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.

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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: Opposite to the normal account.

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.

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 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:

rules-of-debit-and-credit-img1

Example:

The following transactions are related to Small Traders:

  1. Started business with cash $95,000.
  2. Purchased furniture for cash $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:

rules-of-debit-and-credit-img2

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27 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. RASHID ALI

    also understand thax and send more other type

  3. Muhammad Tanveer Ikram

    easily understandable
    Thanks

  4. Daud Hamad

    I had to understand clearly, Please send more.

  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.
    I’m so pleased.

  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.

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