Rules of Debit and Credit are the fundamental basis of Double Entry bookkeeping. These rules, lays down, how the accounting is to be performed and are summarized as under : –
Rules of Debit and Credit
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.
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.
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as they bring funds into business, capital account is credited to the owners’ capital account , whereas when amount is withdrawn from the owners’ capital account, i.e drawings are made, it is debited to the capital account i.e. the capital is reduced.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 account
Rule 4 – Personal Accounts – Debit the Receiver and Credit the giver
Let us take an example ; A pays Rs. 10,000 to B.
In this example A and B, are Personal Account.
In Books of A, B’s account will be debited as B is the receiver.
In Books of B, A’s account will be credited as he is the giver.
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.
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.