Rules of Debits and Credits

Rules of Debit and Credit When Accounts are Classified According to Traditional Classification of Accounts: Debit and credit are simply additions to or subtraction from an account. In accounting, debit refers to the left hand side of any account and credit refers to the right hand side. Asset, expenses and losses accounts normally have debit balances; liability, income and capital accounts normally have credit balances. The term debit is derived from the latin base debere (to owe) which contracts to the "Dr" used in journal entries to refer to debits. Credit comes from the word credere (that which one believes in, including persons, like a creditor), which contracts to the "Cr." used in journal entries for a credit. Personal Accounts: Debit the account of the person who receives something and credit the account of the person who gives something. Real Accounts: Debit the account of the asset/property which comes into the business or addition to an asset, and credit the account which goes out of the business. When furniture is purchased for cash, furniture account is debited (which comes into the business) and cash accountis credited (which goes out of the business). Nominal Accounts: Debit the accounts of expenses and losses, and credit the accounts of incomes and gains. When wages are paid, wages account is debited (expense) and cash accountis credited (asset goes out). Valuation Account: Debit the account when the account is to be reduced and credit the account when the account is to be increased. Rules of Debit and Credit When Accounts are Classified According to Modern Classification of Accounts: 1. Assets account: Debit Increases Credit Decreases 2. Liabilities account: Debit Decreases Credit Increases 3. Capital account: Debit Decreases Credit Increases 4. Revenue account: Debit Decreases Credit Increases 5. Expenditure account: Debit Increases Credit Decreases.