Each transaction must affect two or more accounts with debit equal to credit. It is a concept that states every transactions involves the giving of a benefit and the receiving of a benefit. Each account includes two sides. one side of account is known as debit and another side is known as credit. Simply debit refers the left hand side of an account and credit is the right hand side. Thus, the guidelines for debiting and crediting the account while recording the financial transactions refer the rule of debit and credit.
On the Basis of Accounts Types
Under this approach , first of all the accounts involve in the transactions are classified into different types as they belong and rule of debit and credit are applied. the types of accounts and the rule of debit and credit are given below:-
Personal Account:- The account relating to person or individual such as natural person and the artificial person is called personal account. For Examples: Ram account , Sita account , Afroj account , Nepal Bank account etc.
Rule Applied:-
Debit: The receiver
Credit : The giver
Real Account: The account relating to the assets which really exist with the monetary value is called real account. For Examples: land , building, plants, machinery, furniture, equipment, cash, stock of goods , stock of supplies etc.
Rule Applied:
Debit: What comes in
Credit: What goes out
Nominal Account: The account relating to expenses , losses , income , revenue , gain etc. are called nominal account.
Rule Applied:
Debit: All expenses and losses
Credit: All incomes and gains
Some of the examples , which help to understand the rule of debit and credit are given below:-
Transactions | Account involve | Account Type | Explanation | Rule of Debit and credit |
Started business with cash | Cash a/c Capital a/c | Real Personal | comes in giver | Debit credit |
Purchase furniture for cash | Furniture a/c Cash a/c | Real Real | comes in goes out | Debit Credit |
signed promissory note at bank and received loan | Cash a/c Notes payable a/c | Real Personal | comes in giver | Debit Credit |
Purchase office supplies on cash | supplies a/c Cash a/c | Real Real | comes in goes out | Debit Credit |
Advertisement paid | Advertisement expenses a/c Cash a/c | Nominal Real | expenses goes out | Debit Credit |
Provide service on cash | cash a/c Service Revenue a/c | Real nominal | comes in income | Debit Credit |
Payment of to accounts payable | Account payable a/c cash a/c | Personal Real | receiver goes out | Debit Credit |
Purchase of merchandise on credit | Stock of goods Account Payable a/c | Real Personal | comes in giver | Debit Credit |
On the Basis of Account Heads/ Accounting Equations
Overall transactions of an organization creates five categories of accounts heads. They are:- assets related, liabilities related, capital or equity related, expenses and income related accounts. The rules applied for debit and credit under this basis as discussed below:-
Debit: Increase in assets and decrease in liabilities
Credit: Decrease in assets and increase in liabilities