How to Better Understand Debits and Credits

If you understand the rules of debit and credit, you can better understand debits and credits. Rules will helpful to decide to write one account in the debit side and other account in credit side. This rules rules will also helpful to know, "why any account has been shown in the debit side of any other account and why any account has been shown in the credit side of any other account?"

These rules are collected on the basis of two approaches.

1. American Approach 


In american approach, debit and credits rules are following

A) Debit and Credit Rules for Assets Accounts

When there is any increase in the asset's value, it will be recorded in the debit side of journal entry and also same amount will be debited to same asset account account. If there is any decrease in the asset's value, same asset account will be credited in the journal entry and will go to credit side of same asset account account.

Example :

For example, we have nil furniture. We have bought the furniture of $ 10,000. Now, $ 10,000 is increase in the furniture asset. So, in the journal entry, furniture account will be debit because value of furniture asset has increased from zero. Cash account will be credited because cash asset has decreased. In the furniture account, cash account will be debited. In cash account, furniture account will be credited.

Remember

Asset Account
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Increase in asset will be debited  at here Decrease in asset will be credited at here


B) Debit and Credit Rules for Liabilities Accounts

When there is any increase in the liability's value, liability account will credited in the journal entry because by taking more loan or increasing in creditors, we have to include in the total liability account. Total liability account will always credit balance. In the ledger account, increase in the liability value will be credited in the liability account.

Decrease in the liability account will be debited in the journal entry because every decrease in the liability will also decrease the total value of our liabilities. So, we have to write in the debit side. It also will go to the debit side of liability account.

Example :

Mr. A borrows $ 10000 from joraj shamy. In the books of A, loan from joraj shamy is increase in our total liability. So, loan from joraj shamy will be credited and cash account will be debited in the journal entry. In the account of loan from joraj shamy, we will credited this loan's value by transferring cash account in its credit side.

Remember : 

Liability Account
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Decrease in the liability will be debited at here Increase in the liability will be credited at here


C) Debit and Credit Rules for Capital Account

Capital is also special type of liability. It is the liability which is taken from business's owner. So, liability account's debit and credit rules will apply on capital account.

Credit Rule :

Every increase in the capital by fresh capital will be credited in the journal entry. We will write the capital account credit and cash account debit in the entry. We also credited the increase value in the capital account.

Debit Rule :

Every decrease in capital by withdraw the money for personal use will be debit in the journal entry. In the journal entry, capital or drawing account will be debit and cash account or purchase (goods used for personal aim) will be credit. In the capital account, decrease in the value of capital will be debited.


Capital Account
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Decrease in the capital will be debited at here Increase in the Capital will be credited at here


D) Debit and Credit Rules for Income Accounts

 Credit Rule : 

Any increase in the income will be credited in the journal entry. For example, we have obtained dividend on our invested money in share. So, dividend income account will be credited and cash account will be debit. In the dividend income account, we also credit this increase in the income. We will show the cash account in the credit side of dividend income account.

Debit Rule :

Any decrease in the income will be debit. In journal entry, decrease in the income will be debited. In the income account, this decrease will also show in the debit side. For example, company has paid us over dividend than our actual dividend earned. So, we have returned the dividend. With this, our total income has decreased, so, this earning will be debited in the journal entry. In dividend account, we also this decrease in the debit side.

Income  Account
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Decrease  in income  will be debited  at here Increase  in income will be credited at here



E) Debit and Credit Rules for Expenses and Losses Accounts

Debit Rule : 

Every increase in the expense will be debited in the journal entry. Every increase in the value of expenses will also go to the debit side of expense account. For example, we have paid electricity bill of $ 200. Now, Electricity expense will be debited and cash account credited in the journal entry because $ 200 payment is the increase in the expenses. We also show $ 200 in the debit side of Electricity expense account.

Credit Rule 

Every decrease in the expense will be credited in the journal entry. Every decrease in the value of expense will also go to the credit side of same expense account.

Logic : Do, you know, how, we pay all the expenses. We pay all the expenses from our working capital. Working capital is the part of our total capital. It means, we pay all the expenses or suffer all the losses from our total capital. So, increase in the expenses is the decrease in the capital. Decrease in the capital is the increase in the capital. There is opposite relation between expense and capital. So, we show increase and decrease in opposite side in both account.

Expenses  Account
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Increase in expenses and losses will be debited  at here Decrease in expenses and losses  will be credited at here

2. Traditional Approach 

Learn traditional approach deeply through journal entries examples at here.

A) Debit and Credit Rules for Personal Accounts

i) Debit is the receiver

ii) Credit is the giver

B) Debit and Credit Rules for Real Accounts

i) Debit :  What comes in.

ii) Credit  : What goes out.

C) Debit and Credit Rules for Nominal Accounts

i) Debit : All the expenses and losses

ii) Credit : All the incomes and gains.


Video Tutorial 


For your better understanding about debit and credit, please also see following video tutorial. 





See Also 

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Accounting Education: How to Better Understand Debits and Credits
How to Better Understand Debits and Credits
Accounting Education
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