Rules of Determining Debit & Credit

Presented by
Monmatha Ranjan Howlader
Faculty Member (PO)
Janata Bank Staff College
Dhaka
 Rules of Determining Debit & Credit

• When a financial transaction occurs, it affects at

least two accounts. For example, purchase of
machinery for cash is a financial transaction that
increases machinery and decreases cash
because machinery comes in and cash goes out
of business.
 Rules of Determining Debit & Credit
• The increase in machinery and decrease in cash
must be recorded in the machinery account and
the cash account respectively. As stated earlier,
every ledger a account has a debit and a credit
side. Now the question is that
on which side the increase or decrease in an
account is to be recorded.
• The answer lies in the learning of normal
balances of accounts and the rules of debit and
credit.
 Normal balance of accounts
• The understanding of normal balance of
accounts helps understand the rules of debit
and credit easily. If the normal balance of an
account is debit, we shall record any increase
in that account on the debit side and any
decrease on the credit side.
 Normal balance of accounts
• If, on the other hand, the normal balance of
an account is credit, we shall record any
increase in that account on the credit side and
any decrease on the debit side.
 Normal balance of accounts
• The normal balance of all asset and expense
accounts is debit where as the normal balance
of all liabilities, and equity (or capital)
accounts is credit.
 Rules of Debit and Credit
Accounting equation is Assets = Liability + Owner’s Equity.
Assets = Equity
• Or, Assets = Liability + Owner’s Equity
• Or, Assets= Liabilities + (Capital + Income)-Expenses
• The elements of the accounting equation are A
(Assets), L (Liabilities), C (Capital), I (Income), and
E (Expenses).
 Rules of Debit and Credit

(1). Assets accounts:

Normal balance: Debit
Rule:
An increase is recorded on the debit side and a
decrease is recorded on the credit side of all
asset accounts.
 Assets
An asset is a resource owned or controlled by an individual,
corporation, or government with the expectation that it will
generate a positive economic value. Common types of assets
include current, non-current, physical, intangible, operating, and
non-operating.
Example-
 Cash, Bank Balance,Prize Bond, Marketable Securities,
Account Receivables, Stock, Loans & advances, Investment,
Land, Building, Machinery, Computer, Furniture, Stock of
Stationery, Prepaid Expenses/ Advance Payments etc.
 Goodwill, Copyright ,Trademark etc.
 Rules of Debit and Credit

(2). Expense accounts:

Normal balance: Debit
• Rule: An increase is recorded on the debit side
and a decrease is recorded on the credit side
of all expense accounts.
 Expenses
• An expense in accounting is the money spent,
or costs incurred, by a business in their effort
to generate revenues. Essentially, accounts
expenses represent the cost of doing business.
• Cost of Goods Sold (COGS)
• Operating Expenses – Selling/General and Admin
• Financial Expenses
• Non-Operating Expenses
• Non-Cash Expenses
 Rules of Debit and Credit
3). Liability accounts:
Normal balance: Credit
Rule: An increase is recorded on the credit side
and a decrease is recorded on the debit side of
all liability accounts.
 Liabilities
• Liabilities are obligations of the company.
• Example-
• Account payable, Interest Payable, Bills
Payable, Short & Long term Loan, Accrued
Expenses etc.
 Rules of Debit and Credit
4). Revenue/Income accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side

and a decrease is recorded on the debit side of
all revenue accounts.
 Revenue
• Revenue is the amount a company receives
from selling goods and/or providing services
to its customers and clients.

• Examples of revenue accounts include: Sales,

Service Revenues, Fees Earned, Interest
Revenue, Interest Income
 Rules of Debit and Credit
5). Capital/Equity accounts:

Normal balance: Credit

Rule: An increase is recorded on the credit side

and a decrease is recorded on the debit side of
all equity accounts.
 Capital/Equity
• Equity is the remaining value of an owner’s
interest in a company, after all liabilities have
been deducted. You may hear of equity being
referred to as “stockholders’ equity” (for
corporations) or “owner’s equity” (for sole
proprietorships). Equity can be calculated as:
• Equity = Assets – Liabilities.
Rules of Debit and Credit
 Rules of Debit and Credit
• Assets (A) = increase is debit – decrease is credit
• Expenses (E) = increase is debit – decrease is
credit
• Liabilities (L) = increase is credit – decrease is
debit
• Capital (C) = increase is credit – decrease is debit
• Income (I) = increase is credit – decrease is debit
 Example
The following transactions are related to Tania Traders:
• Started business with cash Tk.95,000.
• Furniture purchased for cash to be used in business
Tk.8,000.
• Purchased goods for cash Tk.40,000.
• Purchased goods on credit from Big Traders Tk.57,000.
• Sold goods for cash Tk.5,000.
• Purchased equipment for business Tk.4,000.
• Sold goods on credit to John Retailers Tk.1,500.
• Paid salary to employees Tk.1,200
Solution:
 Exercise
• The following transactions have been performed by Rahim &
Co. during the month of December 2019 .
2019
December 1 Purchased goods Tk. 90,000/- from Alfa & Co.
“ 2 Goods returned from David Tk.2000/-.
“ 4 Depreciation on machinery valuing Tk.5,000/-
“ 8 A sum of Tk.200/- due from Nelson but irrecoverable.
“ 15 Tk. 500/- written off as bad debts now realized.
“ 16 Goods returned to Alam Tk.3000/-.
“ 20 Tk. 400/- paid for repair of Machine.
“ 23 Tk. 20,000/- paid for rent.
“ 27 Tk. 4000/- received from Hazi & Co.
“ 28 Paid cash Tk.6000/- for Salary.
“ 29 Sold goods for cash Tk. 5000/- to Hazi & Co.
“ 30 Draw cash from the business Tk.10,000/- for personal needs.