Rules of Debit and Credit . sometimes also referred to as the Golden Rules of Debit and Credit, are the fundamental (most basic) basis of Double Entry bookkeeping. These rules, lays down, how the accounting is to be performed in respect of various expenses/income, assets/liabilities amongst others, and are summarized as under : –
Rule 1 of Rules of Debit and Credit – 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 , Debtors, Building, Intangible Assets like Goodwill etc.
Journal Entry when Assets are increased
What would be the Journal Entry for Purchase of Building for Rs. 10,000 in Cash ?
Explanation:
Since Purchase of Building results in an increase in the value of Building (which is an Asset), Building A/c would be debited, as an increase in an asset A/c is debited .
Further , on Purchases of Building in Cash , there is a in reduction of Cash, which is an Asset. When an asset is reduced, the asset account is credited and hence Cash A/c would credited.
Hence the correct entry is:
Building A/c Dr. 10,000
To Cash A/c 10,000
Journal Entry when Assets are decreased
What would be the Journal Entry for Sale of Plant and Machinery for Rs. 10,000 in Cash ?
Explanation:
Since Sale of Plant and Machinery results in a decrease in the value of Plant and Machinery (which is an Asset), Plant and Machinery A/c would be credited, as a decrease in an asset A/c is credited .
Further , on Sale of Plant and Machinery in Cash , Cash is received and there is an increase of Cash, which is an Asset. When an asset is increased, the asset account is debited and hence Cash A/c would debited.
Hence the correct entry is:
Cash A/c Dr. 10,000
To Plant and Machinery A/c 10,000
Rule 2 of Rules of Debit and Credit – Increase or Decrease in Liabilities
When Liabilities are increased, the liability account is credited and when liabilities are reduced decreased, liabilities account is debited. Liabilities could be creditors, expense payable etc.
Journal Entry when Liabilities are increased
What would be the Journal Entry for purchase of Furniture amounting to Rs. 10,000 from Nived on credit ?
Explanation:
Purchase of Furniture results in an increase in the value of Furniture, which is an asset. Furniture A/c would be debited, because according to the Rules of Debit and Credit, an increase in an asset A/c is debited .
Further , on Purchases of Furniture on Credit from Nived, the company incurs a liability towards Nived, or in other words the liability of the company is increased.
When a liability is increased, the liability account is credited , as according to the Rules of Debit and Credit, an increase in liability account is credited. Hence account of Nived would be credited.
Hence the correct entry is : –
Furniture A/c Dr. 10,000
To Nived A/c 10,000
Journal Entry when Liabilities are decreased
What would be the Journal Entry for payment to Nived in the above example ?
Explanation:
Payment to a creditor results in decrease in Cash, which is an Asset. When an asset is reduced, the asset account is credited and hence Cash A/c would credited.
Further , on payment to Nived, the company reduces a liability towards Nived, or in other words the liability of the company is decreased.
When a liability is decreased, the liability account is debited , as according to the Rules of Debit and Credit, decrease in liability account is debited. Hence account of Nived would be debited.
Hence the correct entry is : –
Nived A/c Dr. 10,000
To Cash A/c 10,000
Rule 3 of Rules of Debit and Credit – Increase or Decrease in Capital
When the owners’ bring funds into business, owner’s capital is increased , and capital account is credited .
However, when owners’ withdraw funds business, owners’ capital account, also sometime referred to as the Drawings A/c or Capital account is debited , i.e. the owner capital is reduced.
Profit in business leads to increase in capital account , and is therefore credited to the owners’ capital account.
Losses leads to reduction in capital account and is therefore debited to the owners’ capital account.
Rule 4 of Rules of Debit and Credit – Personal Accounts – Debit the Receiver and Credit the giver
A personal account , is an account or a ledger , which relates to individuals (Like Ram, Shyam, Rahim), firms (partnership firms Limited Liability Partnerships) ,Associations and companies. The goldern rule of Accounting relating to Personal Accounts is, Debit the Receiver and Credit the giver.
Let us take an example ; A , an individual , pays Rs. 10,000 to B, another individual.
In this example A and B, are Personal Account, since they relate to individuals
In Books of A, B’s account will be debited as B is the receiver of money.
In Books of B, A’s account will be credited as he is the giver of money.
Rule 5 of Rules of Debit and Credit – 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.
Rule 6 of Rules of Debit and Credit – 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.
Chapter 3 – Recording of Transactions