The Rules of Debit and Credit

The rules of debit and credit (also referred to as golden rules of accounting) are the
fundamental principles of modern double entry accounting. They guide accountants and
bookkeepers in journalizing financial transactions and updating ledger accounts of their
business entity.
Since the accounting cycle starts with a journal comprising of debit and credit entries, the
use of a double entry accounting is not possible without strict adherence to these rules. The
rules of debit and credit are the heart of accounting, and their understanding is extremely
important for individuals responsible for handling the accounting system of a business entity.
A ledger account (also known as T-account) consists of two sides – a left hand side and a
right hand side. The left hand side is commonly referred to as debit side and the right hand side
is commonly referred to as credit side. In practice, the term debit is denoted by “Dr” and the
term credit is denoted by “Cr”. In the rest of this discussion, we shall use the terms debit and
credit rather than left and right.
In accounting, the rules of debit and credit are fundamental principles used to record
financial transactions. These rules are based on the accounting equation, which states that assets
equal liabilities plus equity. Here are the general rules:

Debit (DR): Credit (CR):

Increases Assets. Decreases Assets.
Decreases Liabilities. Increases Liabilities.
Decreases Equity (Capital) Increases Equity (Capital)
Decrease in Revenue Increase in Revenue
Increase in Expense Decrease in Expense
Increase in Drawing Decrease in Drawing
Represents the left side of an account. Represents the right side of an account.

Example 1: Cash Purchase of Supplies

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You purchase office supplies for cash.
Debit: Office Supplies (Asset) - Increases the asset of office supplies.
Credit: Cash (Asset) - Decreases the asset of cash.

Example 2: Sale on Credit

You make a sale on credit to a customer.
Debit: Accounts Receivable (Asset) - Increases the asset of accounts receivable.
Credit: Sales Revenue (Equity) - Increases the equity through revenue recognition.

Example 3: Loan Taken

You take out a loan from a bank.
Debit: Cash (Asset) - Increases the asset of cash.
Credit: Loan Payable (Liability) - Increases the liability of loans.

Example 4: Repayment of Loan

You repay part of the loan.
Debit: Loan Payable (Liability) - Decreases the liability of loans.
Credit: Cash (Asset) - Decreases the asset of cash.

Example 5: Owner's Investment

The owner invests personal funds into the business.
Debit: Cash (Asset) - Increases the asset of cash.
Credit: Owner's Equity (Equity) - Increases the equity by reflecting the owner's investment.

Example 6: Rent Expense Payment

You pay rent for the office space.
Debit: Rent Expense (Expense) - Increases the expense of rent.

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Credit: Cash (Asset) - Decreases the asset of cash.

Example 7: Owner’s withdrawal for personal use

You withdraw money on your capital for personal use.
Debit: Owner’s Drawings (Drawings) - Increases in your personal withdrawal.
Credit: Cash (Asset) - Decreases the asset of cash.

It's essential to note that each transaction must have an equal amount of debits and
credits. The accounting equation (Assets = Liabilities + Equity) must always balance.
Understanding these rules is crucial for accurately recording financial transactions and
maintaining the integrity of accounting records.
Example of debit and credit rules:
The following transactions are related to Small Traders:
Feb 1 - Started business with cash 950,000.
Feb 3 - Furniture purchased for cash to be used in business 80,000.
Feb 5 - Purchased goods for cash 400,000.
Feb 10 - Purchased goods on credit from Big Traders 157,000.
Feb 12 - Sold goods for cash 55,000.
Feb 15 - Purchased equipment for business 44,000.
Feb 20 - Sold goods on credit to John Retailers 41,500.
Feb 21 - Paid salary to employees 31,200
Feb 23 - Recorded annual depreciation on building 2,500.
Feb 27 - Recorded uncollectible accounts expense at the end of the year 15,000.
Feb 28 – Recorder 12,000 owners withdrawal for personal use.
Required: Identify the accounts involved in above transactions and state the nature of each
account. Also mention how increases or decreases in accounts resulting from above transactions
should be recorded in accordance with the rules of debit and credit described in this article.
Below are the transactions for March 2023 of ABC Corporation, now with specific amounts for
illustration:

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March 1: Started a Business with Personal Savings
Debit: Cash (Asset) -
Credit: Owner's Equity (Equity) -
March 3: Purchased Office Supplies on Credit
Debit: Office Supplies (Asset) -
Credit: Accounts Payable (Liability) -
March 8: Sold Products to a Customer on Credit
Debit: Accounts Receivable (Asset) -
Credit: Sales Revenue (Equity) -
March 12: Received Cash Payment from Customer
Debit: Cash (Asset) -
Credit: Accounts Receivable (Asset) -
March 15: Paid Rent for Office Space
Debit: Rent Expense (Expense) -
Credit: Cash (Asset) -
March 18: Purchased Equipment on Credit
Debit: Equipment (Asset) -
Credit: Accounts Payable (Liability) -
March 20: Repaid Loan Installment
Debit: Loan Payable (Liability) -
Credit: Cash (Asset) -
March 22: Received Interest Income
Debit: Cash (Asset) -
Credit: Interest Income (Revenue) -
March 25: Hired a Freelancer, Paid in Cash
Debit: Freelance Services (Expense) -
Credit: Cash (Asset) -

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March 28: Declared Dividends to Shareholders
Debit: Dividends (Equity) -
Credit: Cash (Asset) -
March 31: Depreciation Expense for Equipment
Debit: Depreciation Expense (Expense) -
Credit: Accumulated Depreciation (Contra-Asset) -
March 31: Received Utility Bill for the Month
Debit: Utilities Expense (Expense) -
Credit: Accounts Payable (Liability) -
March 31: Recorded Prepaid Insurance
Debit: Prepaid Insurance (Asset) -
Credit: Cash (Asset) -
March 31: Sold Old Equipment for Cash
Debit: Cash (Asset) -
Credit: Equipment (Asset) -
March 31: Adjusted for Accrued Salaries
Debit: Salaries Expense (Expense) -
Credit: Accrued Liabilities (Liability) -
These amounts are arbitrary and for illustrative purposes. In a real business scenario, the
amounts would be based on the actual financial transactions and the financial policies of the
company.

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