Debit Credit Rules

Debit Credit Rules are applied to every transaction recorded in the books of accounts. If one account is debited, another account/s , will be credited with the same amount .

For example,  if someone purchases goods, such purchase would increase the goods or an asset. Therefore, we will debit the Purchase account (Increase in Asset is debited) . When we purchase goods, we pay cash for it. Therefore, the  cash account will be credited with the same amount that has been debited , as purchase would reduce the cash (Decrease in Asset, i.e, cash is credited).

Debit Credit Rules – Rule 1 – Increase or Decrease in Asset

When assets are increased, the Asset account is debited and when assets are reduced or decreased, the Asset  account is credited. The Asset accounts could be like Plant and Machinery, Furniture, Stock etc.

Debit Credit Rules – Rule 2  – Increase or Decrease in Liabilities

When Liabilities are increased, the liability account is credited and when liabilities are decreased, liabilities account is debited. Liabilities could be creditors, expense payable etc.

Debit Credit Rules – Rule 3  – Increase or Decrease in Capital

When the owners’ capital is increased as they bring funds into business, capital account  is credited to the owners’ capital account , whereas when amount is withdrawn from the owners’ capital account, i.e drawings are made, it is debited to the capital account i.e. the capital is reduced.

Profit leads to increase in capital account , and is therefore credited to the owners’ capital account

Whereas losses leads to reduction in capital account and is therefore debited to the owners’ capital accoun

Debit Credit Rules  – Rule 4 – Personal Accounts – Debit the Receiver and Credit the giver

Let us take an example ; B pays Rs. 10,000 to C.

In this example B and C, are Personal Account.

In Books of B,  C’s account will be debited as B is the receiver.

In Books of C,  B’s account will be credited as he is the giver.

Debit Credit Rules – Rule 5 – Real account – Debit what comes in credit what goes out

Let us take an example  – If we purchase goods, we  will debit the purchase account as goods are coming into the business, whereas if goods are sold, we will credit the sales account as goods are going out of business.

Debit Credit Rules  – Rule 6  – Nominal account – Debit all expenses and losses and credit all profits and income

If salary is paid, we  will debit the salary account as it is an expense,  whereas any interest received will be credited to the interest account, as it is a profit. Other example of expenses can be rent, rates and taxes, telephone. Example of income could be Sales, interest income on deposit etc.

APPLICATION OF DEBIT  CREDIT RULES

MEANING OF DEBIT AND CREDIT

Credit refers to accounting entry that either decreases assets or increases liabilities and equity on the company’s balance sheet.

Debit refers to accounting entry that either increases assets or decreases liabilities or decreases equity on the company’s balance sheet.

Question 1:

Credit refers to ———————- .

Explanation:

Credit refers to accounting entry that either decreases assets or increases liabilities and equity on the company’s balance sheet.

INCREASE AND DECREASE IN THE AMOUNT OF ASSET AND LIABILITY

Question 2:

A Decrease in the amount of an Asset represent —————– to the Asset account .

Explanation:

A decrease in asset is credited to the Asset Account.

INCREASE IN THE AMOUNT OF AN ASSET

Question 3:

Purchased of Building worth Rs. 60,000 By Mr. B for cash is —————- to the Building Account .

Explanation:

As per the Rules for Debit and Credit,  an increase in Asset is debited to the Asset Account.  Since Building is an asset,and purchase of Building would results in an increase in Building , Building Account would be Debited by Rs. 60,000 .

REDUCTION IN THE AMOUNT OF AN ASSET

Question 4:

Sale of Building worth Rs. 45000 to Mr. Shyam for cash is —————- to the Building Account.

Explanation:

As per the Rules for Debit and Credit, a Decrease in Asset is Credited to the Asset Account.  Since Building is an asset, and sale of     Building would results in an  decrease in Building  , Building Account would be  Credited by Rs. 45,000 .

INCREASE IN LIABILITY

Question 5:

Amount Borrowed by ABC Ltd. from Ram would be ——— to Ram Account.

Explanation:

As per the Rules for Debit and Credit, increase in liability to the lender is credited to Lender A/c. On borrowal of money from Ram their would be an increase in liability to Ram from ABC Ltd. Hence  Ram A/c would be Credited .

REDUCTION IN LIABILITY

Question 6:

Repayment of Rs. 12,000 to  X by DK Ltd. , a lender, would be ————- to X Account.

Explanation:

As per the Rules for Debit and Credit, reduction in liability to the lender is debited to Lender A/c. On repayment of money to X their would be decrease in liability to X from DK Ltd. Hence  X A/c would be Debited .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-PURCHASES OF FURNITURE IN CASH

Question 7:

Which Accounts are involved in the following transaction.
Purchased Building for cash Rs. 20,000 .

Explanation:

Journal entry for the above transaction will be

Building A/c Dr. 20,000
To Cash A/c 20,000

Hence Building A/c and Cash A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-INTEREST RECEIVED IN CASH

Question 8:

Which Accounts are involved in the following transaction.
Interest received from A in cash Rs. 22,100 .

