# Rules of debit and credit

A ledger account (also known as T-account) consists of two sides – a left hand side and a right hand side. The left hand side is commonly referred to as debit side and the right hand side is commonly referred to as credit side. In practice, the term debit is denoted by “Dr” and the term credit is denoted by “Cr”.

In the rest of the discussion we shall use the terms debit and credit rather than left and right.

When a financial transaction occurs, it affects at least two accounts. For example, purchase of machinery for cash is a financial transaction that increases machinery and decreases cash because machinery comes in and cash goes out of business. The increase in machinery and decrease in cash must be recorded in the machinery account and the cash account respectively. As stated earlier, every ledger account has a debit and a credit side. Now the question is that on which side the increase or decrease in an account is to be recorded. The answer lies in the learning of normal balances of accounts and the rules of debit and credit.

## Normal balance of accounts

The understanding of normal balance of accounts helps understand the rules of debit and credit easily. If the normal balance of an account is debit, we shall record any increase in that account on the debit side and any decrease on the credit side. If, on the other hand, the normal balance of an account is credit, we shall record any increase in that account on the credit side and any decrease on the debit side.

The normal balance of all asset and expense accounts is debit where as the normal balance of all liabilities, and equity (or capital) accounts is credit. The normal balance of a contra account (discussed later in this article) is always opposite to the main account to which the particular contra account relates.

## Rules of debit and credit

### (1). Asset accounts:

Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all asset accounts.

### (2). Expense accounts:

Normal balance: Debit

Rule: An increase is recorded on the debit side and a decrease is recorded on the credit side of all expense accounts.

### (3). Liability accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all liability accounts.

### (4). Revenue/Income accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all revenue accounts.

### (5). Capital/Equity accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side and a decrease is recorded on the debit side of all equity accounts.

### (6) Contra accounts:

Normal balance: Always opposite to the relevant normal account. The normal balance of a contra account can be a debit balance or a credit balance

An example: Accounts receivable is an asset account that normally has a debit balance. The allowance for doubtful accounts is a contra account to the accounts receivable and normally has a credit (opposite) balance.

Other examples of contra accounts include:

• accumulated depreciation account – a contra asset account
• sales returns and allowances account – a contra revenue account
• sales discount account – a contra revenue account
• drawings account – a contra equity account
• treasury stock account – a contra equity account
• bonds discount account – a contra liability account

As the normal balance of a contra account is always opposite to the normal balance of the relevant main account, it causes a reduction in the reporting amount of the main account. For example, if the balance in building account is \$500,000 and the balance in accumulated depreciation – building account is \$150,000, the building would be reported at \$350,000 (= \$500,000 – \$150,000) in the balance sheet.

Rule: If the normal balance of the contra account is debit, the increase will be recorded on the debit side and the decrease will be recorded on the credit side. If, on the other hand, the normal balance of the contra account is credit, the increase is recorded on the credit side and the decrease is recorded on the debit side.

A summary of the whole discussion about rules of debit and credit is given below:

The following example may be helpful to understand the practical application of rules of debit and credit explained in above discussion

A D V E R T I S E M E N T

## Example:

The following transactions are related to Small Traders:

1. Started business with cash \$95,000.
2. Furniture purchased for cash to be used in business \$8,000.
3. Purchased goods for cash \$40,000.
4. Purchased goods on credit from Big Traders \$57,000.
5. Sold goods for cash \$5,000.
6. Purchased equipment for business \$4,000.
7. Sold goods on credit to John Retailers \$1,500.
8. Paid salary to employees \$1,200

Required: Identify the accounts involved in above transactions and state the nature of each account. Also mention how increases or decreases in accounts resulting from above transactions should be recorded.

### Solution:

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A D V E R T I S E M E N T

### 58 Comments on Rules of debit and credit

1. kabita

i understand easily ,thank you so much.

1. tahir hussain

HI IF U Have more example of debit and cridit rules then plz share with.
thanks

2. Salim Malik

oye this is not Easy very bery dificualt fisrt should eat Half Kg Almond then try to understand .

3. Joy deb Das

Can you . Explain golden rules?

Personal a/c – debit the reciver. credit the giver
Real a/c – debit what comes in. credit what goes out
Nominal a/c – debit all expense & losses. Credit all income & gain’s

2. RASHID ALI

also understand thax and send more other type

easily understandable
Thanks

5. Soneni Nkata

Thank you for the explanations. Really helpful

6. Beyena Regasa

I had to under stand from this . thanks for explanation

7. Nouman Hussain Janjua

Woow, amazing
Too much easy and I really clear my concept.

8. Peter Kelau

Thanks a lot clearly explained.

9. Siddhi

Thanks u so much for your very thankful information about credit and debit

10. Angela

At last, an explanation that includes all the information needed to understand the concepts: Debits, Credits. Thank you very much indeed.

11. Abraham Sheriff

It’s easy and understandable now thanks for the teaching

12. Abraham Sheriff

Thanks

13. Abraham Sheriff

I want to know if it’s the end of the debit and credit rules

14. Md. Sahidul Islam (Dhaka)

Thank you so much.
Especially those who presented so well with tireless labor.

15. preetmohan

It is written clearly. Layman can also get a good understandability by reading this.. Thankyou indeed !

16. Akinkunmi Ayodeji

This is very helpful and i really appreciate this,thanks for the write up.

17. Nigus

Which side will be record first.example,sales on cash USD 3000,so is journalize first Dr side or Cr and why???

18. melaku etefa

very interesting approach

19. temesgen bitweded

tax for ur justification

20. vinod

Who presented it clearly so I understood easily so I am very glad

21. Prince N. Karsu

thanks a lot. its well understood

22. Mahfuj

Thank you very much, it’s very way to understnd without tutor.

23. Nabeel Jaan

I have many confusions about dr. cr. but now i’m satisfied thanks so much.

24. Lateefah

Very well explained, thanks

25. Tahir

Too Easy to Clear Concepts, Understanding Debit/Credit Rules

26. Hellen Musamali

Thanks alot..well elaborated

27. phidux

You made it clear and simple. Thanks a lot.

28. Kaeli Mimiki

brilliant explanation

29. Maqsood Zaman

Great sir
This site is too much good
understating is so easy from this site

30. eligu abel

thanks for good explanation

1. Sudhir

Need more examples

31. Joshua Yaling

You just make me clear about the confusion about Dr and Cr rules. Thank your

32. Wazirgul

33. fikru

wow thank you very much keep it up

34. XAVIER ANTONY

It would have been great if the example contains statement for dealing with contra entries too.

35. MATSIKO ISAAC

many thanks.means alot

36. Mkhuze Mahlangu

Now I am beginning to see the light. My school teachers were not good teachers. Thank you so much for this information.

Very good elaboration, it has backed up my accounting concepts.

38. Fagbayi Abosede

Wow,i understand it better now,thank u so much

39. Qahirshah

40. sanjhi

😊😊