Elements of Accountancy · Ch 4 — Recording of Transactions - I
Rules of Debit and Credit
Rules of Debit and Credit
The Five Categories of Accounts
Before you can apply debit and credit rules, you must first understand that all accounts are classified into five categories:
- Assets — things the business owns (cash, furniture, machinery, debtors, bank balance)
- Liabilities — amounts the business owes to outsiders (creditors, loans)
- Capital — the owner's claim on the business (also called owner's equity)
- Expenses/Losses — costs incurred to run the business (rent, salary, purchases)
- Revenues/Gains — income earned by the business (sales, commission received)
This five-category classification is the foundation. Every transaction affects at least two of these categories, and the rules of debit and credit tell you exactly which account to debit and which to credit.
The Two Fundamental Rules
The rules are grouped into two sets, based on the nature of the account.
Rule 1: For Assets and Expenses/Losses
- Increase in an asset is debited; decrease in an asset is credited.
- Increase in an expense/loss is debited; decrease in an expense/loss is credited.
Notice the pattern: both assets and expenses/losses behave the same way — an increase goes to the debit side.
Rule 2: For Liabilities, Capital, and Revenues/Gains
- Increase in a liability is credited; decrease in a liability is debited.
- Increase in capital is credited; decrease in capital is debited.
- Increase in revenue/gain is credited; decrease in revenue/gain is debited.
Again, notice the pattern: liabilities, capital, and revenues/gains all behave the same way — an increase goes to the credit side.
The golden rule to remember: Assets and Expenses take debit for increase; Liabilities, Capital, and Revenues take credit for increase. This is the single most important idea in this section.
Summary Chart of Debit and Credit Rules
| Account Type | Increase | Decrease |
|---|---|---|
| Asset | Debit | Credit |
| Expense/Loss | Debit | Credit |
| Liability | Credit | Debit |
| Capital | Credit | Debit |
| Revenue/Gain | Credit | Debit |
Applying the Rules: Transaction Analysis (Examples 1–9)
The textbook walks through nine transactions. For each, you must identify which accounts are affected, whether each account increases or decreases, and then apply the rule to decide debit and credit.
Transaction 1: Rohit started business with cash ₹5,00,000
Analysis: Cash (asset) increases by ₹5,00,000. Capital increases by ₹5,00,000.
- Cash is an asset — increase is debited.
- Capital is capital — increase is credited.
Journal entry: Debit Cash Account ₹5,00,000; Credit Rohit's Capital Account ₹5,00,000.
Transaction 2: Opened a bank account with ₹4,80,000
Analysis: Bank (asset) increases by ₹4,80,000. Cash (asset) decreases by ₹4,80,000.
- Bank is an asset — increase is debited.
- Cash is an asset — decrease is credited.
Journal entry: Debit Bank Account ₹4,80,000; Credit Cash Account ₹4,80,000.
Transaction 3: Bought furniture for ₹60,000, issued cheque
Analysis: Furniture (asset) increases by ₹60,000. Bank (asset) decreases by ₹60,000.
- Furniture is an asset — increase is debited.
- Bank is an asset — decrease is credited.
Journal entry: Debit Furniture Account ₹60,000; Credit Bank Account ₹60,000.
Transaction 4: Bought Plant and Machinery from Ramjee Lal for ₹1,25,000; paid ₹10,000 cash as advance
Analysis: Plant and Machinery (asset) increases by ₹1,25,000. Cash (asset) decreases by ₹10,000. Liability to Ramjee Lal increases by ₹1,15,000 (the unpaid balance).
- Plant and Machinery is an asset — increase is debited.
- Cash is an asset — decrease is credited.
- Ramjee Lal is a liability — increase is credited.
Journal entry: Debit Plant and Machinery Account ₹1,25,000; Credit Cash Account ₹10,000; Credit Ramjee Lal's Account ₹1,15,000.
The textbook text says "debit to furniture account" in the analysis for transaction 4, but this is a typographical error — the correct account is Plant and Machinery, as shown in the ledger accounts that follow.
Transaction 5: Goods purchased from Sumit Traders for ₹55,000
Analysis: Purchases (expense) increases by ₹55,000. Liability to Sumit Traders increases by ₹55,000.
- Purchases is an expense — increase is debited.
- Sumit Traders is a liability — increase is credited.
Journal entry: Debit Purchases Account ₹55,000; Credit Sumit Traders Account ₹55,000.
Transaction 6: Goods costing ₹25,000 sold to Rajani Enterprises for ₹35,000
Analysis: Rajani Enterprises becomes a debtor (asset) for ₹35,000. Sales (revenue) increases by ₹35,000.
- Rajani Enterprises is an asset (debtor) — increase is debited.
- Sales is revenue — increase is credited.
Journal entry: Debit Rajani Enterprises Account ₹35,000; Credit Sales Account ₹35,000.
Transaction 7: Paid monthly store rent ₹2,500 in cash
Analysis: Rent (expense) increases by ₹2,500. Cash (asset) decreases by ₹2,500.
- Rent is an expense — increase is debited.
- Cash is an asset — decrease is credited.
Journal entry: Debit Rent Account ₹2,500; Credit Cash Account ₹2,500.
Transaction 8: Paid ₹5,000 salary to office employees
Analysis: Salary (expense) increases by ₹5,000. Cash (asset) decreases by ₹5,000.
- Salary is an expense — increase is debited.
- Cash is an asset — decrease is credited.
Journal entry: Debit Salary Account ₹5,000; Credit Cash Account ₹5,000.
Transaction 9: Received cheque from Rajani Enterprises as full payment, deposited same day
Analysis: Bank (asset) increases by ₹35,000. Rajani Enterprises (debtor, an asset) decreases by ₹35,000.
- Bank is an asset — increase is debited.
- Rajani Enterprises is an asset — decrease is credited. …