Explanation:

Journal entry for the above transaction will be

Cash A/c Dr. 22,100
To Interest A/c 22,100

Hence Cash A/c and Interest A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-GOODS PURCHASE FOR CASH

Question 9:

Which Accounts are involved in the following transaction.
Goods Purchased for cash Rs. 10,000 .

Explanation:

Journal entry for the above transaction will be

Purchases A/c Dr. 10,000
To Cash A/c 10,000

Hence Purchases A/c and Cash A/c are involved in the above transaction .

UNDERSTANDING OF BALANCES

Question 10:

A Closing balance of Commission Received would be ————–.

Explanation:

Commission Received Account is Nominal Account. The Rules of Debit and Credit applicable to the Nominal Account is Debit all expenses and losses and credit all gains and incomes rule is applicable.  Therefore Closing balance of Commission Received will represent Credit balance .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION – GOODS PURCHASE ON CREDIT

Question 11:

Which Accounts are involved in the following transaction : –

Goods Purchased from Akash For Rs. 15000 .

Explanation:

Journal entry for the above transaction will be

Purchases A/c Dr. 15,000
To Akash A/c 15,000

Hence Purchases A/c and Akash A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-INTRODUCTION OF CAPITAL

Question 12:

Which Accounts are involved in the following transaction.
D started business with Rs. 5,00,000 in cash .

Explanation:

Journal entry for the above transaction will be

Cash A/c Dr. 5,00,000
To Capital A/c 5,00,000

Hence Cash A/c and Capital A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-GOODS SOLD ON CREDIT

Question 13:

Which Accounts are involved in the following transaction.
Goods sold to A for Rs. 4,000 .

Explanation:

Journal entry for the above transaction will be

A A/c Dr. 4,000
To Sales A/c 4,000

Hence A A/c and Sales A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNTS INVOLVED IN TRANSACTION-GOODS SOLD FOR CASH

Question 14:

Which Accounts are involved in the following transaction.
Goods sold for cash Rs. 1,200 .

Explanation:

Journal entry for the above transaction will be

Cash A/c Dr. 1,200
To Sales A/c 1,200

Hence Cash A/c and Sales A/c are involved in the above transaction .

IDENTIFICATION OF ACCOUNT

Question 15:

ABC Ltd. Account is a —————- Account.

Explanation:

Personal Accounts are those Accounts which relate to persons i.e. individuals, firms, companies etc. Since ABC Ltd. represent particular person, firm, company.Hence ABC Ltd. Account is a Personal Account.

IDENTIFICATION OF ACCOUNT

Question 16:

Ram Account is a —————- Account.

Explanation:

Personal Accounts are those Accounts which relate to persons i.e. individuals, firms, companies etc. Since Ram represent particular person, firm, company.Hence Ram Account is a Personal Account.

RULES OF DEBIT AND CREDIT

Question 17:

Debit all expenses and losses and Credit all income and gains is the rule of —————- Account.

Explanation:

As per the rules of debit and credit:
Debit the receiver and credit the giver is the rule of Personal account.
Debit what comes in credit what goes out is the rule of Real account.
Debit all expenses and losses credit all income and gains is the rule of Nominal account.

Question 18:

Debit the receiver and credit the giver is the rule of —————- Account.

Explanation:

As per the rules of debit and credit
Debit the receiver and credit the giver is the rule of Personal account.
Debit what comes in credit what goes out is the rule of Real account.
Debit all expenses and losses credit all income and gains is the rule of Nominal account.

Question 19:

Debit what comes in credit what goes out is the rule of —————- Account.

Explanation:

As per the rules of debit and credit
Debit the receiver and credit the giver is the rule of Personal account.
Debit what comes in credit what goes out is the rule of Real account.
Debit all expenses and losses credit all income and gains is the rule of Nominal account.

TYPES OF PERSONAL ACCOUNT

Question 20:

Personal Accounts are ———–types.

Explanation:

Personal accounts are 3 Types namely
Natural
Artificial
Representative

REDUCTION IN PROPRIETOR CAPITAL

Question 21:

Drawings made by the proprietor during the year would be ————- to the capital account.

Explanation:

As per rules of Debit and Credit, reduction in Capital A/c of the proprietor, decrease liability of the proprietorship to proprietor and  is debited to proprietor A/c. On withdraw of money, their would be a decrease in liability to proprietor from firm. Hence Proprietor’s A/c would be debited.

INCREASE IN PROPRIETOR CAPITAL

Question 22:

An additional capital introduce during the year would be ————— to the capital account.

Explanation:

As per rules of Debit and Credit, increase in Capital A/c of the proprietor, increase liability of the proprietorship to proprietor and  is credited to proprietor A/c. On introduction of capital, their would be an increase in liability to proprietor from firm. Hence Proprietor’s A/c would be credited.