By the Double Entry System of accounting, every business transaction consists of two parts. One is the receiving or incoming aspect, which is referred to as the debit aspect, and the other is the providing or outgoing aspect, which is referred to as the credit aspect. These two aspects of the Double Entry System of Accounting are used to formulate the necessary Rules of Debit and Credit, which are based on the nature of various accounts and are used to correctly determine when to debit an account and when to credit an account to ensure the correct effect and treatment for a particular transaction.

Rules of Debit and Credit 

There are 3 golden rules of debit and credit 

  • Whatever goes out has to be debited; whatever comes in has to be credited
  • All gains and incomes are credited; all losses and expenses are debited
  • Crediting the giver; debiting the receiver

Rules of Debits by Account:

  • The “rule of debits” states that any account that ordinarily has a debit balance will see its balance grow when it is debited, and its balance decrease when it is credited

Rule of Credits by Account:

  • Unlike debits, the “credit rule” states that any accounts that ordinarily have a credit balance will see their balance increase when credit is made to them, and their balance decrease when a debit is added to them, and vice versa
  • These are the categories of accounts that are affected by this rule: equity, liabilities, income 

Normal Balance of Accounts 

Understanding the typical balance of accounts makes it much easier to comprehend the laws of debit and credit, as well as the relationship between them. The standard balance of an account is a debit, so any increase or reduction in that account will be reported on the debit side and the credit side respectively. A positive account balance, on the other hand, means that any increase in the account’s value will be recorded on the ledger’s credit side, while any decrease will be recorded on the negative side.

There is a debit in the normal balance of all asset and expense accounts, and credit is in the normal balance of all liabilities and equity (or capital) accounts, and vice versa.

Rules of Debit and Credit Across Different Accounts-

Assets account:

  • The accounts that pertain to an enterprise’s economic resources, such as furniture, machinery, patents
  • The normal balance is debit
  • Rule: All asset accounts have an increase reported on the debit side and a drop recorded on the credit side

Liability Account:

  • These are the lenders’, creditors’, and other parties’ liability accounts, which comprise outstanding expenses, creditors for goods, and so on
  • Normal balance in credit 
  • Rule: All liability accounts have an increase recorded on the credit side and a drop recorded on the debit side

Capital Account:

  • Capital and Drawings Accounts are included in the accounts of proprietors/partners who have invested money in the firm
  • The normal balance is credit
  • Rule: All equity accounts have an increase recorded on the credit side and a drop recorded on the debit side

Revenue account:

  • These are the accounts of incomes and gains that include sales, interest, bad debts that were paid, and so on
  • The normal balance is credit 
  • Rule: All revenue accounts have an increase recorded on the credit side and a drop recorded on the debit side

Expense Account:

  • These are the accounts for things like purchases, wages, depreciation, and so on
  • The normal balance is debit 
  • Rule: All expense accounts have an increase reported on the debit side and a decrease recorded on the credit side

Contra Account:

  • A general ledger account that is used to diminish the value of another account that is tied to it, such as a sales discount account, treasury stock account 
  • The normal balance is always the opposite of the applicable normal account’s normal balance
  • A contra account’s typical balance might be either a debit or a credit balance
  • Rule: If the contra account’s typical balance is negative, the increase will be recorded on the debit side and the decrease on the credit side
  • Whereas, on the other hand, if the contra account’s typical balance is credit, the credit side records the gain and the debit side records the loss

Impact of Debit Credit Rules 

  • Making entries in the general ledger are technically correct if the debit and credit rules are followed, which is ensured by following these guidelines
  • As a result, the possibility of having an imbalanced trial balance is eliminated
  • However, just obeying the rules does not ensure that the resulting entries are valid in substance, because doing so also necessitates knowledge of how to record transactions within the applicable accounting framework, which is not always available

Conclusion

At the very least, two accounts must be affected by an accounting transaction, with a debit entry recorded against one and a credit entry made on the other. A transaction must have at least two accounts participating, even though there is no maximum limit on the number of accounts that can participate. In order for an accounting transaction to be deemed in balance, the sum of the debits and credits must always equal the sum of the debits and credits for that transaction.