Rules of Debits and Credits

Fundamental notions the accounting structure is built upon are the rules of debits and credits which form part of preliminary studies of accountancy learners. Debits and credits are the ceremonial book keeping and accounting expressions used and followed extensively in accountancy literature as well as in practice. Primarily the accounts are classified into four components and each transaction is attributed as category of any one of them. Such elements are namely:

·         Assets ( further divided into fixed, current, and financial assets)

·         Liabilities ( subdivided  into equity, long term debts, and current liabilities)

·         Expenses ( mainly classified into cost of goods or service and operational expenditures)

·         Revenues ( sale of goods and services and other incomes)

The categories enlisted above are usually joined up as main accounts in the chart of account and are not used in debit and credit entry by themselves. What goes into debit or credit are usually the 3^rd or 4^th level account heads specified as sub-category of the assets, liabilities, expanses, and revenues. These sub-categories may be labeled or titled differently by every organization but are classified as type of main accounts according to the nature of each transaction almost unanimously every where.

The canons of debits and credits

Rule No. One

Debit               increase in assets

Credit             decrease in assets

Illustration

Equipment bought for $500:

Debit               Equipment                             $500

Credit             Bank                                                   $500

Machinery sold for $ 250:

Debit               Bank                                        $250

Credit             Machinery                                             $250

Rule No. Two

Debit               decrease in liability

Credit             increase in liability

Illustration

Bought material on credit for $1000:

Debit               Purchase Material                $1000

Credit             Accounts Payable                                        $1000

Merchant paid of by $ 500:

Debit               Accounts Payable                  $500

Credit             Bank                                                                 $500

Rule No. Three

Debit               increase in expense

Credit             decrease in expense

Illustration

Paid salaries for $200:

Debit               Salary and wages expense                        $200

Credit             Bank                                                                           $200

Salaries wrongly paid over by $ 20:

Debit               Receivable from staff                                   $20

Credit             Salary and wages expense                                    $20

Rule No. Four

Debit               decrease in revenue

Credit             increase in revenue

Illustration

Revenue earned for $1000:

Bank                                       $1000

Revenue                                            $1000

Supplies below standard valuing $50 returned back by the client and amount paid back:

Revenue                                               $50

Bank                                                                  $50

Another way of expressing rules of debit and credit

The same rules of debit and credit may be expressed differently through classification of the elements of accounts into three types of accounts which are:

1.    Nominal accounts which deal with revenues and expenses

Expenses are debited and incomes are credited

2.    Real accounts which deal with assets

Purchase of assets is debited and sale of assets is credited

3.    Personal accounts which deal with the parties

           Receiver is debited and giver is credited