Explanation on Rules of Debit and Credit

The rules of debit and credit, if there is anything that governs the world of accounting, it is this. The world of accounting would be a disorganised chaos without these laws.

It is critical that the accounts are correctly managed according to these principles in order to ensure that the results reported by such books of accounts are accurate. Let’s look at what debit and credit are and how they function in accounting.

Debit and Credit

Every business transaction that can be measured in monetary terms makes its way into a company’s accounting records. A debit and credit system has been designed to record such transactions, which records such events through two different accounts.

In terms of quantity, the net effect of these accounting entries is the same. However, the accurate and appropriate accounting treatment can be shown by debiting and crediting two different accounts. The debit column is normally on the left and the credit column is on the right in a ledger account.

• A debit is an accounting entry that enhances the value of an asset or decreases the value of an expense account. Alternatively, it reduces a liability or equity account. In an accounting entry, it is on the left side.
• A credit is an accounting item that raises the amount of money in either a liability or equity account. Alternatively, it reduces the value of an asset or an expenditure account. In an accounting entry, it is on the right side.

A minimum of two accounts are always impacted whenever an accounting transaction occurs, with a debit entry being recorded against one account and a credit entry being made against another. The number of accounts engaged in a transaction has no maximum limit, although the minimum cannot be fewer than two.

Any transaction’s total debits and credits must always equal each other in order for an accounting transaction to be stated to be in balance. As a result, the most important control on accounting correctness is the employment of debits and credits in a two-column transaction recording format. Debit and credit cards are used in this manner.

Debits and credits rule

The opposing sides of an accounting journal entry are debits and credits.

The rule of debit and credit is governed by the golden rules of accounting. Before we proceed any further, it’s important to understand the three famous golden laws of accounting:

• Debit what comes in and credit what leaves.
• Debit all expenses while crediting all gains and incomes.
• The third step is to debit the receiver and credit the giver.

When accrual basis accounting is applied, they are used to adjust the ending balances in the general ledger accounts. The following are the guidelines for using debits and credits in a journal entry.

Rule 1. Debits Increase Expensive, Assets and Dividends

When a debit (left column) is added to an account that ordinarily has a debit balance, the amount will increase, and when a credit (right column) is made to the account, the amount will decrease. Expenses, assets, and dividends are the types of accounts that fall under this criterion.

Rule 2.Credits Increases Liabilities, Revenues and Equity

When a credit (right column) is added to an account that ordinarily has a credit balance, the amount will increase, and when a debit (left column) is put to the account, the amount will decrease. Liabilities, income, and equity are the sorts of accounts to which this rule applies.

Rule 3.Contra Accounts Offset Paired Accounts

The balances of the accounts with which they are associated are reduced by contra accounts. This means that a contra account linked with an asset account, for example, behaves like a liability account.

Rule 4. Entries Must Balance

In a transaction, the total amount of debits must equal the entire amount of credits. A transaction is considered to be unbalanced if it is not balanced, and the financial statements used to build the transaction are intrinsically inaccurate.

Any imbalanced journal entries will be flagged by an accounting software package, preventing them from being entered into the system until they are fixed.

Impact of the Debit and Credit Rules

Following these debit and credit rules will ensure that you make technically valid entries in the general ledger, eliminating the chance of an uneven trial balance. 

However, simply obeying the rules does not guarantee that the resulting entries are proper in substance, as knowing how to record transactions within the applicable accounting framework is also required (such as Generally Accepted Accounting Principles or International Financial Reporting Standards).

Conclusion

The rules of debit and credit, if there is anything that governs the world of accounting, it is this. The world of accounting would be a disorganised chaos without these laws.

Every business transaction that can be measured in monetary terms makes its way into a company’s accounting records. A debit and credit system has been designed to record such transactions, which records such events through two different accounts.

The rule of debit and credit is governed by the golden rules of accounting. Before we proceed any further, it’s important to understand the three famous golden laws of accounting:

• Debit what comes in and credit what leaves.
• Debit all expenses while crediting all gains and incomes.
• The third step is to debit the receiver and credit the giver.