Golden Rules of Accounting – Debit and Credit

SHARE

Yarab A | Jan-13-2020

Understanding Debit and Credit just got Easier

Got stuck in figuring what to Debit and Credit? Yes, like some of you, even I used to get puzzled as well in my early days. By the time I would settle my understanding on golden rules of accounting: debit and credit, one or the other scenarios would again lead me back to zero and start my understanding afresh.

After following some of logics below, I settled my understanding on debit and credit and after that, I got it right every time. Let’s clear the confusion once and for all!

Instead of beginning with golden rules of accounting, let me register debit and credit as shown in the table.

Debit

Credit

Positive (+)

Negative (-)

Come

Go

Receive

Give

Receiver

Giver

Deposit

Withdraw

Increasing

Decreasing

From the above table, it’s clear that it is neither a theory nor a puzzling topic anymore - it’s just logic and reasoning. To summarize - Debit is all about incoming/deposits and Credit is all about outgoing/withdrawal.

For example, you purchased a computer by paying 25,000 by cash. Here, you are receiving a computer so it should be debited, and cash should be credited since it is going out.

Voila! You just recorded an accounting transaction even without looking at the golden rules of accounting.

Golden Rules of Accounting

With the above understanding, let us introduce the golden rules of accounting. Golden rules of accounting refer to a set of pre-defined principles which guides the sequential way of recording the transactions using double entry system of bookkeeping.

Golden Rules of Accounting

 

Real Account

Personal Account

Nominal Account

Debit

What Comes In

The Receiver

All Expenses & Losses

Credit

What Goes Out

The Giver

All Income & Gains

Looks bookish? Let us make it simpler with WhatWho and Why -

 

What (Real)

Who (Personal)

Why (Nominal)

Examples

Goods, Furniture, Money

Firm, Person, Company

Interest, Commission, Discount

Debit

Comes In

Receiver

For expenses

Credit

Goes Out

Giver

From Income

Any scenarios of accounting entry must fall under any of these three broad categories – What (Real)who (Personal) and Why (Nominal). So basically, it covers why (Nominal) a transaction has happened; what (Real) commodities are coming in or going out and who (Personal) is receiving or giving.

Going by this logic, the above transaction of computer purchase in simple language becomes –

  • Received What?
    Computer, hence debited
  • Paid What?
    Cash, hence credited

Let’s take one more example to be sure about it. Paid electricity bill of 5,000 in cash.

  • Why money has been paid?
    For Electricity expenses, hence debited.

  • Paid What?
    Cash, hence credited

Next time you are confused about debit and credit, just remember ‘What, Who and Why’

Types of Accounts

For all those who are still curious to know the definition of a real account, personal account and nominal account, here is the brief about it.

Account Type

Definition

Examples

Real Account

Real accounts are those accounts which are related to assets or properties or possessions. It includes both tangible and intangible.

Plant and Machinery, Stock, Cash, Vehicle, Goodwill, Trademark, Patents & Copyrights, Intellectual Property Rights etc.

Personal Account

This includes all accounts related persons consist of natural, artificial and representative accounts.

Mr Ram’s a/c, A&B Bros trading a/c, salary payable etc.

Nominal Account

Nominal accounts are those accounts that are related to expenses or losses and incomes or gains.

Wages, Salaries, Rent, Travelling Expenses, Commission received, Loss by fire etc.

Example of the Golden Rules of Accounting

In the below example, we have listed different type of transactions along with the type of accounts and details of debit/credit after applying the accounting rules.

Sl No.

Accounting Transaction

Accounts Involved

Type of account

Debit/ Credit

1.

Mr Sham started a business with Rs.60,000 cash.

Cash A/c
Capital A/c

Real
Personal

Debit what comes in
Credit the giver

2.


Purchased goods for cash 25,000 Tk

Purchase A/c
Cash A/c
Real
Real

Debit what comes in
Credit what goes out

3.

Sold goods for cash 20,000 Indo Rupiah

Cash A/c
Sales A/c ( Inventory sold )

Real
Real

Debit what comes in
Credit what goes out

4.

Purchased goods from Mr Bhasha for cash 10,000 dirham

Purchase A/c (Inventory Purchased)
Cash A/c

Real
Real

Debit what comes in
Credit what goes out

5.

Sold goods to Mr Sam  8,000 KES on credit.

Mr Sam  A/c
Sales A/c ( Inventory sold )

Personal
Real

Debit the receiver
Credit what goes out

6.

Purchased furniture for Rs.6,000

Furniture A/c
Cash A/c

Real
Real

Debit what comes in
Credit what goes out

7.

Paid rent 1,500 Tk

Rent A/c
Cash A/c

Nominal
Real

Debit expenses
Credit what goes out

8.

Paid wages 10,000 Indo rupiah from Bank

Wages A/c
Bank A/c

Nominal
Real

Debit expenses
Credit what goes out

9.

Purchased goods from Ali Ltd on credit

Purchase A/c ( Inventory purchased )
Ali Ltd

Real
Personal

Debit what comes in
Credit the giver

10.

Dividend received in cash

Cash A/c
Dividend

Real
Nominal

Debit what comes in
Credit income

11.

Salary outstanding

Salary A/c
Salary Outstanding A/c

Nominal
Representative
personal

Debit expenses
Credit the representative personal account

 

Obsessed With Delight
Inspired by the way you work, Tally is designed to delight you. Try out the all new
Tally.ERP 9 Release 6.6