Rs.10,000. Purchases increase, so Purchases is debited. Cash decreases, so Cash is credited.

Day 3: she sells goods for cash Rs.5,000. Cash increases, so Cash is debited. Sales income increases, so Sales is credited.

Day 4: she pays rent Rs.2,000. Rent expense increases, so Rent is debited. Cash decreases, so Cash is credited.

If students can identify what increased and what decreased, debit-credit becomes easier.