In accounting, three golden rules govern the usage of debits and credits. First, with Real Accounts, debit what comes in, and credit what goes out. Second, with Personal Accounts, debit the receiver and credit the giver. The rules of debit and credit are fundamental principles that govern how transactions are recorded. These rules form the basis of the double-entry accounting system, assuring that every trade has equal debits and credits. Understanding these rules is crucial for keeping exact and balanced financial records. Debit and credit entries are used to record increases or decreases in different accounts, and their application is guided by specific principles.

The rules of debit and credit is a very vital topic for the UGC-NET Commerce Examination.

In this article, the learners will be able to know about the rules of debit and credit along with right examples in detail.

In this article, learners will know about the following:- 

• Golden Rules of Debit and Credit
• Examples of Journal Entry with Description
• Modern Rules of Debit and Credit
• Golden Rules vs Modern Rules of Debit and Credit

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Golden Rules of Debit and Credit

The golden rules of debit and credit form the foundation of the double-entry accounting system. In this system, every trade affects at least two accounts, and for each trade, the total debits must equal the total credits to keep the accounting equation's balance. The golden rules supply policies on how varied types of accounts are affected by debits and credits. Here are the golden rules:

• Real Accounts:
  • Debit: Increase in assets
  • Credit represents a decrease in asset value.
  • Real accounts consist of the following assets: cash, accounts receivable, real estate, and tools. A debit entry increases the value of a real account, while a credit entry decreases its value.
• Nominal accounts are those that affect profit and loss: Debit-entry means increase in expenses and losses, Credit-entry means increase in incomes and gains.
  • Nominal accounts are concerned with matters of income, expenditure, profits, and losses. An expense account or the loss account shall incur a debit increasing it. On the other hand, an income account or a gain account shall be credited to increase it.
• Personal Accounts:
  • Debit: Increase in liabilities and capital
  • Credit: Decrease in liabilities and capital

Personal accounts include liabilities and owner's equity. Debiting a personal account raises its value, while crediting it reduces its value.

These rules can be remembered using the following mnemonic:

• Real:
  • Debit what comes in.
  • Credit what goes out.
• Nominal:
  • Debit all expenses and losses.
  • Credit all incomes and gains.
• Personal:
  • Debit the receiver.
  • Credit the giver.

Understanding these golden rules is crucial for keeping the balance in accounting entries. It ensures that the accounting equation (Assets = Liabilities + Equity) remains in equilibrium, feeding accurate and reliable financial data for decision-making and reporting.

Fig: rules of debit and credit

Understanding the rules of debit and credit is much easier when applied to actual transactions. A few examples of transactions from a journal entry that cover all types of accounts: Real, Personal, and Nominal. These practical examples will help to clarify when to debit and when to credit a transaction.

Real Account Example

Transaction: Purchase machinery worth ₹1,00,000 in cash.

Journal Entry

Machinery A/c Dr. ₹1,00,000

To Cash A/c ₹1,00,000

(Being machinery purchased for cash)

Explanation

Machinery is a Real Account -> "Debit what comes in" -> So, it is debited.

Cash is also a Real Account -> "Credit what goes out" -> So, it is credited.

This entry shows the acquisition of a tangible asset, which increases business capacity, and a simultaneous reduction in cash.

Personal Account Example

Transaction: Payment of ₹5,000 to Amit Traders for the goods purchased earlier.

Journal Entry

Amit Traders A/c Dr. ₹5,000

To Cash A/c ₹5,000

(Being payment made to Amit Traders for the previous purchase)

 Explanation

Amit Traders are Personal Account -> "Debit the receiver" -> They are receiving the payment so debit them.

Cash is Real Account -> "Credit what goes out" -> Cash is leaving the business, thus credited.

It reflects the settlement of previous liability by cash payment to supplier.

Nominal Account Example

Transaction: Paid rent of ₹10,000 for the month.

Journal Entry

Rent A/c Dr. ₹10,000

To Cash A/c ₹10,000

(Being rent paid in cash for the current month)

Rent is a Nominal Account -> "Debit all expenses and losses" -> Rent is an expense so it gets debited.

Cash is a Real Account -> "Credit what goes out" -> Cash is going out that is why it is credited.

This entry will record the operational expense through debiting and crediting. 

Modern Rules of Debit and Credit

The modern rules of debit and credit remain even with the traditional golden rules but are often defined in a simplified and more universally useful manner. These rules guide the recording of transactions in the double-entry accounting system. Here are the modern rules:

• Assets:
  • Debit: Increase in assets
  • Credit: Decrease in assets
• Liabilities:
  • Debit: Decrease in liabilities
  • Credit: Increase in liabilities
• Equity:
  • Debit: Decrease in equity
  • Credit: Increase in equity
• Revenue:
  • Debit: Decrease in revenue
  • Credit: Increase in revenue
• Expenses:
  • Debit: Increase in expenses
  • Credit: Decrease in expenses
• Contra Accounts:
  • Debit: Contra accounts to assets, such as accumulated depreciation, are recorded as debits.
  • Credit: Contra accounts to liabilities or equity, such as discount on bonds payable, are recorded as credits.
• Gains:
  • Debit: Decreases in gains (e.g., loss on sale of assets) are recorded as debits.
  • Credit: Increases in gains (e.g., gain on sale of assets) are recorded as credits.
• Losses:
  • Debit: Increases in losses (e.g., loss on disposal of assets) are recorded as debits.
  • Credit: Decreases in losses are recorded as credits.

These rules keep the basic principles of the golden rules but express them in a way that is more universally applicable across various accounting systems and contexts. The focus is on the effect of trades on specific types of accounts, ensuring that the accounting equation remains balanced.

Golden Rules vs Modern Rules of Debit and Credit

To understand debit and credit effectively, it’s important to compare the Golden Rules and Modern Rules of accounting. While both serve the same purpose in the double-entry system, their classification style, focus, and practical usability differ. The following table outlines the key distinctions to aid both theory and application.

Conclusion

We can define the rules of debit and credit as the fundamental principles that ensure accurate and balanced recording. The double-entry system maintains equality of debits and credits according to these rules, leading to the periodic and reliable accounting of financial transactions. An understanding of these rules forms the basis for the professional accountant in preparing financial reports and assessing the financial health of a business.